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You are here : IndiaNotes >> Research & Analysis >> Industries >> Engineering >> Research

Texmaco Rail and Eng: Buy for an upside of 26% in 15 months

SKP Research | 07 Jul, 2016  | Follow Author | Add to my Favourites 
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Valuation


Texmaco  is  making  strategic  diversification  (value  added  products)  in  its revenue stream by building technical collaborations with global players and has a  strong  balance  sheet  with  net  cash  (after  factoring  current  investments)  to pursue organic and in-organic growth. We expect Texmaco to witness full impact of recovery from FY18 lead by higher volume amid improved demand for wagons from IR & private players coupled with diversification benefits and growth from steel casting segment, due to focus on exports. We recommend a Buy on the stock with a target price of Rs 119/-(26% upside) in 15 months.


Investment Rationale


Well placed to benefit from growth drive of IR, volume growth to pick up

  • Contrary to the subdued demand of ~5,000-6,000 wagons p.a. by IR, the sector is  all set to get boost by massive pent-up demand in  the replacement market and introduction of 10-20% freight loading through 25-tonne axle-load wagons in FY17 which will augment higher demand for wagons.
  • Texmaco is  best  placed  to  benefit  from  IR’s  growth  drive  with its  low  cost manufacturing  infrastructure,  enabling  it  to  sustain  aggressive  price competition.It  has  lately  secured  an  order  of  1,338  wagons  from  IR  and expected  to  win  another order  (1,200-1,500  wagons)  over  the  next  one  year. This, along  with  continued  traction  in  orders  from  private  sector  and defence would help in volume growth from FY18.

 

Acquisition of Kalindee Rail will help in its quest to become an integrated rail solutions company.

  • Texmaco acquired  a  controlling  stake  in Kalindee Rail which  provides EPC services to IR and Metros, and enjoys a leadership position in ballastless tracks (for metro lines) along with a strong presence in signalling & track laying (a key thrust area for railways).
  • The  combined  entity  has  made deeper inroads  in railways’  value  chain. Kalindee will be able to bid for higher value project, given the strong financial backing of Texmaco. Higher value orders are margins accretive as this space is less crowded (2-3 players as against 10-15 players in lower value orders).


Focus on non-wagon (value added) businesses and exports to aid growth.

  • Texmaco has  significant  presence  in  non-wagon  businesses  (steel  foundry & hydro  mechanical  equipment), which  are  expected  to  offset  any  slow  orders from  IR.  It  has  also  forayed  into  wagon  leasing  (through  100%  Hi-tech subsidiary),  EMU  coaches  (received  pilot  order)  and  loco  bogies  frames (through JV) and plans to enhance presence in rail safety, which bodes well for company’s  growth.Further,  robust  demand  of  steel  foundry  products  arising from exports (North America) augurs well.
  • Any Global company establishing its base in India would like to have a partner like Texmaco. Given the technical knowhow strength and infrastructure, a move into defence is a matter of time whichcan be the key revenue driver in future.


Margins to scale up with better capacity utilization

  • EBITDA margins have declined significantly from ~15.2% in FY13 to ~2.6% in FY16 on  account  of  muted  volumes  and  depressed  realisations  due  to slack demandandcompetitive pricing by a new entrants.
  • Industry  Margins  can  only  improve  with  higher  volumes  (only  expected  in FY18E/19E), absorbing fixed cost. However, as volumes gather momentum (IR & Non IR), driving up operating leverage and change in product mix (forging and defence), we expect margins to steadily recover to ~5-6%+ over FY16-FY18E. It would still be below ~17%-18% margin enjoyed during FY11-12.


Company Background


Texmaco  Rail  &  Engineering  (Texmaco), a  part  of  Adventz  Group  of Mr. Saroj Poddar, is  India’s largest  railway  wagon manufacturer with an annual capacity of 10,000 wagons near Kolkata, West Bengal. It also manufactures hydro mechanical equipment,  bridges,  structural  equipment  and  steel  castings  (annual  capacity  of 30,000 metric  tonnes). It has recently  acquired  Kalindee  Rail  Nirman  and  Bright Power, EPC service providers to Indian Railways (IR) & Metros in diverse areas, towards its  quest  to become  an integrated rail  solutions  provider, targeting high value contracts. It has JVs with Wabtec & Touax Rail.

 


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