IN 2016-17, over a billion people rode the Delhi Metro. On some days, over 3.5 million boarded the trains. Based on similar high ridership figures in 2015-16, Rajiv Gauba, former chairman, Delhi Metro Rail Corporation (DMRC), said, “These high ridership figures show the tremendous faith and confidence that the people of the entire National Capital Region have in the Delhi Metro as a safe, fast and a reliable means of transportation.” He added that the Delhi Metro was “instrumental in ushering in a new era in… mass urban transportation” in the country.
Despite this success, DMRC incurred huge losses. In 2015-16, its net loss was over Rs. 700 crore. This is the reason that it hiked its fare in May 2017. The maximum rise was a hefty 66.66% for distances over 32 km. According to DMRC’s revenue director, KK Sabarwal, the hike “was important in order to sustain its operations”. This was the second time, after 2009, that the ticket prices were increased. In October this year, the tariffs will rise by another 20%. In effect, the maximum fare, as applicable in October, will zoom by 100%, compared to the pre-May rates.
However, there is another story hidden behind these so-called facts. It’s a narrative of how the DMRC is one of the most cash-rich transportation companies in the country. It cash profits, i.e. operating profits are enormous. Its other costs are minimal. The only reason that company incurs a net loss is not because of actual expenditure—like on salaries, operations and interest—but because of its huge depreciation charges. For the non-initiated, depreciation, a reduction in the value of the various assets, such as trains and rails due to wear and tear, is a non-cash expense.
As per one formula, your car will depreciate to 50% of the value of a new one in 4-5 years. As one can see, it’s a notional loss. You don’t have to pay this amount to anyone; you may be able to sell the car at a higher price, if there’s a demand. Similarly, a company doesn’t pay depreciation to anyone; there is no outgo. Here are a few ‘facts’, before we delve deeper into this alternative narrative. In 2015-16, Delhi Metro’s profits before depreciation and tax were an impressive over Rs. 1,000 crore. The figure was positive in each of the 10 years between 2006 and 2016.
There is another aspect to depreciation. A company that has a high and growing depreciation each year is obviously on an aggressive expansion spree. Such growth implies that its annual revenues will multiply accordingly, as the expansion translates into newer operations in the near future. Once the new projects, or extension of the existing ones, are completed, it will also boost the bottomline of a company. So, while depreciation may eat into the profits on paper—and only on paper—there’s no cash outgo, but immense profitability in the near future.
For efficient companies, there are immense benefits. Ever since its inception, DMRC completed almost all its projects on time, or even before the scheduled commissioning dates. During his tenure as the DMRC’s managing director between 1995 and 2012, Elattuvalapil Sreedharan was known as the ‘Metro Man’. He ensured that processes and systems were put in place for DMRC to run efficiently and effectively. Hence, the financial advantages that will accrue to the company because of its expansion will be higher than for other firms.
One of the ways to prove this is to look at the depreciation to revenues ratio over the years. This figure was a high 36 per cent in 2010-11, but it came down dramatically to 28 per cent within three years, by 2013-14. Obviously, this was because the projects that commenced in the former year were completed, and led to a huge jump in the annual turnover. The ratio rose again to 36 per cent in 2014, and came down to 34 per cent in the next year. This indicates that over the next 2-3 years, the ratio will reduce as the new projects commence operations, and add hugely to the top-line.
LET’S go back to the tale spun by DMRC that talks about its net losses, and justifies the fare increase in May 2017. The company’s revenue director, Sabarwal, mentioned four reasons for the losses – growing interest, energy expenses, traction costs and salaries. He added that the operating ratio, i.e. expenses to earnings one, had risen from Rs. 54 in 2009 to Rs. 84 now. What he meant was that eight years ago, DMRC spent Rs. 54 for every Rs. 100 it earned, and the expenditure now is Rs. 84 for every Rs. 100 earned. In the future, the ratio will go up.
A detailed look at all the above-mentioned issues tells a different story. First, let’s take a look at the finance costs. Over the last six years, between 2010-11 and 2015-16, interest outgo went up by a stupendous 13.66 times to Rs. 264 crore. The latter was 6% of the revenues and a quarter of the operating profits before interest, depreciation and tax. These percentages do seem higher than other urban transportation and infrastructure companies. But there is a huge difference – the size of the DMRC’s loans, and the interest rates on them.
LONG-TERM borrowings of the Delhi Metro were humungous Rs. 29,150 crore in 2015-16, or 6.7 times the annual revenues. Of this, almost Rs. 3,000 crore was free of interest. This was the amount granted largely by the central government and Delhi government. Over Rs. 7,300 crore was doled out at an interest of 1.2 per cent, Rs. 2,900 crore at 1.3 per cent, and another Rs. 10,000 crore at 1.4 per cent. In effect, these accounted for 80 per cent of the loans. Another Rs. 2,100 crore was at a higher interest of 1.8 per cent, and Rs. 275 crore at 2.3 per cent. For anyone in finance, these are ridiculously low rates.
Compare the above to the interest paid by private firms. Larsen and Toubro, one of the largest private infrastructure companies, paid Rs. 1,318 crore as interest in 2016-17, which was almost 12.5 per cent of its loans. One can argue that the private sector takes short-term loans, apart from the long-term ones, and have to pay a much higher rate on the former. But even we compare apple to apple or orange to orange, i.e. DMRC’s long-term loans to private firms’ similar borrowings the difference in the interest rate between the two is huge—five to six times.
An insightful comparison of the energy costs over the years indicates that DMRC has managed to save on such expenses. First, between 2010-11 and 2015-16, such expenditure as a percentage of total revenues inched up a little bit—from 3.67 per cent to 3.9 per cent. But in the past three years, the figure came down from just over 4 per cent in 2013-14 and a high 4.8 per cent the next year. Of course, there is a dispute with the various DISCOMs related to electricity tax, which resulted in a contingent liability of Rs. 102 crore as on March 31, 2016. The figure went up from Rs. 80 crore in the previous year.
Traction costs have indeed gone up, as claimed by Sabarwal. In terms of the percentage of revenues too, they went up from 4.7 per cent in 2010-11 to 7.6 per cent in 2015-16, which is a huge jump. But there is still a lot of volatility in these expenses. For example, traction costs as a percentage of revenues were 6.2 per cent in 2013-14. According to experts, this may be because of the commissioning of new projects. As this happens, the traction costs shoot up during the year new routes are tested and launched, and then stabilide after several months. This is especially true in rail transportation.
Now, we come to the salaries paid to the DMRC’s employees. Any company that expands its operations and services has to add new employees at a faster clip. So has Delhi Metro. Ironically, its annual salary bill as a percentage of total revenues has actually decreased—from 15 per cent in 2010-11 to 12.4 per cent in 2015-16. The company can argue that the trend is the opposite when one compares the cost of salaries to the operating profits. During the period mentioned above, the percentage has shot up from 43 per cent to 53 per cent, a handsome rise of 10 per cent.
However, the figures vary quite dramatically from year to year. In 2013-14, the figure was 43.6 per cent, or almost the same as 2010-11, and 48.5 per cent in the next year. This trend points towards a counterintuitive conclusion. During an expansion phase, firms generally hire most of the employees before the new projects become operational. Hence, the salary bills look bloated until the capital investment converts into actual realizable revenues and profits. Thus, during the growth phase, a firm’s expenditure on manpower will definitely be volatile.
TWO more issues need to be highlighted in the context of Delhi Metro’s financials, and its management claim that it loses money. The first is the company’s cash flows. Any company with positive cash flows is in good health, and its problems are temporary. In the case of DMRC, its cash flows from the operating activities were over Rs. 1,500 crore in 2015-16. In the same year, it generated a ‘net cash’ of over Rs. 7,800 crore from its financing activities. Thus in two key areas, operations and the ability to raise funds, Delhi Metro performed admirably.
It is crucial to closely look at the ‘financing activities’. In 2015-16, DMRC raised over Rs. 1,200 crore as ‘grants, or interest-free loans, and almost Rs. 5,000 crore as interest-bearing ones. In comparison, its outgo on repaying loans and paying interest was less than Rs. 600 crore. In addition, DMRC received a huge Rs. 2,250 crore as additional equity. As analyzed earlier, the loans are at incredibly cheap rates and, of course, the equity is free as the company hasn’t paid dividends to its promoters.
One can argue that there is no reason for a public transport company, which is getting such a huge largesse from the Central and State governments, State-owned agencies, and foreign lending agency (Japan International Cooperation Agency), to charge commercial tariffs. In fact, Delhi Metro needs to be happy with minor operating profits, and subsidise its services to woo more riders.
Alam Srinivas is a business journalist with almost four decades of experience and has written for the Times of India, bbc.com, India Today, Outlook, and San Jose Mercury News. He has written Storms in the Sea Wind, IPL and Inside Story, Women of Vision (Nine Business Leaders in Conversation with Alam Srinivas),Cricket Czars: Two Men Who Changed the Gentleman's Game, The Indian Consumer: One Billion Myths, One Billion Realities . He can be reached at editor@gfilesindia.com
