New wagon allocation scheme may result in consolidation of domestic wagon players


PTI | Mumbai | Updated: 10-06-2019 20:55 IST | Created: 10-06-2019 20:51 IST
New wagon allocation scheme may result in consolidation of domestic wagon players
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The new wagon allocation scheme rolled out by the Indian Railways last fiscal is likely to result in consolidation among the domestic wagon players as it would impact their revenues, the report said. The impact of the new wagon allocation scheme would be larger in small/mid-sized corporates on account of greater dependencies on the IR wagon allocations than the large players who have well-diversified order books, the India rating report said.

In FY19, the IR allocated around 11,790 wagons with an overall order value of Rs 3,420 crore to the domestic wagon manufacturers through the new bucket filling scheme with a reverse auction mechanism. As per the revised scheme, the railways allocates wagons to L2-bidder at the same price as to the lowest bidder only if the overall capacity of L1 is fulfilled, against the erstwhile mechanism where 60 per cent of the tender quantity was allocated to L1-L6 bidders on a fixed ratio basis and the rest 40 per cent based on their remaining capacities and execution track records.

"The previous policy was implemented by the IR to allocate its orders to players operating across segments, while the new scheme would impact revenue visibility of the small corporates. It would be a credit negative for the domestic wagon manufacturers on account of the predatory pricing nature of the scheme along with higher working capital requirements," the report said. Ind-Ra further said the presence of larger players who have better bidding capabilities to acquire the major chunk of orders will impact the industry-wide average realisations backed by the reverse auction mechanism.

"Thus the impact would be larger in small/mid-sized corporates on account of greater dependencies on the IR wagon allocations than the large players who have well-diversified order books," the agency said. Although the average price per wagon increased to Rs 2.9 million in FY19 from Rs 1.3 million in FY15, the increase was disproportionate to the expectation of the wagon players due to stoppage of free supply items by the IR, it said.

In Q3 FY19, Texmaco Rail Engineering, despite having the largest unutilised capacities in the industry, availed only 1,623 wagons amounting to around Rs 500 crore as the other bidders had quoted far lesser prices, resulting in predatory pricing. The agency further noted that the IR was providing free supply items, which accounted 45-50 per cent of the overall raw material cost required to manufacture its wagon orders on timely basis till FY17, instead of mobilisation advances.

However, in FY18-FY19 allocations, it stopped issuing these free supply items on account of supply constraints. Moreover, free supply items such as cartridge tapered roller bearings will have to be purchased from RDSO approved sources, steel items from integrated steel plants where the IR board was earlier procuring and wheelsets from Rail Wheel Factory located at Bengaluru.

The working capital borrowings for these wagon manufacturers have also increased in the past few years to 35.4 per cent of revenue in FY18, the agency said.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)

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