Freight Fare Hike, Negative For Individual and India Inc

Something that benefits one person pinches another. The phrase holds true for yesterday's Railway Budget which saw the announcement of a Fuel Adjustment Component. It means the revision of freight tariff effective from April 2013. This freight revision is expected to raise the freight charges by almost 5.79%.

Railway Minister Pawan Kumar Bansal announced that the freight charges would be linked to the market driven fuel prices, which would eventually lead to volatility in these prices. The move is definitely a positive one for the Railways. It would however be a drag for India Inc's various sectors which are highly dependent on the freight for their operations.

The sectors which would be hit hard by this move are Electricity, Steel, Coal and Cement. In day to day operations of cement and steel companies, freight expenses are one of the major expenses and because of this move their EBITDA margins would decline. For instance, the power and fuel expenses for cement companies are around 20% of their total sales and approximately 50-60% of the freight expenses are related to rail freight. If the demand for cement moderates further and companies are unable to pass on this cost, their EBITDA margins will fall by 75 to 100 basis points, said India Ratings and Research Report. 

Coal prices - one of the major inputs for the Power sector - is majorly transported through the rail route, leading to an increase in its costs going ahead. This might not impact Coal India as it would directly pass it on to the Power generation companies and State electricity board (SEBs). The companies would pass on these hikes and hence power tariff may go up in the coming days thus helping inflation move up. According to media reports, Power tariff could increase approximately by 1-2% per unit. 

Further, the Railway Budget also announced a probable revision in the passenger fares towards the end of 2013. If the move comes across, this would hurt the common man, as the railway fare was hiked recently in the month of January 2013. Overall, we believe that the move is reformist from the central government’s point of view. However, there might be a negative impact on individuals as also on India Inc.