Strong operating performance, moderate capex, low leverage to lift credit metrics
Wagon makers are on track to achieve 20% growth in revenue this fiscal, riding on healthy order book. Additionally, improved scale of operations will propel operating margin ~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% of the industry capacity of ~40,000 wagons per annum, indicates as much.
Logistics cost accounts for 14% 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 10,000 wagons annually over the past decade.
The order flow is likely to sustain as the government aims to increase the share of rail transport to 45% by 2030 from 27% currently. The setting up of dedicated freight corridors is also adding to the demand for wagons.
Says Rahul Guha, Director, CRISIL Ratings, "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 comes at a premium of 10-15% due to less competition."
The order books of wagon makers rated by CRISIL Ratings were ~2.3 times their revenue last fiscal. Consequently, the industry, which used to operate at less than 50% capacity in fiscal 2021, is expected to operate at ~90% this fiscal.
The upshot is that operating margins of wagon manufacturers rated by CRISIL Ratings should rise 100 bps to ~12.5% this fiscal, driving up cash accrual.
The strong order flow will also spur capex of ~Rs 800-1,000 crore by these companies this fiscal, primarily for backward integration into components, apart from additional wagon manufacturing capacity.
Says 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 gearing1 is expected to stay below 0.20 time as on March 31, 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."
Shares of CRISIL Limited was last trading in BSE at Rs. 4646.15 as compared to the previous close of Rs. 4684.00. The total number of shares traded during the day was 1395 in over 262 trades.
The stock hit an intraday high of Rs. 4741.60 and intraday low of 4623.15. The net turnover during the day was Rs. 6496205.00. |
