Long-term growth prospects stay on track

Titagarh Wagons Ltd (TWL) is a private wagon manufacturer in India. It also manufactures Bailey bridges, heavy earth-moving and mining equipment, steel and SG castings of moderate to complex configurations.

Railways is the largest customer for its wagons, but many private sector firms are also its clients. The company also manufactures shelters and other engineering equipment for defence use.

TWL is the only company registered with the defence ministry for manufacture of Bailey bridges and related accessories. It operates two manufacturing units at Titagarh and Uttarpara in West Bengal. TWL completed fundraising through a public issue in March this year.

Business
While the wagons division contributes majority of revenues, TWL has begun de-risking its business by diversifying into other areas. Its business activities are divided into wagons division, heavy earth-moving & mining division and special projects—steel bridges.

Wagons division: This segment contributed about 91% to overall business revenues as well as total operating profits of TWL in FY08. Wagon production saw a 63% growth while sales jumped 67%. Companies such as Nalco, NTPC etc procure wagons for in-house usage. TWL’s acquisition of the heavy engineering division of Hyderabad Industries included a manufacturing unit in Uttarpara. This unit enhanced the plant land area from 7 lakh sq feet to 22 lakh sq ft. It also gave TWL facilities for second wagon manufacturing plant. TWL has also been focusing on exports.

Upgrade of facilities for manufacturing passenger coaches is also underway.  Rs 18.74 crore is being utilised for upgrading EMU manufacturing capacities. An acquired steel foundry is also undergoing modernisation and works are on for setting up an axle machining and wheel-set assembly shop at an investment of Rs 12.93 crore.

Heavy earth-moving & mining division: This division has shown marked improvement in productivity and customer base. In FY08, production volumes increased 43% while sales value grew a robust 140%. TWL is one of the approved suppliers for Coal India Ltd, which also provides it prerequisite to participate in other tenders for such equipments.

TWL has an arrangement with Komatsu Mining Germany (Demag) for supply of components and spares for heavy earthmoving and mining equipments.
Special projects — steel bridges: This division’s performance in FY08 has been satisfactory, recording 43% growth in sales volume and 86% growth in value terms.

Through this division, TWL caters to the niche market for Bailey bridges and explores export opportunities. It is planning to develop double lane modular bridges called Kawada System Truss bridges. TWL enjoys being an industry partner of DRDO and specialises in the manufacture of equipment for defence shelters such as integrated field shelter, etc.

TWL has also become an equipment supplier to Nuclear Power Corp of India. Looking at opportunities in the segment especially after the nuclear deal with the US, these capacities are being upgraded.

Investment rationale
Freight traffic has been a major contributor to Railways’ revenues. This  main contributor to revenues grows at a brisk pace. The Railways has planned an investment of Rs 6,000 crore annually during the five-year period up to 2012, a major portion of which is for freight carriage.

TWL is focusing on producing special purpose wagons to expand market share. It has signed an MoU with US-based Freight Car to that effect. The planned JV is intended for newer and modern designs of aluminium wagons.

The company also has an MoU with US-based Miners Inc for supply of electro-pneumatic door operating equipment for hopper wagons. Strategic sourcing arrangements of components remain crucial for sustainability.

Wheel-sets are generally in short supply globally and sourcing them from RDSO-approved global vendors always remains a challenge. TWL has also entered the manufacture of passenger coaches. With upgrade of facilities, it will achieve production capacity of 2 EMU racks of nine coaches each per month.

TWL has exported wagon parts to Africa. Besides, it got repeat orders from existing customers. Heavy earth-moving and mining equipment facilities are undergoing expansion, as in the steel foundry. TWL intends setting up sales and service centres across the country either directly or through dealers to ramp up sales. The supply of equipment for nuclear power plants will have immense growth opportunities in the coming days.

Concerns
The business model depends heavily on wagon manufacturing and Railways’ orders dominate the order book. So any change in wagon procurement policy or delays in releasing of orders may adversely affect revenues.

The track record of the promoters’ group has not been up to mark and group companies Continental Valves and Titagarh Steels had failed to issue dividends. Poor corporate governance had also led to de-listing of Continental Valves from the BSE during 1999-2003.

Valuations
FY08 saw TWL achieve Rs 556.91 crore topline compared with Rs 280.41 crore in FY07. With major plans for expansion and growth, TWL expects a good upside in FY09. However, margins during H1FY09 have been under stress.

Volatility in prices of basic raw materials has pulled down margins — steel-based raw materials are principal inputs in manufacturing wagons, Bailey bridges and engineering equipments. The company’s Q2 results show operating margins at 12.06% against 15.03% during FY08. Profit margins too have shown compression.

Global slowdown is also expected to exert pressure on demand for equipment. So growth targets will be under pressure. But long-term growth story remains intact and investors with long-term investment horizon may invest in the stock.

Disclosure: The author does not hold any shares in the company