27 February 2015

Railway Budget 2015-16: On the right track for a long journey

Key points

The Union Railway Budget for 2015-16 aims to achieve the dual objectives of improving the financial health of the Indian Railways and significantly increase the capital expenditure (capex) on modernisation, expansion and improvement of customer amenities & services of the railways at the same time.

The new rail minister’s mantra for improving the financial health of the railways is to improve the operational efficiencies and customer experience through better management, transparency and accountability.

On the other hand, the minister has increased the planned expenditure by 52% to over Rs1 trillion in 2015-16 for an aggressive network expansion plan including 16,400km of new lines, gauge conversion, doubling/tripling of lines, electrification and freight corridor. What’s more, the government has come out with a five-year plan that envisages capital investment of Rs8.5 trillion. The aggressive capital outlay would boost the morale of the domestic industry especially with a five-year visibility of possible business opportunity spelt out. It is also a step towards reviving the industrial activity and the investment cycle in India. In this regard, the government is also going to release a vision document outlining investments to be made till 2030.

A marginally negative step from the corporate standpoint is the revision done in the freight charges that would increase the freight cost for cement, coal, steel, urea and some other commodities. Moreover, there are questions regarding the government’s ability to raise financial resources to fund the aggressive capital investment plan outlined in the rail budget.

However, the positive takeaway is that the government has shown a clear intent to considerably increase the capital outlay for infrastructure projects and we could see a similar policy push in the Union Budget for 2015-16. Thus, we believe that the railway budget is positive for corporate India and the equity market. To play on the capital spending by the railways from the long-term investment perspective we prefer stocks like: Larsen and Toubro, Kalpataru Power Transmission and Thomas Cook (its subsidiary Quess is among the largest maintenance & housekeeping companies in India) in our coverage stocks along with companies like Gateway Distriparks and Container Corporation of India, which would see a significant improvement in their rail freight business with a better railway line network and a lower turnaround time.

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