IRFC Vs RVNL: Which Dividend Railway Stock Offers Better Return On Equity (RoE)? Key Fundamentals Here!

Indian Railway Finance Corporation (IRFC) and Rail Vikas Nigam (RVNL) are some of the rising stars of the railway segment since last year. The New Year 2024 also kick-started on a robust note with both stocks giving hefty returns to investors and touching record highs. But one of them has performed better than the other! Both RVNL and IRFC are in focus after reforms announced in the Interim Budget 2024.

IRFC, a stock which recorded transformational growth from small-caps to mid-caps and is now a large-cap with over Rs 2 lakh crore market cap, has performed better than RVNL by over 6 percentage points. Notably, IRFC is also cheaper than RVNL.

Also, in terms of sectoral performances, IRFC outperformed its sector by nearly 364%, and RVNL outperformed by over 214%. But in the case of Return On Equity (RoE), RVNL has a better RoE than IRFC.

Moreover, RVNL's debt-to-equity ratio is less than 1, as per Trendlyne data, but this is higher in IRFC at 9.21% which indicates that the company assets are financed through debts. Further, the interest coverage ratio in RVNL is higher. Meanwhile, their promoters' pledges are zero.

IRFC Share Price:

Last week, on February 2nd, IRFC's share price dipped by 0.65% to end at Rs 168.95 apiece with a market cap of Rs 2,20,792.41 crore on BSE.

Nevertheless, IRFC shares have rallied by at least 68.96% on BSE in a month. The stock price was at Rs 99 on January 2, 2024. However, IRFC shares have skyrocketed by a massive 564% from its 52-week low of Rs 25.45 apiece. IRFC has the potential to cross over Rs 190 since it recorded a 52-week high of Rs 192.80 apiece late last month.

Some of the positive to neutral fundamentals of IRFC shares as per Trendlyne data are: Stock Price rose 435% and outperformed its sector by 368.91% in the past year; Promoter Pledges are zero; Promoter Share Holding stayed the same in the most recent quarter at 86.36%; Return on Equity(ROE) for the last financial year was 13.93%, in the normal range of 10% to 20%; and Interest Coverage Ratio is 1.36, in the normal range of 1 to 1.5.

RVNL Share Price:

Unlike IRFC, RVNL is a midcap stock. Last week, on Friday, RVNL shares ended at Rs 294.45 apiece, down by 1.04% on BSE with a market cap of Rs 61,393.42 crore.

In a month, the stock has gained by 62.86% on BSE. The stock price was at Rs 180.80 apiece on January 2, 2024.

But compared to its 52-week low of Rs 56.15 apiece, RVNL shares are currently up by a huge 424.4%. Also, the stock has the potential to be above Rs 300 and had almost reached near Rs 350 levels in January. That being said, its 52-week high is Rs 61,393.42 crore.

According to Trendlyne data, some of the positive to neutral fundamentals of RVNL shares are -- Stock Price rose 299.12% and outperformed its sector by 214.28% in the past year; Debt to Equity Ratio of 0.87 is less than 1 and healthy, implying that its assets are financed mainly through equity; Mutual Fund Holding increased by 0.01% in the last quarter to 0.14; Interest Coverage Ratio is 3.86, higher than 1.5, which means that it can meet its interest payments comfortably with its earnings (EBIT); Return on Equity(ROE) for the last financial year was 19.39%, in the normal range of 10% to 20%: Promoter Share Holding stayed the same in the most recent quarter at 72.84%, and Promoter Pledges are zero.

That being said, RVNL offers a higher RoE of 19.39%, while IRFC offers 13.93%. But both are in the normal range which is between 10% to 20%. In terms of dividend yield, IRFC's yield is slightly higher at 0.89%, and RVNL's yield is 0.72%.

Let's understand why RoE is important when investing shares:

As per Motilal Oswal's website, Return on Equity (ROE) is one of the most popular measures of the return earned by shareholders. When you put money into an investment, you are interested to know how much your investment is earning. When the company makes a profit, the company pays dividends to shareholders out of that. The profit left after paying dividends is added to the net worth of the company. ROE is important as it tells investors that the money that is being ploughed back into the company is still earning a healthy return.

There are two ways in which the company treats its profits. Firstly, it pays out dividends to shareholders, which is equivalent to partially extinguishing the wealth of the company. The second method is to plough back the funds for internal use. If a company ploughs back profits rather than paying out as dividends, it needs to justify this decision with an attractive ROE, the brokerage explained.

ROE is calulated as -- (Net Profit)/(Net Worth (Equity)

Typically high ROE companies are those companies that are asset-light and have very low levels of debt. The bottom line is that ROE is more useful from a shareholder point of view and from the point of view of determining the trajectory of the P/E Ratio, it said.

Disclaimer: The author, the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns. in advises users to consult with certified experts before making any investment decision.