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
