ICMR Case Collection

ICFAI Center for Management Research

This case was written by Hadiya Faheem, under the direction of Debapratim Purkayastha, ICFAI
Center for Management Research (ICMR). It was compiled from published sources, and is intended to be
used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a
management situation.













The Indian Railways Turnaround Story Continues
MCBS0026
2008, The ICFAI Center for Management Research. All rights reserved. No part of this publication may be
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1


MCBS0026

The Indian Railways Turnaround Story Continues
The Indian Railways (IR), the worlds largest rail network under a single management, registered
total earnings of approximately Rs. 444.72 billion for the period April-November 2007. This
represented a growth of 12.11 percent compared to the same period in 2006.
1
Analysts felt the
figures showed that the dramatic turnaround story of the IR continued. IR was in deep financial
trouble in the 1990s. Its fund balances had touched a low of Rs. 1.49 billion in FY 1999-2000.
2
IR
cited many reasons for its bad performance including the leadership of the then Railway Minister,
Nitish Kumar. Some analysts attributed the dramatic turnaround to the leadership qualities of
Laloo Prasad Yadav (Yadav) who became the Minister of Railways in May 2004.
Though IR was the worlds fourth largest freight carrier, and also the largest employer in India, it
was consistently losing money in the 1990s. In mid-2001, the Expert Group on Railways
3
noted,
Today IR is on the verge of a financial crisis... To put it bluntly, the business as usual low
growth will rapidly drive IR to fatal bankruptcy, and in sixteen years, Government of India will be
saddled with an additional financial liability of over Rs 61,000 crore [610 billion] On a pure
operating level, IR is in a terminal debt trap.
4
The bleeding continued through 2004, with IR
incurring losses of around Rs. 1.37 billion in FY 2002-2003 and again in FY 2003-2004.
5

However, in FY 2005-2006, in what was termed as the most remarkable turnaround of any
company ever, IR registered profits of Rs. 150 billion.
6
The next year, it generated profits of Rs.
147 billion and in FY 2006-2007, of around Rs. 200 billion despite a cut in passenger fares.
7
As of
2007, IR was Indias second largest profit making Public Sector Undertaking (PSU) after Oil and
Natural Gas Corporation Ltd. (ONGC).
Some analysts felt that Yadav had not only turned IR around, but had also been able to
significantly boost its financial performance. Under the turnaround plan, Yadav focused on certain
key determinants which would help in reviving the IR, such as, goods, passengers, and other
services related to parcel, catering, and advertising. Initially, he emphasized bolstering the freight
carriage system since it was the major revenue earner for IR, contributing to 70 percent of its
annual revenues. The freight revenues were earned due to an increase in the loadings of coal, steel,
iron ore, and cement. In 2006, the freight carrying capacity of IR was pushed up by increasing the
wagonload by 64 million tons. This led to a significant hike in earnings.
Another core focus area for IR was the passenger segment. IR aimed to increase its earnings from
passengers by deploying 24 coach trains, installing additional coaches, running additional trains,
etc. The demand for the additional trains was determined based on the data obtained by the
passenger reservation system.

1
Indian Railways Strides of Progress in 2007, www.inrnews.com, December 27, 2007.
2
Karan Kumar, Public-Private Partnership in Indian Railways, www.ccsindia.org, 2007.
3
The Expert Group on Railways was constituted under the chairmanship of Rakesh Mohan, the then Director General
of the National Council of Applied Economic Research (NCAER).
4
G Raghuram, Turnaround of Indian Railways: A Critical Appraisal of Strategies and Processes,
www.iimahd.ernet.in, February 2007.
5
Review on Passenger Revenue Management in Indian Railways, www.cag.nic.in, 2005.
6
Lalu to Teach Management at IIM-A, www.in.rediff.com, August 30, 2006.
7
UPDATE 1-Indian Railways Makes $4.5 Bln Profit in 2006/07, www.reuters.com, February 26, 2007.
The Indian Railways Turnaround Story Continues

2
Other initiatives taken by the IR to increase revenues from the passenger segment included
increasing cancellation charges for tickets and augmenting the time limit for the tatkal scheme,
that targeted last minute passengers, from one day to three days and later to five days. The tatkal
scheme helped in boosting IR revenues as the Railways adopted a differential pricing strategy, the
charges depending on the booking time. As a result, IR reported passenger earnings of Rs. 10.13
billion in FY 2005-2006.
Yadav also focused on other areas including services related to parcel, catering, and advertising.
The IR parcel capacity utilization was a mere 5 million tons compared to its capacity of 35 million
tons. The cost incurred by IR on parcel services was Rs. 18 billion including haulage costs and
staff salaries while revenues earned from the services were only Rs. 5 billion. To address this
issue, IR adopted an outsourcing strategy through a public private partnership. The parcel services
were leased out to parcel service providers, thereby decreasing costs to IR. Similarly, catering
contracts were leased to caterers through an annual open tendering system by the Indian Railway
Catering and Tourism Corporation (IRCTC). IR proposed to increase its earnings from advertising
services by open competitive bidding of space for hoardings and advertisements and wholesale
leasing of stations in contrast to retail leasing. On the whole, parcel, catering, and advertising
services contributed earnings of Rs. 5.99 billion in FY 2005-2006.
IRs successful turnaround caught the attention of renowned business schools and corporations
around the world as well as railway service-providers of other nations. In late 2006, around 100
students from the Harvard Business School and 30 students from Wharton School of the
University of Pennsylvania along with seven professors came to attend a lecture by Yadav on the
IR turnaround story.
However, not everyone was impressed. Critics said that the turnaround was not a result of better
management but rather of some innovative accounting practices on the one hand and some
changes in key commercial practices on the other.
8
They argued that the model adopted by Yadav
was not sustainable.
In January 2008, IR announced its plans to modernize railway stations and offer value-added
services like restaurants, cyber cafes, shopping malls, etc. These services were mainly targeted at
people who came to the railway stations to send off or receive passengers. Several corporations
such as the Tata Group, Reliance Industries Ltd., Larsen & Toubro, GVK Group, etc., expressed
interest in modernizing the railway network. Commenting on railway modernization, G
Raghunathan (Raghunathan), a Professor of the Indian Institute of Management, Ahmedabad, who
had prepared a case study on the turnaround story, said, The principles of airport modernization
can be applied to railway station modernization, too. There is huge potential for non-ticket-based
revenues in railway stations like the concept of non-aeronautical revenues in the privately-run
airports.
9

Industry observers opined that under Yadavs leadership, IR had not only become profitable but
had also been able to generate surplus funds of Rs. 215 billion, according to the FY 2007-2008 IR
budget presented by Yadav. Analysts expected Yadav to announce a populist FY 2008-2009 IR
budget as well. They felt that there was still ample slack in the system that Yadav could use to rake
in the profits for IR without hiking the fares. However, critics contended that IR was still facing
some tough challenges and was yet to fully come out of the red. They pointed out that the
passenger fare was being subsidized by freight earnings. And after incurring costs of 40 percent of
the budget for payment of its large workforce, 20 percent on fuel, paying of dividends, etc., IR was
left with only 7 percent for capital fund and 4 percent for development work, they said.
10


8
V Sridhar, Feel-good Train, www.frontline.in, March 10-23, 2007.
9
P R Sanjai, Tatas, Ambanis, DLF Interested in Modernizing Railway Stations, www.livemint.com, January 4, 2008.
10
Bisheshwar Mishra, Lalu to Continue with His Turnaround Story, www.timesofindia.indiatimes.com, February 26,
2008.
The Indian Railways Turnaround Story Continues

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ADDITIONAL READINGS & REFERENCES:
1. Review on Passenger Revenue Management in Indian Railways, www.cag.nic.in, 2005.
2. Lalu to Teach Management at IIM-A, www.in.rediff.com, August 30, 2006.
3. UPDATE 1-Indian Railways Makes $4.5 Bln Profit in 2006/07, www.reuters.com,
February 26, 2007.
4. G.Raghuram, Turnaround of Indian Railways: A Critical Appraisal of Strategies and
Processes, www.iimahd.ernet.in, February, 2007.
5. V Sridhar, Feel-good Train, www.frontline.in, March 10-23, 2007.
6. Rajat Guha and Ratna Bhushan, Railways May Earn Rs.1800 Crores by Offering 300
Trains for Advertisement, www.economictimes.com, December 13, 2007.
7. Rajat Guha, Lalus Gravy Train Eyes the Vote Bank, www.economictimes.indiatimescom,
December 25, 2007.
8. Indian Railways Strides of Progress in 2007, www.inrnews.com, December 27, 2007.
9. Rajat Guha, Lalu Likely to Drive in Freight Cuts to Help Inflation Busters,
www.economictimes.indiatimes.com, December 28, 2007.
10. Karan Kumar, Public-Private Partnership in Indian Railways, www.ccsindia.org, 2007.
11. P R Sanjai, Tata, Ambani, DLF Interested in Modernizing Railway Stations,
www.hindustantimes.com, January 4, 2008.
12. Bisheshwar Mishra, Lalu to Continue with His Turnaround Story,
www.timesofindia.indiatimes.com, February 26, 2008.
13. Indian Railwayson the Right Track? www.gobartimes.org.