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The raise in railway fares is likely to bring cheer to rail manufacturers and suppliers.
Stocks such as Titagarh Wagons, Kalindee Rail Nirman, Kernex Microsystems, Hind Rectifiers and Texmaco Rail and Engineering, which gained as much as 12 per cent last week after news of foreign direct investment (FDI) in the sector, might run up further with the freight raise, according to experts.
The government raised passenger fares by 14.2 per cent, while freight rates were raised by 6.5 per cent.
Analysts said the increase in fares was a much-needed shot in the arm for the sector, which has been struggling for capital in the past few years. The raise would be effective from June 25.
"The impact of the railway freight hike will be very positive on railway stocks. With the railways being an important part of the economic recovery, this could be significant for the sector," said Gopal Agrawal, chief investment officer and head - equity, Mirae Asset Global Investment.
"The raise will reduce the cross-subsidisation of passenger fares from freight. The increase in fares will augment the railway coffers and may be just the right medicine for investment in infrastructure," said a State Bank of India (SBI) report, Fare and freight hike to improve Railway finances.
According to industry estimates, annual revenues for the railways could go up by nearly Rs 9,000 crore.
"The good news is that operating cost ratio will come down significantly to 85 per cent from the Budget estimate of 89.7 per cent, lowest since 2007-08," said the SBI report.
Better finances are expected to increase investments in infrastructure by the railways. It is expected that it could move to increase capacity and take steps towards modernisation of its network and infrastructure. Other issues likely to be in focus include safety and decongestion, according to the report. It added that passenger receipts might increase by 33.5 per cent for the financial year ending March 2015, compared to 20.7 per cent estimated in the interim Budget. Goods receipts would increase by 16.7 per cent in the same period.
The move on fares comes shortly after Minister for Commerce and Industry Nirmala Sitharaman said the government was considering 100 per cent FDI in several segments of the railways sector. At present, there is a ban on any form of FDI in the railways. According to industry estimates, the railways loses about Rs 900 crore a month on passenger fares.
Some sections of the market, however, remain sceptical about the raise. "While this is a good move, we need to wait and watch how many of these companies will benefit from the fare hikes. We will have to see if the additional revenue would be spent on meeting the capex needs of the sector," said Dipen Shah, senior vice-president, research, Kotak Securities.
