Texmaco rail (Texrail) as we all have probably known was a wagon manufacturing company. But in the last few years, its hastransformed itself into a total rail solutions provider. Texrail is the largest rail solution provider in India with 25% market share. It is part of the Adventz group which is a conglomerate comprising Zuari group of companies, Texmaco infrastructure and holdings and lifestyle companies Hettich India, Style Spa etc. It promoted by Mr. SK Poddar who is known as a takeover tycoon (his acquisition of Kalindee and current takeover battle of Mangalore Chemicals and Fertilizers are examples). He is the one who brought global brands like Gillete, Hettich to India.
I have been tracking this company for the last 2-3 yearsand what I found interesting was while the capital goods companies were sulking in the economic downturn, thiscompany was slowly and steadily moving up the value chain. However, the downturn and the inaction of the UPA governmentin terms of not releasing enough wagon orders for the last 3 years brought Texrail down the heels affecting both its top line and bottom line.
Following are the events that happened which catapults this company into the league of high-tech manufacuring companies:
1). It expanded its capacity to around 10,000 freight cars a year. In fact, the last year performance worsened owing to this huge idle capacity and manpower
2). Commissioned emu (Electric multiple units which we colloquially call ‘engines’ in passenger trains) coach facility at Sodepur. The companycalls this facility as start of art facility where they have a technical collaboration with Kawasaki Heavy Industries (KHI), Japan. With the urban modernization planned by the new government, there will be huge opportunity in urban passenger market
3). JV with UGL rail services, Australia where they have bagged initial international orders from Kazakhastan and Queensland, Australia
4). JV with Toux Rail, France , a lease finance company- Wagon leasing is a global phenomenon where 90% of the wagons in the US and UK are leased to private players. http://www.telegraphindia.com/1120521/jsp/business/story_15512230.jsp#.VE_lKfmUc7U
5). Venture into auto car rake used to transport cars/white goods etc - This could be a game changer as this significantlybrings down the transportation cost compared to the existing road alternative. They have already started supplying to Hyundai and Ford
6). Tapping defence orders - They bagged a large 1000 wagon orders from the Indian defence worth 380 Cr
7). Acquisition of Kalindee rail - This is another big thing as it makes Texrail a complete rail solutions provider. While Texmaco is present in wagon manufacturing, Kalindee is engaged in infrastructure and signaling.
8). JV with Wabtec, a leading multi-billion-dollar US company in the field of advanced rail technology and rail safety products to set up facility in India
Most of the points above are explained in detail in the Fy14 annual report.
On the policy front we know that the cabinet cleared 100% FDI in railwaysinfrastructurewhich would provide the required tailwind to the sector.
Now coming to numbers:
)- In the Sep’14 quarter, it reported a net profit (although a small 3 Cr) from the loss in the last 2 preceding quarter.I feel the trajectory is looking up. The CFO indicated in CNBC today that they would do around 700 Cr in Fy15.My best guess is around 50 Cr in net profit. For a 1600 odd market cap company in capital goods segment, this might look a stretched PE.But looking at the points above, I feel it is attractively valued from 3-5 years perspective
)- As per the latest press release, total order book is close to 1200 Cr. http://www.moneycontrol.com/stocks/reports/texmaco-rail-results-press-release-878044.html
)- It is almost a debt free company, very difficult to find one in the capital goods/infrastructure space. It has around 200 Cr in liquid investments
Negatives-
)- My assumption here is that we are at the bottom of the economic cycle and things should look up from hereon. If it does not happen for whatever reasons that we are back to the square one
)- Inspite of diversifying its client base to private sector, there is still heavy reliance on government railways orders. Hope the railways board is reconstituted and it is run like a professional organization
Disclosure - I have been acquiring shares from 35 levels and have close to 20% of my portfolio invested into it. My fundamental hypothesis when I started buying it during mid last year wasthat if the next bull run has to happen in India, it cannot happen without infrastructure boom and this was a great play there. I personally feel given the opportunity size ahead of Texrail, itsmarket leadership position and NDA government doing (or at least trying to do) right things on reforms, this should do well in the next 3-5 years
Feedback/comments awaited
Vijay