Five years after the container train operations market was opened up by Indian Railways amidst much fanfare, a deep mistrust has set in between the Ministry and the operators.

Two operators — Reliance Infra and Pipavav Rail — have not even started operations, while two more — Arshiya Rail and Kribhco Infrastructure — have dragged Indian Railways to the Competition Commission of India.

While the Railways can be blamed for shifting goalposts mid-way, some investors also misread the container train business. Sixteen players — including Concor, in which Railways has a majority stake — form the market.

Broadly, the market has seen growth in three parameters — cargo handled, rolling stock and terminals. The volume of containerised cargo has increased — the Railways handled 37 million tonne of cargo in containers in 2010-11, against 21.13 million tonnes in FY2007-08.

The rolling stock capacity has also grown, with entrants accounting for close to 30 per cent of rolling stock. Of the container train operators running 390 odd rakes now, the entrants account for about 130.

TERMINALS, THE KEY

But the entrants have not invested as much in the terminals. Building a terminal requires close to 12 times the capital investment in a rake.

A rake of flat wagons costs Rs 12-13 crore, while setting up a terminal involves an investment Rs 150 crore. Moreover, building a terminal requires large land acquisition — a cumbersome job. So, while Concor has about 62 terminals, all other players, put together, have about six-seven terminals.

This is one of the key reasons for some players making losses. “Some investors thought they could simply use the existing terminals of Concor, or good sheds of the Railways, or of independent warehouse operators,” explained an industry official.

But Concor and the Railways proved tough nuts to crack. Concor levied high access charges for its terminals, as it was not going to help its competitors take away business.

With this, many players started operating from same terminals. The net result was that four-five operators would run their wagons on the same routes, provide the same kind of service and, whenever there was dearth of cargo, they started undercutting each other on price.

Nobody makes money by only moving cargo between two points on the rail network.

“Money is made by terminal handling, which is where the operators provide value-added service and get a margin of over 40 per cent,” stated another official.

Companies need to focus on reducing the rake-to-terminal ratio. Concor, which has four rakes for a terminal, has a return on capital employed of over 25 per cent. The private operators — with over 12 rakes to a terminal, have a negative return on capital employed.

Railways SHORTCHANGED?

A strategy that backfired was when some players started moving a full train-load of cargo between two points. The Railways opened up this market, hoping that these operators will aggregate smaller cargo that moves by road and, in the process, shift some cargo from road to rail. But some players started targeting customers who had full trainloads of cargo, something the Railways considers its turf.

One of the entrants started moving full trainload cargo for a steel plant by stuffing bulk cargo in containers. For this, it charged the steel plant about 30 per cent less than the Railways charged to move the same cargo in wagons.

This was possible because the Railways' haulage charge moving heavy goods in container wagons was almost half of what it charges for moving iron and steel in its own wagons.

Contractually, the operators were not in the wrong. But many in the Railway Ministry felt short-changed and slammed the operators with very high haulage charges for specific commodities. This has hit the domestic container train market hard, particularly players that depended primarily on domestic market.

CONSOLIDATION

Now, the segment is set to see consolidation with some promoters getting into “stop loss” mode. But some players still maintain that the long-term view for this business is good.

Shipping lines such as APL and MSC viewed this business as an extension of their liner business.

Port operators such as Adani Group's Mundra Port SEZ and DPW invested in the segment, eyeing this as a hinterland linkage. Gateway Rail Freight, subsidiary of listed firm Gateway Distriparks, has broken even.

Ownership of ETA-Freightstar has gone to a private equity player — India Infrastructure Fund. Dubai-based promoter ETA, with large debts, could not allocate funds to see the completion of its business plan.

> mamuni@thehindu.co.in

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