Rail Budget: Reforms on, slowdown drags

Updated: Feb 28 2013, 08:38am hrs
BofAML

The rail Budget 2013 announced that land acquisition for 2,800 km of the eastern and western freight corridors is almost complete. The first major civil construction contract on the 343 km Kanpur-Khurja section of the eastern corridor has been awarded and by the end of FY14, construction contract to cover up to 1,500 km on the two corridors would be awarded and the work will be started. L&T could be the potential beneficiary as it is one of the two bidders for a $1.2-billion contract with its Japanese partner.

We believe the rail Budget has carried on reforms by introducing fuel adjusted component (FAC)-linked revision in freight tariff from April 1. This should increase railway freight by 5-6% which, in turn, should add about 20 bps to WPI inflation assuming most companies pass on. The railways will adjust freight tariffs twice a year to neutralise the impact of changes in fuel prices on operating expenses.

An average ~35% of cement industry volumes and key industry inputs are transported on rail. We estimate that a ~5-6% hike in rail freight will hurt CY13/FY14 ebitda of majors by 1-3% assuming no pass through via higher cement prices. Among the majors, ACC has the highest rail exposure at ~50% of volumes while Ambuja has the lowest (~25%).

Railway tariff hikes have pulled down the operating ratio (ratio of total working expenses to gross traffic receipts) to 88.8% in FY13 from 94.9% in FY12 despite slower growth pulling down railway traffic. The railways has targeted 87.8% for FY14. In fact, this is the first time that the railways operating ratio has come off below 90% since FY08. The 14% increase in gross traffic receipts in FY14 looks fairly reasonable given the steep hikes in railway tariffs. The railways has targeted a 1,047 million tonnes of revenue earning originating traffic in FY14, after scaling down the FY13 target to 1,007 million tonnes from 1,025 million tonnes. Working expenses, at 14.3% in FY14, are also conservative.

The railways has hiked annual plan outlay by a limited 5% to R63,600 crore. This is largely proposed to be financed by gross budgetary support of R26,000 crore, internal resources of R14,260 crore and market borrowings of R15,100 crore. This has also muted expansion plans.