The changing beneficiaries of rail capex
Investors began selling shares of the traditional beneficiaries of railway capital expenditure (capex)—Titagarh Wagons Ltd and Texmaco Rail and Engineering Ltd—even before the Union budget. The selling continued as the budget proposals became known. Why did that happen even after Indian Railways stepped up next fiscal year’s capex by 8% to Rs1.3 trillion?
The answer lies in the railways’ expenditure. The thrust on network decongestion and safety means that the focus right now is on route expansion. Not on rolling stock acquisition. New track construction and electrification are seeing higher allocations. On the other hand, allocation for rolling stock which involves locomotives, coaches and wagons has been cut by two-thirds.
Rolling stock constitutes a significant portion of business for traditional rail stocks like Titagarh Wagons and Texmaco Rail. “In recent years, spends on rolling stock are only being tinkered with. They are not seeing the kind of jump as one may expect from overall capex numbers. In fact, if one sees the physical targets (in terms of number of units) for next fiscal there is not much of a change from the current year,” said Rohit Natarajan, an analyst at IDBI Capital Markets and Securities Ltd. “Delay in decommissioning of old coaches or railways, going for refurbishments than new acquisitions can be the reasons. Either way, the headline (rolling stock) numbers are far from enticing.”
Conversely higher spending on track construction and electrification are expected to benefit companies like KEC International Ltd, Kalpataru Power Transmission Ltd, Simplex Infrastructures Ltd, Siemens Ltd and ABB India Ltd which do civil contracts, track laying, signalling and electrification projects. These companies have diversified revenue streams. A quantum jump in rail capex means that the railway business is on an upswing for these firms.
KEC International, for instance, has seen its revenues from the railways jump 50% in the first nine months of the current fiscal year. It expects business from the national transporter to double. From just 4% a year ago, the share of railways in total order intake jumped to 17% this fiscal year.
The traditional rail beneficiaries are diversifying. Titagarh Wagons ventured into defence contracts and mining equipment. Texmaco Rail acquired Kalindee Rail Nirman (Engineers) Ltd, which does track and signalling work. While benefits from diversification are increasingly visible, the railways still remains a major revenue generator for these companies.