Assured rail business not enough for steel companies, say experts

Representative Image
While recent orders from the railways for modernising of its infrastructure do augur well for some steel players, analysts wonder if the assured revenue would majorly change the investor outlook for the firms. 

Jindal Steel & Power (JSPL), state-owned Steel Authority of India (SAIL, which had the earlier monopoly in supplying), and Jindal Stainless recently won various orders, a revenue plus, given the long-term nature of rail contracts. 

“It will have a substantial value addition to our portfolio, in profitability and volumes,” said Naushad Akhter Ansari, chief executive officer of the steel business at JSPL.

Giriraj Daga, portfolio manager at Visaria Securities, says: “From an investor perspective, assured revenue from the railways is not a major focus and though it is marginally positive for a company like Jindal Steel, it will not move the needle much in the bigger scheme of things.” 

Stainless steel coaches, foot overbridges and 4,000 km of track renewal each in 2018-19 and 2019-20 form some of the big orders announced by the railways in recent months.

“Railway orders form up to 10 per cent of our total revenue share. With a PSU, it is the commitment which is crucial and we want to be with the railways for the long term,” said Vijay Sharma, senior vice-president at Jindal Stainless.  SAIL aims to increase the segment’s share (now a tenth) in its turnover (~60,000 crore a year). “This year, we are to supply one million tonnes to the railways. Next year, we will raise it to 1.2 mt, then move to 1.4 mt and take it to 1.9 mt (annually),” said Anil Kumar Chaudhary, chairman.

 Their Bhilai unit is where the company produces for the railways. 

For three years, all three steel companies have seen revenue grow, even as their bottom line remained weak due to high debt.

“SAIL has a high-cost structure compared to Jindal Steel and, hence, (the latter) could get better margins from rail orders,” said a Mumbai-based analyst, on condition of anonymity. 

Jindal Steel's annual capacity is eight mt, a fourth of which is in Oman. 

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel