Railway Budget 2015-16 : Evolution, not revolution! :: HDFC Sec

Please Share::

�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��

��

-->
Evolution, not revolution! The Railway Budget 2015-16 marked a promising departure from established conventions (populism) with an absence of new train announcements and a marginal hike in freight rates. To us, the budget’s intent was more to present a five year plan for development of Railways. Fixes were suggested for leaky plumbing through PPP (Public Private Partnership) via innovative financing models and augmenting internal resources. The stated objective is to make capital investments to the tune of Rs 8,560 billion over the next four years. However, structural reforms in the railways related to simplifying the organisational structure and decentralization of power are still not visible. While the intent seems noble, the Railway Budget was not very different from solutions and investment proposed in the 12th FYP and earlier Vision 2020. As always, execution holds the key. NOT REVOLUTIONARY :  No drastic change visible in budget structure and presentation. While tall and unrealistic promises to launch new trains, etc have been avoided, we do not see any fresh approach to solving the structural weaknesses of the railways.  No major organisational change was unleashed (eg. revamping the Railway Board), nor was there any attempt to change the mix of operations or modify cost structures in any significant way. FREIGHT BOOST FEASIBLE :  The ~14% hike in freight earnings looks feasible with the increase in tariffs effectively reducing the ask on volume increases to 6-7%. This looks achievable with the likely growth in coal, cement, iron ore volumes. Investments to hike network efficiency over the next few years will be crucial to achieving continuous growth in freight earnings and gaining market share from roads.  Container traffic is growing much faster than overall traffic. Improving container carrying efficiency looks like a key imperative to us. PASSENGER REVENUES TOO OPTIMISTIC :  Passenger earnings have risen from 25% to 27% of the revenue mix in the three years (FY13-15) primarily owing to fare hikes. This revenue stream is budgeted to rise by 18% in FY15E, even as passengers carried will dip marginally. We think that the 17% YoY growth in passenger earnings budgeted for FY16 is infeasible without at least one more significant hike in passenger fares.  This, in any case, would cap volume growth and is likely to be a political and practical challenge (as high end fares are anyway close enough to discount airfares).  Longer term, a significant growth in passenger earnings is, indeed feasible on the back of higher investments into rolling stock and other
infrastructure, but FY16 is surely going to see a miss. EMPLOYEE COSTS REMAIN A DRAG :  It is depressing to see that salaries, perks and pensions account for ~50% of the overall cost of running the entire Railway network. This will only increase with time as pay hikes kick in, courtesy the 7th Pay Commission.  This will consequently lead to deterioration in the operating ratio (Targeted operating ratio for 2015-16 at 88.5% against 91.8%in 2014-15: best in the last 9 years). It surprises us that such a lopsided cost structure is not talked about or debated (let alone criticised) anywhere in the popular media. CAPEX WELCOME, DEBT SERVICE NOT VISIBLE :  We are happy to see the ambitious intent to spend upto Rs 8,560 bn over the next five years in building out the Indian Railway network.  However, it is not apparent to us as to how this invested capital will be serviced, especially as a large part of this outlay is intended to be financed by borrowings. For example, 35% of the Capex for FY16 (Rs 1,000 bn) is intended to be financed via market and institutional borrowings, which we find alarming given the lack of clarity on servicing.  We also note that the Railways have continuously resorted to using borrowed funds to finance much of the historical capex as well. We are even more alarmed to see no outlay for payment of interest (or repayment of debt) in the Railway Budget for historical borrowings.  Similarly, projects worth Rs 25 bn crore through BOT/Annuity route (Wardha-Nagpur 3rd line, Kazipet-Vijaywada 3rd line, Bhadrak–Nargundi 3rd line and Bhuj-Nalia Gauge Conversion) have been announced but there is lack of clarity on the revenue or operating model.  Implementation of these plans hinges on the establishment of an infrastructure fund, a holding company and a JV with an existing NBFC of a PSU with IRFC for raising long term debt from domestic as well as overseas sources, including multilateral and bilateral financial institutions. Further clarity on these avenues is awaited. WAGON PROCUREMENT : IMPACT ON TEXMACO RAIL AND TITAGARH WAGONS  The wagon procurement plan of 16,800 for FY16 looks good, but we understand that FY15 procurement is unlikely to exceed 10,000 vs. the 13,162 target. Tenders for FY16 have not been released as yet.  Two major listed wagon manufacturing companies – Texmaco Rail and Titagarh Wagons continue to grapple with operating losses on existing wagon orders.  Industry is suffering from overcapacity and in this back drop it is difficult to see a sharp return to peak profitability (18% OPM) in the near term.  However, a more diversified revenue base for Texmaco (defence wagons, rail infrastructure through Kalindee) holds it in good stead compared to Titagarh Wagons, which gets more than 90% of its revenues from railway wagons.  At 30x FY16E consensus EPS, Texmaco Rail’s stock price factors in possible positives for the wagon business, however a possible ramp up in revenues of Kalindee Rail can aid earnings growth further, providing further fillip to the stock.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3011634