Railway budget disappoints Wagon manufacturers

The tone was clear from Mamata today, when she presented the Railway budget for this year. The sentence “The old mindset of economic viability should be substituted by Social viability” clearly summed up what she had in her mind. The wagon manufacturers were betting big time on the initiatives that would be taken the Railways to boost the movement of freight and goods across the country. But, clearly the emphasize has been laid on passenger trains and not on revenues from the increase in freight movement.

The interim railway budget presented by Lalu in February had indicated that the production of wagons needs to be increased to about 15,000 units per annum and diesel and electric locomotives to 480 units. The wagon manufacturers were planning to undertake capacity additions as well.

Texmaco, currently has a capacity of around 5000 wagons and was planning for a capacity addition that would produce 7500 wagons per annum. Titagarh which currently has a capacity around 5500 wagons was specifically looking at aluminium wagon orders. It had even formed a JV with Freight Car America for this purpose.

However, the Railways budget had envisioned the procurement of only 18,000 wagons for the current financial year. Out of this 18,000 it is yet to be seen how many would be thrown open to private players, leaving out the wagons that the railways itself can manufacture. The value of this procurement is not clear yet. However, if a rough estimate were to be drawn up Titagarh Wagons currently has a order book for 19,000 units and the order book is valued at 2000 crore.

So, it seems that somewhere around 2000 crore is what the wagon manufacturers would be able to monetize from the wagon division. There are too many players including TIL, Texmaco, unlisted players and State owned entities that will look at a share of this 2000 crore pie. It is highly unlikely that Texmaco or TIL would be benefited immensely from this opportunity.

If the above is the case for the short term, the long term also does not look rosy. It seems that Railways will actively look at making use of its existing facilities and the proposed manufacturing plants to increase the number of wagons and coaches that it can build on its own. Per the budget, one new coach factory is to be set up in West Bengal. Also, the Railways has been in touch with Department of Heavy industries for the take over of ailing wagon manufacturing units like burn Standards.

To contact the equity analyst on this story: Arun Gopalan in Chennai at Arun@hbjcapital.com