Budget derails rail-linked stocks

Srividhya Sivakumar | Updated on February 26, 2011



One would have imagined that an annual plan of Rs 57,630 crore, the highest-ever proposed investment by the Indian Railways, would lead to investors making a beeline for rail-related companies.

However, it did exactly the opposite. Ambiguity over the implementation of the proposed projects, delays in execution of projects announced last year and slow progress in the setting up of the much-awaited dedicated freight corridors (aim to complete it by December 2016) seem to have spooked investors into dumping the stocks of the many rail-related companies, on the day of the Budget.

The Railways has budgeted to spend about Rs 13,824 crore towards acquisition of rolling stock. It proposes to procure 18,000 wagons in the coming fiscal, the same as what was targeted in the previous Budget.

Status quo

This means the share of private wagon manufacturers would be lesser now as the Railways Minister also announced plans to set up two new wagon manufacturing units under the PPP route.

Notably, five wagon factories in joint venture/PPP were proposed to be set up in the Budget last year. Focus on import of rolling stocks too would impact the revenue visibility of the listed wagon manufacturers. That Railway orders typically tend to be large and suffer from frequent delays doesn't help sentiments either. Shares of private sector wagon makers Texmaco and Titagarh Wagons plunged by about 8-13 per cent, while that of BEML ended 3 per cent lower.

High on aspiration, low on execution

The Indian Railways also announced its plan to double it's spend on gauge conversion to Rs 2,470 crore. It has allocated Rs 9,583 crore for new lines in the coming year (1,000 km). The Railways is also looking to build new rail line capacity of 700 km a year against its average of 180 km a year.

The stock price of Kalindi Rail Nirman, in the business of laying railway lines, however dipped considerably, closing 13 per cent lower. Similarly, announcement of steps on installing anti-collision devices in eight of 17 rail zones too failed to stir up the price of Kernex Microsystems, which ended the day 5 per cent lower.

Much of the stock price inertia can be explained by the scepticism about the execution of the many proposals made by the Railways. Even as announcements regarding expansion of rail lines, setting up of projects under PPP model and wagon procurement have become routine features of the Budget presentation, their progress has not been.

Railways' growth aspiration, therefore, may best be taken with a lavish pinch of salt, which may also explain why stocks prices failed to react positively. That the Railways is facing a financial crunch – operating ratio is above 91 per cent – only adds to the concerns.

Freight rate maintained

Keeping the freight rates unchanged, however, would be beneficial to iron ore, coal and cement companies that rely heavily on the railways' transport network. But with inflation soaring by the day and State elections coming up soon, the move was along expected lines only.

Published on February 25, 2011

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