Reports that Indian Railways is looking to ramp up its wagon procurement should have come as a godsend for the shares of wagon makers. Instead, shares of the Texmaco Rail and Engineering Ltd and Titagarh Wagons Ltd have lost around 18% each in the last two months.
The caution reflects the unfortunate experience these companies have had with wagon procurement. As railway wagon orders became sporadic in recent years, companies undercut each other, taking a huge hit on pricing. Retendering, low prices and insufficient orders have all contributed to their woes.
Part of the problem is about to get addressed. The national carrier is working to issue a large wagon tender for about 22,000 units. Given the expanding capacities (new rail lines) and growing needs of the customers, Indian Railways is said to be looking at maintaining the procurement momentum for at least a couple of years.
But given the bitter experience in recent years, equity investors are cagey. Part of the fear is competitive pressures will remain high. Underutilization of the existing capacities means firms are likely to bid aggressively. Also, news reports indicate that the national carrier plans to procure wagons through reverse auction.
While good for low-cost bidders, reverse auction can keep prices low and crimp earnings benefits. This is amply seen in the coal blocks and renewable energy capacity additions auctions. Also implicit in the large order is the railways’ objective of lowering the procurement cost through reverse auction, according to news reports. This is at a time when raw material costs are on the upswing.
Of course, these companies are facing other earnings headwinds as well. Performance of Titagarh Wagons, for instance, was impacted by execution of low-margin legacy orders and technical problems in overseas businesses in Europe. The company expects the situation to improve in the current fiscal year, returning to normalcy next year.
Even then, given the sizeable contribution of the Indian operations and railway business, the wagon business remains key to earnings turnaround of the companies. Texmaco Rail’s revenue drop in FY18 was largely attributed to low wagon orders.
“The company’s overall performance for the year (FY18) was under severe pressure due to very poor order book in its wagon division for a greater part of the year,” Texmaco said in a statement last month after releasing March quarter results.
Subsequent commentary by various stakeholders indicates wagon ordering activity is set to gather pace. The question now is will they be remunerative enough, especially post the order drought in recent years and underutilization of capacities.