India’s top railway wagon makers, Titagarh Wagons and Texmaco Rail and Engineering, are likely to be hit by order delay from Indian Railways this financial year. However, despite the shrinking order book, both stocks are trading at high valuations. Titagarh, the country’s largest private wagon manufacturer, has outperformed the Sensex over the past one-month and three-month periods. On the contrary, Texmaco Rail, the second largest player, has underperformed the markets in both periods.
The current valuations of both stocks appear rich. Titagarh and Texmaco Rail are trading at 10 times and 13 times FY12 earnings estimates, respectively. However, analysts feel these valuations are unjustified. Given the lack of revenue visibility, outlook on both companies remains muted.
On a slow track
At a cost of Rs 4,000 crore, Indian Railways was to procure 15,715 wagons from private manufacturers this financial year. Of this, Texmaco Rail was allotted the maximum wagons (3,539), the rest being distributed among eight other companies (including Titagarh). Even as the share of each wagon maker is announced earlier, allocations are completed by September-October each year. This year, however, they are expected to be completed in the March 2012 quarter. Experts believe these orders are unlikely to be released for the next three-four months, given the overall slowdown in Indian economy.
| ORDER WORRIES | ||||
| Rs crore | Titagarh | Texmaco Rail | ||
| FY11 | FY12E | FY11 | FY12E | |
| Sales | 733.4 | 673.2 | 938.6 | 740.3 |
| % chg | 32.3 | -8.2 | 0.8 | -21.1 |
| OPM (%) | 14.2 | 15.1 | 17.3 | 16.9 |
| chg (in bps) | -10.0 | 90.0 | 290.0 | -40.0 |
| Net profit | 71.3 | 81.8 | 121.5 | 80.0 |
| % chg | 18.4 | 14.7 | 29.8 | -34.2 |
| EPS (Rs) | 35.6 | 40.8 | 6.7 | 4.4 |
| Change calculated year-on-year E: Estimates, all figures are consolidated Source: Analysts | ||||
With the railways expected to miss their freight targets this year, the outlook remains grim. Says Anubhav Gupta of Kim Eng Securities, “We believe the delays in railway orders are due to a slowing economy and they may continue until end FY12. Indian Railways may lower its target of a 10 per cent increase in FY12 freight traffic, given that local industrial production increased only five per cent in the first half of FY12.”
Even if the orders are released now, companies would take at least three months to start production. This means they will be able to complete the order only in the first half of FY13, their FY12 revenues and earnings taking a knock, as a result. The pruning of FY13 wagon orders from 18,000 to 12,000 will hit the their performance in the coming financial year as well.
Order book issues
Both companies derive around 80 per cent of their revenues from railway wagons. Due to the delayed order inflow, the current ratio of order backlog to sales has hit its lowest level in past four years for both. While Titagarh has an order backlog of Rs 280 crore, the figure stands at Rs 330 crore for Texmaco Rail. This forms just 40 per cent of their FY12 estimated sales. Thus, analysts believe the topline of both companies will be squeezed significantly in the second half of this financial year. While Titagarh could see a revenue squeeze of 30 per cent in the next six months compared to the first half, Texmaco Rail could see a revenue contraction of 35 per cent.
Chetan Kapoor, analyst at IDBI Capital, believes the impact of this delay will be greater on Titagarh because of its lower order book compared to Texmaco Rail. Further, the latter has already executed a large part of the order it received from Indian Railways in September 2010. It usually takes a year to complete an order. Hence, even if the order is awarded now, its FY12 numbers would still be dismal. The company expects to receive the railway order shortly.
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Outlook and valuations
Analysts have cut their FY12 earnings estimates for Titagarh and Texmaco Rail by 20 per cent and 11 per cent, respectively. FY13 earnings have been trimmed by 16 per cent for Titagarh and eight per cent for Texmaco Rail. The Texmaco Rail management expects margins to be pressured due to a higher share of low-margin private sector orders and input cost inflation.
While it is not uncommon for railways to postpone their order procurement, the quantum of delay is huge this time, as the complete order has not been placed yet. Given this uncertainty, most analysts are bearish on the stocks.