Construction - FY17 Rail Budget: Remarkable Amidst Funding Constraints; Sector Update ::Edel

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The FY17 Railway Budget highlighted the government’s vision to “Reorganize, Restructure and Rejuvenate” Indian Railways (IR). Positives include cost optimisation (INR87bn savings), strong performance on PPP front (64% more than budgeted figure), healthy capex (25% YoY growth; 47% target growth in FY17) and growing impetus on partnerships with states. Challenges remain in terms of tepid revenue growth in FY16 – 7.6% for passenger and 5.7% for freight (aided by 10% tariff hike), particularly in light of ambitious target for FY17 (12.4% and 5.4% growth respectively, without tariff hike) at 10% overall growth. Also, higher wage bill (7th Pay Commission impact) is likely to lead to deterioration in operating ratio from 90% in FY16 to 92% in FY17. In such a scenario, fund raising through alternative sources (asset monetisation, advertising) with faster progress on process improvement and completion of Dedicated Freight Corridor (DFC) is vital to sustain the growth momentum.

Robust capex plan positive for sustainable turnaround

FY16 capex, at INR822bn, was up 25% YoY, led by impressive progress in new line construction (50% YoY), gauge conversion (18% YoY) and rolling stock (12% YoY). Target capex for FY17 at INR1.21tn is 47% higher than FY16, led again by the above mentioned items along with greater emphasis on doubling and electrification works. In addition, the ambitious target of awarding all civil contracts for DFC by March 2016 end along with the proposal to develop 3 new corridors are important to regain the IR’s lost market share in freight traffic. 

Banking on external resources, internal accruals to fund plan outlay

As far as generating internal accruals is concerned, FY16 saw IR more or less meeting its target at ~INR193bn (up 8% YoY). However, 21% YoY growth target in FY17 looks stiff, considering no tariff hike, subdued freight traffic growth and higher wage bill. Similarly, while 74% YoY growth in extra budgetary resources (market borrowings, PPP) in FY16 is commendable, the target for FY17 is again challenging at 92% YoY growth. IR failed to utilise the entire budgetary support in FY16 (6% YoY growth); FY17 again assumes just 7% growth in budgetary support to IR at ~INR342bn. 

LINK
https://www.edelweiss.in/research/Construction--FY17-Rail-Budget-Remarkable-Amidst-Funding-Constraints;-Sector-Update/31691.html