TITAGARH WAGONS a I D Steady Quarter

p RESULT UPDATE

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TITAGARH WAGONS a i d Steady quarter

n I India Equity Research| Infrastructure - Railways

Titagarh Wagons’ (TWL) Q2FY20 standalone revenue jumped 62% YoY to EDELWEISS RATINGS INR3bn driven by ramp up in execution in the wagons & coaches Absolute Rating BUY segment. This led to PAT surging 137% YoY to INR123mn. The company’s Investment Characteristics Growth performance could have been even better, but for issues in wheel sets

availability, which impacted delivery of wagons to Indian Railways (IR); MARKET DATA (R: TITW.BO, B: TWL IN) management expects the issue to be resolved by Q3FY20-end. Taking cognizance of this, we trim FY20/21E earnings 4%/3%. Maintain ‘BUY’ CMP : INR 42 with revised SOTP‐based target price of INR61 (INR64 earlier) as we roll Target Price : INR 61 forward the valuation to March 2021E. 52-week range (INR) : 87 / 31 Share in issue (mn) : 115.6 Future order inflow key for domestic businesses M cap (INR bn/USD mn) : 5 / 68 Avg. Daily Vol. BSE/NSE (‘000) : 525.1 TWL received its maiden order for metro coaches in India worth INR10.6bn; this order from Pune Metro pertains to delivery of 36 trainsets. Including this, the company’s SHARE HOLDING PATTERN (%) order book stands at INR26bn (book-to-bill of 2.1x). Incremental order inflow from Current Q1FY20 Q4FY19 wagons (IR tender of about 10,000 wagons due to open in December 2019) and Promoters * 45.7 45.7 45.7 coaches (TWL targeting bids for metro rail projects) is a key catalyst for the stock, in MF's, FI's & BKs 9.8 10.1 10.1 our view. FII's 2.6 3.1 3.1

Corporate guarantee overhang in AFR; Firema outlook positive Others 41.8 41.1 41.0 * Promoters pledged shares : NIL A French court has approved the transfer of subsidiary AFR’s business and assets to (% of share in issue)

another bidder and ordered its liquidation. As a result, TWL is no longer in control of AFR; its entire investment in AFR was written-off in Q4FY19. The ~INR325mn corporate PRICE PERFORMANCE (%) BSE Midcap Stock over guarantee given by TWL for AFR’s liabilities remains an overhang though. Management Stock Index Index expects FY20 revenue to be flat YoY in Firema; though top line will improve in FY21. 1 month 7.7 2.2 (5.5) Outlook and valuation: Well placed; maintain ‘BUY’ 3 months 8.6 21.3 12.7 12 months (0.8) (41.0) (40.2) Burgeoning investments in the railway space and thrust on wagon procurement in

FY20 budget (refer to, 'Railways - Union Budget FY20: Railways chugging along) are

key positives for TWL. That said, issues regarding availability of wheel sets has

prompted a cut in our FY20/21E earnings by 4%/3%. Incremental order intake from IR,

momentum in private sector orders and turnaround at Firema are key variables for the stock. We maintain ‘BUY’ with revised SOTP-based TP of INR61 as we roll forward the valuation to March 2021E.

Financials (Standalone) (INR mn)

Year to March Q2FY20 Q2FY19 % change Q1FY20 % change FY19 FY20E FY21E Parvez Akhtar Qazi Revenues 2,982 1,838 62.3 3,287 (9.3) 9,101 13,165 15,691 +91 22 4063 5405 EBITDA 237 112 110.7 283 (16.4) 538 1,103 1,330 [email protected]

Adj. profit 123 52 136.9 137 (9.8) 441 519 627 Archit Ranka Dil. EPS (INR) 1.1 0.5 136.9 1.2 (9.8) 3.8 4.5 5.4 +91 22 4063 5523 P/BV (x) 0.6 0.6 0.5 [email protected]

EV/EBITDA (x) 12.0 6.1 4.6 ROAE (%) 5.2 6.2 7.1 November 8, 2019 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL , Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Infrastructure - Railways

Other highlights  Consolidated order book break-down: INR51.6bn, of which INR23bn orders are in Firema, ~INR15bn are wagon orders in TWL standalone & Cimmco, ~INR10.6bn pertains to Pune Metro; balance belongs to EMU/MEMO/loco shells/ship building.

 While TWL dispatched 850 wagons during the quarter (950 in Q1FY20 and 864 in Q4FY19), Cimmco dispatched 250 wagons (300 in Q1FY20 and 262 in Q4FY19).

 Management indicated that the dispatch was affected by lack of availability of wheel sets from the Rail Wheel Factory, which is the sole supplier of wheel sets to the industry. Management mentioned that it has received permission to import wheel sets for private wagon orders and has received the first consignment as well. Besides, IR will soon start importing axles and hence, the issue should be resolved by end-Q3FY20; post this, monthly wagon production should improve from 280-300 to 450-500 wagons.

Chart 1: Wagon dispatch shows signs of improvement Wagon dispatch 4,000

3,200

2,400

1,600

800 (No of wagons dispatched) wagons of (No

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY15 FY16 FY17 FY18 FY19 FY13 FY14 H1FY20

Source: Company, Edelweiss research

 Received Pune Metro order worth about INR10.6bn: TWL, along with Firema, has won the INR10.6bn tender floated by Maharashtra Metro Rail Corporation (Maha-Metro) for the design, manufacture and supply of 102 metro coaches for Pune Metro Rail.

As per tender documents, the first three-car prototype trainset is required to be supplied in 78 weeks and the balance 33 trainsets in several phases over 160 weeks. This is the first-ever contract for aluminium coaches in the Indian metro rail system.

Management indicated that this contract will be a game changer for the company. It mentioned that bulk of the revenue will start flowing in after supply of the prototype train and margins in this project are on a par with those in domestic wagons and coaches business.

Design and prototype work on these coaches has already started in Italy.

 IR wagon tender: IR tender for ~10,000 wagons is likely to be finalised by end- December 2019. Incremental order inflow for the company from this tender is a key catalyst for the stock, in our view.

 DFC: Management expects wagon procurement for the Dedicated Freight Corridor (DFC) to begin in Mar-Apr 2020.

2 Edelweiss Securities Limited Titagarh Wagons

 AFR: TWL announced that the Commercial Court of Paris has approved a plan for the transfer of business and assets of AFR to another bidder and has ordered its liquidation. As a result, w.e.f. June 4, 2019, TWL is no longer in control of AFR.

The entire investment in AFR was written off in Q4FY19 and starting Q1FY20, results of AFR are no longer being consolidated with TWL’s accounts.

However, the company had given a Corporate Guarantee of about INR325mn in favour of a bank regarding a secured working capital limit sanctioned to AFR. We have considered this amount of about INR325mn i.e. INR2.8/share as a negative contribution in TWL’s SOTP-based valuation.

 Firema: Firema has turned in positive EBITDA for H1FY20 and has almost broken even at the cash level. Management expects Firema’s revenue to be flat YoY in FY20 before an improvement in FY21.

As far as the INR17.4bn order for Catania Railway is concerned, work will start in FY21 with majority of the revenue likely to be booked in FY22/23.

Management stated that existing orders of INR23bn in Firema have 7-8% EBITDA margin.

 Debt: Net debt at the consolidated level increased to INR8.2bn (INR7.6bn at end-FY19).

3 Edelweiss Securities Limited Infrastructure - Railways

Financial snapshot (INR mn) Year to March Q2FY20 Q2FY19 % change Q1FY20 % change YTD20 FY20E FY21E Net revenues 2,982 1,838 62.3 3,287 (9.3) 6,269 13,165 15,691 Staff costs 77 68 14.0 77 (0.6) 154 335 399 Direct costs 2,112 1,299 62.5 2,466 (14.3) 4,578 10,988 13,079 Other expenses 556 359 55.1 461 20.8 1,017 740 882 Total expenditure 2,745 1,726 59.1 3,004 (8.6) 5,749 12,063 14,361 EBITDA 237 112 110.7 283 (16.4) 520 1,103 1,330 Depreciation 31 34 (9.8) 26 18.9 56 137 185 EBIT 206 79 162.6 258 (19.9) 464 965 1,145 Interest 96 51 85.8 101 (5.1) 196 435 492 Other income 52 43 20.4 33 55.8 86 171 194 Add: Prior period items Add: Exceptional items Profit before tax 163 70 131.3 190 (14.4) 353 701 847 Provision for taxes 39 18 115.4 53 (26.1) 93 182 220 Reported net profit 123 52 136.9 137 (9.8) 260 519 627 Adjusted Profit 123 52 136.9 137 (9.8) 260 519 627 Equity capital 231 231 231 231 231 231 Diluted shares (mn) 116 116 116 115 116 116 Adjusted Diluted EPS 1.1 0.5 136.9 1.2 (9.8) 2.3 4.5 5.4

As % of net revenues Direct costs 70.8 70.7 75.0 72.9 83.5 83.4 Other expenses 18.7 19.5 14.0 16.4 5.6 5.6 EBITDA 7.9 6.1 8.6 8.4 8.4 8.5 Reported profit 4.1 2.8 4.2 4.2 3.9 4.0 Tax rate 24.2 26.0 28.1 26.2 26.0 26.0

4 Edelweiss Securities Limited Titagarh Wagons

Company Description Incorporated in 1998, TWL is a reputed player in India’s railway sector. The company went public in 2008. TWL’s business is primarily divided into following verticals:

• Railways division: The division is involved in the manufacture of wagons and coaches and undertakes steel casting.

• Defence division – TWL primarily develops and supplies bailey bridges, nuclear shelters, canisters, rail wagons for transporter cumtiler launchers and other engineering equipments.

• Other division – The earth moving machinery division manufactures crawler cranes and excavators; the shipbuilding division manufactures naval barges and bulk carriers; and the tractor division manufactures tractors and other agricultural equipment.

TWL acquired 75% of equity share capital of Cimmco which has a manufacturing facility of 2,400 wagons per annum at Bharatpur, Rajasthan. The company has also expanded overseas by acquiring AFR, France which specialises in freight wagons and Firema, Italy which specialises in passenger and metro rolling stock.

Investment Theme Inorganic route propelling growth trajectory – TWL is well entrenched in the wagon segment having beefed up the business in its near 2 decade journey. To capitalise on Indian Railways’ (IR) wagon tendering policy, which favours players with strong track record, the company acquired Cimmco, an established player in the wagon segment. Similarly, acquisition of AFR (the biggest French wagon maker) bolstered its design skills and expanded geographical presence. While low wagon orders in past few years hurt TWL, it remains well placed to benefit from rising demand for custom-made wagons post commissioning of DFC.

De-risking through diversification – To reduce dependence on wagon segment, TWL ventured into the fast-growing coach segment. Acquisition of Firema, an Italian passenger and metro coach maker, has enabled the company to tap the growing Metro rail business. Similarly, Cimmco fortified its presence in the high-potential defence segment, which is expected to lend fillip to order inflows going ahead.

Key Risks Predatory pricing by new entrants – The number of players competing in the wagon industry has been on the rise over the years. With wagon ordering being sluggish, increased competition impacted TWL’s margin. Continuation of the same could weigh on the company’s operating margins.

Risks from overseas acquisitions, new ventures – TWL has acquired AFR and Firema, both of which are situated in Europe, which is experiencing economic slowdown. This can impact financial performance of the afore-mentioned companies going ahead. Similarly, foray into new business ventures which may require additional capital could strain TWL’s balance sheet.

5 Edelweiss Securities Limited Infrastructure - Railways

Financial Statements

Key Assumptions Income statement (INR mn) Year to March FY18 FY19 FY20E FY21E Year to March FY18 FY19 FY20E FY21E Macro Income from operations 3,140 9,101 13,165 15,691 GDP(Y-o-Y %) 7.2 6.8 6.3 6.8 Direct costs 2,252 7,502 10,988 13,079 Inflation (Avg) 3.6 3.4 3.7 4.0 Employee costs 287 277 335 399 Repo rate (exit rate) 6.0 6.3 4.5 4.5 Other Expenses 625 785 740 882 USD/INR (Avg) 64.5 70.0 71.0 71.0 Total operating expenses 3,164 8,563 12,063 14,361 Company EBITDA (25) 538 1,103 1,330 Raw Material (% net rev) 61.8 76.2 73.2 73.1 Depreciation 130 124 137 185 Order intake (INR bn) 5 24 11 23 EBIT (154) 414 965 1,145 Y-o-Y growth (%) 18.0 353.0 (51.8) 102.3 Less: Interest Expense 86 239 435 492 Book-to-bill ratio (x) 2.4 2.4 1.5 1.8 Add: Other income 233 221 171 194 Order backlog (INR bn) 7 22 20 28 Profit Before Tax (8) (874) 701 847 Order backlog growth (%) 37.6 193.6 (8.1) 36.3 Less: Provision for Tax (37) (45) 182 220 Revenue growth (% yoy) (10) 190 45 19 Add: Exceptional items - (1,270) - - Employee (% of net rev) 9.2 3.0 2.5 2.5 Reported Profit 29 (829) 519 627 Job work (as % of sales) 9.9 6.3 9.0 9.0 Exceptional Items - (1,270) - - Other admin (% net rev) 19.9 8.6 5.6 5.6 Adjusted Profit 29 441 519 627 Depreciation rate (%) 7.8 7.2 6.8 7.5 Shares o /s (mn) 116 116 116 116 Dividend per share 0.3 0.3 0.3 0.3 Adjusted Basic EPS 0.3 3.8 4.5 5.4 Inc. in invts (INR mn) 205 (819) - - Diluted shares o/s (mn) 116 116 116 116 Tax rate (%) 470.0 5.1 26.0 26.0 Adjusted Diluted EPS 0.3 3.8 4.5 5.4 Capex (INR mn) 183 229 985 835 Adjusted Cash EPS 0.9 4.4 5.7 7.0 Incremental debt 558 768 600 - Dividend per share (DPS) 0.3 0.3 0.3 0.3 Dividend Payout Ratio (%) 143.1 (5.0) 8.0 6.7

Common size metrics Year to March FY18 FY19 FY20E FY21E Operating expenses 100.8 94.1 91.6 91.5 EBITDA margins (0.8) 5.9 8.4 8.5 Net Profit margins 0.9 4.8 3.9 4.0

Growth ratios (%) Year to March FY18 FY19 FY20E FY21E Revenues (10.1) 189.9 44.7 19.2 EBITDA NA NA 105.1 20.6 PBT NA NA (180.3) 20.8 Adjusted Profit (84.9) 1,412.0 17.7 20.8 EPS (84.9) (2,942.6) (162.6) 20.8

6 Edelweiss Securities Limited Titagarh Wagons

Balance sheet (INR mn) Cash flow metrics As on 31st March FY18 FY19 FY20E FY21E Year to March FY18 FY19 FY20E FY21E Share capital 231 231 231 231 Operating cash flow (137) (73) 913 1,322 Reserves & Surplus 8,668 7,815 8,333 8,960 Financing cash flow 558 768 600 - Shareholders' funds 8,899 8,046 8,564 9,191 Investing cash flow (431) (715) (1,168) (823) Short term borrowings 992 1,759 2,359 2,359 Net cash Flow (10) (20) 345 499 Total Borrowings 992 1,759 2,359 2,359 Capex (183) (229) (985) (835) Long Term Liabilities 29 29 29 29 Dividend paid (42) (42) (42) (42) Def. Tax Liability (net) 297 239 44 44

Sources of funds 10,216 10,073 10,997 11,623 Profitability and efficiency ratios Gross Block 3,183 3,350 4,300 5,100 Year to March FY18 FY19 FY20E FY21E Net Block 2,887 2,958 3,771 4,387 ROAE (%) 0.3 5.2 6.2 7.1 Capital work in progress 160 179 209 239 ROACE (%) 0.8 6.4 11.0 11.9 Intangible Assets 134 151 151 151 Inventory Days 229 84 81 79 Total Fixed Assets 3,180 3,288 4,131 4,777 Debtors Days 126 63 63 61 Non current investments 3,836 3,017 3,017 3,017 Payable Days 192 121 144 165 Cash and Equivalents 152 182 562 1,095 Cash Conversion Cycle 163 27 - (24) Inventories 1,326 2,144 2,744 2,944 Current Ratio 3.0 2.1 1.7 1.6 Sundry Debtors 1,059 2,089 2,439 2,839 Gross Debt/EBITDA (40.4) 3.3 2.1 1.8 Loans & Advances 781 98 303 318 Gross Debt/Equity 0.1 0.2 0.3 0.3 Other Current Assets 1,492 2,803 3,083 3,359 Adjusted Debt/Equity 0.1 0.2 0.3 0.3 Current Assets (ex cash) 4,658 7,134 8,570 9,460 Net Debt/Equity 0.1 0.2 0.2 0.1 Trade payable 370 2,779 4,503 5,935 Interest Coverage Ratio (1.8) 1.7 2.2 2.3 Other Current Liab 1,240 769 779 791

Total Current Liab 1,610 3,548 5,282 6,726 Operating ratios Net Curr Assets-ex cash 3,048 3,586 3,287 2,735 Year to March FY18 FY19 FY20E FY21E Uses of funds 10,216 10,073 10,997 11,623 Total Asset Turnover 0.3 0.9 1.2 1.4 BVPS (INR) 77.0 69.7 74.2 79.6 Fixed Asset Turnover 1.0 3.0 3.7 3.7 Equity Turnover 0.4 1.1 1.6 1.8

Free cash flow (INR mn)

Year to March FY18 FY19 FY20E FY21E Valuation parameters Reported Profit 29 441 519 627 Year to March FY18 FY19 FY20E FY21E Add: Depreciation 130 124 137 185 Adj. Diluted EPS (INR) 0.3 3.8 4.5 5.4 Interest (Net of Tax) 86 239 322 364 Y-o-Y growth (%) (84.9) 1412.0 17.7 20.8 Others (182) (339) (364) (406) Adjusted Cash EPS (INR) 0.9 4.4 5.7 7.0 Less: Changes in WC 200 537 (299) (552) Diluted P/E (x) 167.2 11.1 9.4 7.8 Operating cash flow (137) (73) 913 1,322 P/B (x) 0.5 0.6 0.6 0.5 Less: Capex 183 229 985 835 EV / Sales (x) 1.8 0.7 0.5 0.4 Free Cash Flow (320) (302) (72) 487 EV / EBITDA (x) NA 12.0 6.1 4.6 Dividend Yield (%) 0.7 0.7 0.7 0.7

Peer comparison valuation Market cap EV / EBITDA (X) P/B (X) ROAE (%) Name (USD mn) FY20E FY21E FY20E FY21E FY20E FY21E Titagarh Wagons 68 6.1 4.6 0.6 0.5 6.2 7.1 Texmaco Rail & Engineering 136 8.2 7.0 0.8 0.7 6.4 7.7 Median - 6.7 5.8 0.7 0.6 6.5 7.4 AVERAGE - 6.7 5.8 0.7 0.6 6.5 7.4 Source: Edelweiss research

7 Edelweiss Securities Limited Infrastructure - Railways

Additional Data Directors Data Mr. Jagdish Prasad Chowdhary Executive Chairman Mr. Umesh Chowdhary Vice Chairman & Managing Director Ms. Rashmi Chowdhary Non-Independent and Non-Executive Director Mr. Sudipta Mukherjee Wholetime Director Mr. D N Davar Independent Director Mr. Manoj Mohanka Independent Director Mr. Ramsebak Bandyopadhyay Independent Director Mr. Atul Joshi Independent Director Mr. V K Sharma Independent Director Mr. Anil Kumar Agarwal Director (Finance) and Chief Financial Officer

Auditors - Price Waterhouse & Co Chartered Accountants LLP *as per last available data

Holding – Top 6 Perc. Holding Perc. Holding HDFC AMC 9.02 Polunin Emerging Markets 1.51 Dimensional Fund Advisors 1.26 Alaska Permanent Fund Corp 0.01 Mitsubishi UFJ 0.03 Bessemer Group 0.01

*as per last available data

Bulk Deals Data Acquired / Seller B/S Qty Traded Price

No Data Available

*as per last available data

Insider Trades Reporting Data Acquired / Seller B/S Qty Traded

No Data Available

*as per last available data

8 Edelweiss Securities Limited Titagarh Wagons

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91-22) 4009 4400, Email: [email protected]

Aditya Narain Head of Research [email protected]

Coverage group(s) of stocks by primary analyst(s): Infrastructure - Railways Titagarh Wagons, Texmaco Rail & Engineering

` Recent Research Date Company Title Price (INR) Recos 21 -Aug-19 Titagarh Domestic business on track; 38 Buy Wagons Result Update

16-Aug-19 Texmaco Soft quarter; 48 Buy Rail & Result Update Engineering 08-Jul-19 Railways Union Budget FY20: Railways chugging along; Sector Update

Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period * 1stocks under review Hold appreciate up to 15% over a 12-month period > 50bn Between 10bn and 50 bn < 10bn Reduce depreciate more than 5% over a 12-month period Market Cap (INR) 156 62 11

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Infrastructure - Railways

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10 Edelweiss Securities Limited Titagarh Wagons

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11 Edelweiss Securities Limited Infrastructure - Railways

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