Rail Budget a major boost for logistics companies, steel manufacturers



New rail lines, wagon addition, dedicated freight corridors to spur growth

With the Indian Railways set to incur capital expenditure of ₹1.21 lakh crore in 2016-17, domestic steel makers and some logistics companies are likely to benefit.

Initiatives such as construction of new rail lines, renewal of existing tracks and additions to the Railway’s existing fleet of wagons and coaches, all of which use steel should spur steel consumption thereby benefiting domestic steel manufacturers.

Here are some numbers to put things in perspective. The Indian Railways has proposed to construct 400 route kms of new lines and also add 747 locomotives, 3,431 coaches and 12,000 wagons, among other things in 2016-17.

The production of all this would require about three lakh tonnes of steel.

This calculation is based on the assumption that 400 route kms of new lines would translate into at least 800 kms given that at least one track (two rail lines) will be laid on a particular route. The renewal of existing tracks would generate addition demand.

The steel industry has been bogged down by tepid demand. During April-December 2015, India’s steel consumption grew 4.7 per cent (year-on-year) to 59 million tonnes.

While this is better than the average growth in world steel demand, it is much lower than the rates at which domestic steel demand has grown in the past.

Among the large steel manufacturers, Steel Authority of India (SAIL) caters directly to the demand from the Indian Railways and stands to benefit. SAIL manufactures rails and wheels and axles (used in wagons and coaches) and also supplies steel to the production facilities of the Indian Railways such as the Integral Coach Factory and the Rail Coach Factory that manufacture coaches and wagons. For some of the other large steel companies, supplies to the Railways constitute a smaller proportion of their product portfolio.

Many steel producers that do not directly supply to the Railways too can gain by supplying to rail product manufacturers such as Texmaco Rail & Engineering and Titagarh Wagons.

Logistics play

The proposal to create three new dedicated freight corridors (DFCs) will give a boost to logistics players such as Container Corporation of India (CCI) and Gateway Distriparks. There are already two DFCs under construction currently. Not increasing freight rates in spite of subdued freight segment revenue is a positive that can aid volume growth. Freight traffic is targeted to increase by 50 million tonnes in 2016-17. And given the desire to ‘challenge conventional thinking on freight policy’, freight logistics players may continue to witness policy tailwinds, boosting growth.

Using a PPP model to create logistics and warehouse parks can give a boost to smaller players such as Navkar Corporation. At the same time, it can hurt State-owned rail transport service provider CCI. The company has enjoyed leadership position with a market share of 75 per cent. It has a vast network of 63 container depots and it handles two-thirds of the railway container cargo. This advantage may be diminished somewhat in the long-term, though near-term prospects remain bright.

Published on February 25, 2016

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