Centrum Indian Railways conference - Event Update - Accelerating on the right track

Accelerating on the right track

We attended the Indian Railways' annual conference, presided by the Indian Railway minister, and the chairman of the IR board and the finance commissioner. Clearly, the team seems set to transform IR over the next 3-4 years, striving to significantly improve its service delivery, with both strong capex outlay and sustainable capex funding plans, and reorganising itself to improve synergy and lower operating cost.

Key takeaways:

- IR delivered strong capex of Rs940bn in FY16 (~70% jump YoY). It missed the budgeted target by a modest ~6%. A large part of the capex (~40-45%) was executed in Q4FY16. FY16E capex is more than double the average run-rate of ~Rs450bn spent by IR during the past five years. Further, the management is confident of achieving its FY17E target of Rs1.2tn, a 28% YoY growth.

- IR lowered its operating ratio to 90% in FY16 from 91.3% in FY15 and 93.6% in FY14. Various cost optimisation measures including increase in the share of low-cost open access power, train route optimisation exercise to reduce power demand during peak hours, and lower fuel costs benefits, etc drove cost reduction.

- For FY17, the operating ratio is targeted at 92%, higher than 90% in FY16, due to the impact of the 7th Pay Commission implementation (400bps increase in operating ratio). Excluding the pay revision impact, the operating ratio would have declined to 88%.

- In the FY16 budget, IR had set a five-year capex master plan entailing total capex of Rs8.6tn. It has set up innovative financing to fund this mega capex through a mix of enhanced budgetary support, internal generation, institutional financing and PPP. While IR expects to fund ~45% of its capex through budgetary support and internal accruals, the remaining 55% would come from external debt, PPPs and state JVs.

- The minister highlighted decentralisation of power to ensure project execution and operating cost reduction. Project approval cycle has reduced to 6 months from 24 months earlier.

- To improve efficiency, IR is now benchmarking itself with other global railway systems. The minister highlighted that globally, non-freight income currently forms ~20% share in total revenue of the railways vs 2-3% for Indian Railways. Hence, IR has a vast scope for monetising its land banks and creating other innovative revenue streams so as to reduce the pressure on it to continuously increase cargo freight rate (currently accounting for two-thirds of its total revenue).

- IR is making efforts to offer confirmed tickets for all its passengers as well as to offer "time-table based" operation of cargo trains in India by 2020. By then, IR expects even the dedicated rail freight corridor to be fully operational.

Overall, as part of its Vision 2020, the Indian Railways is in a transformational phase, striving to become more accountable and transparent, delegating decision making power to fast-track project approvals, bringing in more collaborative work culture within different verticals, and partnering with various countries (for capex funding and technology transfer) as well as state governments (to improve railways infrastructure). Strong infrastructure growth of Indian Railways is expected to have a spillover effect on the Indian economy as a whole.

Source : Equity Bulls

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