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Titagarh Wagons Limited January 6, 2021 Ratings Amount Facilities Ratings1 Rating Action (Rs. crore) CARE BBB+; Positive Long term Bank 235 Reaffirmed; Outlook (Triple B Plus; Outlook: Facilities (enhanced from 200) revised from Stable Positive) CARE BBB+; Positive/CARE Long term/Short term 1,100 A2 Reaffirmed; Outlook Bank Facilities (enhanced from 1,000) (Triple B Plus; Outlook: revised from Stable Positive/A Two) 1,335 Total Facilities (Rupees One Thousand Three Hundred and Thirty Five crore Only) Details of facilities in Annexure-1

Detailed Rationale & Key Rating Drivers The ratings assigned to the bank facilities of Titagarh Wagons Limited (TWL) continue to derive comfort from the established track record and strong market position of the company in the domestic wagon manufacturing industry, foray into manufacturing of specialised wagons where margins are relatively better, healthy order book position providing revenue visibility and stable outlook of wagon industry. The ratings also take note of the completion of merger of two subsidiary companies namely Cimmco Limited (Cimmco) and Titagarh Capital Private Limited (TCPL) with TWL w.e.f April 1, 2019 pursuant to National Company law Tribunal (NCLT) order dated September 30, 2020. The ratings also factor in the significant increase in total operating income and operating profitability in FY20 (refers to the period April 1 to March 31) in view of growth in revenue from wagons and coaches segment on back of execution of wagon orders. While the company incurred net loss during the year on account of impairment of investments held in its overseas subsidiary viz. Titagarh Firema Adler S.P.A., Italy (TFA, Italy) and Titagarh Singapore Pts Ltd. (TSPL, investment company; which also held shares in TFA, Italy) along with provisions for guaranteed obligations of Titagarh Wagons AFR, France (TWA) which is currently under liquidation, the gross cash accruals (adjusted for non-cash items) stood at Rs.47.85 crore in FY20 vis- à-vis Rs.55.15 crore in FY19. The ratings also take into account significant reduction in fund based and non-fund based exposure of TWL towards the subsidiaries as on March 31, 2020. The company during the current year has transferred the investments of TFA, Italy and TSPL to its wholly owned subsidiary viz. Titagarh Bridges and International Pvt. Ltd. (TBIPL) and no further loss is expected due to further impairment in investments of TFA, Italy. Furthermore, the rating also factors in management’s enunciation that no further support would be provided to TFA, Italy directly or indirectly by TWL. While the profitability was impacted during H1FY21 due to subdued performance of the company in Q1FY21 with impact of Covid-19 on operations, the performance witnessed substantial improvement in Q2FY21 on the back of increased pace of order execution. The ratings also factor in the significant reduction in debt levels of the company with improvement in cash flow from operations and prepayment of entire debt obligation for FY21 & FY22 and to an extent for FY23. The ratings, however, are constrained by the order & sales concentration to Indian Railways (IR) for domestic operations, though the company is gradually trying to diversify its order book with foray into metro coach segment, execution risk associated with large size order of metro coach, subdued return indicators as result of impairment of investments, working capital intensive nature of operations, exposure to volatility in availability and prices of raw materials and risk associated with tender based business.

1Complete definitions of the ratings assigned are available at www.careratings.com and in other CARE publications.

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Outlook: Positive The outlook has been revised from Stable to Positive considering the expected improvement in profitability on the back of execution of existing order book, lower finance costs with reduced debt levels and expectation of no further exceptional costs pertaining to subsidiaries going forward. This is likely to lead to improved return indicators and debt coverage indicators of the company on a sustained basis. The Outlook may be revised to ‘Stable’ if the company is unable to improve the profitability or debt levels increases higher than envisaged.

Rating Sensitivities Positive Factors - Factors that could lead to positive rating action/upgrade: • Successful execution of order book leading to improvement in revenue and operating margin at above 8% • Generation of positive cash flow from operations on sustained basis. Negative Factors - Factors that could lead to negative rating action/downgrade: • Any further impact on standalone profitability due to exceptional costs incurred towards subsidiaries • Any further increase in direct or indirect exposure towards TFA, Italy • Increase in net overall gearing beyond 0.75x

Detailed description of the key rating drivers Key Rating Strengths Established track record and strong market position in the wagon manufacturing industry Titagarh group is one of the largest private sector wagon manufacturers in with a capacity to manufacture 8,400 wagons p.a. (including Cimmco capacity of 2,400 wagons which is now merged with TWL). Over the years, the group had diversified its presence outside India by acquiring Italy-based metro coach maker Firema Trasporti SpA (TFA, Italy) in 2015. The credentials of TFA, Italy enabled TWL to get high value order of Rs.1,125 crore from Pune Metro in August’2019. TWL also had a 50:50 JV agreement viz. Matiere Titagarh Bridges Pvt. Ltd. (MTBPL) with one of the leading supplier of bridges globally, Matiere SAS France to bid for tenders for construction of unibridges. MTBPL has now become a wholly owned subsidiary of TWL w.e.f. 14th July, 2020 by acquiring balance equity shares from Matiere SAS, France and has been renamed as Titagarh Bridges and International Pvt. Ltd. (TBIPL). TWL has also formed a JV with Mermec SpA, Italy for venturing into railway signaling work. The group also held 100% stake in TWA, France; which is currently under liquidation.

Diversified product portfolio TWL ventured into wagon manufacturing in 1997 as forward integration of its existing business of steel foundry for IR. The company is also engaged in designing and manufacturing EMUs, metros, passenger rolling stock, locos and electrical propulsion equipment in India. The company had forayed into manufacturing of coaches for metro and high speed train through acquisition of TFA, Italy in 2015. TWL is well positioned to bid for large order for metro coaches and double decker coaches by virtue of its overseas acquisitions. TWL further forayed into manufacturing range of products for defence sector, manufacture farm machinery (tractors), heavy earth moving and mining equipment division, bailey type modular bridges and shipbuilding which has broadened its customer profile. The company has also entered into an exclusive cooperation agreement with ABB in June’20, to address the large and growing business of propulsion equipment (traction converters) for the Indian railway Electric Multiple Unit/Mainline Electric Multiple Unit market. However, the contribution from wagons segment continued to remain high at 88% of total standalone revenue in FY20.

Healthy order book position providing revenue visibility The standalone order book of TWL stood at Rs.2,487 crore as on September 30, 2020 as compared to Rs.2,093 crore as on June 30, 2019. The standalone order book majorly comprised of the orders pertaining to wagons of IR and Pune metro project. TWL in consortium with its Italian subsidiary had received order from Maharashtra Metro Rail Corporation Limited (MMRCL) for ‘Design, Manufacture, Supply, Testing, Commissioning of passenger Rolling Stock (Electrical Multiple Units) and Training of Personnel’ for Pune Metro Rail Project in August’2019. The order is for manufacture and supply of 102 Metro coaches at a 2 CARE Ratings Limited

Press Release contract value of Rs.1,125 crore. However, the execution risk is associated with the order as the company is currently in process of completing the prototype. TWL has also bagged an order of 1,787 wagons from IR in September’20 amounting to around Rs.500 crore along with orders from Non-IR parties. The consolidated order book stood at Rs.4,850 crore as on September 30, 2020 as compared to Rs.4,479 crore as on June 30, 2019.

Significant increase in total operating income with improvement in operating profitability; albeit net loss due to exceptional items On a standalone basis, the total operating income of the company witnessed significant y-o-y growth of 40% from Rs.1,064.71 crore in FY19 (restated for merger) to Rs.1,490.82 crore in FY20. The growth in revenue was primarily driven by growth in revenue from wagons and coaches segment. With increase in turnover, the operating profits also increased from Rs.65.80 crore in FY19 to Rs.135.49 crore in FY20 and the PBILDT margin improved from 6.18% in FY19 to 9.09% in FY20. However, with increase in finance costs and lower other income, the PBT before exceptional items increased from Rs.40.40 crore in FY19 to Rs.62.86 crore in FY20. However, the profitability continued to remain impacted due to exceptional costs incurred by the company. The company incurred exceptional cost of Rs.161.35 crore in FY20 (Rs.135.08 crore for impairment in investments of TFA, Italy and Rs.26.27 crore towards obligations of TWA, France) vis-à-vis Rs.126.95 crore in FY19 (Rs.107.58 crore for impairment in investment and Rs.19.37 crore for other obligations pertaining to TWA, France). Accordingly the company incurred net loss of Rs.79.92 crore in FY20 vis-à-vis Rs.55.30 crore in FY19. The company reported net profit of Rs.10.92 crore on total operating income of Rs.429.36 crore in H1FY21 vis-à-vis net profit of Rs.25.58 crore on total operating income of Rs.761.15 crore in H1FY21. The performance was impacted in Q1FY21 due to impact of Covid-19 on operations of the company. However, the performance of the company improved significantly during Q2FY21. On a consolidated basis, the total operating income increased from Rs.1,559.25 crore in FY19 to Rs.1,766.22 crore in FY20 with increase in operating profitability. The net profit from continuing operations were relatively stable at Rs.57.96 crore in FY20 vis-à-vis Rs.51.93 crore in FY19. The net loss from discontinued operations (pertaining to TWA) increased from Rs.74.46 crore in FY19 to Rs.94.11 crore in FY20. Accordingly the consolidated net loss increased from Rs.22.53 crore in FY19 to Rs.36.14 crore in FY20. On a consolidated basis, TWL reported net loss of Rs.18.74 crore on total operating income of Rs.641.38 crore in H1FY21 vis- à-vis net loss of Rs.33.94 on total operating income of Rs.899.73 crore in H1FY20.

Comfortable capital structure with improvement in debt coverage indicators during FY20 On a standalone basis, the total debt of the company decreased from Rs.441.64 crore as on March 31, 2019 to Rs.292.92 crore as on March 31, 2020 with substantial decrease in working capital borrowings on account of significant improvement in cash flow from operations. The improvement in cash flow from operations was primarily due to decrease in receivables and inventory outstanding as on March 31, 2020. Further, the company also received significant amount of mobilisation advances for the Pune Metro project. Accordingly, despite decrease in networth with net loss during the year, the overall gearing improved from 0.50x as on March 31, 2019 to 0.36x as on March 31, 2020 with decrease in total debt. The standalone debt further reduced to Rs.177.63 crore as on September 30, 2020 with lower working capital utilisation and prepayment of term debt during H1FY21. The overall gearing further improved and stood at 0.20x as on September 30, 2020. PBILDT interest coverage and Total Debt/GCA improved from 1.67x and 8.01x respectively in FY19 to 2.08x and 6.12x respectively in FY20. The debt coverage indicators though improved continued to remain moderate. On a consolidated basis, total debt decreased from Rs.1,074.30 crore as on March 31, 2019 to Rs.810.86 crore as on March 31, 2020 and further to Rs.681.58 crore as on September 30, 2020. Overall gearing improved from 1.27x as on March 31, 2019 to 1.00x as on March 31, 2020 and further to 0.87x as on September 30, 2020.

Substantial decrease in exposure to subsidiaries/JVs The exposure of TWL to subsidiaries/JVs decreased substantially from Rs.866 crore as on March 31, 2019 to Rs.120 crore as on March 31, 2020 with release of corporate guarantee for debt availed in TFA, Italy. Further, during the current year, TWL has transferred the investments of TSPL and TFA, Italy to TBIPL. 3 CARE Ratings Limited

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The company has indicated that there will be no further increase in exposure towards TFA, Italy going forward. The exposure to group companies is a key rating sensitivity.

Stable outlook of wagon industry IR is the largest consumer of wagons. The outlook of the wagon industry is mainly dependent on the demand from the same and the budgeted allocation for such outlays. Government of India is expected to focus on improving the railway infrastructure and ensure faster development and completion of tracks, rail electrification, rolling stock manufacturing and delivery of passenger freight services. The new wagon allocation scheme and revision in GST structure is also expected to benefit the wagon manufacturers.

Key Rating Weaknesses Subdued return indicators The return indicators of the company have continued to remain impacted due to losses incurred with exceptional costs during the last two years with subdued performance of overseas subsidiaries.

Working capital intensive nature of operations The nature of business of TWL entails considerable dependence on working capital requirements both in the form of fund- based and non-fund based borrowings due to relatively longer processing period necessitating high inventory holding period and elongated collection period. Further, working capital requirement had increased after discontinuation of free supply items for wagons. TWL funds the same through a mix of creditors, customer advances (non-interest bearing in nature) and bank borrowings. However, the operating cycle improved from 87 days in FY19 to 53 days in FY20 on account of improvement in collection period and inventory days. The average collection period improved from 71 days in FY19 to 56 days in FY20 on account of reduction in debtors and un-billed revenue. The average inventory days improved from 83 days in FY19 to 70 days in FY20 with substantial decrease in raw material inventory as on March 31, 2020 with increased order execution.

High dependence on IR for domestic operation Wagon manufacturers largely depend on orders from IR for their revenue. The proportion of sales to IR out of total operating income increased significantly from 51% in FY19 to 62% in FY20. In order to partly mitigate the risk, the company has diversified its revenue base by increasing its presence in defense sector, private sector and export markets. Further, the company has diversified its customer profile with foray into metro coaches.

Exposure to volatility with regard to availability and price of raw material Earlier, the IR used to provide free supply of major raw materials required by the companies to manufacture wagons. However, since 2017, the free supply has been discontinued and the wagon manufacturers have to rely on approved vendors for the supply of major raw materials such as steel, Cartridge Tapered Roller Bearings (CTRB), wheel sets, etc. Short supply of wheel set during FY18-19 had led to delay in execution of orders by TWL and lower capacity utilisation.. Further, the company is exposed to significant volatility in prices of raw materials. However, the same is mitigated to an extent due to presence of escalation clause with regard to variation in input prices in long term contracts of IR.

Risk associated with tender based business The company receives majority of its orders from IR and other government and semi-government entities for both domestic and foreign operations based on tender. Hence, the revenue is dependent on the company's ability to bid successfully for these tenders. Furthermore, there are various players operating in the segment who compete for the orders. Profitability margins come under pressure because of this competitive and tender based nature of the industry.

Liquidity Analysis – Adequate The company has an adequate liquidity position with free cash and bank balance of Rs.9 crore as on October 31, 2020. The average month end fund based working capital utilisation of the company was low 33.78% during the last 12 months ending October’20. The utilization of the non-fund based limits was also moderate at 75.83% during the last 12 months ending

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October’20. Furthermore, the company has already prepaid the standalone term debt obligations till FY22 and also a portion of term debt due in FY23. The company does not plan to incur any debt funded capex or expansion in near term.

Analytical approach: Standalone. CARE had earlier taken a consolidated view on TWL while assigning the rating. Pursuant to the completion of Scheme of Arrangement, Cimmco and TCPL has now been merged with TWL w.e.f. April 1, 2019. The other major subsidiary with operations, viz., TFA; Italy is a foreign subsidiary with operations in Italy with limited cash flow fungibility. Furthermore, the company has maintained that no further increase in exposure will be made towards TFA, Italy. The corporate guarantee provided by TWL for subsidiaries has also fallen off in FY20.

Applicable Criteria CARE’s Policy on Default Recognition Criteria for Short Term Instruments Rating Outlook and credit watch Rating Methodology - Consolidation Rating Methodology-Manufacturing Companies Financial Ratios - Non Financial Sector Liquidity Analysis of Non-Financial Sector Entities

About the Company TWL, incorporated in July 1997, was promoted by Mr. Jagdish Prasad Chowdhury. The company manufactures various types of freight wagons, bailey bridges, steel and iron castings and other products. The company has three manufacturing facilities (two at Titagarh and one in , ). TWL has a capacity to manufacture 6000 wagons, 36 Electric Multiple Units (EMU) coaches and 30,000 MTPA of cast iron products. Cimmco, a subsidiary of TWL has now been merged with TWL w.e.f April 1, 2019. Cimmco had a capacity to manufacture 2,400 wagons per annum along with manufacturing of farm equipment.at its factory in Bharatpur (Rajasthan). Over the years, the company along with its wholly owned subsidiary investment company TSPL has acquired various foreign and domestic entities with a view to grow inorganically across various geographies as well as to have access to technology which enabled them to pre-qualify for metro project tenders in India. Brief Financials (Rs. crore) FY19 (A) FY20 (A) Total operating income 1,064.71 1,490.82 PBILDT 65.80 135.49 PAT -55.30 -79.92 Overall gearing (times) 0.50 0.36 Interest coverage (times) 1.67 2.08 A: Audited

Status of non-cooperation with previous CRA: Not Applicable

Any other information: Not Applicable

Rating History for last three years: Please refer Annexure-2

Annexure-1: Details of Facilities Name of the Date of Coupon Maturity Size of the Issue Rating assigned along with Rating Outlook Instrument Issuance Rate Date (Rs. crore) Non-fund-based - LT/ ST-BG/LC - - - 1100.00 CARE BBB+; Positive / CARE A2 Fund-based - LT-Cash Credit - - - 235.00 CARE BBB+; Positive

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Annexure-2: Rating History of last three years Current Ratings Rating history Name of the Type Rating Date(s) & Date(s) & Date(s) & Date(s) & Sr. Amount Instrument/Bank Rating(s) Rating(s) Rating(s) Rating(s) No. Outstanding Facilities assigned in assigned in assigned in assigned in (Rs. crore) 2020-2021 2019-2020 2018-2019 2017-2018 CARE 1)CARE BBB+; BBB+; Non-fund-based - LT/ 1. LT/ST 1100.00 Positive / - Stable / - - ST-BG/LC CARE A2 CARE A2 (24-Oct-19) CARE 1)CARE Fund-based - LT-Cash BBB+; BBB+; 2. LT 235.00 - - - Credit Positive Stable (24-Oct-19)

Annexure-3: Detailed explanation of covenants of the rated instrument / facilities: NA

Annexure 4: Complexity level of various instruments rated for this company Sr. Name of the Instrument Complexity Level No. 1. Fund-based - LT-Cash Credit Simple 2. Non-fund-based - LT/ ST-BG/LC Simple

Note on complexity levels of the rated instrument: CARE has classified instruments rated by it on the basis of complexity. This classification is available at www.careratings.com. Investors/market intermediaries/regulators or others are welcome to write to [email protected] for any clarifications.

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