Stressed Profits: Need to increase revenues to counter rising expenses

Need to increase revenues to counter rising expenses

The financial performance of Indian Railways (IR) has recently exhibited a mixed trend. While both revenues and expenditures have recorded a consistent rise over the past few years, profits have exhibited peaks and troughs.

Indian Infrastructure analyses IR’s financial performance over the past five years…

Revenue and expenditure trends

IR’s earnings largely comprise gross traffic earnings – freight, passenger, other coaching, and sundry earnings. The shares of these different revenue sources in total earnings have remained more or less the same over the years. Freight earnings continue to have the largest share in total revenues, followed by passenger and sundry earnings.

While IR’s total receipts have grown consistently over the five-year period from 2012-13 to 2016-17, the rate of growth of revenue has fallen. In 2016-17, total receipts denoted a year-on-year (YoY) growth of only 2.33 per cent, in comparison to YoY growth rates of 7.2 per cent recorded in 2015-16 and 12.32 per cent  in 2014-15. However, in 2017-18, revenue is expected to increase by about 10 per cent, to Rs 1,894.98 billion.

Working expenses account for the largest share in IR’s total expenditure. These include IR’s ordinary working expenditure (which is almost three-fourths of the total working expenses), and its appropriations to the Pension Fund and the Depreciation Reserve Fund.

Like its receipts, IR’s expenditures have also shown a consistent increase during the period 2012-17. While the rate of growth of these expenditures declined from 16.8 per cent in 2013-14 to 3.38 per cent in 2015-16, the revised estimates for 2016-17 pegs the expenditure growth at 10.23 per cent. For the current fiscal year, IR has budgeted for a lower expenditure growth of about 9 per cent, at Rs 1,783.5 billion.

Trend in profits

IR’s profits have shown an inconsistent trend during the years under consideration. The revenue surplus fell by about 27 per cent in 2016-17 from the peak recorded in the previous year. Going forward, IR expects to clock a higher revenue surplus – Rs 89.48 billion for 2017-18, 16.28 per cent higher than that earned in the previous fiscal year. This surplus will be available for appropriation to several funds, such as the Railway Development Fund, the Capital Fund, and the Railway Liability Reserve Fund.

Operating trends

One of the key parameters to gauge financial health is to assess the operating ratio, which denotes the amount spent by a firm to earn one unit of operational revenue. Thus, the lower the value of the ratio, the better it is for the firm‘s financial standing. Considering the five-year period from 2012-13 to 2016-17, IR‘s operating ratio increased from 90.2 per cent to 94.9 per cent. This indicates a lower availability of surplus with IR for undertaking capital investments. However, as per budget estimates for 2017-18, the operating ratio is expected to improve marginally, decreasing to 94.57 per cent.

Focus on non-fare revenues

New revenue streams from advertisements, land leasing, catering services, etc. are being explored by the railways. For instance, a railway display network project is being planned for im-plementation in 2017-18. Under this, 100,000 digital advertisement screens across 2,175 railway stations will be installed. While IR plans to spend about Rs 12.89 billion under this initiative, the policy is estimated to generate

Rs 45.82 billion in the first year. By 2021-22, IR is targeting an annual advertising revenue of Rs 117.7 billion. Besides advertising through digital screens, it is also planning to display advertisements on trains through vinyl wrapping.

The way forward

To augment profits, which continue to exhibit inconsistent growth, the Railway Board needs to focus on resolving some pressing concerns in the sector. For instance, in the process of providing affordable travel to the masses, IR plies passenger trains at low fares. To offset the losses resulting from this, freight tariffs are usually kept high. Thus, IR loses its freight market share to other modes of transportation, such as roads.

At the same time, high costs such as those due to the Seventh Pay Commission recommendations are worsening IR’s operating efficiency. There is also a paucity of funds for capacity augmentation, as most of IR’s budgetary support is used to meet its high operational expenses. Such issues need to be resolved to ensure a sustainable profit stream for the railways.