Railway Budget: Record outlays may benefit a host of cos (indian stock market)

Growth initiatives appear promising

Armed with a cash surplus of Rs 25,000 crore, the Indian Railways has announced several initiatives towards easing infrastructure bottlenecks in the Railways. These moves may open up a host of business opportunities for many companies.

Backed by the largest ever annual plan outlay of over Rs 37,500 crore, the Railways Minister's growth initiatives appear promising.

Rolling stock

The Budget has laid down plans to procure an all-time high number of 20,000 wagons, 250 diesel and 220 electric locomotives for the coming year. This opens up sizeable potential revenues for wagon manufacturing companies such as Texmaco, BEML and Titagarh Wagons (the company has recently filed for an initial public offering with SEBI), which derive a significant portion of their revenues from the manufacture of wagons for the Railways.

Besides revenue growth, these companies may also benefit by way of margin expansion over the long-term, given the proposal to migrate to high-end stainless steel wagons starting from 2011. The Government's focus on setting up public-private partnerships to further infrastructure growth may also help keep the demand for wagons buoyant.

That apart, introduction of a wagon leasing policy and the wagon investment scheme may reduce the capital outgo for the buyers and boost demand. Nonetheless, this could also breed competition. Attempts by established foreign players such as General Electric, Alstom and Bombardier, with a superior technology backup to expand their operations in the Indian market, may raise competition for existing players.

In this context, the fact that Indian companies enjoy access to lower manufacturing cost offers some respite.

Freight corridors

Kalindee Rail Nirman, a frontrunner in railway related infrastructure works such as construction of new line and gauge conversion, may benefit significantly from the setting up of dedicated freight corridors by the Railways. This may translate into topline growth for the company from the next financial year, with the work on both the Eastern and Western dedicated freight corridors slated to begin by 2008-09.

The thrust on setting up of freight corridors, rail-port connectivity and increased investments expected in container rolling stock and inland container depots by Container Corporation and other operators may also open up opportunities for logistics players such as Gateway Distriparks and Allcargo Global.

With newer schemes in place for procuring wagons, these players may be able to expand at a faster rate. This could have marginally negative implications for Container Corporation, which stands to lose its monopoly in rail logistics. The proposal to form special purpose vehicles to establish rail links to ports such as Mundra, Kandla and Krishnapatnam may help Mundra Port and SEZ scale higher growth by way of improved connectivity.

Other initiatives

Kalindee Rail Nirman may also benefit from the railways' target to set up new lines spanning 350 km and gauge conversion for over 2,150 km. Notably, these have been planned for an outlay of Rs 1,730 crore and Rs 2,489 crore respectively.

Further, the Government's focus to strengthen railway safety through automatic devices such as anti-collision device (ACD) and signal and telecommunication (Rs 1,520 crore) also holds potential. Companies such Kernex Microsystems, which manufactures ACDs and other companies such as Integra Hindustan, Kalindee and Siemens, which are involved in providing signalling equipment to the Railways stand to gain from this. Among other beneficiaries of the rail budget are companies such as Stone India, Hind Rectifiers and Simplex Castings.

IT push

Apart from capital goods suppliers, the Railway Budget offers some opportunities for domestic IT hardware and software companies as well. Proposals ranging from increased mobile ticketing, augmenting IT infrastructure, fleet tracking, having CTV and LED displays at Railway stations to having complete call-centre infrastructure by 2008-09 gives companies operating in these segments significant opportunity.

For example, while Bartronics might benefit from greater RFID deployment, proposals to increase mobile ticketing may benefit CMC.

MIC Electronics being a strong LED and video display manufacturer may be a beneficiary.

HCL Infosystems with its complete IT infrastructure offering and existing Government clientele could make inroads into Railways. Along with CMC, it could also look to tap into system integration projects.

All these companies are used to working with the relatively smaller margins that domestic deals provide. But it remains to be seen if tier-I IT companies will look at entering this fray, as a means to increase their domestic footprint.