Ambitious agenda

March 14, 2012

Rail budget sets ambitious targets for FY13 (revenue) and

4x increase in capital outlay 12th five year plan to Rs7350bn. Aims to achieve sharp improvement in operating ratio (+28%) (2) Operating Ratio at 84.9% (+1010 bps) and (3) capital outlay at Rs 601bn (up 21%)

FY13E highlights (1) Gross Traffic Receipts at Rs1.3tn

Targeting operating ratio to 74% by FY17 v/s 95% in FY12.

This is significantly higher than avg. of 93% (FY09-FY12). Budget is benchmarking ratio to best year ever of 1963-64 sector relying railway for transportation. Mixed budget for railway related stocks

Sharp freight rate hike (on 6th march) will be negative for

Rail budget announced today is an combination of tighter allocation, expected improvement in operating ratio (at 85% from 95% in FY12) aided by increase in freight rates (passenger fare following the cargo freight hiked last week) translating into modest rise in GoIs fiscal support to the rail budget (Rs 240bn) and lower market borrowing (Rs 165bn).

Non-Populist Reflection of tight financial condition

The rail budget can be considered non-populist and is a reflection of the intensely tight fiscal conditions facing the governments in general and declining profits of the railway department. The later is reflected in the fact that the passenger fare hike (10% to 12%) has happened after a long gap of 8 years.

FY13E gross traffic receipts growth expected at 27.6% to Rs 1.3tn

Railways expects gross traffic earnings to increase sharply by 28% to Rs1,254 bn in FY13E, driven by (1) 25.2% growth in passenger earnings to Rs360.7 bn aided by 10-12% increase in fares and 5.4% growth in passenger traffic and (2) 30.2% increase in freight earnings to Rs893.4 bn. Sharp increase in freight earnings will in turn be led by (1) 5.6% increase in freight loading to 1025 MT and (2) 20-32% increase in freight rates (effected from 6 Mar12). We believe that the gross traffic receipts targets are optimistic and expect disappointment.
Rs bn Gross traffic earnings Expense & Appropriation Ordinary working exp Railway depreciation Railway pension fund Miscellaneous Expenditure Total Net earnings Dividend Excess/Surplus Railway Development Fund Railway Capital Fund Plan outlay (investments) Operating rates (%) Margin 407.92 94.6% 5.4 576.3 91.1% 8.9 495 95.0% 5.0 21.3 601.0 84.9% 15.1 21.5 895 63 49.4 14 681.4 55.2 158.2 736.5 70.0 158.0 8 964.5 120 67.4 53 986.1 71 57 15 10.2 12.6 14.3 6.4 1124 222 67 156 14.0 211.2 18.2 941.0 756.5 61.6 168.0 11.0 11.7 6.2 844.0 95.0 185.0 11.6 54.2 10.1 FY11 (Act.) 945.4 FY12BE 1062.4 FY12RE 1039 % YoY 9.9 FY13BE 1326 % YoY 27.6

A: Actual; RE: Revised Estimates; BE: Budget

Emkay Global Financial Services Ltd

Railway Budget

Indian Railway Budget 2012-13

Indian Railway Budget 2012-13

Railway Budget

Rail freight expected to grow by 5.6% to 1025 MT, seems optimistic

Freight traffic movement expected to grow by 5.6% to 1025 MT over 970 MT in FY12P (revised estimates). Growth in rail freight expected to be driven by (1) strong growth in domestic coal production comprises about 50% of annual traffic (CILs production expected to grow by 6.4%) and (2) healthy growth across product categories
Rail freight expected to grow by 5.7% to 1025 MT in FY13E
1200 1000 Million Tonne 800 600 400 4.0% 2012(RE) 970 1,025 200 474 493 519 557 602 667 728 794 833 888 926 0 993 2% 0% 5.3% 7.5% 8.0% 7.2% 6.6% 5.0% 4.3% 5.7% 4.7% 6% 4% 8% (%) 10.7% 9.2% 9.1% 12% 10%

2012 (BE)

Source: Indian Railway, Emkay Research

Composition of the Rail Freight

Categories Coal RMl to Steel Plants Pig Iron & Fin. Steel Iron Ore for Export Cement Food Grains Fertilizers P.O.L Container Service Other Goods Total 2010-11 Tonnage (Mn) 420.4 13.3 32.8 118.5 99.1 43.5 48.2 39.3 37.6 69.2 921.7 YoY growth (%) 2011-12RE 454.5 14.6 34.5 104.63 108.84 46.1 50.02 41.51 38.3 77 970 2012-13BE 485 15.25 37 104 118 49.75 52 42 42 80 1025 2011-12RE 8.1 9.8 5.1 (11.7) 9.9 6.1 3.7 5.7 1.9 11.4 5.2 2012-13BE 6.7 4.5 7.2 (0.6) 8.4 7.9 4.0 1.2 9.7 3.9 5.7

Source: Indian Railway, Emkay Research

Passenger fare hiked by a moderate 10-12%

After a hiatus of 8 years, railways increased passenger tariffs by 10-12% across the board. We believe that the increase in passenger fares is moderate given the sharp increase in operating costs (Fuel prices up 50% in the past 10 years) and prevalence of significant cross subsidization from freight carriage.
Rail Category (In Paise/Km) Suburban trains Mails / Express trains Sleeper class AC Chair, 3-Tier AC 2-Tier AC 3-Tier
Source: Indian Railway, Emkay Research

Existing rate 40 Ps NA 41 Ps 110 Ps 150 Ps 252 Ps

Increase 2 Ps 3 Ps 5 Ps 10 Ps 15 Ps 30 Ps

2013 (BE)

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Increase (%) 5% NA 12% 9% 10% 12%

Emkay Research

14 March 2012

Indian Railway Budget 2012-13

Railway Budget

Capital outlay increased by 21% to Rs601 bn; could have been higher
The capital outlay for FY13E is Rs601 bn, which has been increased 21% (based on revised estimates (RE). However, they are up by mere 4.3% YoY based on budget estimates (BE). There has been a sharp drop in capital outlay for FY12 (vs. BE) refer graph below. Allocation of outlay is as follows (1) acquiring rolling stocks - Rs 182bn (2) investments in signaling and telecom systems - Rs 20bn (3) gauge conversion - Rs 19.5bn (4) doubling lines - Rs33.9bn (5) passenger amenities - Rs 11.1bn (6) railway electrification - Rs 8.2bn and (6) new lines - Rs68.7bn. Considering the estimates for operating ratio, capital outlay could have been higher. Further, budgeting could have been done in favor of acquisition of rolling stocks over new track lines. The sources for financing capital outlay are (1) gross budgetary support of Rs240 bn (2) internal generation of Rs200 bn and (3) balance from extra budgetary resources or market borrowing.
Plan outlay to shoots up 21% to Rs601 bn
700 600 500 Rs bn 400 300 200 100 0 FY08 FY09 FY10 1% FY11E FY12 (BE) FY12 (RE) FY13 (BE) 9% 5% 290 369 27% 403 408 576 495 21% 601 30% 25% 21% 20% 15% 10% 5% 0%

Equal to 45% of total revenues highest ever allocation

60 55 50 45 40 35 30 FY08 FY09 FY10 FY11E FY12 (BE) FY12 (RE) FY13 (BE) 40 46 46 43 54 48

45

Overall Capex
Source: Indian Railway, Emkay Research

Grow th

12th Plan perspective: 4x increase in outlay, but fails on a clear roadmap

The overall investment spending envisioned in the 12th plan is Rs 7350bn versus Rs 1900bn in the 11th Plan. The Five focus areas of the 12th plan are safety, decongestion, capacity expansion, modernization, and operating efficiency.

Dependence on budgetary support has been guided at Rs 2500bn against, a modest rise of 7.3% over 11th FYP. This clearly indicates decreasing dependence on budgetary support and greater reliance on internal on non-budgetary resources. The estimated internal accrual of Rs 2000bn along with FY13BE surplus of Rs 180bn imply an annual run rate of Rs 450bn for the balance four years of the Plan period which is an ambitious target. The ambitious outlay target in the 12th plan would require alternate funding support and much larger implementation bandwidth by the railways. Clearly, the Railway Budget announced today lacks any clarity on these issues.

Emkay Research

14 March 2012

Indian Railway Budget 2012-13

Railway Budget

12th Plan perspective: Operating ratio of 74% by FY17E, an ambitious target

Step-up in investment in 12th 5-year plan is supported by steep improvement in operating ratio to 74% by the terminal year. This is significantly higher than the average of 93% during FY09-FY12, infact highest ever in last 25 years. Even during the best phase of economic boom of FY04-FY08 during the average was around 82% and lowest was 77%. Clearly, the Rail Minister is having an overambitious efficiency gains.
Aggressive assumption for improvement in operating ratio (%)

100 95.1

90 89 85.3 80 77 70 77.2

93.6

93.3

84.9

74.7

60 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 201112RE 201213BE 201617BE

Source: Indian Railway, Emkay Research

Our observations

Increase in freight rates (effected on 6th March) negative for users of railways for transport of goods Land Allocation to Dedicated freight corridor will be beneficial for private operators and Container depots like Concor & GDL Railways budgeted procurement of 16,000 wagons in FY13E will benefit companies like Texmaco, Titagarh Wagons We expect the increase in plan outlay will benefit companies like - L&T, Microsystem, BEML, Kalindee Rail, ARSS Infra, Hindustan Rectifier Dedicated freight corridor has not witnessed much action and the progress on land acquisition has been pretty ordinary at 6,500 hectares v/s and overall requirement of 105,000 hectares. We believe the capital outlay although could have been higher considering the fact that railways has not been able to achieve their target expenditure in FY12E.
Key beneficiary companies Kalindee Rail, BEML, Stone India etc Texmaco and Titagarh Wagons. However, overall pie has shrinked as compared to FY12 L&T, Simplex infra, Kalindee Rail with almost all the companies related with Railway work ARSS Infra, Kernex

Key initiatives Outlay on expanding rail lines Rs 102.6bn (Rs 88bn in FY12) Procurement of 16000 wagons vs 18,000 units in FY12 Accelerating process for Dedicated rail freight corridor (DFC). Allocated 6,800 acres of land parallel to the existing railway network for DFC Railway Electrification Rs 8.2bn

Emkay Research

14 March 2012

Indian Railway Budget 2012-13 Break of Capital outlay and Key participants
Capital outlay Rs bn Gauge conversion Doubling Rolling stock Locomotives Carraiges Wagons Cranes Road safety works Bridge works Signalling and telecommunication Electrical works Metropolitan transport Others Total Capital outlay

Railway Budget

FY11 FY12BE FY12RE % YoY FY13BE % YoY Companies which operate in the respective segment 32.3 21.7 147.1 57.2 41.8 46.7 0.0 110.1 3.5 9.6 9.3 5.18 69.1 407.9 27.8 54.2 141.2 52.2 30.1 44.0 13.3 200.0 3.3 11.0 12.7 65.02 61.1 576.3 26.6 26.5 158.9 59.0 46.0 49.8 0.0 165.7 3.4 8.9 11.1 10.52 83.1 494.7 50.5 -4.8 -7.4 19.9 103.1 20.2 21.3 -17.7 22.2 8.0 3.1 10.0 6.6 22.7 34.1 184.9 71.4 42.0 52.6 14.5 200.0 4.6 20.1 13.4 47.33 73.9 601.0 20.7 Kernex Microsystem 38.1 Construction contractors 124.6 Kalindee Rail, 20.3 349.9 BEML, Alstom projects -11.1 21.5 -14.6 Kalindee Rail, BEML, Stone India etc 28.7 Kalindee Rail, BEML, Stone India etc 16.4 BHEL, BEML, Titagarh, Texmaco, Kalindee 21.0 BHEL, BEML -8.6 Texmaco, Titagarh Wagons, BEML 5.7 Texmaco, Titagarh Wagons, BEML

Emkay Research

14 March 2012

Indian Railway Budget 2012-13

Railway Budget

Annexure
Profile of key railway companies
Company Brief Profile Involved in manufacturing, installing and maintaining of anti-collision systems Kernex as well as conceptualizing, designing, and developing certain railway safety and signal systems for Konkan Railways Corporation Ltd. Manufacture and installation of signaling and telecommunication equipment and execution of gauge conversion projects of the Indian Railways Manufactures of rectifier equipment, semi-conductor devices. Also, AC electric locomotives and AC electrical multiple units for Railways. Manufactures Rail Coaches & Spare Parts and Mining Equipment Manufacturers various equipment for the railways like alternators, air brakes and brake regulators. Manufactures Railway Freight Cars/Wagons, Hydro-Mechanical Equipment for Mega Power Projects, Heavy Steel Structures and Process Equipment. Manufactures railway wagons, Bailey bridges, Heavy Earth Moving and Titagarh Wagons Mining equipment, steel and SG iron castings of moderate to complex configurations Company undertakes construction of railway infrastructure, roads, bridges, and irrigation projects.

Kalindi Rail

Hind Rectifiers

BEML India Ltd.

Stone India

Texmaco

ARSS Infra

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Emkay Research

14 March 2012

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