Feb. 27 (Bloomberg) -- A proposal by Indian Railways, Asia’s oldest network, to step up wagon production with at least seven new factories is raising concerns at suppliers Titagarh Wagons Ltd. and Texmaco Rail & Engineering Ltd.
The state-owned rail operator is setting up more units to ensure adequate and timely supply of stock and components, Rail Minister Pawan Kumar Bansal said yesterday while presenting the budget for the next fiscal year, after signaling no increase in orders. That triggered the biggest slide in the vendors’ stocks in two years yesterday, prompting Texmaco’s Chief Financial Officer A.K. Vijay to say that Indian Railways should deploy funds to improve infrastructure rather than in manufacturing.
Titagarh, backed by General Electric Co., and Texmaco are counting on the world’s third-largest network’s plan to spend as much as 14 trillion rupees ($259 billion) by 2020 to upgrade and expand its facilities as India’s $1.8 trillion economy grows at the slowest pace in a decade. Bansal announced a 21 percent increase in investment for the year starting April 1, most of it to pay wages and meet fuel costs, while saying wagon procurement target will be around the same as the current year’s 16,000 and less than about 18,000 last year.
“The one thing that raises a bit of a concern is the announcement of new manufacturing facilities,” Umesh Chowdhary, managing director of Kolkata-based Titagarh, said in a telephone interview. “I don’t know whether the Railways with its limited resources should actually put money there.”
Titagarh shares plunged 13.6 percent today, the most since July 2009, to 211.15 rupees in Mumbai, after an 8.3 percent drop yesterday. Texmaco rose 6.9 percent to 58.60 rupees, rebounding after an 11 percent slide yesterday.
“There were expectations that wagon acquisition will increase next year, and that didn’t happen,” said Chetan Kapoor, an analyst with IDBI Capital Market Services Ltd. “If these new factories see the light of the day, they will have a negative impact as the share of orders to existing companies will decrease.”
Titagarh, which is the nation’s biggest non-state wagon maker and has an annual capacity of 10,000 units, supplies about 85 percent of the cars its builds to Indian Railways, while business from the state-owned operator accounts for about 80 percent for Texmaco, which is also based in Kolkata.
Sales growth at Titagarh slowed to 23 percent in the year ended March 31, 2012, from almost 30 percent in the previous 12 months. Texmaco’s revenue fell 18 percent in the period, according to data compiled by Bloomberg.
Indian Railways’ new wagon manufacturing plants include two that will make high-capacity cars for a dedicated freight link, according to the ministry’s budget document.
“We have suffered a lot in the current fiscal year,” Texmaco’s Vijay said in a telephone interview. “With railway finances in real stress, their funds shouldn’t be deployed in projects that aren’t related to infrastructure.”
Indian Railways, which ferries 23 million passengers every day, is set to report a loss of 246 billion rupees in the year to March 31 from subsidized services, Bansal said yesterday. It plans to spend 634 billion rupees to expand services and renovate stations across the country.
“The Railways’ plan fell short of investor expectations and there’s no initiative on the part of the government to fast track delayed targets,” said Kamlesh Kotak, head of research at Asian Markets Securities Pvt. “No wonder the stocks fell.”
Titagarh, which is 12.7 percent owned by GE Capital International (Mauritius), and Texmaco are exploring overseas markets to rely less on its home market amid slowing sales.
Texmaco said in September that it is targeting exports of rolling stock and steel castings to Australia, Southeast Asia and Africa to account for 8 percent of its sales in the year ending March 31. Titagarh’s Chowdhary said in an interview in December that he is seeking railroad orders in Africa as an acquisition in France two years ago helps win contracts.
In November, the board of Titagarh approved separating its rail coaches division into an existing unit and demerging its heavy earth moving and mining equipment division into another subsidiary.
The changes will help increase the contribution of business from non-state companies to about 40 percent of total revenue over the next two to three years, from about 15 percent now, Chowdhary said.
“All these new projects will have a gestation period,” Texmaco’s Vijay said. “Whether these projects will happen or not is a big question mark. Ultimately, everyone has to compete.”