Strengths :
* Strong Investment pipeline of Indian Railways to the tune of Rs.375 billion, demand estimated at 20000 wagons for FY 2008-09. Carrying capacity of railways to increase 40% over the next four years which would mean additionla investment in rail tracks and wagons.
* Plans to upgrade to stainless steel coaches from 2010-11 an opportunity for private wagon players
*PPP investments to the tune of Rs.1,00,000 crore in freight corridors, terminals,logistics and infrastructure in the coming fiscal in railways will propel demand for wagons. Dedicated freight corridors coming up in the different parts of the country will entail the need for high capacity and high payload special purpose wagons to handle bulk cargo. The company with its value added services is well positioned to capitalise on these opportunities.
*Wagon leasing scheme implementation by railways will ensure replacement demand for wagon manufacturers
*Total Order book stands at Rs.753 crore which is 2.65x FY 07 sales and indicates good visibility of earnings going forward.
*The company has just begun exporting wagons to Africa.Its still in the process of exploring relationships with customers in foreign markets. This may emerge as a potential revenue stream going forward.
*The special projects division (which concentrates on value added services to railways and supplying defence equipments as well as nuclear power plant equipments )and the heavy engineering division, though forming miniscule portion of revenues as on date have scope to add to the topline and are steadily pursuing orders from DRDO and Nuclear Power Corporation.
*Realisation per wagon has been improving over the last few years with the reduced dependance on railways albeit the company sells to Indian railways at a significant discount compared to private sector customers.Even adjusting for the free raw materials supplied by Indian railways, there exists a huge subsidy incurred by the company on its sales to Indian railways given the highly competitive bidding prices for wagons. The realisation from private players cross subsidises the margin losses on sales to railways.
Weakness:
*Dependant on a single segment namely wagons and also on Indian Railways policies.
* Competition is significant in the industry with the presence of players like Texmaco, BESCO, Hindustan Engineering, Bharat Bhari Udyog Nigam. With the Railway Ministry deciding to approach international companies for wagon design, the possibilities of competition intensifying in the wagon manufacturing segment is quite high.
*Significant Pricing pressure with resultant negative impact on margins buttressed by increase in raw material costs and inability to pass on the same to Railways, the latter being a monopoly player in India.
*Acquisition of Cimco Birla, a loss making wagon manufacturer, though the same auguments the capacity, operational and financial turnaround seem unlikely at the moment. The same factors apply to the acquisition of the loss making heavy engineering division of Hyderbad Industries.
*Indian Railways have a budgeted investment of Rs.750 billion to ramp up their own infrastructure and are also setting up a new wagon manufacturing plant in Kerala
* Change in Indian Railways procurement policy of wagons to favour the public sector undertakings can adversely affect the financials of the company. The company is not the exclusive supplier of wagons to Indian railways. Therefore supply to Indian railways shall vary from year to year.
*As far as orders procured from Indian railways are concerned, the terms and conditions of the order include free supply of raw materials of high value like wheel sets and bearings. This cushion is not available to the company in case of private customers and the company will be exposed to vagaries in the movement of raw material prices to the specified extent. The cost of wheel sets have risen exponentially over the last few years and constitute 30-35% of the selling price of a wagon. The item as a raw material is also in short supply globally and as a result has a profound impact on the operating margins of the company.The impact of raw material prices on the bottomline of the company assumes significance in the wake of the company placing greater emphasis on orders from private players. The share of Indian railways in the revenue of the company has shown a steady decline over the years.
* Production delays in the past on account of delayed procurement of raw materials like wheel sets have resulted in the company paying liquidated damages to both Railways and private customers to the tune of Rs.2.5 crore.
* Titagarh Steels, one of the group companies is also manufacturing certain wagon related components produced by this company resulting in conflict of interest and may result in loss of orders and revenue in future.
Financials :
*Sales of the company have grown at a CAGR of 43% over the last five years and profits have grown at a CAGR of 51% over the same period.
* Raw Material costs constitute 70-75% of the total revenues of the company. The company has maintained its operating margins at 18% over the last couple of years and PAT margins at 9% over the same period. Margins have shown significant improvement from 2005 after the company started assembling wheelsets at its own plant in Uttarpara. The company has also been aided by free supply of raw materials from specific customers including Indian railways.
*Operating margins and PAT margins are higher than its immediate peer company Texmaco but the latter has a much higher market share and a better track record and a much diversified business model. Texmaco is setting up Asia Pacific's biggest wagon hub in West bengal and commands 30% market share in the wagon manufacturer's segment vis a vis Titagarh Wagons at 18%. The order book for Texmaco also stands higher at 2000 crore at more than 3x FY 07 sales.
Valuation :
Titagarh Wagons discounts its trailing 4 quarter FY07 earnings at 38x at the lower end and 43x at the upper end of the price band of Rs.540-610. If we annualise the half yearly earnings for the six month ended Sept 2007, the PE works out to 24x and 27x forward EPS of Rs.22 for FY 2008.
The only listed peer company being Texmaco is trading at 24x FY 08 earnings after the steep correction in the stock markets. Based on the current volatile market conditions, the pricing appears to be stiff and investors would have been more comfortable with a 20% reduction in the price band to leave something in the form of listing gains on the table. Therefore it is advisable to apply for this IPO at the lower end of the price band. Investors would need to moderate their expectations of major listing gains from this counter, however, stocks like these with good fundamentals and earnings visibility are a definite long term hold.
New Initiatives in Railway Budget 2008-09 that shall affect the Wagon Industry
1. Setting up of dedicated freight corridors and privatising the same to container operators shall increase the demand for wagons from private players
2.All coaches of Rajdhani, Shatabdi and Suburban rail coaches to be made from stainless steel. This initiative shall benefit wagon manufacturing companies that upgrade to meet this requirement.
3.Railways has set a target of 20000 new wagons, 250 diesel and 200 electric locomotives to be manufactured internally/ sourced from private manufactureres
4.Wagon leasing scheme to be operative from 2008. This will ensure continued demand for wagons
5.Railway capex plan for Rs 375 billion for wagon procurement, Rs.750 billion for improving internal infrastructure holds a lot of promise for private manufacturers
6.PPP model to be pursued aggressively by railways and out of the total planned investment of railways to the tune of Rs.2,50,000 crore, 40% of the same is to be harnesssed through PPP model and throws up new opportunties for wagon and locomotive manufacturers.
7. Plans to set up a new wagon manufacturing unit in Kerala is a negative for private wagon manufacturers as it indicates the increasing emphasis of railways on internal manufacturing of wagons and locomotives.
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