Texmaco

Investors can consider accumulating the stock of Texmaco, a leading supplier of wagons to the Railways. Stability on the demand front with the Railways announcing an addition of 18,000 wagons, besides the heightened focus on developing the dedicated freight corridors underscore our optimism.

Texmaco appears well-placed to benefit from these given its established relationship with the Railways and the private logistics players. At the current market price of Rs 101, the stock trades at about 12 times it likely FY-10 per share earnings.

This appears reasonable given the vast business potential in the wagon manufacturing space.
Demand drivers

The reiteration of the Railways’ focus on improving infrastructure in the country, with increased budgetary allocation, higher wagon orders and sustained efforts towards setting up of dedicated freight corridors (DFCs), bodes well for Texmaco.

The company’s wagon manufacturing business benefit immensely from that as it is the largest wagon supplier for both the Railways and the private sector.

Besides, the setting up of DFCs will also in the long run translate into higher wagon orders from the private container rail logistics players. That Texmaco had secured orders for the supply of 3,455 wagons from the Railways last year (of the total 11,000 wagons) lends confidence on its execution skills.

But even as increasing wagon orders from the Railways are expected to make up a chunk of Texmaco’s order-book, the demand from the private players is unlikely to improve in the near-term. Save for Container Corporation, which is continuing with its capex plans for the year, most other private container rail logistics players are likely to go slow on their wagon procurement plans.

The global economic slowdown may continue to shadow the sector given its exposure to EXIM traffic. Though there have been slight signs of revival in cargo volumes — even the latest cargo volumes for the month of June have registered growth — it may take at least a couple of months of sustained cargo growth before wagon orders from the private logistics players begin to trickle in.

The company also has a presence in the steel castings and hydro-mechanical equipment space. The castings division, besides meeting captive requirements, also supplies bogies and couplers to the Railways and other wagon builders. Though not a revenue spinner, the division scores well on profit margins and contributes highly to overall cost savings for the company. Texmaco plans to increase the division’s exposure to high-margin export market and has in this respect even established its export base for hi-tech precision castings to serve a few multi-national clients.

The company has received a certificate from the Association of American Railroads for manufacture of Side Frame, Bolster and Centre Plate for the US market. It also has a presence in hydro-mechanical equipment space.

Though the division is yet to make any meaningful contribution to the company, it holds potential to add significantly to revenues. The Government’s increasing focus on improving power infrastructure and the proposed capacity addition in various hydropower projects point to high growth prospects for the division.

While the competition in this space is immense, Texmaco’s proximity to the untapped hydropower potential in North-East India may give it an edge.
Scorecard

For the financial year-ended March 2009, the company reported 15 per cent growth in revenues, while profits grew by 10 per cent. Operating margins dropped by half a percentage point to 15.5 per cent for the year. Deferment of wagon acquisition plans by private players leading and erratic commodity prices could be attributed to the drop in margins. On a segmental basis, the company’s rolling stock division continued to drive growth. Overall, it recorded an impressive performance by turning out 4,701 wagons during the year.

Though in terms of volume, the production was about the same as that of the previous year, the new hi-tech design Indian Railway wagons in stainless steel construction and special wagons for the private industry helped it make substantially higher value-addition over the previous year. It now enjoys an order book of Rs 1,300 crore.

The company is also in the process of raising Rs 200 crore through either preferential allotment of foreign currency convertible borrowing, ADR or GDR.