Wagon Makers Set To Roll In 20% Revenue Growth This Fiscal

Crisil Ratings has said that wagon makers are on track to achieve 20 per cent growth in revenue this fiscal, riding on a healthy order book. Additionally, improved scale of operations will propel operating margin by 100 basis points (bps) leading to higher cash accrual. That, along with modest capital expenditure (capex) plans, will keep the credit profiles of these companies stable.

A Crisil Ratings study of wagon manufacturers accounting for 65 per cent of the industry capacity of 40,000 wagons per annum, indicates as much.

Logistics cost accounts for 14 per cent of India’s gross domestic product, significantly higher than 8-10% in the US and some European countries. To bridge the gap and improve efficiencies, the central government plans to increase the share of railways in transport. The cost of rail transport is half that of roads. Increasing wagon availability is a step in that direction. Over the past two fiscals, more than 90,000 wagons have been ordered, which is a record. 

That compares with an average of 10,000 wagons annually over the past decade. The order flow is likely to be sustained as the government aims to increase the share of rail transport to 45% by 2030 from 27 per cent currently. The setting up of dedicated freight corridors is also adding to the demand for wagons.

Rahul Guha, Director, Crisil Ratings said, “In this milieu, private players, particularly in industries with large freight movements by rail, such as steel, coal, cement, automotive and logistics, are also procuring wagons through the Liberalised Wagons Investment Scheme floated by the government. This has given an additional boost to the operating performance of the wagon industry as private orders come at a premium of 10 to 15  per cent due to less competition.”

The order books of wagon makers rated by Crsil Ratings were 2.3 times their revenue last fiscal. Consequently, the industry, which used to operate at less than 50 per cent capacity in fiscal 2021, is expected to operate at 90 per cent this fiscal. The upshot is that the operating margins of wagon manufacturers rated by Crssil Ratings should rise 100 bps to 12.5 per cent this fiscal, driving up cash accrual.

The strong order flow will also spur capex of Rs 800 to 1,000 crore by these companies this fiscal, primarily for backward integration into components, apart from additional wagon manufacturing capacity.

Argha Chanda, Director, Crisil Ratings, “Rising capex will not affect the credit profiles of wagon manufacturers as significantly higher accrual this fiscal and well-capitalised balance sheets backed by fund infusion through the qualified institutional placement route will limit the term debt requirement for capex. Their gearing is expected to stay below 0.20 time as of 31 March 2025, like last year. Their strong operating performance will also improve interest coverage to 7.8 times this fiscal from 6.2 times last fiscal.”

The rating agency added that any slowdown in the flow of government orders or change in government policy for private ownership of wagons will bear watching.