Edelweiss sector update on Construction - Railways: Capex gathering steam

That Indian Railways (IR) is in the midst of a humongous capex surge (INR8.56tn investment plan over 2015-19, 1.9x 2000-15) is well known. What, however, has surprised most is the unprecedented speed at which the plan is bearing fruit—FY17 capex >2x FY15—and the wide array of segments where investments are happening. While IR’s historically indolent image had led to many doubting the government’s grand plans, tangible success across multiple parameters like broad gauge commissioning, electrification, rolling stock manufacturing and increasingly positive commentary from numerous companies is turning sceptics into believers. We believe, the railway boom in India has just begun and reiterate our thesis that rail investments will far outstrip those in National Highways over the next decade. That it will lead to a wider India capex revival (Our report on “Capex Recovery – Here it comes!”), should only make the landscape for stocks and the sector more rewarding.

IR’s investment plans turning into reality

IR has announced a massive INR8.56tn capex plan over 2015-19, ~90% more than the combined capex done in previous 15 years. Performance in the first 2 years of the plan has been strong with ~59% and ~29% YoY growth in investments over FY16 and FY17, respectively. IR has also notched its best-ever achievement on parameters like broad gauge commissioning, electrification, freight terminal commissioning, etc., in FY17.

Management commentaries turning increasingly positive

As highlighted in our sector report “Indian Railways - Re-birth of the Colossus”, comparatively small package sizes of IR projects had historically precluded listed companies from bidding for rail projects. However, with the benefits of assured funding, corporates are increasingly able to tap the surging rail opportunities. Companies in electrification (Kalpataru Power, KEC), components (ABB, Cummins, Bharat Forge), bearings (Timken, SKF) etc., have been vocal about the “huge investments happening across the board,” traction in order intake from IR and the fact that “execution in these projects has also started as per plan and is progressing satisfactorily.” Recent developments like IR’s plan to electrify 24,400km over FY17-21 (<7,000km over FY12-16), announcement of an INR1tn Safety Fund and upcoming bids for the ~INR200bn Kanchrapara coach manufacturing plant will ensure that this trend will grow stronger going ahead.

Outlook: Transformation underway

We believe, the rail revolution has only just begun in India and the pace of change will gather traction going ahead. We expect EPC companies to be big beneficiaries of the rail opportunity as an entire new segment has emerged for them. Similarly, engineering and capital goods companies undertaking product manufacturing, civil construction, electrification & signaling, etc., will benefit from IR’s capex. Lastly, modernisation of IR’s fleet will benefit rolling stock manufacturers.

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