Railway Budget Special Railway Budget 2016-17: On the right track but not at the right speed
Summary - Focus on capex but lacks clarity on raising resources
- Better efficiency in FY2016; however, weak growth in freight and passenger traffic disappoint
- Optimist targets would require better economic vibrancy in FY2017; while higher employee cost would adversely affect operating ratio.
The Railway Budget 2016-17 proposes significantly higher capital expenditure (capex) on modernisation, expansion and better amenities & services. However, there is a lack of clarity on the generating required resources given the tepid growth in the freight and passenger fare revenues. The railway minister has hinted at raising some funds through monetisation of assets along with not so successful models of public private partnership (PPP; at least in the case of railways) and participation from state governments (again looks difficult as most of the state governments are already in tight fiscal situation). In terms of operational metrics, as per 2015-16RE, the operating ratio (gross expenses as ratio of gross revenues) has increased to 90% against 93.3% in 2014-15. However, there was clearly a miss on the receipt front in 2015-16RE over the budget numbers, largely on account of a lower-than-estimated freight traffic. Nevertheless, the receipt is expected to grow by 7% in 2015-16RE over last year and better net surplus at Rs11,402 crore. Going forward, in FY2016-17 the budget proposes a revenue growth of 10% YoY, despite any tariff revision which indicates there is an expectation of traffic improvement. We believe, a revival in the economy could be crucial to uplift traffic and given the challenging environment, the budget seems a bit optimistic on that front. In FY2016-17 railways budget, the operating expenses could be slightly under pressure to implement the 7th Pay Commission. On this account, the appropriation to pension fund is budgeted to surge and result into lower surplus in FY2016-17. On the positive side, the railway minister has highlighted a plan to expand freight basket and move to time-table freight, which could be helpful in achieving better freight traffic. Moreover, the higher investment plan (capex plan of Rs120,100 crore) for capacity augmentation, modernisation and improvement in passenger services, is encouraging. We also see unprecedented focus on the security, convenience of passenger with interactive platform for feedback and monitoring system. The budget remained focused on adding tracks, broad gauge lines, electrification of lines for the budgeted year. Moreover, efforts to achieve long-term plans like adding more freight corridors, improving track laying pace, average speed of trains and set-up of two more locomotive factories. Thus, we believe that the Railway Budget is positive from the corporate India point of view, given the higher spending in physical infrastructure in the above mentioned areas and no hike in freight tariff. We believe, the stocks like Larsen & Toubro, Kalpataru Power Transmission and KEC International would benefit from the electrification and other infrastructure plans. However, the effect would not be material enough. On the other hand, the long-term plan to add two more dedicated freight corridors apart from timely completion of on-going Dedicated Freight Corridor (DFC) project by 2019 are going to be key drivers in enhancing container volumes which could provide some relief to companies like Container Corporation of Inida and Gateway Distriparks Ltd. However, railways propose to develop rail-side logistics parks and warehousing, which could increase competition for the private logistic solution providers.
Stock Update Andhra Bank
Reco: Hold
PT: Rs54
CMP: Rs47
NPA concerns persist; downgrade to Hold with PT revised to Rs54 Key points - Higher NPA provisions affect earnings: Andhra Bank's earnings deteriorated significantly (down 83% YoY to Rs34 crore) owing to a sharp increase in NPA related provisions (up 67.2% YoY). The net interest income (NII) grew by 8.1% though net interest margin (NIM) contracted by 19BPS to 3.24% (due to a decline in yield on loans). The advances growth was relatively strong (up 14.5% YoY) driven by an uptick in small ans medium enterprises (SMEs) and retail advances (up 32% and 24% respectively) which partly aided NII growth. The non-interest income was largely flattish (down by 2.9% YoY) due to a sharp decline in foreign exchange (forex) and treasury income (down 42% and 70% YoY respectively) though fee income showed a healthy growth of 29.4% YoY.
- Asset quality deteriorates in line with industry trends: The bank's gross non-performing asset (NPA) ratio surged by 129BPS QoQ to 7.0% on account of a sharp rise in fresh slippages amounting to Rs2,522 crore (vs Rs1,190 crore in Q2FY2016). According to the management about Rs900-crore-worth of slippages were on account of the Reserve Bank of India (RBI)'s asset quality review (AQR) and slippages in Q4FY2016 will remain high. From segmental perspective, the corporate portfolio constitutes ~67% of NPAs followed by SME (17% of gross NPAs). The bank has cumulatively refinanced accounts worth Rs2,000 crore under 5:25 scheme and has invoked strategic debt restructuring (SDR) on accounts worth Rs2,000 crore. Accounts worth Rs99 crore were restructured during the quarter while total restructured book stands at 10.0% of the overall book.
- PT revised to Rs54, downgrade to Hold: While the bank's operating performance (up 11.6% YoY) and advances growth were relatively better; rise in NPAs remains a key concern. The stressed loans (gross NPAs + restructured loans) were to the tune of 14.4% of the overall book (ex-state discom loans) which may add pressure to the asset quality. About half of the loan book is towards corporate segment and has relatively higher exposure towards stressed sectors like infrastructure (18% of book) and iron & steel (5% of book). The bank's lower capital ratio (tier-1 CAR) could result in increased equity dilution. We have revised our estimates downwards resulting in revised price target of Rs54 (0.35x its FY2017 BV). We have downgraded the ratings to Hold on the stock.
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