Texmaco rail and engg. - A high tech total rail solutions provider

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

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Wagon orders from Indian Railways started trickling. Texmaco got orders for 1200.

Conf call the co was rep by AK Vijay, CFO.Key takeaways by Capital Mkt
Order book (including non wagon order book) of the company currently stands at Rs 1250 crore. Of which wagon order is about Rs 600 crore in value terms and 2300 wagons in volume terms. Of the total wagon order about 550 wagons were from Indian Railways (IR), 974 wagons were from defence and about 700-800 wagons from other sector. IR wagon orders are with material supply.No export orders for wagons. Export order of foundry division excluding that of US orders is about Rs 30-35 crore. The export order of structural is about Rs 200-250 crore.Q1FY16 results were little disappointing as there was sudden disruption in wagon production during the quarter. Not done any wagon production in May and June 2015. IR which managed to get lower price (predatory price) from a player for its 2015-16 wagon orders has forced other player to take that price for 2015-16 orders as well as earlier period orders outstanding, which was duly refused by the industry (established players). The company’s original orders upto FY14 were already supplied and that orders diverted from other players only got struck up due this change in price thrusted by IR. IR after deliberation restored the price to original level for orders pertain to FY2013-14.In 2015-16 wagon tender by IR the predatory player (new entrant) quoted Rs 10.80 lakh and bagged orders for 1800 wagons. As far as 2014-15 wagon tender is concerned the established players not ready to match the predatory price. IR offered last year price which is also refused by established players as it is still less than the reasonable price. The company as well as other established players wanted a reasonable price and the IR is yet to take a call and place orders.Despite disappointing Q1FY16 the company is hopeful for better FY16.Hydro mechanical Equipment division – Despatch could not be done during this quarter due to Nepal earthquake. Starting despatch from Q2FY16 as roads to some extend got repaired.
Foundry – meeting own wagon, export orders and least is other wagon builders.Wagon procurement for 2015-16 will be better than the last 2 years that is 11500 wagons and 8500 wagons respectively in FY14 and FY15. Only once the tender is out the exact numbers will be known.
Defence Wagon – Execution of 974 defence wagon order has started and it will pick up in the coming months. For the first rake currently got the IR clearance and defence clearance is awaited. The First rake of 38 wagons will be dispatched in July 30, 2015.Outstanding orders pertain to years prior to FY2014-15 Quantity not supplied and outstanding is 550 wagons and revenue loss is Rs 650 crore.
The export of Bridge girders for Bangladesh has commenced during the quarter. US market exports orders will start from Sep 2015.The Coal India wagon requirement of 5000 wagons in 3-4 years will be routed through IR and will come in with in this year.Working on metro opportunity the company has put in ground work but the company has no orders to show off. The company can’t participate on its own and will bid in JV with technology from the partner.Until merger of Kalindee merger and metro opportunity materialize there won’t be any major expenditure.Wagons supplied by the company in FY2014-15 are 1900 wagons and the value if it was Rs 320 crore .Margins of bridges, HME and steel foundry the margin are different with the margin of latter depend on the industry. Margin of non IR will be better than IR orders.

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Rs 6450 crore order from Indian Railway

TEXRAIL_11052022103348_SEIntimationReceiptofOrder.pdf (218.1 KB)

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