Titagarh Wagons

Titagarh Wagons

Titagarh Wagons

Titagarh Wagons

Titagarh Wagons

Titagarh Wagons

Titagarh Wagons

Titagarh Wagons

Titagarh Wagons

Titagarh Wagons

Titagarh Wagons

Investments with a two-three year perspective can be considered in Titagarh Wagons (TWL), a leading private sector wagon manufacturer.

Our investment argument stems from the relatively stable business opportunities available in the rail sector arising from setting up of dedicated freight corridors, sustained capex by leading container rail logistics companies and introduction of wagon leasing scheme.

All these factors hold considerable merit in today’s scenario as many mid and small-sized manufacturing companies are already facing a slowdown in demand. On that note, TWL’s revenues appear comparatively cushioned.

Not only is the demand for wagons stable, the fact that TWL has a long-standing relationship with both the Indian Railways (IR) and private players also lends considerable credence to its growth potential.

Valuations

From a long-term perspective, the recent meltdown in the broad markets has rendered the company’s valuations quite attractive.

At the current market price of Rs 399, the stock now trades at about 10 times its likely FY09 per share earnings, down significantly from the PE multiple (of 17 times) it enjoyed at the time of its initial public offering in March this year. That there has been no significant mark down in capex, by either the IR or leading container rail logistics players such as Concor and Gateway Distriparks (GDL) in the interim period, suggests that there may be sufficient room for expansion in its price-earnings multiple from the current levels.
Wagon demand buoyant

The demand for wagons is largely driven by the capital expenditure incurred by the Indian Railways. That IR has moved to positive earnings territory over the last couple of years and given that railway spending has little linkage to the global economic slowdown (in recent times, the passenger traffic using railways has increased significantly) suggests that its budgetary spending on revamping its infrastructure and adding to its wagon fleet in the coming years may well continue.

This bodes well for TWL since IR had intended to procure an all-time high of about 20,000 wagons in the coming years. Another factor that adds up favourably for TWL is the high replacement demand from IR. To increase its share of the freight traffic, IR plans to substitute its older wagons with ones that have a higher axle load design and are made of stainless steel and aluminium.

The entry of new private players in container rail logistics is also a positive. While it may take a while for the demand from private players to ramp up, this space offers a huge business potential for wagon manufacturers (industry estimates peg it at about Rs 2000 crore).

The growing consensus that interest rates may have peaked and will begin to taper from hereon may also support demand. On that note, the wagon investment scheme, which seeks to provide 10 per cent rebate on normal freight charges to wagon owners and guaranteed supply of rakes every month, may also sustain demand.

Besides this, introduction of wagon-leasing scheme, which allows third-parties to invest in wagons and lease them, may also help.

In addition to all this, TWL has recently started the manufacture of Electric Multiple Units (EMUs), which are widely used for the passenger transport by the Railways. While only a nascent business presently, it holds the potential to become a significant revenue spinner for TWL in the coming years.
High barriers to entry

Given the high entry barrier in this business, private wagon manufacturers are likely to reap the benefits arising from near term opportunities. This is because IR’s procurement policy stipulates that three-fourth of its orders should be placed with players on the basis of their past five years’ track record. That straightway eliminates the threat of TWL losing any significant market share to newer players.

On the other hand, TWL may well procure incremental business from the Railways in the coming years since it is presently investing in doubling its wagon manufacturing capacity. That the capacity expansion will be funded through the IPO money raised by the company also does away with concerns regarding any high reliance on debt for expansion. The only bottleneck in this business is the limited availability of axle and wheel sets given the supply constraints of the domestic railways-approved wheel set manufacturers.

sThis, the company plans to circumvent by setting its own axle machining and wheel set assembling plant.
Financials

On a compounded annual basis, TWL has in the last four years grown its revenues and profits at 76 per cent and 97 per cent respectively.

Operating profit margins, during this period, have expanded by over 2.6 percentage points to 15.5 per cent.

Though TWL has presence in HEMM (heavy earth moving and mining equipment) and steel castings (captive consumption) businesses, we expect a bulk of its revenue growth to come from the wagon manufacturing division.

To that extent, it leaves little scope for expansion in margins and realisations as IR fixes the price of wagons on the basis of the lowest bid (L1) it receives.

Titagarh Wagons - Allotment - Subscription Details

Sr.No.	Category			No. of times of total meant for the category
1	Qualified Institutional Buyers (QIBs)			10.3670
1(a)	Foreign Institutional Investors (FIIs)
1(b)	Domestic Financial Institutions(Banks/ Financial Institutions(FIs)/ Insurance Companies)
1(c)	Mutual Funds
1(d)	Others
2	Non Institutional Investors			2.7683
2(a)	Corporates
2(b)	Individuals (Other than RIIs)
2(c)	Others
3	Retail Individual Investors (RIIs)			0.9798
3(a)	Cut Off
3(b)	Price Bids
4	Employee Reservation			0.0707
4(a)	Cut Off
4(b)	Price Bids

Grey Market - Titagarh Wagons slips into discount

Gammon Infra 167 4 to 5


Sita Shree Food Pro. 30 3 to 5


Titagarh Wagons Ltd. 540 to 610 Discount (However, there was high institution interest)


Kiri Dyes & Chemicals 125 to 150 6 to 8

Titagarh Wagons IPO review

Titagarh Wagons is well positioned to benefit from the demand in the logistics space.

Kolkata-based Titagarh Wagons, a private sector manufacturer of railway wagons, is setting up a manufacturing centre to make electric multiple units (EMUs) and expanding its existing facilities at a cost of Rs 70 crore.

To fund its expansion as well as meet corporate expenses the company aims to raise Rs 111- Rs 126 crore through the IPO route, with each share priced between Rs 540 (lower band) and Rs 610 (higher band).

While the company has wagons, special projects and heavy earth moving and mining equipment divisions, over 80 per cent of its revenues accrue from the wagons division.

Rising freight demand
The opening up of India’s container movement to private players (in 2006) as well as the move to allow corporates to invest in wagons (in 2005) has opened up the erstwhile Indian Railways monopolies.

With a large number of logistics service providers and manufacturers jumping into the fray, this nascent segment is expected to take off.

In 2004-05, freight handled was pegged at 6,000 lakh tones, while that for FY08 is estimated at 7,850 lakh tonnes. This is expected to move up further to 11,000 lakh tonne by the end of the 11th five-year plan in 2012.

Indian Railways plans to double its wagon purchase order from the estimated 10,200 wagons for the current fiscal to 20,000 wagons for FY09. This translates into a steady demand for players such as Titagarh Wagons, which along with nine other public, private and joint sector companies are eyeing the Rs 15,000 crore wagons market.

While the company is planning to expand its share in wagons, it is also targeting niche applications. It has tied up with US-based FreightCar America to manufacture aluminium coal hopper wagons and other wagon products.

Passenger segment
The company is also planning to expand its EMU production to cater to the passenger car and metro rail requirements of the railways. The unit to be set up at the Uttarpara facility in West Bengal will manufacture 24 rakes per annum with each rake consisting of nine EMU coaches.

The company has received an order for supply of 9-car rake from Indian Railways and hopes to expand its presence in the sector once its Uttarpara facility is completed by December 2008.

In addition to the EMU facility, the company wants to set up an axle machining and wheelset assembly unit with an annual capacity of 10,000-12,000 wheelsets.

The expansion will allow Titagarh Wagons to integrate backwards and reduce dependency on Indian and foreign suppliers.

With only two Indian manufacturers of wheelsets, which constitute 35 per cent of a wagon’s selling price, and continued increase in prices over the last two fiscals due to global shortage, Titagarh’s move to backward integrate makes sense.

Special projects/euipment segment
The special projects business, which contributes 11 per cent to total revenues, makes modular bridges, equipment for nuclear power plants and special purpose wagons for the defence sector.

Defence equipment sales to Defence Research and Development Organisation (DRDO) have increased from 1.6 per cent in FY07 to 4.4 per cent in the first half of FY08.

The heavy earth moving and mining equipment division manufactures hydraulic excavators, cranes and forklifts and accounts for 5 per cent of revenues. To ramp up its facilities and improve cost efficiencies in the equipment division, the company plans to invest Rs 4 crore.

Healthy order book
The company’s order book as on January 31, 2008 stands at Rs 753 crore, which is over 2.5 times its FY07 revenues. Of this, 90 per cent is accounted for by wagons and EMU sales.

Though Indian Railways continues to be Titagarh’s single largest customer, its share of revenues and wagon sales is declining. While Indian Railways’ share in Titagarh Wagons’ total revenues has come down from 61 per cent in 2005 to 11 per cent in FY2007, its share of wagon sales has also declined from 75 per cent to 49 per cent in the same period.

Strategic moves
Over the last nine months, two strategic investors--GE Capital International and JP Morgan have bought 15.5 per cent (August, 2007) and 5 per cent stakes (January 2008) in the company at Rs 509 per share and Rs 610 share, respectively.

The vendor financing agreement with GE Equipment Services on May 2007 will help Titagarh’s customers finance their wagon purchases. JP Morgan, on the other hand, is helping Titagarh Wagons acquire a majority stake in Cimmco Birla. JP Morgan owns a significant portion of Cimmco Birla’s debt.

As part of the restructuring programme, Titagarh will be investing Rs 35 crore in Cimmco for a 51 per cent stake. This acquisition is expected to double Titagarh Wagons’ current manufacturing capacity of 5,000 wagons per year.

nvestment rationale
With rising demand from corporates such as Adani Ports, Hind Terminals and logistics service providers, replacement and new wagon requirement of Indian Railways and the cost advantage for rail transport over road, the macroeconomic outlook for the logistics sector manufacturers and service providers looks bright.

While there are 10 players in the wagon manufacturing space, competition for Titagarh Wagons comes from Texmaco. Going by Titagarh’s half-year FY08 numbers, with revenues at Rs 211 crore and a bulging order book, revenues should top Rs 350 crore in FY08.

If the company is able to maintain its 20 per cent operating margins and 12 per cent net profit margins in future, the stock is available at 17 times FY09 earnings of Rs 36.93 at the higher end of the band and 15 times at the lower end.

While Texmaco trades at a premium of 20 times its FY09 earnings of Rs 85 due to its leadership position, Titagarh could bridge the gap thanks to its growth prospects and higher operating margins, and at this price can fetch good returns over the short- to medium-term.

Issue opens: March 24
Issue closes: March 27

Titagarh Wagons IPO Analysis

Investments with a two-three year perspective can be considered in the initial public offering of Titagarh Wagons (TWL). Our optimism stems from the opening up of business opportunities in the rail sector by way of setting up of dedicated freight corridors, participation of private players in rail logistics and the introduction of the wagon leasing scheme.

Titagarh Wagons appears well placed to ride this growing demand for wagons, given its established relationship with the Indian Railways (IR). At the price band of Rs 540-610, the stock is valued at about 15-17 times its likely FY-09 per share earnings on a diluted equity base. This is at a marginal discount to Texmaco, which trades at about 17 times its likely FY-09 per share earnings. This discount is justified as Texmaco commands a higher share in wagon supplies and has a more diversified business mix. Growth prospects notwithstanding, we would be more comfortable if the offer were priced at the lower end of the price band.
Railways, demand booster

The demand for wagons is set to increase given the Railways’ renewed focus on increasing its share of freight traffic. This is reflected in the latest Rail Budget, which aims to procure an all-time high of about 20,000 wagons for the coming year. While railway orders are generally procured only through an open tendering process, TWL’s already established relationship with the Railways and the expansion and de-bottlenecking of present capacities may lend it greater credence. Besides, TWL’s proposed entry into EMU (electric multiple unit) may also expand its potential market. It plans to invest about Rs 19 crore to set up the EMU unit, which will have the capacity to manufacture two rakes (nine EMU coaches) per month.

Revenue contribution from the Railways, one of TWL’s largest customers, has reduced over the years, despite an increase in the supply of wagons. This is because the Railways typically provides a bulk of raw materials as ‘free supply’ items to wagon manufacturers.

While this may dwarf the Railways’ contribution to wagon manufacturers’ revenue pie, Railway orders yield higher margin and provide greater flexibility in working-capital management. With a likely ramp up in Railway orders in TWL’s books, the latter may enjoy greater operational freedom.
Private participation

Entry of 14 new private players in container rail logistics is also likely to keep the demand for wagons strong. Since these players are required to invest in their own wagons, the introduction of wagon leasing policy and investment scheme offers support.

The wagon investment scheme provides a 10 per cent rebate on normal freight charges to wagon owners and a guaranteed supply of rakes every month. The wagon-leasing scheme, on the contrary, allows third-parties to invest in wagons and lease them. These schemes, introduced to attract more private participation, may help keep the order books of domestic wagon manufacturers buoyant.
Strategic sourcing of components

TWL’s proposal to set up an axle machining and wheel set assembling plant appears strategic, given the supply constraints of domestic railways-approved wheel set manufacturers. With an investment of about Rs 13 crore, TWL plans to set up a unit to assemble wheel sets through procurement of loose machined-wheels and axles from global suppliers. This unit, which will have the capacity to assemble over 10,000-12,000 wheel sets annually, will give TWL better control over its cost and greater operational continuity.
Financials

TWL witnessed a compounded earnings growth of about 74 per cent during the last four years on the back of 57 per cent growth in revenues. Operating margins have also expanded from over 10 per cent in FY-03 to the current levels of about 17 per cent. Its order-book of about Rs 750 crore, with Rs 670 crore for the rolling stock division, also reflects the strengthening demand scenario.

However, since IR fixes the price of wagons on the basis of the lowest bid (L1) it receives, there is little scope for a drastic improvement in TWL’s realisations. This may be compensated by way of expansion in margins, considering the likely ramp up in IR orders and its backward integration initiatives.

Going forward, we expect the bulk of revenue growth to come from TWL’s wagon manufacturing division only. While its casting division may help on the margin front, the HEMM (heavy earth moving and mining equipment) division may take a couple of years to make significant earnings contribution.
Offer details

The offer is open from March 24-27. Kotak Investment Banking is the book running lead manager. The company plans to raise about Rs 126 crore through a combination of fresh issue of shares and offer for sale by the promoters.

Titagarh Wagons IPO Analysis

Promoted by J P Chowdhary and his family, Titagarh Wagons (TWL) is one of the leading manufacturers of railway wagons. The company also manufactures bailey bridges, heavy earth moving and mining equipment (HEMM). It is an approved and registered supplier with the Ministry of Defence, supplying bailey bridges and wagons.

Incorporated in 1997, TWL purchased land and machinery from Titagarh Steels (now Titagarh Industries, a listed promoter group company) in 1998 to set up a wagon manufacturing unit at Titagarh. In 2005, it acquired the loss-making Heavy Earth Moving equipment division of Hyderabad Industries at Uttarpara, West Bengal.

The wagon manufacturing business of the company primarily caters to Indian Railways. Its clients also include Container Corporation of India (Concor), National Thermal Power Corporation (NTPC), Wagon Investment Scheme (WIS) customers and private container transport players. The current wagon-manufacturing capacity at both Titagarh and Uttarpara aggregates 5,000 numbers of railway wagons. Product range of railway wagons consists of wagons meant for carrying and discharge of coal and ballasts, wagons for transport of cement, food grains, coal, iron ore, stone and containers, and specialised wagons such as merry go round (MGR). On 22 January 2008, the company entered into a joint venture (JV) agreement with FreightCar America Inc to jointly promote and incorporate a private limited company to develop, design, manufacture, service and distribute railcars and other wagon products. The wagon division accounted for a lion’s share of 78.9% and 83.7% of the total income of the company for the fiscal ended March 20’07 (FY 2007) and six month ended September 2007.

Acquisition of the Uttarpara unit from Hyderabad Industries in 2005, apart from augmenting its wagon capacity, and addition of earth-moving and mining equipment into the product portfolio has also facilitated backward integration into steel forgings required to manufacture wagon. The Uttarpara unit consists of a 5,000-tonne steel foundry, and a machine and a fabrication shop. TWL has the capability to manufacture various types of hydraulic excavators ranging from one cubic meter to 14 cubic meters and crawler cranes with capacity varying from 75 tonnes to 92 tonnes. With an installed capacity to manufacture 50 equipments per annum, the HEMM division contributed about 4.8% and 5% of the total income in FY 2007 and six months ended September 2007.

In 2007, TWL entered into a tie-up with JP Morgan Mauritius Holdings to propose a scheme to revive and rehabilitate Cimmco Birla to the Board of Industrial and Financial Reconstruction (BIFR). Cimmco Birla has a wagon-manufacturing unit in Rajasthan.

The proceeds from issue of new shares to fund the capex to set up an electric multiple units (EMU)-manufacturing unit, expand and modernise existing units, establish axle and wheel-set unit at Uttarpara, and build a new corporate office and for strategic acquisition. The setting up of the EMU unit and modernisation of the existing units are expected to be completed by FY 2009.

Strength

Order book stood at Rs 753. 11 crore end Janaury 2008. Current order book translates into 2.7 times FY 2007 revenue, lending revenue visibility. Order book also consists of order for manufacture and supply of nine car rakes of EMU from Indian Railway, depicting the successful foray into passenger EMU vehicles.

Though Indian Railways continues to be a significant customer, the business of wagons to non-railway clients is growing with the entry of private players in container movement through railway, ending Concor’s monopoly along with schemes such as wagon investment scheme. Moreover, economic growth provides strong support. Sales of wagons to non–railway clients and their share in total revenue by value increased to 68.26% in FY 2007 compared with nil in FY 20’04. This results in better utilisation of capacity and insulation to a large extent from the risk of delay in placement of orders or delivery of free items by Indian Railways.

Orders placed by Indian Railways usually include free supply of materials of high value such as steel, bogies and wheel sets. There is a price-escalation clause linked to the wholesale price index (WPI) for labour, thus insulating margin. Similarly, orders from public sector undertakings (PSUs) such as Concor and NTPC also have price- escalation clause for iron and steel and labour linked to the WPI.

Weakness

Has to source Dispatch Memo (DM) components from Research and Development Standard Organisation (RDSO)- approved vendors. There are global supply constraints for wheel sets. Thus, operation/ production of wagons depends on supply of critical components. Penalty has to be paid for missed delivery schedule.

In addition to the bogies and couplers manufactured at the Uttarpara foundry unit, not running to its full capacity, these components are procured from Titagarh Industries, a group company, resulting in clash of interest.

Titagarh Industries (formerly Titagarh Steel (TSL)), one of the promoter-group company, along with its directors was declared a willful defaulter by the Reserve Bank of India.. Subsequent to a one-time settlement, it was removed from the list in 2007.

Propose to invest Rs 35 crore in Cimmco Birla, a company under BIFR scheme of revival and rehabilitation, subject to necessary approvals from BIFR. Signed an agreement with JP Morgan to propose a joint revival scheme. Though the takeover of Cimmco Birla brings additional wagon-manufacturing capacity, specially at a different geographical location in Rajasthan, the ability to successfully turn around it has to be seen as quite a few promoter group companies are in the red.

The share of Indian Railways by value in total revenue has come down to about 10%. But in terms of volume it is significant. Any delay in placement of orders may hit operations and margin.

Valuation

The first-half (ended September 2007) annualised EPS works out to Rs 28.2. On the offer-price band of Rs 540-Rs 610, the PE works out to 19.1 times at the lower price band and 21.6 times at the upper price band. In comparison, peer player Texmaco quotes at a PE of 27.6 times its first-half annualised standalone earning.

Via CM

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