Titagarh Wagons – Is this train finally moving?

Wagon and rail equipment manufacturers have had an torrid time over the last 4-5 years with orders from Indian Railways not coming and private capex being non existent. While there have been noises of Indian Railways modernizing or doing this and that, on the ground this has not translated to actual orders for the wagon manufacturers and this has told on TItagarh Wagon’s financials as seen below.

Just note the contrast between the numbers between 2008-12 and 2013 – 18. While there have been a few mirages along the way there are some indicators this cycle is finally turning, while I will discuss this in greater detail below, just wish to make the point that this is an industry with huge fixed costs, Titagarh has been operating at like 20-25% capacity utilization over the last couple of years and operating leverage impact if and when it happens will be huge.

Now coming to the turnaround, a few pointers or green shoots if you like:

a) Firstly there have been increasing orders from the Indian railways, one tender of 10000 wagons was closed last year and another of 22000 wagons will be finalized this year. To put this in perspective total manufacturing capacity in India all manufacturers is less than 30000 wagons, so this is pretty much 2 years business for them.

b) Private sector orders seem to be slowly coming back. Titagarh is getting orders from wagon leasing companies, container train operators and this may get a further fillup with the Railways last month restarting the Wagon Investment Scheme which was discontinued in 2012. In this a customer can invest in a customized rail wagon e.g. car carriers may design a wagon that can carry more cars as compared to the standard rail wagon. Ditto for other industries such as steel etc. This private sector order fillup is reflecting in current order book, given at end of point c.

c) Titagarh has made a lot of efforts with varying degree of success to diversify itself, both geographically and segment wise. They have entered new segments such as shipbuilding, defence & construction of bailey bridges and specialized equipment, while these are smaller segments they are much more profitable, with EBIT of over 15%.

d) In terms of geographical diversification Titagarh has made 3 acquisitions, one a French company called Arbel Fauvet Rail in 2010 (now known as Titagarh AFR), in 2014 Cimmco Birla an Indian company in the same segment and in 2017 an Italian company called Firema. On the plus side all these were loss making companies picked up on the cheap without straining the balance sheet, on the minus they were bought in a down cycle and are all as of date loss making.

The huge loss in 2017-18 relates mainly to Firema, it had a lot of disputed and loss making contracts, for which provisions have been made and the losses written off in 2017-18 (this issue was known at time of purchase and is reflected in acquisition cost). The purchase of Firema though gives Titagarh a lot of design capabilities and the opportunity to participate in metro tenders as they have that experience. If played well, this can have major positive impact.

Now the main story, losses in foreign subsidiaries are stabilized and management expects breakeven at PBT level in 2017-18. Coming to the Indian operations the larger order book, 80% of which management expects to execute in the current year will turnaround financials, which is already starting to show in Q1 results. My projections…

FY19 base case frankly only shows that the company is reasonably priced at CMP, and overpriced in bear case but the point is that this is only with the company operating at 40% capacity on current order book without taking into account any revenue from the 22000 wagon order, when this comes in capacity utilization will move to 60% range (more private orders will push this even further), this should jack up operating leverage even further and make valuations compelling. Please note Indian railways distributes orders among multiple vendors and TItagarh + Cimmco is pretty much guaranteed to get around 20-25% of the order. There is no chance of no orders coming.

Second huge potential upside here is metro rail orders, post the acquisition of Firema, TItagarh is eligible to bid for metro rail tenders, it had bid for Nagpur Metro contract and lost out by margin of 0.1% to an Chinese company. However post the same GoI has changed procurement policy of the government and now mandates two things

  1. Minimum 75% of the coaches must be manufactured in India
  2. There will be a price preference of up to 20% of domestic manufacturers compared to imports.

This excludes all the Chinese players & restricts the field to 4; Alstom, Bombardier, BEML & Titagarh. As per management concall Bombardier, Alstom and BEML have the order books full for the next 2-3 years. This does not mean Titagarh will get orders but may impact bidding patterns. Also the other Indian company BEML does not have the technology so need to pay technology fee to their collaborators while Titagarh owns the technology and has a price advantage.

Quantum of potential upsides given below, only 2 metro tenders announced though given that multiple cities are going in for metro, there should be a slow and steady stream of tenders albeit at India’s Elephantine pace! There are a couple of new segments entered, not assuming any revenue from those, though there they have got the 1st propulsion system order.

Pricing

At CMP of 87 Stock is down over 50% for 52 week high, about 20% above the lows. Not cheap on current financials but once it gets the Indian Railways order or by chance a Metro order, rerating is very possible. This is more of a 12-18 month play and has it’s risks (given below) but has good upside potential and reasonable revenue visibility so IMO is a bet one can take.

Also if one sees the price chart it has a trend of shooting up mostly around budget period so if one buys around the lows there is always a trading upside coming. I have been doing this for some time!

Risks

  1. Order finalization has been delayed for years, nothing to guarantee it will not be delayed for years more. But in general after this 3-4 year furlough, logically it is about time things start moving.

  2. Quality issues in order execution, E.g. some technical problem in French order last year led to huge loss on contract in French subsidiary.

  3. While metal prices are a pass through in most contracts, there is a delay which can impact QoQ numbers, also there have been fixed price contract in past in European subsidiary, by earlier management which caused heavy losses. Current management has mentioned they don’t want to go that road in one of the concalls.

Disc - Invested

Links
https://titagarh.in/annual-reports.php
TWL_Concall_Transcript_for_Q1_FY_19_Results.pdf (601.3 KB)

TWL_Concall_Transcript_for_Q4_FY_18_Results.pdf (662.7 KB)
From metro coaches to warships, Titagarh hits the fast track - The Hindu BusinessLine

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I am rather surprised at the total lack of interest in this counter.

To me, it is the emerging manufacturing powerhouse in India and one of the best bets to play the infrastructure cycle & Atamnirbhar Bharat theme over the next two decades.

Although company has been doing great to build up the business for the next level, the results are not seen yet. But the company is now at the cusp of big earnings explosion.

TTM revenue Rs 1500cr. Order Book Rs 5200cr.
Titagarh has following lines of business - Wagons, Metro trains & Metrolite, High Speed Trains, Navy ships, Land based defence systems, bridges. And also, an under development train electric propulsion system in exclusive partnership with global industry leader ABB.

Future Order Intake Outlook:

  • Wagons: Railways to procure 2lac wagons in the next 5-7 yrs per Indian Railway CAPEX plan (refer to FY21-Q3 concall). TWL has a ~25% market share, implying order intake, based on Rs 30 lac/wagon, of 15,000cr. On a conservative basis, even if I spread this out to a 10yr period, instead of 5-7, it implies an order inflow of 1500cr/yr.

  • Private Sector Wagons & Dedicated Freight Corridor Wagons: On a very conservative basis, and going by past record, lets say 300cr per year.

  • Defence & bridges: Again, on an extremely conservative basis, say 200cr per year ( although it has the potential to be significantly more)

  • Metro & Metrolite: Based on the visible opportunity size and noting only 3 players exist in India - TWL, BEML & Alstom/Bombardier, I expect at least one order per year worth ~1000cr.

  • Italian operations: Again on a very conservative basis, and based on past trends, ~1000cr per year.

This implies a minimum order intake, on a very conservative basis, of ~4000cr per year over the next decade.

Based on current order book & future outlook, I expect revenue of 2500cr in FY22, 3500cr in FY23 & 4000cr in FY24 with a PAT of 100cr, 170cr & 210cr, respectively.
(Note: this is based on blended EBITDA of 9.5%, Depreciation of 30cr, Finance cost of 70cr)

Valuation:
Based on the above projected PAT, TWL should have market cap of ~1800cr today, or fair value Target Price of Rs 150 per share today.
(Note: Assumed terminal growth rate of 5% beyond Fy24 & expected return on equity of 15%.
This is an extremely conservative estimate as it ignores the higher potential revenue from defence/DFC/propulsion biz/High-speed trains biz., & the margin expansion due to much higher turnover)

This is a classic example of how operating leverage can do wonders when the cycle turns and becomes favourable.

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Technically, Titagarh Wagons is showing strength.

Buying interests in the counter since the beginning of this year. Below is the snippet of weekly chart. Blue towers denote buying and Magenta shows selling.

The monthly candles have been closing above Bollinger band(4th month in a row).
The price has been consolidating in a range from last 2 months and can being its upward journey again.

image

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Hi, nice observations but how do you forecast such figures for FY 22 and 23?
What I see here is that there are tremendous order inflows for sure but the company’s capacity is fairly limited. Unless they expand their manufacturing capacity, they’ll remain struck in this range of 400 to 500cr revenue per quarter

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does anyone know, how much time does it takes to build a 3 coach passenger rolling stock for metro in India? or how much time did titagarh wagons took to build 1 trainset for Pune metro?

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I went through the Investor Presentation from Sep 2019 up till now and read through the last few con calls and I have gathered the following information. It’s a long read however i have covered all the important developments in the past 2 years.

Credit Rating

CRISIL Ratings has revised its outlook on the long-term bank facilities of Titagarh Wagons Limited (TWL) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL A-’. The short-term rating is reaffirmed at ‘CRISIL A2+

Order Book 10000 crs for India Operations. 8000 cr from Indian Railways 24177 wagons order
Delivery time is 39 months. No advance on wagon orders

TFA has a 500million euro order book

Debt
On standalone we have long-term net debt is zero. However, there is working capital utilization of about Rs. 140 Crores, this keeps on fluctuating because this is on a particular moment of time and depending upon the cycle of the execution of the contract. Typically in the beginning of the cycle of the execution the debt level goes up or the utilization of working capital goes up. so, the debt level I would say in India is pretty low on a standalone basis and on consolidate and overseas, we have a total net debt of about €80 million. (640 cr debt in Italy business, borrowing cost of 3.5%pa)

EBITDA Margins
I would maintain the same guidance that in our business and EBITDA margin of between 8% and 10%

Market Share
last several years in a row we have been having a market share of about 30%

Contract Clause
the contracts come with the price variation clause upward and downward.

Pune Metro Coaches & Metro projects

The demand for the metro coaches is very healthy in the country, the Honorable Prime Minister while inaugurating the Pune Metro had also announced that all the Tier-1 and Tier-2 cities are being planned to be connected

metro so I would say that while the orders that we have on hand is only the Pune right now the tender pipeline is strong and healthy.

FY2023 the contract will be fully executed.

All states, if you look at the Delhi metro, Chennai, Ahmedabad, Bengaluru so there are different states coming up, so Gorakhpur has been sanctioned so there would be number of them that would continue to come up.

TFA Titagarh Firema - Italy Business

As far as the earning is concerned, the order book of the company is about €500, million as of now and we expect that in 2022-2023 we should be EBITDA positive and 2023-2024 we should be able to turn net positive.

Titagarh Firema, there has been a very important development milestone that we have been able to achieve in terms of signing an agreement with the government of Italy, wherein the government of Italy would acquire a minority stake into Titagarh Firema. No there is no OFCD infusion; there will be an equity infusion which will include the equity infusion from the Government of Italy

it includes €4 million of almost like Rs. 35 Crores of onetime provision that we have done for the end of life the legacy contracts for the extra cost of films from the customer so that is the major impact from the consolidated perspective from the European Operations

The Italian railway business operates on a smaller EBITDA margin. normally the EBITDA target margin in Europe is at about 6%-7%

Italy future projects scope
Government of Italy and the European Union which entails spending €180 billion in infrastructure out of which almost €40 odd billion will come to our sector. since Titagarh Firema is a company based out of the south, recently announcements that were made by the senior government officials clearly said that the company is based out of in the south of Italy will be the bigger beneficiary of the PNRR. (The Program Of National Reconstruction And Resilience)

we have also given lien on one land of Bharatpur which is our indirect exposure to the lenders of the Italian subsidiary.

Catania Project - It is a framework contract of 54 trains and till now our company has got the execution clearance for 25 trains typically the way the market works is that the execution clearance is issued in batches based on the infrastructure progress or building of the infrastructure by the client.
it’s a Lazio region that is the region of Rome. we have got this contract for €280 odd million

Capex

We have done a capex of about close to Rs. 100 Crores which has been primarily funded out of internal accruals.
24000 wagons order, We by and large have the capacity some balancing capacity that will need to be created it is being created

Wheelsets issue?

Wheelsets has been continued to be a problem but the railways have taken necessary action because the Railway Board has to effectively deliver the wheelsets to us, we have to buy the wheelsets from them so the railway has placed some orders for importing wheelsets. we have not faced shortage of wheel sets in the recent past, the Rail Wheel factory has been able to ramp-up production. of course from time to time

Other business: Propulsion System/ Traction Motor

We have received orders and we have started the trial production. we already have orders and for that the plant approval and the trial production has already started.

As far as Vande Bharat opportunity is concerned, it is an important opportunity, I am happy to share that our company has already got an order for developing the propulsion for the Vande Bharat train a few months ago

Passenger Train design & delivery mechanism

The contracts that we have been signed recently and typically in a passenger train business, first designing and the production of the first train takes between 18 to 24 months that is one.

Bangalore Metro New Business and Future growth

An important milestone was reached by the company when we signed a contract with CRRC, which is the Chinese Railway Rolling Stock Corporation and Bangalore metro. The genesis of the contract is Bangalore metro had placed the contract on CRRC to supply 200 odd coaches but because of China CRRC not able to fulfill the Make in India condition the contract was not moving forward. We were able to step in and sign a tripartite contract to produce these coaches entirely in our plant in Titagarh. Apart from a acquiring the contract the advantage that we get is that this will also bring us into the stainless-steel coach manufacturing arena. We will be able to get the technical expertise know how from CRRC and also the credentials to be able to manufacture stainless steel coaches and this would make us as the first and only company in the passenger rolling stock to have facilities and capabilities to produce every type of passenger coach which is carbon steel as we have done in the case of EMU and MEMU, aluminum which we are doing now for the Pune project and stainless steel which we will start with Bangalore metro.

Vande Bharat Opportunity

There is a tender for 200 and there are two aluminum coach tenders for 100 each. These are very large value tenders including several complexities and challenges at the same time offering a great opportunity. so we are very carefully examining the tender. It not yet finalized, the tender is still not been closed in the sense. The tender is still open, and we will definitely share with you once the tender is closed as to what the company has finally done.

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Some excerpts from the recent ABB India Concall gives us insights into the traction building in the Railways and Metro projects

I would say looking into the metal prices and others but let me tell you that the pipeline is strong. Metals, cement, oil and gas, all the large projects are investing, and they are very upbeat and bullish. And that is how I see from the large projects point of view. And just to add to that, even the mobility part if we talk of traction, so both the Indian railways as well as the metro projects are going quite strong. So, we are in a good space that’s from my side

data centers, F&B, railway and renewable assets. So, large orders from these kinds of sectors are further expected

Also, if you look into the railways, most of the OEMs who are certified to supply directly into railways, they receive our components, and they integrate them into sub systems and they go into the railway system

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