Cost economics continue to favour rail transportation

Coal remains the largest revenue contributor for the Indian Railways, as rail is the preferred mode of coal transport because of lower cost of
transportation vis-a-vis other modes. Factors that aid better cost economics are:

bulk

Bulk transportation is possible only through rail. One rake can carry about 3,800 tonnes of coal, and daily coal requirement (of various
industries) is considerable.
Railways classifies coal under a lower freight class; hence, the commodity enjoys lower freight rates. (Falls under rate class 145 for train load
and rate class 150 for wagon load which is about 28% lower than the maximum freight rate class 200).
Loading/ unloading is mechanised, which minimises labour cost.
There is a significant difference between the average lead distances of road and rail in coal transportation. Hence, the scope for substitution of modes
on the basis of lead distances is limited. (Typically, rail is used for transportation over long distances and roads for short distances.) For very short lead
distances, a belt or ropeway is also used.

Railways to maintain share despite capacity constraints in short run

The Railways will continue to account for over 80% of coal transport in billion-tonne-km (BTKM) terms, including merry-go-round trains (these trains
consist of hopper wagons which load and unload cargo while moving). Total coal movement, which grew by 6.6% CAGR (in tonnage terms) during
2010-11 to 2015-16, is expected to maintain a similar growth trajectory over the next five years. During 2015-16 to 2020-21, coal freight is expected to
increase by 7-9% CAGR, led by demand from power and steel sectors. With capacity utilisation of rail at over 100%, growth in rail share will be
capped.

Rail share to zoom post commissioning of dedicated freight corridors

After expected commissioning of the dedicated freight corridors (DFC) in 2019-20, the share of rail in coal transportation will expand significantly.
Growth in tonnage will be aided by growth in average lead distance. High-capacity, double-decker wagons that will be used in the DFCs will fuel
tonnage growth. With increase in tonnage and lead distance, the rail share of coal in its transportation is expected to escalate to around 84% from 81%
in 2015-16.

Coal freight starts 2016-17 on a weaker note but expected to pick up pace in 2016-17
Indian Railways supplies coal to 104 power plants every day from mines located mostly in eastern and central India, with average lead distance of
around 600 km. Due to power purchase issues of state power utilities, inventory of around 100 mt has built up in power plants and coal pitheads. Now,
with schemes like the Ujwal Discom Assurance Yojana (UDAY), there is some pick-up in consumption of coal. However, with the weak start, the
Railways is most likely fail to attain its target of 577.9 MT (which is about 5% higher than 2015-16 actuals) of coal transportation in 2016-17, although
growth will be seen on-year. Moreover the lead distance is expected to decline due to network rationalisation steps undertaken by the Railways.
As of 2015-16, the Railways comprised 81% share (in BTKM terms) of total coal movement, given its favourable cost economics. The share has
decreased by 4% (in BTKM terms) over the previous five years, largely due to capacity constraints and lowering average lead distances.
However, the share of Railways (including merry-go-round) is expected to increase in 2016-17 from current levels, largely due to
rationalisation initiatives. Long-run growth hinges on growth in coal demand.

freight

The new Merry-go-round scheme to increase coal loadings from pitheads to plants
To counter stiff competition from the road sector for coal transportation in short-distance routes, the Railways finally decided to rationalise its freight
policy with the formulation of a "merry-go-around" (MGR) scheme to increase coal loadings from pitheads to plants.
The scheme, which is effective from April 2016, aims to generate additional revenue to the tune of Rs. 500 crore in 2016-17.
What is Merry-go-round scheme?
Railways is generally preferred for long-distance freights. The MGR scheme is targeted at freight over shorter distances. It resembles a circular rail
track (located near a pithead) where coal loaded from the pithead is unloaded in the nearby plants and the rake comes back again for loading; the
movement continues multiple times round the clock as per requirements.
The revised merry-go-round rates will be around Rs 47 per tonne for 18 kilometer lead, as compared to road rates of Rs 72 per tonne for the same
distance. The wagons could make two or three trips a day.
MGR terminals and track will be privately owned and Railways will provide locomotive, wagons and staff to operate the freight train.

Removal of 10% port congestion surcharge

The Railways had been levying 10% surcharge on base freight rate, since November 2014, on companies importing goods, as compensation for the
huge cost arising from pressure on intermodal rail connection because of surge in import volumes. However, the situation has since changed with
This document is being provided for the exclusive use of Sushant Anand at Indian Institute of Management Tiruchirappalli
No part of this Report may be published/reproduced/distributed in any form without CRISIL's prior written approval

congestion levels at almost all ports having come down due to a significant drop in container traffic and in import of thermal coal, iron ore,
fertilisers.

and

The withdrawal is expected to give respite to Railways and bring down logistics costs; this would attract greater volumes of traffic, particularly from the
major segments of imported thermal and coking coal meant for the power sector and steel plants.

Transportation mode share (as % of BTKM)

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E: Estimated; P: Projected
Source: CRISIL Research, Industry

This document is being provided for the exclusive use of Sushant Anand at Indian Institute of Management Tiruchirappalli
No part of this Report may be published/reproduced/distributed in any form without CRISIL's prior written approval