Rail PSUs: A Lot Of Things To Do Before Listing

Union Finance Minister Arun Jaitley may have announced the government's intention to list the three railway public sector undertakings (PSUs) — IRCTC, IRFC and IRCON — but a closer look at the financials of the three throws open some challenges. Sources in the Rail Bhawan said Jaitley's announcement to list the three rail PSU in 2017-18 came as a “surprise to many” including those in the railway board, the apex decision making body.

When asked to explain the impact of such a move, experts were divided. "The budget has outlined the intentions regarding the PSUs. The intentions are all well-meaning and a step in the right direction," Abhaya Agarwal, partner, infrastructure and PPP, EY told BW Businessworld during a post-budget round table. Manish R Sharma, Partner, PWC underlined the fact that Indian Railway has not been in a "very good shape" as they have been losing a lot of traffic and hence their revenue. "The composition of freight traffic is also changing. Coal, the bread and butter of railways, has seen a shift to road transport. Capital needs to roll out as there are lots of projects that need to be completed,” Sharma said.

Another expert on railway finances gave a very realistic picture of things to come following the announcement made in the budget speech on listing of rail PSUs. "A formal proposal will be drafted and shared with the railway ministry. The railway ministry will forward the same to the railway board for discussions and feedback. All suggestions, inputs or objections, if any, will then be shared with the department concerned in the finance ministry. Once all aspects are discussed and finalized, a Cabinet note will be prepared and circulated for any final comments from all ministries before the subject is approved by the Union Cabinet. Post that, the listing etc. will happen," the expert and a formal railway ministry official said adding all this could take anywhere between three to nine months.

Let's briefly examine the three PSUs in question.

IRCON (Indian Railway Construction Company Limited)
IRCON, established in 1976, is an engineering and construction company, specialized in transport infrastructure. It is a wholly owned entity of the Ministry of Railways. Its primary charter was the construction of railway projects in India and abroad. In the past two decades, IRCON has diversified into other transport and infrastructure segments and operates even outside India.

A closer look at IRCON's financial highlights shows that its total income has been on a decline since 2012-13 till 2015-16. In FY13, IRCON International posted a total income of Rs 4,471 crore. But in FY16, its total income was reported at Rs 2,703 crore, a decline of almost 40 per cent over four financial years. This impacted the net profit too, according to the financial performance reported on its official website. In FY13, the company posted a net profit of Rs 730 crore. But four years later, in FY16, its net profit was at Rs 379 crore.

Explaining the decline in income and profitability, Mohan Tiwari, chairman and managing director, IRCON said this was primarily due to "completion of mega foreign projects". "Your company recorded an operating turnover of Rs 2,403 crore during 2015-16. Foreign projects have accounted for 18 per cent of this turnover, which is 51 per cent less than the previous year’s contribution by such projects. There has been a corresponding fall in the profit before tax which stood at Rs 567 crore, registering a decline of 33 per cent approx.," Tiwari stated in the company's latest annual report. He went on to state that "The company is confident of surmounting the decline in the turnover and profitability with sizeable order book of more than Rs 17,000 crore."

IRFC (Indian Railway Finance Corporation)
As the name suggests, IRFC is a finance arm of the Indian Railway and raises financial resources for expansion and running through capital markets and other borrowings. Of the three, IRFC is perhaps in best of financial health. In 2015-16, it reached a landmark in asset financing with a cumulative funding to the rail sector crossing Rs 1.5 lakh crore.
During 2015-16, IRFC funded Rs 14,000 crore worth of acquisition of locomotives, passenger coaches and freight wagons.

Profit after Tax of the company registered an year-to-year growth of 11.92 per cent to Rs 848.69 crore for 2015-16 as against Rs 758.30 crore for 2014-15. "The higher year-to-year growth in PAT as compared to PBT, is attributed to higher incidence of Deferred Tax Liability, due to increase in effective corporate tax rate to 34.608 per cent from 33.99 per cent, leading to additional provision towards DTL to the tune of Rs 77 crore on account of revaluation of accumulated DTL pertaining to earlier years in the accounts for the year 2014-15," the chairman Sanjoy Mookerjee explained in the company's latest annual report.

Apart from profitability, IRFC continues to enjoy the highest credit rating from the three leading Credit Rating Agencies, According to Mookerjee, during FY16 the company was accorded highest possible ratings, both for its long term and short term domestic borrowings programme. For the long term domestic borrowings, the company was awarded “CRISIL AAA/Stable rating by CRISIL, “(ICRA) AAA” rating by ICRA and “CARE AAA” ratings by CARE. "Similarly, the company’s short term domestic borrowings were rated “A1+” by CRISIL, ICRA and CARE. Besides, the three prominent International Credit Rating Agencies namely Standard & Poor’s, Moody’s and FITCH have awarded to IRFC “BBB-(Stable)”, “Baa3 (Positive)” and “BBB-(Stable)" respectively rating at par with the Sovereign. ," he said in the report.

IRCTC (Indian Railway Catering and Tourism Corporation)
Recently, Railway Minister Suresh Prabhu had said that IRCTC, which is already one of the largest e-portals in India, could become as huge as the e-commerce giant Amazon. He had added that the website would start online selling hand-made products procured from rural women. Indeed, that being true, IRCTC, once listed, is expected to give healthy returns to its shareholders. Currently, 6 out of 10 rail tickets are booked online on IRCTC website. However, post demonetization first and later in his budget speech, Jaitley has proposed abolishing the service charge on tickets booked on IRCTC. This will be a major dampener for the company as one-third of its revenue come from Service Charge. IRCTC sold tickets worth Rs 24,022 crore in 2015-16, earning a revenue of Rs 1,506 crore. Service charge accounted for over one-third of IRCTC’s total earning in the year at Rs 551 crore.

"Going forward, IRCTC may have to depend on the sale of food, water, and licences issued to various food vendors to make up for the loss in revenue stream from Service Charge. This will be a challange for IRCTC and also to the investors post its listing," said a former rail official.