Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Market / Mark-to-market/  Suresh Prabhu delivers freight rate hike googly for capex push
BackBack

Suresh Prabhu delivers freight rate hike googly for capex push

There are limited funds at the railways’ disposal to boost purchases or capital expenditure immediately

Thanks to the hike in freight tariffs, Prabhu was able to double the amount of excess revenue (after meeting the expenditure) and make higher appropriations to the development and capital funds. Photo: Ramesh Pathania/Mint (Ramesh Pathania/Mint)Premium
Thanks to the hike in freight tariffs, Prabhu was able to double the amount of excess revenue (after meeting the expenditure) and make higher appropriations to the development and capital funds. Photo: Ramesh Pathania/Mint
(Ramesh Pathania/Mint)

The 52% jump in the annual Plan outlay for India Railways brought little cheer for investors. Shares of some firms that depend on Indian Railways closed with losses on Thursday. Many of them—Texmaco Rail and Engineering Ltd and BEML Ltd, for example—had risen sharply in the past six months and valuations are not cheap. The fact that the rail budget for 2015-16 has little to offer to these companies in the short term also didn’t help.

Even though financial performance improved slightly in the last fiscal year, there are limited funds at the railways’ disposal to boost purchases or capital expenditure immediately. Allocation for rolling stock, or money to procure wagons, locomotives, carriages and others, is higher by 11% to 19,342 crore. Of that, only 7 lakh is for new acquisitions. The rest of the amount is for rolling stock that has been already ordered. Although the railways plan to buy more wagons, those orders can take time to materialize as over the next three months they want to review schemes through which it invests or conducts these purchases.

While that provided little cheer for wagon manufacturers, shares of logistics companies like Container Corp. of India Ltd and Gateway Distriparks Ltd fell because their expectations did not materialize. “There was no concrete announcement on setting up of a Rail Tariff Regulator and no comments on reduction in railway haulage charges either," said Sachin Bhanushali, chief executive officer of GatewayRail Freight Ltd. “That has come as a disappointment from this year’s budget."

Also, even though the allocation for Dedicated Freight Corridor Corp. of India Ltd more than doubled, lower-than-expected awarding of contracts disappointed some. “On DFC, the ministry expects award of 750km of civil awards. This was against its expectation of 1,000km of civil awards in FY2015," Ritesh Jain, chief investment officer of Tata Asset Management Ltd, said in a statement. “This modest target on an ambitious project was a slight disappointment."

That said, the national carrier is getting a much required push to capital expenditure and capacity addition. It aims to commission 1,200km of new tracks (second, third or fourth) in 2015-16. Targets in kilometres and allotments to new track construction, gauge conversion, doubling of lines and track renewals have been kept significantly higher. Collectively, allocations for these have doubled from the current year’s estimates. These should up opportunities for track laying and electrification services firms like Kalindee Rail Nirman (Engineers) Ltd and Transformers and Rectifiers (India) Ltd.

The only question is whether the railways can manage to achieve the targets timely, especially considering its chequered past. Part of the achievement will depend on the organization’s ability to raise the required funds. It is here railway minister Suresh Prabhu has tapped the freight segment. Thanks to the hike in freight tariffs, Prabhu was able to double the amount of excess revenue (after meeting the expenditure) and make higher appropriations to the development and capital funds from which part of the planned expenditure will be funded.

While improving appropriations is a good sign, generation of higher revenue is dependent on recovery in the domestic economy. Anticipating a healthier growth in the core sector of the economy, the rail minister has projected a stronger growth in goods traffic.

To be sure, the hike in freight rates can have a cascading effect on user industries. The 6.3% hike in coal freight will raise the cost of coal-based captive power, mostly used by cement and steel firms. For the electricity sector, in most power purchase agreements, variable costs such as freight are pass-through. So to that extent, it will lead to a rise in tariffs. But then, most thermal power plants are located close to fuel sources, so the hike in tariffs will be limited.

Cement is bulky to transport, and the 2.7% hike will imply a direct hit of about 700 per tonne. Obviously, firms like ACC Ltd, which have a higher lead distance, may get hit more on profit margin. But analysts say the rise in freight works out to less than 1 per bag, all hikes rolled in. As demand improves with the rise in economic activity, companies will be able to pass on the cost increases to the user.

Steel freight has been hiked by 0.8% and steel companies’ outward freight costs are set to rise. Those buying iron ore or processing scrap or pig iron will see their costs increase further. Steel makers may find it difficult to pass on higher costs due to weak demand and pressure from cheaper imports. These concerns have sent half of the shares in the S&P BSE Metal index lower.

Costs for fertilizer firms will also rise. Even though the government compensates them for the rise in costs, delay in payments means an extra burden on working capital of these firms.

Overall, the railway budget is giving the much required push to capital expenditure and capacity addition. While it will take time for the plans to materialize into contracts and orders, the hike in freight rates when the demand recovery is weak has disappointed many.

The writer doesn’t own shares in the above-mentioned companies.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 26 Feb 2015, 09:39 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App