The new wagon allocation scheme of the Indian Railways (IR) might trigger a market consolidation among domestic wagon players, cautioned India Ratings and Research (Ind-Ra)
The scheme, which was released by the IR this year, would be a credit negative for the domestic wagon manufacturers on account of its predatory pricing nature and higher working capital requirements, said the rating firm in an analysis.
In FY19, the IR allocated around 11,790 wagons with an overall order value of ₹34.2 billion to the domestic wagon manufacturers through the new Bucket Filling Scheme with a reverse auction mechanism.
As per the revised scheme, the IR allocates wagons to L2-bidder at the same price as L1 only if the overall capacity of L1 is fulfilled, against the erstwhile mechanism where 60% of the tender quantity was allocated to L1-L6 bidders on a fixed ratio basis and the rest 40% based on their remaining capacities and execution track records.
“The new scheme would impact revenue visibility of small/mid-sized corporates who have created capacities in this segment. This is majorly for larger players who would have better bidding capabilities to acquire the major chunk of orders, thus impacting the industry-wide average realisations backed by the reverse auction mechanism,” it said.
Although the average price per wagon increased to ₹29 lakh in FY19 from ₹13 lakh in FY15, the increase was disproportionate to the expectation of the wagon players due to stoppage of free supply items by the IR.
In 3QFY19, Texmaco Rail Engineering, despite having the largest unutilised capacities in the industry, availed only 1,623 wagons amounting to around ₹500 crore as the other bidders had quoted far lesser prices, resulting in predatory pricing.
The IR had been supplying free items, which accounted 45%-50% of the overall raw material cost required to manufacture its wagon on a timely basis till FY17, instead of mobilisaton advances. However, in FY18-FY19 allocations, it stopped issuing these free items on account of supply constraints, Ind-Ra said.
Moreover, the IR also made it mandatory that items like cartridge tapered roller bearings should be purchased from Research Design and Standards Organisation approved sources, steel items from integrated steel plants where the IR board was earlier procuring and wheel sets from Rail Wheel Factory located at Bangalore. All these have pushed up the working capital borrowings of small/medium wagon manufacturers, said the report.
As per Ra-Ga, the IR has released around 11,790 wagons of the overall 22,000 wagon requirement in FY19 while the pending 9,000 wagons would be released in FY20. “The capacity utilisation to remain subdued at the existing levels in FY20-FY21, on account of the lower realisations and higher working capital requirements,” it added in its outlook.
