Equity Strategy DFC: A Welcome Oasis:: Jefferies,

Key Takeaway
The $18b DFC project will be the first major project coming in an environment
of singularly weak investment cycle. Along with other feeder routes and the
industrial corridor, the DFC could pull in investments of $40-45b in the next
five years. The DFC project is similar in cumulative scale of investments to the
highway program of the past 15 years and will likely have as big an impact.

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DFC project well underway: The Western (1,500km) and Eastern (1,800km) DFC projects
are well on their way to execution. Nearly all the land needed has been acquired (due to
the modified railways acquisition act), environment clearances obtained and funding tied
up (loans from JICA for WDFC and World Bank for EDFC). The first set of contracts for
construction has also been awarded and the rest would likely be awarded over the next
12 months. Civil construction work would account for nearly 60% of the investment, with
traction and signaling accounting for the remainder. In addition, the Indian Railways is
constructing another 4,000km of feeder routes to connect ports, industrial areas and coal
mines to the DFC. The project is scheduled to be completed by 2018. Plans are afoot to
construct four more DFCs with a cumulative length of 6,000km (likely to cost $30b).
Massive improvement in efficiency: The DFC will boost the total capacity of the
network by 30-40%, with a more dramatic increase in the routes it operates on. Freight trains
will run to a timetable, at an average speed of 75-80km/hr vs the current average of 25.
The trains will be twice as long and load per wagon will be nearly 30% more. The average
productivity of trains can potentially be 8-10x higher. The operating cost per unit (NTKM) is
estimated to be 50% lower and total cost, including capital costs, about 30-40% lower.
It’s about containers & coal: The WDFC is designed to carry double stack containers to
facilitate movement between the ports of Gujarat and Maharashtra to the industrial belts of
north and west India. Containers are expected to account for nearly 80% of the traffic on the
WDFC. Ports should benefit significantly from the fall in transportation costs and logistical
efficiencies. Coal will likely account for 70-75% of the traffic on EDFC due to the enormous
transportation of coal from the mineral rich eastern states to the power plants in north India.
Lack of wagons and feeder lines have constrained coal movement in the recent years, and
the DFC and the feeder lines will likely address these issues. The distribution is likely to be
more efficient with significant fall in inventory needs as well as lower cost of logistics.
Threat to roadways & truck demand? Not immediately: Railways has lost share
to roadways almost every single year in the past few decades. With a significant fall in
cost of freight transport, provision of last mile connectivity and time-predictable movement
on DFC, railways could regain some share. Each train on DFC will have the potential to
replace 1,500 heavy trucks. However, during the construction phase of DFC, truck and tipper
demand should get a boost, as was seen during the initial phase of highway construction.
Industrial corridor: The DMIC project is an integrated development of townships,
industrial parks, logistic hubs and associated projects along the western DFC with an
influence area of 150km in either direction of the track alignment. In the first phase,
the project seeks to create basic infrastructure for development of seven new industrial
townships (ultimate target 24), among others. Phase I, scheduled to be completed by 2018,
would involve investments of about $15-16b ($90b ultimately).
Beneficiaries across time-frame: The high tech nature of the project necessitates
significant imports but domestic construction companies benefit during the execution
phase. Once complete, the DFC would lower coal transportation costs, benefit private
logistics companies, boost wagon demand and be a threat to truck demand.