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Crisil Ratings in its latest report has said that wagon makers are on track to achieve 20% growth in revenue this fiscal (FY25), riding on healthy order book. Additionally, improved scale of operations will propel operating margin around 100 basis points (bps) leading to higher cash accrual. That, along with modest capital expenditure (capex) plans, will keep the credit profiles of these companies stable. A CRISIL Ratings study of wagon manufacturers accounting for 65% of the industry capacity of around 40,000 wagons per annum, indicates as much.

According to the report, logistics cost accounts for 14% of India’s gross domestic product, significantly higher than 8-10% in the US and some European countries. To bridge the gap and improve efficiencies, the central government plans to increase the share of railways in transport. The cost of rail transport is half that of roads. Increasing wagon availability is a step in that direction. Over the past two fiscals, more than 90,000 wagons have been ordered, which is a record. That compares with an average 10,000 wagons annually over the past decade. The order flow is likely to sustain as the government aims to increase the share of rail transport to 45% by 2030 from 27% currently. The setting up of dedicated freight corridors is also adding to the demand for wagons.

The report said the order books of wagon makers rated by CRISIL Ratings were around 2.3 times their revenue last fiscal. Consequently, the industry, which used to operate at less than 50% capacity in fiscal 2021, is expected to operate at around 90% this fiscal. The upshot is that operating margins of wagon manufacturers rated by CRISIL Ratings should rise 100 bps to around 12.5% this fiscal, driving up cash accrual. The strong order flow will also spur capex of around Rs 800-1,000 crore by these companies this fiscal, primarily for backward integration into components, apart from additional wagon manufacturing capacity.