July 7, 2016 Texmaco Rail & Engineering Ltd. Transforming from wagon manufacturer to integrated rail solution provider CMP INR 94 Target INR 119 Initiating Coverage – BUY Company Background Key Share Data Face Value (INR) 1.0 Texmaco Rail & Engineering (Texmaco), a part of Adventz Group of Mr. Saroj Equity Capital (INR Mn) 210.1 Poddar, is India’s largest railway wagon manufacturer with an annual capacity of Market Cap (INR Mn) 19,777.5 10,000 wagons near Kolkata, West Bengal. It also manufactures hydro mechanical 52 Week High/Low (INR) 154/89 equipment, bridges, structural equipment and steel castings (annual capacity of 6 months Avg. Daily Volume (BSE) 14,090 30,000 metric tonnes). It has recently acquired Kalindee Rail Nirman and Bright BSE Code 533326 Power, EPC service providers to Indian Railways (IR) & Metros in diverse areas, NSE Code TEXRAIL towards its quest to become an integrated rail solutions provider, targeting high Reuters Code TEXA.BO value contracts . It has JVs with Wabtec & Touax Rail. Investment Rationale Bloomberg Code TXMRE IN Well placed to benefit from growth drive of IR, volume growth to pick up Shareholding Pattern (as on 31 Mar 2016) 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 1 1 % and introduction of 10-20% freight loading through 25-tonne axle-load wagons P ro m o t er 2 5 % F II 's in FY17 which will augment higher demand for wagons. D I I 's Texmaco is best placed to benefit from IR’s growth drive with its low cost 9 % 5 5 % O th e rs 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. Source: Company This, along with continued traction in orders from private sector and defence would help in volume growth from FY18. Key Financials (INR Million) Particulars FY15 FY16 FY17E FY18E Acquisition of Kalindee Rail will help in its quest to become an integrated rail Net Sales 4,385.8 7,280.1 8,427.2 9,576.5 solutions company Texmaco acquired a controlling stake in Kalindee Rail which provides EPC Growth (%) -1.7% 66.0% 15.8% 13.6% services to IR and Metros, and enjoys a leadership position in ballastless tracks EBITDA 195.4 191.5 462.6 621.5 (for metro lines) along with a strong presence in signalling & track laying (a key PAT 137.4 215.9 468.5 633.1 thrust area for railways). Growth (%) -19.1% 57.2% 117.0% 35% The combined entity has made deeper inroads in railways’ value chain. EPS (INR) 0.7 1.0 2.2 3.0 Kalindee will be able to bid for higher value project, given the strong financial BVPS (INR) 46.6 43.3 45.3 47.9 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). Key Financials Ratios Focus on non-wagon (value added) businesses and exports to aid growth Particulars FY15 FY16 FY17E FY18E Texmaco has significant presence in non-wagon businesses (steel foundry & P/E (x) 208.0 91.7 42.2 31.2 hydro mechanical equipment), which are expected to offset any slow orders P/BVPS (x) 3.2 2.2 2.1 2.0 from IR. It has also forayed into wagon leasing (through 100% Hi-tech Mcap/Sales (x) 6.5 2.7 2.3 2.1 subsidiary), EMU coaches (received pilot order) and loco bogies frames (through JV) and plans to enhance presence in rail safety, which bodes well for EV/EBITDA (x) 150.7 108.5 44.6 33.2 company’s growth.Further, robust demand of steel foundry products arising ROCE (%) 0.4% 0.5% 2.3% 3.2% from exports (North America) augurs well. ROE (%) 1.8% 2.3% 4.9% 6.2% Any Global company establishing its base in India would like to have a partner EBITDA Mar (%) 4.6% 2.6% 5.6% 6.6% like Texmaco. Given the technical knowhow strength and infrastructure, a move PAT Mar (%) 3.1% 3.0% 5.6% 6.6% into defence is a matter of time whichcan be the key revenue driver in future. Margins to scale up with better capacity utilization Debt - Equity (x) 0.1 0.1 0.1 0.1 EBITDA margins have declined significantly from ~15.2% in FY13 to ~2.6% in Source: Company, SKP Research FY16 on account of muted volumes and depressed realisations due to slack 1 Yr price performance TEXRAIL vis-à-vis BSE Mid Cap demandandcompetitive pricing by a new entrants. Industry Margins can only improve with higher volumes (only expected in 30% FY18E/19E), absorbing fixed cost. However, as volumes gather momentum (IR & Non IR), driving up operating leverage and change in product mix (forging and -20% defence), we expect margins to steadily recover to ~5-6%+ over FY16-FY18E. It Jul Jul Oct Apr - Jan Jun - Feb Mar Aug Sep Nov Dec May - - - - - - - - - - 3 3 - would still be below ~17%-18% margin enjoyed during FY11-12. 3 3 3 3 3 3 3 3 3 3 -70% 3 Valuation Texmaco is making strategic diversification (value added products) in its Texmaco BSE Mid Cap 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. Analysts: Nikhil Saboo We expect Texmaco to witness full impact of recovery from FY18 lead by higher Tel No: +91-33-40077019; Mobile: +91-9330186643 volume amid improved demand for wagons from IR & private players coupled with diversification benefits and growth from steel casting segment, due to focus e-mail: [email protected] Anik Das on exports. We recommend a Buy on the stock with a target price of Rs 119/- Tel No: +91-33-40077020; Mobile: +91-8017914822 (26% upside) in 15 months. e-mail: [email protected] SKP Securities Ltd www.skpmoneywise.com Page 1 of 22 Texmaco Rail and Engineering Ltd. Industry Snapshot – Rolling Stock (Indian Railways) India has the fourth largest railway system in the world. In CY2015, Indian railways (IR) carried ~1.1 bn tons of freight and ~8.4bn passengers and ran ~13,000 passenger trains carrying more than ~23mn passengers per day. Over the years, Railways have suffered from underinvestment. Nevertheless, the incumbent government has sizeable plans to revamp railway infrastructure, critical for economic growth. A five year master plan (FY16- 20) involving Rs 8.6 trncapex (significant jump in FY16 outlay – Rs 1 trn -up 54% y-o-y) has been unveiled, which would have a multiplier effect on GDP growth. Immediate goals include, spending on de-congestion (doubling and electrification) rather than building new lines, focusing on improving speed, efficiency and finding new sources of funds. Presently, for faster execution IR has locked-in institutional financing. This has allowed for adopting a corridor approach to capex spending rather than piece-meal approach.World Bank is conducting due diligence to put together a USD 30 bn Rail India Development Fund, not limited only to IR, but also PPP projects. IR is also focusing on building partnerships with state governments and PSUs. Seventeen states have signed in principle approval to form SPVs with Odisha & Maharashtra recently having signed MoUs and JVs with PSUs such as Coal India, NTPC, etc. for mine, power plant connectivity projects. Nine projects totalling 962 km worth Rs 95 bn are under implementation. Exhibit: Five-year capex plan (FY16-20) Item Rs Bn % of Total Network Decongestion (including DFC, Electrification, Doubling including 1993.2 23% electrification and traffic facilities) Network Expansion (including electrification) 1930 23% National Projects (North Eastern & Kashmir connectivity projects) 390 5% Safety (Track renewal, bridge works, ROB, RUB and Signalling & Telecom) 1270 15% Information Technology / Research 50 1% Rolling Stock (Locomotives, coaches, wagons – production & maintenance) 1020 12% Passenger Amenities 125 1% High Speed Rail & Elevated corridor 650 8% Station redevelopment and logistic parks 1000 12% Others 132 2% Total 8560.2 100% Source: Indian Railways, SKP Research Opportunities &Demand Drivers Higher freight traffic builds momentum: IR has steadily lost a share of freight transportation to roads (rail share in the freight transportation market has dropped from over 85% in 1950 to less than 30% now) on account of lower investment in railway infrastructure development compared to the projected growth in freight traffic. Due to sombre investment in wagon capacity over the years, wagon capacity utilisation has been over 100%, which underscores the need to add more rolling stock to IR’s kitty. Currently, IR has been taking the following steps to clear bottlenecks: i) Increased tonnage capacity, SKP Securities Ltd www.skpmoneywise.com Page 2 of 22 Texmaco Rail and Engineering Ltd. ii) Separate feeder routes to provide maximum last mile connectivity, iii) Focus on Dedicated Freight Corridor. This strategy aims to shift focus of freight transportation market back to rail transport. Going forward, we believe bulk of the traffic will continue to be through railways as there is significant cost differential between road and rail freight rates. It is expected that DFC project related wagon ordering will boost volumes for the industry and pickup in freight traffic linked to economic activity could add another 4-5% to wagon demand. Exhibit: Drop in rail share in freight transportation market 100% 31% 31% 80% 32% 32% 36% 36% 36% 36% 39% 39% 40% 40% 62% 64% 60% 70% 83% 85% 40% 69% 69% 68% 68% 64% 64% 64% 64% 61% 61% 60% 60% 20% 38% 36% 30% 17% 0% 15% FY1951 FY1961 FY1971 FY1981 FY1991 FY2001 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 Road(%) Rail (%) Source: Ministry of Railways, SKP Research Dedicated Freight Corridor (DFC) – A game changer: Setting up of DFC’s (eastern & western of ~3,300km) would lead to decongestion of freight and passenger traffic on main routes, speed up delivery and generate additional freight carrying capacity of >500 mn tpa at peak.