Railway Sector Analysis Report 

Essential Demand + Pricing Power = True Essential Stock

The Indian Railways will become the growth engine of the nation's 'Vikas Yatra'. - Narendra Modi

The Indian railways is regarded as the lifeblood of the economy.

Currently, Indian Railways (IR) is the second largest in Asia and the fourth-largest rail network globally, after the US, Russia, and China.

IR is a departmental undertaking of the Government of India, which owns and operates most of India's rail transport. The Ministry of Railways oversees it.

Due to its low cost and effective operations, railways continue to be the most popular means of transportation for most Indians when traveling long distances.

It's also ideal for long-distance travel and the movement of bulk commodities. This is apart from being an energy-efficient and economical mode of conveyance and transport. It's also the country's preferred carrier of automobiles.

How Does Indian Railways Make Money?

Indian Railways has multiple revenue sources, including passenger services, freight services, and auxiliary services.

Passenger Services: Indian Railways serves millions (m) of passengers daily, offering travel in various categories such as sleeper, air-conditioned (AC), and general class. A significant portion of revenue from passenger services comes from the sale of reserved and unreserved tickets.

Freight Services: Freight services are the largest revenue source for Indian Railways, transporting minerals, coal, grains, fertilisers, and other goods from one place to another.

Auxiliary Services: These include e-ticketing, catering, tourism services, and advertising. The Indian Railway Catering and Tourism Corporation (IRCTC) manages these services, significantly contributing to the revenue.

As of FY22, Indian Railways ran 13,523 passenger trains and 9,146 freight trains daily on its network. It had 126,611 km of total tracks over a 68,103 km route and 7,337 stations.

In FY24 alone, Indian Railways laid more than 5,100 km of new track.

According to the India Brand Equity Foundation (IBEF), Indian Railways completed a total revenue of Rs 2,560 billion (bn) by the end of FY24.

On a cumulative basis from April to January 2024, railways freight earnings stood at US$ 16.9 bn against US$ 16.3 bn over last year, an improvement of 4%.

During FY24, the total passenger revenue stood at US$ 8.8 bn, compared to US$ 7.6 bn achieved during the same period last year.

The total number of passengers increased by 0.5 bn to reach 6.5 bn in FY24. Most of the passenger revenue (96% in 2023-24) came from non-suburban traffic (or the long-distance trains).

Most of the freight traffic of the railway comes from a few bulk goods such as coal, iron, and cement. The freight basket has remained largely unchanged over the last 15 years.

Coal freight alone constitutes more than 40% of the traffic volume as well as revenue.

In FY24, Indian Railways achieved 1,588 million tonnes (MT) of freight, 82 MT more than the previous best of 1,509 MT in FY23.

With increasing participation expected from private players, both domestic and foreign, due to favourable policy measures, freight traffic is expected to grow rapidly over the medium to long term.

Additionally, Indian Railways aims to contribute around 1.5% to the country's GDP. To achieve this, the infrastructure is being strengthened to handle 45% of the economy's freight.

Indian Railways is exploring a new public-private partnership (PPP) model to attract private investment to re-develop railway stations.

Under this model, investors would receive up to 40% of the total project cost as viability-gap funding (VGF) and be allowed to use the space above platforms and tracks commercially.

In the Union Budget for the FY25, the Ministry of Railways received a total allocation of Rs 2,553.9 bn, accounting for approximately 5.3% of the total expenditure.

This allocation includes a record capital expenditure of Rs 2,622 bn, with a gross budgetary support of Rs 2,522 bn.

The increased funding is aimed at enhancing infrastructure, connectivity, and safety within the Indian Railways, reflecting the government's commitment to transforming the railway sector.

According to IBEF, India's export of railways grew and reached US$ 1,249.4 m in FY22 as compared to US$ 633.3 m in FY21.

Indian Railways plans to market semi-high speed 'Vande Bharat' trains by 2025-26, aiming to cover 1-2 m km on 75 trains in three years. Indian Railways will target European, South American, and East Asian markets for exporting 'Made in India' trains.

According to IBEF, foreign direct investment (FDI) inflows in railway-related components stood at US$ 1.4 bn from April to March 2024.

100 % FDI in the railway sector is allowed under automatic route for operation and maintenance of suburban corridor projects through PPP, including a 100% FDI in railways infrastructure.

The government has laid an ambitious target to allocate US$ 750 bn to the railway infrastructure by 2030 and announced 5,000 km of metro rail network by 2047 in 100 cities.

The Indian government has prioritised investment in railway infrastructure through investor-friendly policies, swiftly enabling FDI to enhance freight and high-speed train infrastructure. Currently, numerous domestic and foreign entities are exploring investment opportunities in Indian rail projects.

Strategies adopted by Indian railways for the future:

1. Revenue Based Strategies

   1. Provision of online rail bookings, hotel reservations, and retiring rooms by IRCTC adds to the revenue of Indian Railways. IR focuses on international tourists and has also produced many tour packages for foreigners.
   2. Plans are in place to remove pantry car services from 300 trains and replace them with AC-3 tier coaches to increase revenue by Rs 14 bn (US$ 167.9 m). Meal service will rely on base kitchens at railway stations, e-catering, and train-side vending machines according to the railway ministry.
   3. Replacing reusable linen sets with disposable linens is another revenue-sharing strategy under review since the pandemic. Contracts are being distributed to private vendors for selling disposable sheets, towels, and pillows at train stations. This will reduce the railways maintenance overheads by passing the cost to the passenger.

2. Turnaround Strategies for Freight Traffic

   1. Axle load increased from 20.3 tonnes to 22.9 tonnes and 25 tonnes for selected routes and freight discounts were offered to customers offering high tariffs.
   2. Freight rates on cement, coal, urea, kerosene, LPG, and food grain and pulses have been hiked by 10% to bring additional revenue of US$ 655.1 m per year.

3. Turnaround Strategies for Passenger Traffic

   1. Fares for premium classes was reduced to compete with airlines, luxury buses, and personal transport vehicles.
   2. The length of popular trains was increased from 16-18 coaches to 24-26 coaches.

Porter's Five Forces Analysis for the Railway Sector

Threat of new entrants: The threat of new entrants in the railway sector is low.

The barriers to entry include:

• Significant capital investment is required to build railway infrastructure, rolling stock, and supporting systems.
• Regulatory requirements and government control pose additional challenges.
• Established players, i.e., Indian Railways, benefit from economies of scale, making it difficult for new entrants to compete.
• Indian Railways, as a state-owned entity, dominates the sector, reducing opportunities for new private players.
• While privatisation efforts (e.g., private trains, metro projects) are growing, these are typically niche opportunities rather than direct competition to Indian Railways.

Bargaining power of buyers: The bargaining power of buyers is moderate.

The buyer dynamics:

• Indian Railways serves millions daily for both passenger and freight needs. The sheer volume reduces buyer power since customers have limited alternatives.
• Large freight customers like coal, cement, and steel industries may have bargaining power due to bulk contracts, but alternatives like road and sea transport keep this in check.
• Passenger services are often subsidised, limiting direct price sensitivity among end users.
• Buyers (passenger and freight) have some bargaining power in metro systems or private freight services where competition exists.

Bargaining power of suppliers: The bargaining power of suppliers is moderate to high.

The power of suppliers:

• Companies like RITES, IRCON, RVNL, Titagarh Rail Systems, and private manufacturers such as Jupiter Wagons dominate the supply chain for rolling stock and infrastructure.
• For advanced components (e.g., high-speed rail systems), India depends on foreign suppliers, increasing supplier power.
• For general goods like steel for tracks and basic equipment, supplier power is lower due to competition.
• Indian Railways sets stringent specifications and often regulates suppliers, mitigating supplier dominance in some cases.

Threat of substitutes: The threat of substitutes for railways is moderate to high.

The substitute options include:

• Alternatives like road transport (buses, private vehicles) and air travel (low-cost carriers) are significant substitutes, especially for shorter or faster routes.
• Road and coastal shipping offer flexibility and competitive pricing, especially for goods not suited for rail transport.
• Metro systems are substitutes for local rail services, while buses, ridesharing, and trams provide competition in urban areas.

Competitive rivalry among existing competitors: The rivalry among existing players remains low to moderate.

Competitive Landscape:

• Indian Railways has a near-monopoly in the sector, with limited direct competition for long-distance passenger and freight services.
• Private metro operators and freight service providers are emerging but remain niche compared to Indian Railways.
• Players like RITES, IRCON, and RailTel are not direct competitors but partners in infrastructure development.
• With the entry of private trains and increased metro projects, the rivalry is expected to intensify, especially in urban and luxury segments.

Financial Comparison of Players in India

	Particulars	Name of the company
	(Rs in m, consolidated)	IRCTC	IRCON	IRFC	RVNL	Titagarh Rail Systems	Jupiter Wagons	RITES	RailTel	Concor
	CMP	790	214	150	437	1,275	520	284	403	769
	Market Cap	63,196	20,155	195,439	91,178	17,173	22,095	13,673	12,921	46,882
	P/E	53	22	30	71	57	60	34	46	36
FY24	Net Sales	4,270	12,331	26,645	21,889	3,853	3,644	2,453	2,568	8,653
	Operating Profit	1,466	925	26,513	1,353	449	487	661	464	1,959
	OPM (%)	34%	8%	100%	6%	12%	13%	27%	18%	23%
	Net Profit	1,111	930	6,412	1,574	286	331	495	246	1,262
	Net Margin (%)	26%	8%	24%	7%	7%	9%	20%	10%	15%

Data Source: Screener.in

Peer Profiles

• IRCTC is a Mini Ratna (category 1, central public sector enterprises) and the only company authorised by the Indian government to provide online railway tickets, catering services, and packaged drinking water at railway stations and trains in India.
• Ircon International commenced its business as a railway construction company and diversified progressively as an integrated engineering and construction PSU specialising in large and technologically complex infrastructure projects in various sectors such as railways, highways, etc.
• Indian Railway Finance Corporation (IRFC) borrows funds from the financial markets to finance the acquisition / creation of assets which are then leased out to the Indian Railways as finance lease.
• Rail Vikas Nigam (RVNL) implements various types of rail infrastructure projects assigned by Ministry of Railway (MoR) including doubling, gauge conversion, new lines, railway electrification, major bridges, workshops, production units and sharing of freight revenue with the railways as per concession agreements with the MoR.
• Titagarh Rail Systems is mainly engaged in the manufacturing and selling of freight wagons, passenger coaches, metro trains, train electricals, steel castings, specialised equipment & bridges, ships, etc.
• Jupiter Wagons is primarily involved in the business of manufacturing metal fabrication comprising load bodies for commercial vehicles, rail freight wagons, and components.
• RITES functions as a multidisciplinary engineering and consultancy organisation. It provides varied commissioning services and integrated solutions in all areas of transport and infrastructure development. The company is engaged in design engineering, project management consultancy, turnkey construction, export of rolling stock, locomotive leasing, and quality assurance.
• RailTel provides nationwide broadband and VPN services, telecom, and multimedia network, to modernise the train control operation and safety system of Indian Railways. The services provided include telecom, managed data centers & hosting, project management, consultancy & professional development, and machine vision & artificial intelligence (AI)/ machine learning (ML) powered solutions.
• Container Corporation of India (CONCOR) is engaged in the business of providing inland transportation of containers by rail. It also covers the management of ports, air cargo complexes, and the establishes cold chains.

Conclusion

The railway sector in India serves as the backbone of the nation's transportation system, facilitating both passenger travel and freight movement on a massive scale.

Dominated by Indian Railways, the sector plays a pivotal role in economic growth, employment generation, and regional connectivity.

With a rich legacy and extensive network, it has continually adapted to meet the demands of a growing economy and population.

Recent initiatives in privatisation, technological modernisation, and infrastructure expansion-such as high-speed rail projects and metro systems-highlight the sector's transformative potential.

While challenges like operational efficiency, competition from other transport modes, and funding remain, the railway sector will remain a critical driver of India's development, fostering economic integration and mobility across the nation.

Best Sources for Information on the Railway Industry

• India Brand Equity Foundation Railway Sector Report