The most significant proposal in this year’s railway budget is the linking of freight rates to fuel prices. Analysts estimate that freight rates will go up by at least 5% on 1 April, when the policy is implemented. That may have an impact on inflation as transportation costs for coal, ores, cement and foodgrain will rise.
However, as the current demand environment is tepid, companies may choose not to pass on the increase to consumers. In this event, expect a slight hit to earnings in the coming year.
For example, India Nivesh Securities said that, “Given that cement players tend to make 50-60% of dispatches through railways, front line cement companies ACC Ltd, Ambuja Cements Ltd and UltraTech Cement Ltd would see an impact of 2.1-2.7% on their FY14E/CY13E EPS (earnings per share).”
In any case, the overall impact on wholesale price index inflation (WPI) may not be more than 10 basis points (bps) in the near term, according to economists.
“According to our estimates, the effect of this price increase would be negligible. We estimate that a 10% increase in freight tariff would increase overall inflation by 0.03-0.05%,” Kotak Securities Ltd’s economist Indranil Pan said in a note. Thus, it is unlikely to prompt a rethink on the Reserve Bank of India’s part at its next review of monetary policy.