Stock Review: Titagarh Wagons

 

Titagarh Wagons is one of the key beneficiaries of the Railways' wagon procurement plan. Investors can consider the stock on a long-term basis

 

 

TITAGARH Wagons, controlled by Savitri Devi Chowdhary & Associates, is one of the key suppliers of wagons to the Indian Railways, and is expected to benefit from the Rail Budget's procurement target of 18, 000 wagons for the current financial year. Titagarh has recently expanded into the sophisticated markets of Europe via its acquisition of assets and business of financially-troubled Arbel Fauvet Rail, a French rail wagon maker. This acquisition should also provide it access to certain niche technology related to the production of wagons used for transporting oil and cars, which is not easily available in India

   In addition, Titagarh Wagons was also listed as Fastest Growing Small Companies, taking into account the company's various operational parameters. This stock also trades at a P/E multiple lower than it's nearest peer in the domestic market (excluding the French acquisition).

BUSINESS :

Titagarh's installed domestic wagon production capacity was 5,000 units at the end of March 2010, unchanged from the earlier three years. However, production and offtake of its wagons depend largely upon order inflows from key customers, like the Indian Railways. For instance, its wagon sales amounted to 2,847 units in the previous financial year compared to 2,073 units three years earlier.

   Average realisation per wagon for Titagarh was Rs 18.06 lakh in FY10, a fall of 7% compared to a year earlier. This division also contributed nearly 88% to its net sales for year ended March 2010.

   In addition, metro projects are being implemented across several metro cities in the country and that should also help the company over the medium term.
   The company also has key inputs for in-house production of wagons, such as steel castings. As part of this strategy, it had earlier merged Titagarh Steels with itself. This resulted in a total steel casting capacity of 20, 000 tonnes at the end of

March 2010, a three-fold jump compared to March 2007. Titagarh Wagons utilises three-fourths of this division's capacity in its wagon production.

   In early July, Titagarh acquired the assets and business of Arbel Fauvet Rail, a financially troubled French rail wagon maker. The acquisition would boost Titagarh capacity to manufacture up to 5,000 wagons per year in the European market, coupled with niche technology.

   Apart from wagons, the company also manufactures heavy earth moving machinery in the domestic market.

FINANCIALS:

The company's operating profit margin improved 470 basis points yearon-year to 19.3% in the June 2010 quarter, while net sales rose 42.6%. However, the results of the first quarter are not strictly comparable with the corresponding period of the previous year.

   Also, while financial details of its earlier acquisition in France are not available, Titagarh management has chalked out plans to beef up the working capital of Arbel Fauvet. The French company is understood to be reeling under financial difficulties and reviving its operations is the key need.Going forward, the company is well positioned to raise additional funds. For instance, its debt to equity ratio was just 0.1 at the end of March 2010 and it has considerable headroom for raising additional debt, if it wants to strengthen its overseas operations.

VALUATIONS:

Titagarh Wagon at CMP trades at a P/E of 11.9 times (excluding French acquisition) on a trailing four-quarter basis. Other players in this segment like Texmaco trades at nearly 20.3 times on trailing basis. Investors could consider Titagarh Wagon as an investment on a long-term basis.