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The change
The Centre, in an ambitious move, has estimated an investment of ₹50 lakh-crore till 2030 for developing railway infrastructure. The Finance Minister also emphasised on the need for public-private partnerships to hasten sanctioned works.
For FY20, the budgeted capital outlay of the Railways has been raised to about ₹1.6 lakh-crore, an increase of 9 per cent from a year ago.
The background
In 2015, the then Railway Minister Suresh Prabhu envisioned transforming the Railways by proposing an investment plan of ₹8,56,020 crore for five years with emphasis on areas including gauge conversion, network expansion (including electrification), purchase of rolling stock and development of metro rail.
However, the key beneficiary of the Railways’ growth, the wagon industry, has seen inflow of bulk orders only over the past one year. By all accounts, the Railways has released orders for 11,790 wagons in FY19, out of the overall 22,000 required. The order for the remaining 9,000 wagons is expected to be released in FY20.
Despite the order inflow, the profitability of wagon companies remain a concern due to raising input costs and predatory pricing in bids. The Railways, too, continues with its efforts to improve the operating ratio, which measures operational expenditure against revenues. A high operating ratio (lower, the better), at an average of 94 per cent (FY11-12 to FY17-2018), has lead to lower internal accruals for the Railways, making it dependent on budgetary and off-budgetary sources of funds to meet its capital expenditure.
The verdict
Increased capital allocation by the Railways towards capacity creation raised the demand for wagons in the previous fiscal and boosted the top-lines of rail-wagon and coach manufacturers such as BEML, Titagarh Wagons, and Texmaco Rail and Engineering. But the stock performance of most of these firms haven’t been impressive in the past one year on the back of poor profitability.
Though Titagarh’s and the State-run BEML’s revenues grew 9 per cent and 25 per cent, respectively, in FY19, their net profits fell 14 per cent and 1 per cent, respectively. Texmaco has been the outlier as its revenue and net profit grew 79 per cent and 31 per cent, respectively. Kernex Microsystems, manufacturer of railway safety equipment, continues to be a loss-making entity.
For FY20, the budgeted amount for rolling stock has almost quadrupled to ₹6,114 crore. The prospects of the wagon industry look optimistic with higher allocation, progress of dedicated freight corridors, focus on PPPs and expansion of metro network. However, profitability of these companies has to be closely watched periodically.
Procurement of steel for railway lines would also give boost to the top-lines of steel-makers such as SAIL and JSPL.
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