Railway Budget 2010-11 Analysis

8/9/2019 Railway Budget 2010-11 Analysis

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Wealth Research, Unicon Financial Intermediaries. Pvt. Ltd.

Email: [email protected]

Executive Summary

Indian Railways present condition leaves a lot to be desired for, in service as well as on

productivity parameters. With an estimated elasticity of ~1.25, Indian Railways need to grow at

CAGR of ~10%, for a GDP growth rate of ~8%. It needs to develop new lines, go for electrification

of existing ones, and improve load carrying capacity of freight trains. This spells huge growth

potential for railways and related sectors, as INR 1.43 tn are required for merely completing the

projects on hand.

Ms Mamata Banerjee, Railway Minister, presented a populist Rail budget, preferring Social

responsibility over Economic viability for taking up of the projects and aims for Inclusive growth

and expansion of rail network for development of the country. The budget focused on providing

security and basic facilities for passengers. It spelled concessions, on freight rates for food-grains

& kerosene, and on passenger rates for certain passenger types. The budget gave feel good

initiatives for next decade.

Overall, the budget was in line with the expectations of no hike in passenger fares, but against theexpectations of reforms in freight tariff which was widely expected. This spells out to be neutral for

sectors like Metals, Coal and Cement and positive for food grains.

Falgesh Sanghvi | [email protected] Arvind Rana | [email protected] Rahul Garg | [email protected]


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Railway Budget Key Highlights

A.General

Passenger fare and Freight tariff unchanged

For issuing e-tickets, maximum service charge reduced to INR 10 for Sleeper Class (currently INR 15) a

INR 20 for AC Class (currently INR 40)

Reduction of INR 100/wagon in freight charges for food-grains for domestic use and kerosene

B. Infrastructure Development and capacity augmentation

Welcomes participation under PPP for a) high speed train corridors to port connectivity (in the states

Gujarat, Maharashtra, Karnataka, Kerala, Orissa, Andhra Pradesh and West Bengal), b) new lines to wo

class stations, c) setting up of 10 automobiles and ancillary hubs, d) manufacturing units of rolling stock

multimodal logistic parks, e) multi-level parking to mine connectivity, and f) six bottling plants with t

mandate that bottled fresh water will be provided at stations at much cheaper rates etc

Proposals to invest in developing high speed corridors of 250 to 350 kmph speed

Add ~25,000 kms of new lines over the next ten years, as outlined in Vision 2020

Ambitious plan to complete 1,000 route-kms of new lines in one year

Construction of another 93 Multi-functional Complexes in the coming year

Plans of introducing the double-decker train to match the best in global standards two trains each fro

Delhi and Kolkata as a pilot project

More emphasis on cutting-edge equipments such as Anti-collision device (ACD) and train protecti

warning system (TPWS) to prevent accidents

C. Passenger Amenities / Facilities

94 stations to be upgraded as Adarsh Stations

10 more stations identified to be converted as World Class Stations

Construction of additional 93 Multi Functional Complexes

To provide modern trolleys at all important stations to be handled by uniformed attendants for sen

citizens and ladies

RFID technology for tracking of wagons carrying coal and iron ore on three zonal railways

Providing cheap water by setting up 6 water bottling plants.

Catering facility in stations to avail good and hygienic food

Allotment of iron ore rakes to be rationalised scientifically and would be accessible through the web

D. Safety and Security

Automatic fire and smoke detection system to be introduced in 20 long distance trains

Unicons Take

Emphasis on dedicated freight corridor, higher acquisition of wagons ~18,000 (compared to only ~6,00

wagons last year), laying of ~1,000 km of tracks every year, thrust on developing railway infrastructure, throu

PPP model, augurs well for the players offering its services to the Railway Segment. Moreover, inclusive grow

for Metal sectors are expected on the back of stable freight rates and higher demand envisaged from tdevelopment plans proposed for railway infrastructure. The food grains companies like KRBL, REI Agro wou

benefit due to lowering of freight (INR 100/wagon). The key challenge would be implementation, as the planne

infrastructure investment of INR 415.8bn has no back up funding.

However, given the time required for its implementation and pre-railway budget rally in railway stocks, w

expect corrections. Prefer, Texmaco, Titagarh Wagon, ARSS Infra (to be listed in Mar10), amongst t

small/mid-cap space with Larsen, BEML and BHEL for long term. Investors can Accumulate these stocks belo

the maximum buying price (MBP) given at the end of this report.


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Highest ever annual plan outlay for 2010-11

Plan outlay at INR 414.26bn, an increase of INR 11.42bn over 2009-10

Fund allocation of INR 44.11bn for new lines Fund allocation of INR 13.02bn for passenger amenities

Fund allocation of INR 10.01bn for Metro Projects

Additional budgetary support sought to the tune of INR 37.01bn for 11 National Projects

Acquisition of 18000 wagons with proposal to set up five state-of-the-art wagon factories in JV/PPP mode

With announcement of 9 new line projects, 1021 km of new lines are expected to be completed Target

~800km for gauge conversion and 700km for doubling

Several projects being taken up on cost sharing basis with State Governments and on PPP mode

Major initiative for Infrastructure Development

To modernize and augment the capacity of CLW (Chittaranjan Locomotive Works) to 275 locomotives.

A Diesel Multiple Unit (DMU) factory to be set up at Sankrail. Second unit to be installed at ICF (Integr

Coach Factory)

Wagon repair shop to be set up at Badnera

Centres of Excellence in Wagon Prototyping to be set up at Kharagpur Workshop

A new Rail Axle Factory to be set up in New Jalpaiguri under PPP/JV mode

A Design Development and Testing Centre for Wheels to be set up at RWF, Bangalore

A new MLR workshop of 250 coach capacity to be set up at Anara (Adra)

Five state-of-the-art wagon factories to set up at Secunderabad, Barddhaman, Bhubaneshwar/Kalahan

Guwahati and Haldia under PPP/JV mode

Freight Business

A modified wagon investment scheme for high capacity general purpose and special purpose wagons to

introduced

Private operators to be permitted to invest in infrastructure and run special freight train

To set up automobile and ancillary hubs at 10 locations

Six high speed passenger corridors identified, to be executed through PPP mode and setting up of

National High Speed Rail Authority for planning, standard setting, implementing and monitoring the

projects


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New Suburban and other train services

101 new suburban services to be introduced in Mumbai area

More services to start in Chennai and Kolkata areas

54 new train services to be introduced

28 new passenger train services, 9 MEMU (Mainline Electric Multiple Unit) and 8 DEMU (diesel-elect

multiple unit) services to start

Extension of 21 trains and increase in frequency of 12 trains announced

Financial Performance in 2009-10 - Muted growth in loading with 10%growth in revenue

Loading target of 882 MT likely to surpass by 8 MT in 2009-10

Gross Traffic Receipts kept at INR 883.56bn, (+10.7%)

Annual Plan outlay kept at INR 402.84bn

Growth pegged at 7% for 2010-11

Freight loading targeted at 944 MT (+7% YoY); with 5.35 passenger growth

Gross Traffic Receipts expected at INR 947.65bn (+7.35% on YoY basis)


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Tonnage (in Mn) in 2008-09

369

131

27 86

41

39

34

29

77

Coal Iron ore Pig Iron & steel

Cement Fertilizer Mineral Oil (POL)

Food Grains Containeer Traffic Others

Source: IRs Vision 2020, Unicon Research

Historically, Gross Revenue of the Indian Railways has

been ~ 1.2% of India's GDP for the last 10 years. Vision

2020 targets it to become 3% in the next 10 years. This

gives railways the potential to grow to ~ INR 2.7 tn from

INR 900 bn currently, with Indias GDP of USD 2 tn

(projected for 2020). To realise this potential, IR must

achieve a CAGR of >10% over the next 10 years, by

developing a sharper commercial focus with a strong

social commitment.

Projected freight loading by IR by 2020 (In Mn

tonnage)

700

39108

250 75150

50

70

48

210

150

Coal Raw material for steel plantsPig Iron & Finished steel CementIron ore (Exports) Iron ore (Domestic)Food Grains FertilizerPOL Containeer TrafficOthers


Further, as per Indias trade policy, its share in

international trade is targeted to become 5% by 2020,

from current 1.5%. Quality of infrastructure will be a key

determinant in the realisation of these projections,

requiring huge investments in infrastructure. All these

macro-economic developments would have a positive

impact on the growth of railways and also put pressure on

it to give efficient and better services.

Fixed Infrastructure (in Km)

779 744

1082

1549

282

797

150

357

180250

156

563426

231

386 363

320

170

361502

2004-05 2005-06 2006-07 2007-08 2008-09

New Lines (Km) Gauge Conversion (Km)

Doubling (Km) Railw ay Electrification (Km)


Network Expansion

Indian Railways route network has expanded only by

~10,419 kms over last 62 years, from 53,996 kms in 1947to ~64,415 kms currently. Vision 2020 targets addition of

25,000 kms of new lines by 2020, via government funding

and Public Private Partnerships (PPPs)

Capacity Creation

Vision 2020 aims the double / multiple lines route of >

30,000 kms, against ~18,000 kms currently. Of this,

>6,000 kms would be quadrupled lines with segregation

of passenger and freight services into separate double-

line corridors.

Electrification of additional route of ~14,000 kms is

targeted over next 10 years.

Six corridors have already been identified for technical

studies on setting up of High Speed Rail Corridors.


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Creation of two dedicated freight corridors (DFC) is

targeted (Ludhiana-Dankuni and Mumbai-Delhi)

IR vis-a-vis others

2

95

53

24

6

19

122

151 3

5

54

Germany France Japan USA Russia China India

mn traffic units (PKM+NTKM) per employee Route Kms per square km area

PKM- passenger kilometer

NTKM- Net tonne kilometersSource: Vision 2020, UIC, Paris

Comparison with Other Railways

Indian railways lags behind the developed countries bothon service parameters (like route-kms per square kms or

route-kms per mn population served), and on productivity

parameters. To bridge this gap or at least keep it

constant, IR would have to go for high-speed rail

networks and heavy haul freight operations. Trains in

USA, China and Russia carry in excess of 20,000 tonnes

of freight against 5,000 tonnes in India.

IR is planning to improve payload to tare ratio of freight

wagons by use of lighter-weight materials like stainless

steel and aluminum. Simultaneously, there are also plans

to make feeder routes of dedicated freight corridors and

other identified routes on the network fit for 25 tonne axle

load. These measures target to improve the load per train

from the existing level of


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Relevant Companies (INR in MnB H E L FY09 FY08 YoY%

Revenue 265,901 194,863 36.

EBITDA 30,034 28,165 6.

EBITDA (%)11.3 14.5 -316 bp

PAT 31,382 28,593 9.

PAT (%) 11.8 14.7 -287 bp

PE (TTM) 31.03

CMP 2,353

Primarily engaged in manufacturing electrical,electronic and mechanical equipments, itsproducts are also supplied to the Indian railways

With robust order book over INR 1.3 tn BHEL isalso eyeing to get its pie from opportunityavailable from the Railway sector.

MBP 2,400

Larsen & Toubro Ltd FY09 FY08 YoY%

Revenue 338,959 249,803 35.

EBITDA 35,674 22,297 60.

EBITDA (%) 10.5 8.9 160 bp

PAT 34,817 21,734 60.

PAT (%) 10.3 8.7 157 bp

PE (TTM) 29.19

CMP 1,500

The engineering behemoth (with strategic stake inKalindee) and strong engineering and executionbackground also aims to increase its order intakefrom the Railway segment. The current order-bookof the company stands at ~INR 911bn

MBP 1,550

BEML Ltd FY09 FY08 YoY%

Revenue 28,009 25,259 10.

EBITDA 571 1,679 (66.0

EBITDA (%) 2.0 6.6 -461 bp

PAT 2,688 2,257 19.

PAT (%) 9.6 8.9 66 bp

PE (TTM) 18.66

Company is involved in manufacturing of miningand construction equipments, railway rollingstocks, metro and defense equipments. (Productsinclude bulldozers, shovels, excavators, dumpers,railway and transway passenger coaches).Current order backlog stands at INR 57bn

CMP 1,046

MBP 900

Titagarh Wagons Ltd FY09 FY08 YoY%

Revenue 6,891 5,548 24.

EBITDA 882 536 64.

EBITDA (%) 12.8 9.7 313 bp

PAT 648 606 7.

PAT (%) 9.4 10.9 -152 bp

PE (TTM) 15.62

Leading private sector wagon manufacturer -manufactures railway wagons, bailey bridges,heavy earth moving and mining equipment, steeland SG iron castings of moderate to complexconfiguration etc. With 55% of its sales torailways, company has order book ~INR 7.2bn.During FY11, Indian Railway aims to acquire18,000 wagons augurs well for the growth of thecompany.

CMP 378

MBP 350Simplex Casting Sim FY09 FY08 YoY%

Revenue 1,795 1,545 16.

EBITDA 209 180 16.

EBITDA (%) 11.7 11.6 1 bp

PAT 91 73 25.

PAT (%) 5.1 4.7 39 bp

PE (TTM) 4.98

CMP 82

Company is engaged in manufacturing ofengineering products, castings and equipmentsused in many sectors including railways

MBP 60


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Kernex Microsystem FY09 FY08 YoY%

Revenue 206 203 1.

EBITDA 34 29 16.

EBITDA (%) 16.5 14.3 218 bp

PAT 28 44 (35.6

PAT (%) 13.6 21.4 -782 bp

PE (TTM) 0.00

CMP 152

Company is engaged in manufacturing, installingand maintaining of anti collision systems,developing certain railway safety and signalsystems

MBP 120

Kalindee Rail Nirman (Engineers) Ltd FY09 FY08 YoY%

Revenue 2,812 2,460 14.

EBITDA 276 256 7.

EBITDA (%) 9.8 10.4 -59 bp

PAT 104 142 (26.6

PAT (%) 3.7 5.8 -207 bp

PE (TTM) 67.5

Involved in Installation, commissioning of tracking& signaling and telecommunication projects andgauge conversion projects. ~80% of business isfrom railways and tracking segment contributes60% to the revenue. 30% addressable market with8-10 competitors. The current order book is~INR4bn.

With focus on RFID (Radio frequencyIdentification for tracks), and strategic partnershipwith engineer behemoth Larsen & Toubro Ltd.,augurs well for the company.

CMP 183

MBP 150

Hind Rectifiers Ltd FY09 FY08 YoY%

Revenue 982 1,020 (3.7

EBITDA 171 199 (14.1

EBITDA (%) 17.4 19.5 -210 bp

PAT 95 123 (23.1

PAT (%) 9.6 12.1 -243 bp

PE (TTM) 16.4CMP 69

Leading manufacturer of rectifier equipment andsemi-conductor devices. Company alsomanufacturers a wide range of products used forRailways, AC electric locomotives and ACelectrical multiple units.

MBP 55Stone India FY09 FY08 YoY%

Revenue 804 791 1.

EBITDA (58) 46 (224.4

EBITDA (%)(7.2) 5.9 -130

bp

PAT (86) 91 (195.0

PAT (%)(10.7) 11.5 -221

bp

PE (TTM) 43.7

CMP 61

Company is engaged in manufacture ofequipment like alternators, air brakes and brakeregulators.

MBP 43


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Texmaco Ltd FY09 FY08 YoY%

Revenue 10,073 8,333 20.

EBITDA 1,145 1,099 4.

EBITDA (%) 11.4 13.2 -182 bp

PAT 758 691 9.

PAT (%) 7.5 8.3 -76 bp

PE (TTM) 22.9

Diversified engineering company, part of K K BirlaGroup, is a leader in wagon manufacturing in thecountry for last five decades. Manufacturesrailway freight cars/wagons, hydro-mechanical

equipment for mega power projects, heavy steelstructures and process equipment. Company alsohas a JV with United Group of Australia, an end-to-end rail technology solutions provider tomanufacture hi-tech wagon and locomotive bogieframes. The company has also set up capacity tomanufacture loco components, orders for whichhave been received from Chittaranjan LocomotiveWorks. The current order book stands at ~ INR18bn (Order book consist of ~6000 wagons).During FY11, Indian Railway aims to acquire new18,000 wagons augurs well for the growth of thecompany.

CMP 142

MBP 130

Container Corporation of India Ltd FY09 FY08 YoY%

Revenue 34,172 33,473 2.

EBITDA 9,311 8,919 4.

EBITDA (%) 27.2 26.6 60 bp

PAT 7,912 7,522 5.

PAT (%) 23.2 22.5 68 bp

PE (TTM) 19.4

CMP 1,199

Subsidiary of Indian Railways, (GoI owns 63%).Carrier, terminal and warehouse operator withmarket share of ~85%-90% in rail container trafficwith network of 57 inland container depots (ICDs),9500 wagons and 225 rakes operating all over thecountry. Company, virtually enjoys monopoly inhandling the nation's trade in containers throughthe rail route.

MBP 1,150

ARSS Infrastructure Projects Ltd (Expected to belisted in March,2010)

FY09 FY08 YoY%Revenue 6,213 3,126 98.

EBITDA (250) (66) 278.

EBITDA (%) (4.0) (2.1) -191 bp

PAT 501 271 84.

PAT (%) 8.1 8.7 -61 bp

PE (TTM) 11

CMP NA

ARSS is engaged in construction of railwayinfrastructure, roads, highways, bridges, andirrigation projects. ARSS have completed ~200 kmrail line and ~300 km of roads and highways.ARSS has significant presence in Eastern Indiaparticularly in the state of Orissa.

Current Order-book of the company stands at INR28,775Mn which is 4.6x its FY09 revenue MBP 520

(Source: Capitaline, MBP=Max Buy Price)


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Railway Budget 2010-11 Analysis