Industry

With steel prices on the rise, wagon industry finds the going tough

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After a five-year break, India’s wagon industry is flooded with orders from the Railways. But its bottomline may continue to be under pressure for one or two more quarters due to the spike in steel prices and flawed cost escalation clause followed by the Railways till last fiscal.

The wagon industry saw orders flowing in large numbers from the second half of last fiscal. A good majority of the orders came in during December-January when flat steel prices were ruling at 40,000 a tonne.

According to Ritabrata Ghosh, Assistant Vice-President, ICRA, prices rose by 15 per cent to 46,000 a tonne in April, and barring a temporary drop in August, it currently rules at that level.

The wagon industry has clearly failed to pass on this cost. A quick comparison of three wagon stocks – Texmaco, Titagarh and CIMMCO – shows operating margin, a ratio of operating profit to sales, ruling below 5 per cent.

Titagarh has the best operating margin at 4.85 per cent, followed by Texmaco Rail (4.32 per cent). CIMMCO (a Titagarh Group outfit), which is more dependent on wagon-making, reported negative margins.

The stock prices of all three declined over the last six months.

Old contracts

According to an industry official, the problem lies with the old contracts that are currently under execution.

Steel is the single-largest (55 per cent) cost component for wagon-making. However, till last fiscal, the Railways wrongly attached maximum priority to labour cost. It had recently corrected the flaw, but the impact will be available once wagon-makers start delivering fresh orders.

Meanwhile, steel price is not the only problem plaguing the wagon-making industry. Due to the prolonged lack of activity, many of its vendors – those who supply items such as brakes and springs – became dormant. They are now finding it difficult to ramp up production.

Some of these suppliers, such as the GP Goenka-led Duncan Goenka Group outfit Stone India, based out of Kolkata, shut shop in October 2017. The company now faces insolvency proceedings with the stock suspended from trading.

The net result is the lack of availability of spares for wagons.

“Low availability of spares is impacting delivery of wagons. We are expecting the supplies to be normalised in the next few months,” a wagon-maker said on condition of anonymity.

According to him, margins will start improving beginning this quarter.

[“Source-thehindubusinessline”]

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Loknath Das

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