Ticket to growth

IPO REVIEW

Titagarh Wagons is well positioned to benefit from the demand in the logistics space.

Kolkata-based Titagarh Wagons, a private sector manufacturer of railway wagons, is setting up a manufacturing centre to make electric multiple units (EMUs) and expanding its existing facilities at a cost of Rs 70 crore.

To fund its expansion as well as meet corporate expenses the company aims to raise Rs 111- Rs 126 crore through the IPO route, with each share priced between Rs 540 (lower band) and Rs 610 (higher band).

While the company has wagons, special projects and heavy earth moving and mining equipment divisions, over 80 per cent of its revenues accrue from the wagons division.

Rising freight demand
The opening up of India's container movement to private players (in 2006) as well as the move to allow corporates to invest in wagons (in 2005) has opened up the erstwhile Indian Railways monopolies.

With a large number of logistics service providers and manufacturers jumping into the fray, this nascent segment is expected to take off.

In 2004-05, freight handled was pegged at 6,000 lakh tones, while that for FY08 is estimated at 7,850 lakh tonnes. This is expected to move up further to 11,000 lakh tonne by the end of the 11th five-year plan in 2012.

Indian Railways plans to double its wagon purchase order from the estimated 10,200 wagons for the current fiscal to 20,000 wagons for FY09. This translates into a steady demand for players such as Titagarh Wagons, which along with nine other public, private and joint sector companies are eyeing the Rs 15,000 crore wagons market.

While the company is planning to expand its share in wagons, it is also targeting niche applications. It has tied up with US-based FreightCar America to manufacture aluminium coal hopper wagons and other wagon products.

Passenger segment
The company is also planning to expand its EMU production to cater to the passenger car and metro rail requirements of the railways. The unit to be set up at the Uttarpara facility in West Bengal will manufacture 24 rakes per annum with each rake consisting of nine EMU coaches.

The company has received an order for supply of 9-car rake from Indian Railways and hopes to expand its presence in the sector once its Uttarpara facility is completed by December 2008.

In addition to the EMU facility, the company wants to set up an axle machining and wheelset assembly unit with an annual capacity of 10,000-12,000 wheelsets.

The expansion will allow Titagarh Wagons to integrate backwards and reduce dependency on Indian and foreign suppliers.

With only two Indian manufacturers of wheelsets, which constitute 35 per cent of a wagon's selling price, and continued increase in prices over the last two fiscals due to global shortage, Titagarh's move to backward integrate makes sense.

Special projects/euipment segment
The special projects business, which contributes 11 per cent to total revenues, makes modular bridges, equipment for nuclear power plants and special purpose wagons for the defence sector.

Defence equipment sales to Defence Research and Development Organisation (DRDO) have increased from 1.6 per cent in FY07 to 4.4 per cent in the first half of FY08.

The heavy earth moving and mining equipment division manufactures hydraulic excavators, cranes and forklifts and accounts for 5 per cent of revenues. To ramp up its facilities and improve cost efficiencies in the equipment division, the company plans to invest Rs 4 crore.

Healthy order book
The company's order book as on January 31, 2008 stands at Rs 753 crore, which is over 2.5 times its FY07 revenues. Of this, 90 per cent is accounted for by wagons and EMU sales.

Though Indian Railways continues to be Titagarh's single largest customer, its share of revenues and wagon sales is declining. While Indian Railways' share in Titagarh Wagons' total revenues has come down from 61 per cent in 2005 to 11 per cent in FY2007, its share of wagon sales has also declined from 75 per cent to 49 per cent in the same period.

Strategic moves
Over the last nine months, two strategic investors--GE Capital International and JP Morgan have bought 15.5 per cent (August, 2007) and 5 per cent stakes (January 2008) in the company at Rs 509 per share and Rs 610 share, respectively.

The vendor financing agreement with GE Equipment Services on May 2007 will help Titagarh's customers finance their wagon purchases. JP Morgan, on the other hand, is helping Titagarh Wagons acquire a majority stake in Cimmco Birla. JP Morgan owns a significant portion of Cimmco Birla's debt.

As part of the restructuring programme, Titagarh will be investing Rs 35 crore in Cimmco for a 51 per cent stake. This acquisition is expected to double Titagarh Wagons' current manufacturing capacity of 5,000 wagons per year. 
 

ON TRACK
Rs crore	FY2007	FY2008E	FY2009E
Net Sales	280.41	362.25	567.65
Operating Profit	52.40	72.45	113.53
Net Profit	26.19	43.47	68.12
EPS (Rs)	17.82	26.55	36.94
PE (x)  @ Rs 610	34.23	22.98	16.52
@ Rs 540	30.30	20.34	14.62

Investment rationale
With rising demand from corporates such as Adani Ports, Hind Terminals and logistics service providers, replacement and new wagon requirement of Indian Railways and the cost advantage for rail transport over road, the macroeconomic outlook for the logistics sector manufacturers and service providers looks bright.

While there are 10 players in the wagon manufacturing space, competition for Titagarh Wagons comes from Texmaco. Going by Titagarh's half-year FY08 numbers, with revenues at Rs 211 crore and a bulging order book, revenues should top Rs 350 crore in FY08.

If the company is able to maintain its 20 per cent operating margins and 12 per cent net profit margins in future, the stock is available at 17 times FY09 earnings of Rs 36.93 at the higher end of the band and 15 times at the lower end.

While Texmaco trades at a premium of 20 times its FY09 earnings of Rs 85 due to its leadership position, Titagarh could bridge the gap thanks to its growth prospects and higher operating margins, and at this price can fetch good returns over the short- to medium-term.

Issue opens: March 24
Issue closes: March 27