Feb 25, 2013 12:59 PM IST | Source:

Street believes railways may see windfall: Macquarie

Last year‘s Budget had pegged the plan outlay for FY13 at around USD 11billion, based on the premise that a large chunk would be financed through internal revenue generation.

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Last year, Dinesh Trivedi (ex-railway minister) had announced significant and far-reaching measures to turn around the fortunes of Indian Railways; however, he had to resign soon after under pressure from his party (TMC) leader Mamata Banerjee.

This year investors are hoping for a repeat of last year’s Budget proposals minus the political drama that followed, says Macquarie.

Much like last year, when freight rates were increased before the Budget, this year too, the government raised passenger fares before the Parliament session. Cash-strapped Railways hiked passenger fare across the board by 21 percent on January 22, aiming to garner additional revenue of Rs 6,600 crore.

The recent diesel price hike has led to added pressure on Railways to further hike passenger fares, so the key focus would be if Railway Minister PK Bansal bites the bullet on raising passenger fares in his maiden Rail Budget on February 26.

What street expects from Railway Budget?

Increase in plan outlay for railways

Last year’s Budget had pegged the plan outlay for FY13 at around USD 11billion, based on the premise that a large chunk would be financed through internal revenue generation.

However, this figure was lowered to around USD 9.5 billion when the government realised it may not be able to achieve this year’s revenue target. Media sources suggest that the ministry may propose a plan outlay of USD 12.5 billion for FY14, which would be the highest railways have ever been allotted.

Of this, the railways would seek around USD 7 billion as budgetary support from the central government, compared to around USD 4.5 billion in FY13. Market borrowing is also likely to go up to around USD 3.5 billion through IRFC, a little above the FY13 target.

The increase in plan outlay is mainly to clear a huge backlog of pending projects, to increase spending on safety enhancing measures and to budget for higher outgo in terms of fuels expenses.

Greater allocation towards electrification of routes

Recently diesel prices were hiked for bulk users by around 20% following which the proportion of high speed diesel in the total fuel bill has increased to around two-thirds from around 50% earlier. This is when around two-thirds of freight and half of passenger traffic is carried by electric locomotives.

In light of the spike in diesel prices, there may be an increase in electrification works from an estimated 1200 route km in FY13 to 1500 route km in FY14. Decongestion via new heavy haul freight trains; temporary alternative to DFC.

Given the capacity constraints that railways is facing, the government will likely propose to increase the number of heavy haul freight trains that have 2-3 times the number of wagons in a conventional freight train.

Currently around 25 such trains with 116 wagons are running and the proposal is to introduce 70 more, possibly with 180 wagons that are currently being operated in countries such as US, Australia and South Africa. This is primarily being looked at as an alternative till the time DFC becomes operational in the next 4-5 years.

The broking firm hopes that the Railway Budget will focus on enhancing railway infrastructure, safety standards, operational efficiency and quality of service. Moreover, with contracting for Dedicated Freight Corridor (DFC) projects under way, the market expects some concrete steps to fast-track the implementation of this all-important project.

The Planning Commission envisages augmenting line capacity, meeting shortage of wagons and enhancing safety standards to be met via investments of around USD110 billion in the 12th Five Year Plan as opposed to around USD 55 billion in the 11th Plan. This may appear ambitious, given that only 75% of the target in the previous plan was met.

However, if bottlenecks are removed to push through delayed or stalled projects and work on the Dedicated Freight Corridor (DFC) begins in earnest, a better proportion of the target could be achieved, which could orchestrate the turnaround in the growth trajectory towards 8-9%.

In its report, the Expert Group for Modernization of Indian Railways estimates that investments to enhance capacity and modernise railways can potentially contribute an additional 1.5% to 2% to the country’s GDP from its current level of 1%.

Stocks that are leveraged to railway investments include

1. Track and track related works: L&T, IVRCL
2. Electrification, Signalling and Telecommunication: L&T, Siemens
3. Rolling Stock/Railway wagons, coaches: Siemens, BHEL

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