Check Out: Stocks to benefit from Rail Budget 2011

Indian Railway Budget 2011-12:

• Ku. Mamata Banerjee presented a populist Rail Budget for FY11-12E– Freight rates left unchanged, meets expectation.
• FY12E highlights (1) Gross Traffic Receipts at Rs1.1 tn (+12%) (2) Operating Ratio at 91.1% (+100 bps) and (3) Freight growth at 7.5% to 993 MT (appears steep)
• Highest ever capital outlay at Rs576 bn (up 39%) – focuses on new lines, rail based industries, security measures – But appears optimistic owing to financial constraints.
• Status Quo on sectors like Cement, Steel, Power, Agriculture, Fertiliser. Positive on railway related stocks.

Mamata Banerjee, facing assembly elections in West Bengal in two months has not touched the freight charges. On the passenger front she has reduced the booking fee by 50%. Budget maintains status Quo on freight rates which leaves no impact on sectors like Cement, Steel, Power, Agriculture, Fertiliser.

FY11E GTR in line with expectation – driven by 4% freight hike:

Railways FY11E revised estimates were inline with our expectations . Railways revised its gross traffic receipts (GTR) estimates marginally upwards to Rs 948.4 bn. This was due to reduced traffic suspense clearance of Rs 1.0 bn and a 4% increase in freight rate (effected from Dec ’10) - leading to overall improvement in collections . However, increased collections from freight hike were offset by reduction of 20 MT in freight load target to 924 MT.

FY11E operating ratio improves 40 bps to 7.9%:

Ordinary working expenses were revised up by 3.1% over previous estimates to Rs 670 bn. Net earnings also increased by 19% to Rs 76 bn - driven by 25% downward revision in depreciation. Operating margins improved by 40 bps to 7.9% led by austerity measures undertaken by the Railways.

FY12E gross traffic receipts growth expected at 12% to Rs 1.06 tn:

Railways expects gross traffic earnings to increase by 12.0% to Rs1,062 bn in FY12E, driven by (1) 6.4% growth in passenger earnings and (2) 7.5% increase in freight loading to 993 MT. Net earnings estimated to increase by 28% to Rs98 bn. Operating ratios are expected to improve by 100bps to 91.1%, resulting in expansion in earning margins to 9%.

Outlook for freight load appears optimistic at 7.5% for FY12E:

Railways expect FY12E freight traffic movement to grow by 7.5% to 993 MT over the revised FY11 estimates of 924MT. The target appears aggressive in view of (1) continuing barriers by the respective states on iron ore movement and (2) low expectation on domestic coal production – thus betting a big way on import freight load.

Capital outlay shoots up 39% to Rs576 bn – Positive surprise:

We were positively surprised with 39% increase in plan capital expenditure allocation to Rs576 bn – highest growth in past decade. Plan expenditure on construction of new lines more than doubled to Rs95.8 bn with target to construct 1300 Kms (including 300 kms spillover from FY11). Allocation towards acquisition of rolling stocks remained healthy at 24% or Rs138 bn – but does not factor higher acquisition of wagons. Wagon procurement target remained constant at 18,000 wagons for FY12E. Railways procured 16500 wagons in FY11 versus target of 18000. We attribute sharp rise in plan allocation to increasing focus on investments in (1) rail based industries (2) rail security measures and (3) planned commencement of Western Dedicated Rail Freight Corridor.

The above capital outlay appears steep in our calculations considering the historical track record of slow ramp up in project execution and regulatory framework which is still in the development phase.

EMKAY Observations:

• Freight rates remained constant – No impact on CONCOR or Gateway Distriparks Limited
• Land Allocation to Dedicated freight corridor will be beneficial for private operators and Container depots like Concor & GDL
• Railways budgeted procurement of 18,000 wagons in FY12E will benefit companies like Texmaco , Titagarh Wagons
• We expect the increase in plan outlay will benefit companies like - L&T , Kernex Microsystem , BEML , Kalindee Rail , ARSS Infra , Hind Rectifier
• We believe the capital outlay although appears to be on a steeper side considering the fact that Railways has not been able to achieve their target expenditure in FY11E. However we believe with a higher provisioning the beginning is in the correct direction.