On the fast track

The Rs 2.5 lakh crore investment planned by Indian Railways over the next five years indicates promising prospects for its suppliers.

A booming economy and the rising needs of transportation on its network is forcing the Indian Railways to improve and expand its infrastructure across the country.

Unlike in the past, the railways is not hampered by the large investments needed to overhual a congested and an overworked system. Four consecutive years of profit has meant a cumulative cash surplus of Rs 68,800 crore.

This turnaround in the railways coupled with the targeted capital expenditure (capex) of about Rs 2.5 lakh crore over the next five years will not only improve the railway infrastructure, but also provide an attractive opportunity for its suppliers.

"The railways has budgeted for a FY09 spending of Rs 37,500 crore, up 21 per cent on y-o-y basis for network expansion, upgradation, and development of high density routes. Of the Rs 2.5 lakh crore investment, Rs 1 lakh crore would be via public-private-partnership projects," says Nitish Ojha, fund manager, Taurus Mutual Fund.

For the annual plan alone, the railway budget has already announced activities relating to throughput enhancement of high density network routes, improvement and expansion of traffic facility and network, construction of flyovers, bypasses, up-gradation of goods sheds.

Besides, in FY09, the railways plans to construct multi-modal logistic parks, set up locomotive manufacturing units, improve port connectivity and allow private players to run container trains.

"Overall, we are bullish on the growth prospects for railways, given the fact it is an efficient mode of transport, with logistical advantages. In fact, growth rate in rail traffic during the 10th five-year plan was twice of what was projected, highlighting the importance of this medium. However, further growth may require investments in rolling stock and tracks," says Mihir Vora, head of fund management - Equities, HSBC Mutual Fund.

Considering these facts, which highlight the long term commitment of the Indian railways towards the improvement of the railway infrastructure in the country, we have a list of companies that manufacture equipment for the railways including wagons, brakes, safety devices, engines, and will benefit the most in the near-to-long run, and thus reward their shareholders.

Rolling stock Over the next few years, investments worth several thousand crores will flow into the development of container wagons, locomotives, railway coaches and metro coaches.

New wagons will be produced to replace the aging fleet of Indian Railways. Over 20,000 km of high-density network will witness new investment, which is expected to generate huge demand for new wagons and locomotives engines.

During the 11th five-year plan, production of railway vehicles, also known as rolling stock, will be doubled as compared to the previous plan. For FY08, the spending on rolling stocks is estimated at Rs 5,500 crore.

Also, for FY09, the railway budget has estimated an all-time high outlay of Rs 11,045 crore for rolling stocks and manufacturing of 20,000 wagons, 250 diesel and 220 electric locomotives. This is good news for companies operating in these segments.    BANKING ON RAIL Rs crore BEML Kernex Texmaco Stone India Kalindee  Market Capitalisation 4410.30 227.50 1468.56 66.77 308.24 Net sales  2428.99 20.99 596.22 78.80 268.35 Operating profit 338.40 12.33 82.35 14.76 28.54 Net profit 200.66 5.05 49.60 11.61 15.69 EPS (Rs) 48.19 4.04 48.02 15.28 14.91 P/E (x) 21.98 45.05 29.61 5.75 19.65 Price (Rs) 1059.15 182.00 1421.65 87.85 293.00 Financials are based on trailing twelve months                           Source:BSRB BEML BEML, the second largest earth moving equipment manufacturer in Asia, is expected to be a major beneficiary of the investments planned by the Indian Railways, especially on metro coaches.

This is also reflected in its growing current order book of Rs 3,400 crore or almost 1.4 times its FY07 net sales of Rs 2,424 crore. BEML has set its sights on being a Rs 5,000 crore company by FY13. Considering the growth prospects, the target will be reached by 2010 itself.

BEML generates over 67 per cent of its revenue from manufacturing of mining and construction equipment, which are also growing businesses. Besides, BEML has also floated a company, BEML Midwest, where it holds a 48 per cent stake. It will own and acquire mines from the government, primarily in the coal sector.

While its railway business generates merely 4 per cent of its total income (in the year 2007), it is growing rapidly on the back of increasing railway spending.

More importantly, higher spending on the metro coaches will augur well for BEML, which is a pioneer in this field. According to the Railway Budget 2008-2009, about Rs 650 crore has been allocated for metropolitan transport.

In this context, the company is expanding its Bangalore-based plant capacity from 150 metro coaches per year to around 300 coaches a year.

BEML is expecting more orders for 'metro cars' from Delhi Metro Rail Corporation (DMRC) and is also participating in similar projects in other states such as Maharashtra (Mumbai), Tamil Nadu, Bangalore, Cochin and West Bengal.

The company is operating in different but growing businesses. Since these segments are witnessing huge investments, the company is expected to maintain a revenue growth of over 20 per cent.

Besides, the company is aggressively looking for opportunities in the overseas market and has thus reported a sharp jump in export turnover to Rs 257.7 crore in FY08 as against Rs 110 crore in FY07. Its current order book of Rs 3,795 crore, which is 1.26 times its FY08 provisional sales of Rs 3,005 crore.

At Rs 1,045, the stock is trading at 21 times its estimated FY08 earnings and 14 times its earnings in the FY09.

Texmaco An increase in demand for railway wagons, especially container wagons, will benefit Texmaco. Texmaco manufactures a range of heavy and precision engineering products, including railway wagons, hydro-mechanical equipment, structural, industrial boilers and pressure vessels and industrial machinery.

Besides, the company will be key beneficiary of the opening up of the container freight business to private operators and the setting up of dedicated freight corridor projects.

Once completed, the corridor can service almost 40 per cent of the estimated freight cargo (for the industry) by 2015 and expected to generate Rs 10,000 crore of additional demand for wagons in the next 5-6 years.

Texmaco, which enjoys a 25 per cent market share in this segment, will be one of the biggest beneficiaries of this investment.

The company will also benefit on account of higher demand for the hydro mechanical equipment on the back of up coming investments for the additional 20,000 mw of hydro power over the next five years. Its steel foundry division and real estate projects are equally promising.

The company has expanded capacity of its steel foundry (railway steel castings) from 10,000 MT to 22,000 MT during FY 2007. The company is aiming to up its capacity utilisation from the current 70 per cent.

Besides, its land bank at Delhi and Kolkata of about 30-35 acre could be a positive trigger, after it takes up development of the property. At Rs 1,421, the stock is trading at 19 times its estimated FY09 earnings and 14 times its estimated FY10 earnings.

Kalindee Rail Nirman Engineers Kalindee Rail Nirman, which generates about 70 per cent of its revenues from construction of tracks, gauge conversion and remaining from signalling and communication products, would benefit from the ongoing investments in these segments.

For FY09 alone, the rail budget has announced an expenditure of Rs 1,730 crore on new lines, Rs 2,489 crore for gauge conversion, Rs 626 crore towards electrification and Rs 650 crore for metropolitan transport projects.

In addition to this, the company will also gain on account of incremental business on the back of the setting up of the eastern and western dedicated freight corridors estimated to cost Rs 28,200 crore.

That apart, after the successful completion of the Delhi metro project, the company is now eying metro projects being set up in cities like Mumbai, Chennai and Bangalore.

These opportunities will also reflect on its growing order book, which is currently at Rs 500 crore or 2.6 times its FY07 revenues. At the current market price of Rs 295, the stock is trading at 22 times its estimated FY08 earnings and 13 times its estimated FY09 earnings. Wagon components Increased capex on wagons, locomotives and other related work of the railways will also propel higher demand for the different equipment used in rolling stocks and wagons.

The industry estimates suggest that for every new coach about Rs 50 lakh is invested on safety equipment ranging from break systems to suspensions translating into an opportunity of about Rs 5,500-6,000 crore. In short, it would prove beneficial for companies like Stone India.

Stone India Stone India is a major player in this segment and enjoys a market share of 25-30 per cent. The company deals in different kinds of brake systems used for carriage and freight, diesel locomotive and electric locomotives. It generates about 98 per cent of its revenues from railways.

Some of its advanced technological products such as End-of-Train-Telemeter (EOTT) are getting repeat orders. Indian Railways proposes to adopt EOTT devices in all its goods trains. This will be Stone India's first patented product, which will also be sold globally.

Besides, the company has also executed a technical collaboration agreement with Sumitomo Electric Industries (Hybrid Products Division), Japan for manufacturing of air spring for passenger and EMU/DMU/MEMU coaches for Indian Railways.

Sumitomo Electrical Industries is known to be a leading supplier of this product to Shinaksen (Japanese bullet trains).

The collaboration will help provide the latest technology in this field to Indian Railways, which is undergoing major technology upgradation in its rolling stock manufacturing process.

This is expected to replace the existing mechanical suspension system resulting in higher passenger comfort for trains running at higher speed.

According to the company, Indian Railways currently inducts more than 2,800 new coaches every year. In light of these opportunities, the company is expected to grow at over 35 per cent for the next few years. At the current market price of Rs 87.85, the stock is trading at PE of just 6 times its FY07 earnings.

Kernex Microsystems Along with expansion of tracks and wagons, safety of these tracks and passengers is equally important. The Indian Railways, after its review of Anti-Collision Devices (ACD) pilot project in North Frontier Railways, declared it to be successful. According to Railway Safety Plan, ACDs will be deployed in the entire Indian Railway Network by 2013 signalling a huge opportunity.

Companies like Kernex Microsystems India, which manufactures, install and maintain anti-collision systems as well as having conceptualised, designed and developed certain railway safety and signal systems for Konkan Railway, will be the key beneficiary of the increased allocation for safety devices and systems.

The company is also a technology partner for the development and implementation of auto driving devices for metro sky-bus, urban transportation system and advanced railway signal systems.

Considering that the total project outlay of implementation of ACD project is estimated at about Rs 2,500 to Rs 3,000 crore, taking cost escalation and design changes into consideration, there is a huge growth opportunity for the company.

The stock is currently trading at Rs 182, and holds good prospects on the back of strong growth in earnings (over next 2-3 years) in the range of 40-45 per cent.