Indian Railways have started issuing orders for the wagon tender floated earlier, giving a much-desired push to the freight movement in the country. This comes at a time when lack of adequate wagons has been hurting industries across the sectors, including power.
The current order for 12,611 wagons of the total of 21,758 units has come as a lifeline for the ailing wagon-making industry, which has suffered due to tepid order flows from their key customer, the railways despite the entry of relatively new players like the Jindals and Steel Authority of India, among others.
The tender was finalized through the reverse auction process, a first for the railways as part of a larger policy decision by the government to procure most of the items through this method.
The idea behind going for the reverse auction was to bring down costs for the government, as suppliers compete against each other to bring down prices in a process where the last bid price is revealed to every competing bidder.
And this is not good news for the suppliers as most of them come from the private sector.
As per the conventional tendering process, price bids are put in sealed envelopes as there were frequent allegations that competitors sometimes formed cartels and mutually decided their bid prices.
But in reserve auction, prices might touch levels even below the cost of productions if the competition is intense.
On the surface, this wagon reserve auction process has led to higher price discovery, as for the commonly used BOXNL variety of wagons, prices per wagon have been decided at Rs 29,39,000 a unit against Rs 24,02,000 decided in the last tendering which was opened in December.
But below the figure, there is a different story.
“The prices have actually been very competitive for the wagons that have been finalized. They are lower than the last purchase price due to reverse auction,” Umesh Chowdhary, vice-chairman and managing director, Titagarh Wagons told.
Titagarh Wagons has been the biggest beneficiary in this first round bagging order for 5,058 wagons followed by Jupiter Wagons (2,894) and Modern Industries (2,643) among others who would be required to supply open wagons before February 2020.
“The company has been awarded a contract for manufacture and supply of 5,058 wagons to Indian Railways, the bidding for which was conducted under the reverse auction method. These wagons are BOXN HL type, designed to carry coal, steel, stones etc. and the value of the order is Rs 1,560 crore,” Titagarh Wagon told.
Earlier, the railways used to supply steel and other materials required for manufacturing the wagons called “free supply” materials but now wagon suppliers need to procure those items from steel producers and others.
“The discovered prices are based on updated prices of materials that we have to procure and also based on free supply,” Chowdhury said.
“No free supply items will be provided to the firm against the subject contract. Steel, bearings, and wheelsets will be purchased by the firm,” a letter accompanying each order now says.
“Cessation of providing free supply items resulting in an enhanced working capital requirement and intense competition are some of the challenges facing the industry,” Titagarh Wagons said in its annual report.
While stoppage of supply of materials to wagon makers would free the railways of investments to be made upfront on procurements of steel and components, the private players would now see their working capital stuck in such purchases.
The finances of wagon makers are already under stress even before the introduction of the reverse auction process started.
“For wagons that we had bagged order, not all varieties are remunerative,” a Titagarh Wagon official had told analysts during a conference call post the second quarter earnings referring to the orders received in December.
Profitable or not, the current crop of orders would definitely provide a fillip to the sector suffering from lack of activity.
Data compiled by the Ministry of Railways shows an alarming backlog in supplies of wagons since the beginning of the year.
Between April and October, the private sector was supposed to supply 6,300 wagons as per the target set by the Ministry of Railways while actual supply stood at 4,092 wagons, a shortfall of 35%.
“The wagon division performance remained subdued on account of supply chain challenges faced by the company’s various sub-vendors which is now gradually stabilizing,” Texmaco Rail and Engineering, the second largest wagon maker in the country, had said post the second quarter earnings.
A prolonged lull in the sector drove many small component suppliers out of job, forcing the wagon makers to look for alternative suppliers.
Copyright: DNA Money