Please refer to important disclosures at the end of this report Market Cap Rs10.1bn/US$208.7mn Year to March FY09 FY10E FY11E FY12E Reuters/Bloomberg TEXM.BO/TXM IN Revenue (Rs mn) 9,845 11,282 12,992 15,482 Shares Outstanding (mn) 111 Net Income (Rs mn) 758 880 1,041 1,269 52-week Range (Rs) 137/34 EPS (Rs) 6.8 7.9 9.4 11.5 Free Float (%) 45.4 % Chg YoY 8.7 16.4 18.2 21.7 FII (%) 1.9 P/E (x) 13.4 11.5 9.7 8.0 Daily Volume (US$'000) 690 CEPS (Rs) 7.9 9.0 10.6 12.9 Absolute Return 3m (%) 58.8 EV/E (x) 8.4 7.0 5.6 4.5 Absolute Return 12m (%) (16.9) Dividend Yield 0.8 0.8 0.8 0.8 Sensex Return 3m (%) 23.1 RoCE (%) 23.6 21.9 21.1 20.7 Sensex Return 12m (%) 0.3 RoE (%) 27.7 25.4 24.0 23.5 Texmaco BU Y Favoured by firm foundations Rs92 Reason for report: Initiating coverage Equity Research July 13, 2009 BSE Sensex: 13504 Infrastructure Shareholding pattern Sep ’08 Dec ’08 Mar ’09 Promoters 54.0 54.5 54.6 Institutional investors 21.9 22.6 21.9 MFs and UTI 14.7 15.6 15.1 Banks, FIs & Insurance 4.9 4.9 4.9 FIIs 2.3 2.1 1.9 Others 24.1 22.8 23.5 Source: BSE Price chart 25 50 75 100 125 150 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 (Rs) Gaurav Pathak [email protected]+91 22 6637 7339 Ashish Gupta ashish.gupta@icicisecurities .com +91 22 6637 7314 Texmaco, the largest wagon manufacturer in India, is in a sweet spot to capitalise on diverse & large-scale opportunities in the Indian railways sector emerging from necessities and logistics advantage. Demand for wagons continues to grow as Indian Railways (IR) and private players strive to meet the burgeoning rail-freight traffic. On the back of its leadership, long-standing experience, low-cost infrastructure and capabilities (skill & capacity), Texmaco is set to benefit from the expanding railways landscape. We value the company at Rs146/share and initiate coverage with BUY recommendation. Further, positive developments on JVs with global partners, the foundry division and real estate would provide upside to our valuations. Railway freight traffic – In fast lane. Rail freight offers logistics advantage and is critical to economic growth. Freight traffic has seen 8.4% CAGR over the past five years; burgeoning demand of bulk commodities, particularly coal & containerisation, would accelerate growth. Demand for wagons is set to grow as IR, Container Corporation of India (CONCOR), and private players increase procurements. Texmaco is the leader in the high-growth, high-margin specialised wagons category. Advantage Texmaco. Texmaco is the largest wagons supplier for IR (~25% market share) and the private sector (~50% market share). It has superior design & manufacturing capabilities, thereby switching rollout to the high-growth, commodity- specific & special-design wagons. Texmaco’s infrastructure is low-cost and has the advantage of parallel processing and a hi-tech foundry. Management has ~50 years of experience, renowned for ethical standards & industrial harmony over 5 decades. Potential upside from Foundry, JVs & real estate. Texmaco’s foundry division is technologically advanced, gaining traction in the export market – Foundry’s EBITDA saw 39% CAGR over FY06-09. Texmaco plans JVs with global peers to manufacture electrical multiple units (EMUs), metro coaches, special wagons, locomotives & their underframes, and bogies. Its 178-acre land bank at Delhi and Kolkata could provide minimum upside of Rs2.9bn or Rs26/share. Valuations. Our SOTP-based valuations for Texmaco stand at Rs16.1bn or Rs146/share, including Rs15.4bn or Rs139/share for core business and Rs750mn or Rs7/share for leased property in Gurgaon (NCR). Based on FY10E & FY11E EPS of Rs8 & Rs9.4, the stock trades at P/E of 11.5x & 9.7x respectively. Texmaco is a value play on growing demand of rail freight and Mass Rapid Transport System (MRTS) across Indian cities. INDIA
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Transcript
Please refer to important disclosures at the end of this report
Texmaco, the largest wagon manufacturer in India, is in a sweet spot to capitalise on diverse & large-scale opportunities in the Indian railways sector emerging fromnecessities and logistics advantage. Demand for wagons continues to grow asIndian Railways (IR) and private players strive to meet the burgeoning rail-freight traffic. On the back of its leadership, long-standing experience, low-cost infrastructure and capabilities (skill & capacity), Texmaco is set to benefit fromthe expanding railways landscape. We value the company at Rs146/share andinitiate coverage with BUY recommendation. Further, positive developments on JVs with global partners, the foundry division and real estate would provideupside to our valuations.
Railway freight traffic – In fast lane. Rail freight offers logistics advantage and is critical to economic growth. Freight traffic has seen 8.4% CAGR over the past fiveyears; burgeoning demand of bulk commodities, particularly coal & containerisation, would accelerate growth. Demand for wagons is set to grow as IR, Container Corporation of India (CONCOR), and private players increase procurements. Texmaco is the leader in the high-growth, high-margin specialised wagons category.
Advantage Texmaco. Texmaco is the largest wagons supplier for IR (~25% market share) and the private sector (~50% market share). It has superior design & manufacturing capabilities, thereby switching rollout to the high-growth, commodity-specific & special-design wagons. Texmaco’s infrastructure is low-cost and has the advantage of parallel processing and a hi-tech foundry. Management has ~50 years of experience, renowned for ethical standards & industrial harmony over 5 decades.
Potential upside from Foundry, JVs & real estate. Texmaco’s foundry division istechnologically advanced, gaining traction in the export market – Foundry’s EBITDA saw 39% CAGR over FY06-09. Texmaco plans JVs with global peers to manufacture electrical multiple units (EMUs), metro coaches, special wagons,locomotives & their underframes, and bogies. Its 178-acre land bank at Delhi andKolkata could provide minimum upside of Rs2.9bn or Rs26/share.
Valuations. Our SOTP-based valuations for Texmaco stand at Rs16.1bn or Rs146/share, including Rs15.4bn or Rs139/share for core business and Rs750mn orRs7/share for leased property in Gurgaon (NCR). Based on FY10E & FY11E EPS of Rs8 & Rs9.4, the stock trades at P/E of 11.5x & 9.7x respectively. Texmaco is avalue play on growing demand of rail freight and Mass Rapid Transport System (MRTS) across Indian cities.
INDIA
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TABLE OF CONTENT Railway freight traffic – In fast lane ...............................................................................3
Expansion, the only way to go ........................................................................................3 Rails offer significant logistics advantage .......................................................................5 Dedicated Freight Corridor..............................................................................................6 Increasing port traffic.......................................................................................................7 Rise in containerisation ...................................................................................................7 Demand for wagons set to grow over next 15 years ......................................................9
In sweet spot to meet burgeoning opportunity ..........................................................12 Foundry, JVs and real estate to provide upside.........................................................14 Attractively valued .........................................................................................................16 Risk factors.....................................................................................................................19 Company overview ........................................................................................................20
Rolling stock division.....................................................................................................22 Steel foundry division ....................................................................................................22 Hydro mechanical equipment .......................................................................................23 Process equipment and agro machinery division .........................................................25 Real estate ....................................................................................................................25
Annexure 1: Financials..................................................................................................26 Annexure 2: Index of Tables and Charts .....................................................................30
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Railway freight traffic – In fast lane
Expansion, the only way to go
Rail freight in India offers logistics advantage and is critical to economic growth. Based on this, India requires significant expansion of rail capacity, given that other means of transport – road, air and waterways – are comparatively cost inefficient, unviable for large-scale transportation and intermittent.
Chart 1: Rail freight traffic in line with GDP growth
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Source: Planning Commission, I-Sec Research Freight traffic has seen 7% CAGR over the past ten years and 8% CAGR in the past five. We expect freight traffic to grow 9% over the next three years, thereby reaching 1,070mnte in FY12E versus 832mnte in FY09.
Chart 2: Growth in freight traffic Chart 3: Rise in railway traffic
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Transport intensive sectors such as Power, Coal, Steel and Cement have witnessed some of the fastest growth rates in the past five years and are set to grow even further. Bulk commodities form over 85% of the railway-freight traffic. Coal would continue to be the mainstay of rail traffic, accounting for ~45% of total traffic.
Demand for coal is set to increase, given ramp-up in coal-based power plants. There is also rise in demand from steel and cement plants. As per the eleventh five year plan (XI FYP), steel production could increase by 40mnte. Each tonne of steel produced is likely to add 5-6mnte of raw material and finished product to rail traffic.
Chart 4: Sector-specific freight traffic to grow Chart 5: Increasing demand for coal
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Railways are the preferred method of freight transportation in developed countries as they offers benefits of cost. However, in India, Roads is the preferred medium as railways lack last-mile connectivity; in contrast, roads offer greater flexibility. Due to this, and despite cost advantage, railways has been losing market share to roads.
Source: Planning Commission, I-Sec Research We believe that market share of Railways is likely to increase as infrastructure bottlenecks clear and cost advantage starts to play a more meaningful role.
To cater to the rise in demand in freight traffic going forward (freight load of 1,070mnte by FY12), the government has started construction activities on a Dedicated Freight Corridor (DFC) on the eastern and western routes. DFC’s development will drive demand for wagons.
A special purpose vehicle (SPV) – Dedicated Freight Corridor Corporation of India (DFCCIL) – has been set up for implementation of DFC projects. The project would cover a total length of over 2,762km. At present, DFCCIL has acquired 70% of required land on the eastern route. The high-speed route will involve a cost of over US$5.78-7.64bn; it will connect Sonnagar with Ludhiana on the eastern route and Mumbai with NCR-Dadri on the western route coupled with the interlinking of these two corridors at Khurja (western Uttar Pradesh-UP). Total area required for the project for both corridors stands at 12,500ha. The World Bank, Asian Development Bank (ADB) and Japan Bank for International Cooperation (JBIC) have evinced interest in investing in the venture along with the IR, which will bear part of the projected cost via gross budgetary support, debts and internal accruals. The corridors are expected to commence operations by FY16-17.
Chart 7: Eastern corridor Chart 8: Western corridor
Source: DFCCIL Source: DFCCIL
Table 4: Benefits of DFC vis-à-vis existing facilities Particulars Existing On DFC Train length 700 metres 1,500 metres Train load 4,000te 15,000te Container stack Single Double Axle load 22.9te/25te 32.5te/25te Maximum speed 75km/hr 100km/hr
Source DFCCIL
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Increasing port traffic
International trade, too, has been in expansion mode, implying higher volumes for transport from ports to the hinterland. Traffic at Indian ports is likely to see CAGR of 8% over FY17E, a growth to 1,320mnte from 723mnte in FY09.
Chart 9: Increasing traffic at ports
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Source: I-Sec Research To meet this colossal growth, railways is committed to providing single/double-line rail connectivity to ports and is implementing most of the port-connectivity projects via public private partnership (PPP) by forming project-specific SPVs. Total fund requirement for completing the identified works stands at Rs38.24bn. Also, 41 ports across Gujarat and Maharashtra will be linked via the DFC.
Rise in containerisation
There has been a shift of focus from transportation of bulk commodities to containerised cargo, which is seeing increased focus. Lately, CONCOR was the only entity transporting container cargo. However, the sector has now been opened to private players and as many as 14 players have obtained licence to operate container trains. Share of containers has, therefore, been steadily increasing over the past few years and we expect this trend to continue going forward.
Non-bulk commodities form 35-40% of the total primary freight movement. Containerisation, as a mode of packing and transporting goods, is attaining greater significance on account of the buoyant export-import (EXIM) trade scenario over the past few years, increasing acceptance of containerisation in port logistics and the huge potential of containers in domestic haulage through railways.
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Chart 10: Containerised traffic at ports on the upswing
Containerised Traff ic at Ports
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Source: I-Sec Research Containerisation is seeing growth on the back of swift handling of cargo, safeguard against material damage or pilferage, reduction in transit time due to faster cargo movement (thereby trimming inventory costs), savings in packaging costs (as the goods can be packed in cartons instead of cases), standardisation of containers (which has promoted mechanised form of cargo handling) and ease of handling cargo in the container form has shifted focus from disparate transport activities to a well-linked transportation chain.
Container traffic increased to ~6.7mn TEU (twenty-foot equivalent units) or 92.3mnte in FY08 from 3.4mn TEU or 44mnte as at end FY03, witnessing CAGR of ~15%.
About 17% of the container traffic moves through rail; in FY09, rail-based container traffic grew 36% to 28.8mnte.
The company enjoy 56% market share in the container wagon segment.
According to the railway budget ’09-10, there has been no increase in freight rates; orders for 18,000 wagons for FY10 (highest ever) have been announced, which is a considerable rise compared with 11,000 wagons in FY09. Wagons contribute 70% to Texmaco’s topline and 59% to its EBITDA.
Demand for EMUs/metro coaches will see growth, given ongoing Metro rail projects that are in the initial stage of development in Mumbai, Bangalore, Chennai & Hyderabad, and are under evaluation for Pune, Lucknow, Kochi, Ludhiana, Jaipur, Cochin and Kanpur. Demand for EMUs will grow with expansion of railway network in urban areas. The XI FYP projects an addition of 22,689 coaches/EMUs. The railway budget announced setting up of an EMU/coach factory via the JV/PPP modal; the factory will have annual production capacity of 500 coaches.
IR plans increasing production of both diesel & electric locomotives to 200 each annually from 150; XI FYP estimates requirement of electric & diesel locomotives to be 1,800 each, or 360 locos per year.
Non-IR Demand Private players were allowed to carry freight on the IR network from FY08, with players investing in their own wagons. Besides CONCOR, 14 players have been issued licences, with 6-7 having already commenced operations.
Wagon Investment Scheme. Implemented by the IR April 1, ’05 onward, the wagon investment scheme aims to secure investment in procurement of wagons via stakeholders in private and public sectors for meeting the anticipated incremental freight traffic going forward.
According to the scheme, the customer is provided guaranteed supply of rakes loading every month and a rebate of 10% on normal freight charges.
Wagon Leasing Scheme. On April 15, ’08, the IR introduced the concept of leasing wagons that allows third parties to invest in wagons and lease them to interested parties.
IR executes 100% procurement of wagons through open tender. A distribution system of tendered quantity amongst all established wagon manufacturers, both private and public, is followed, based on past performance, for broad based distribution. Wagon builders are required to supply orders at the lowest rate, determined by an open tender. The bidder who quotes the lowest price is given 25% of the quantity of wagon requirement, with the remaining 75% distributed in the 60:40 ratio to the public and private sectors respectively.
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Chart 12: Dispatches by wagon manufacturers
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Table 5: New entrants in container rail haulage – Train rollout plans Operator Total trains planned Adani Logistics 20 Box Trans (JM Baxi Shipping) 20 CWC 12 Delhi-Assam Roadways 8 Dinesh ETA 0 Gateway Distriparks 30 Hind Terminals 22 Innovative B2B Logistics (Bothra Shipping) 15 IndiaLinx (APL) NA MICT (DP World) 8 MSC 8 Pipavav Railway Corp. 14 Reliance Infrastructure NA SICAL Logistics 25 Total 182
Source: I-Sec Research
Chart 13: Texmaco – Leader in non-IR segment
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Private players use wagons to transport commodities such as alumina, caustic soda, cement, iron, food grains, iron ore and coal which require special wagons. CONCOR plans to add ~2,000 wagons by FY11, translating into 1,000 wagons a year, creating additional demand.
With increase in bulk commodities’ transportation, supply of commodities to companies (such as NTPC and cement companies) in the core sector will rise, creating additional demand for wagons. Refurbishment of wagons provides a new avenue. Of the wagons held by IR, 5,000 were slotted for refurbishment in FY09.
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In sweet spot to meet burgeoning opportunity Texmaco has over 50 years of experience in manufacturing freight cars and is the largest & oldest wagon builder in the private sector. It has a credible track of lowest default, timely delivery and highest standard of quality products. As a result, it receives the highest number of orders from the IR every year.
Texmaco’s unique low-cost infrastructure provides key business advantage, with all products manufactured under one roof. The one-stop-shop facility is spread over 155 acres with 2mn sqft of factory sheds. The facility has a rail network of ~10km inside the factory for wagon-rake handling that can be used to move and store wagons. The company can simultaneously manufacture eight types of wagons; competitors do not have the scale and low-cost advantage of Texmaco’s infrastructure. The company has depreciated assets and has capability to ramp up capacity, given its current utilisation at 54%. Texmaco has the most modern and state-of-the-art steel foundry with capacity of 30,000mtpa, which gives it significant cost advantage over competitors.
Texmaco’s skill set is unparalleled in the industry, with dedicated in-house engineering and design capabilities including commodity-specific & special-design wagons. The company has the widest portfolio of wagons in India. The company has also pioneered the manufacture of hydro mechanical equipment in India. Capability to fabricate high-pressure vessels and hydro mechanical equipment augments Texmaco’s wagon-manufacturing capability. The hydro mechanical division produces hydro mechanical items such as radial gates, vertical gates, hoists, gantry/EOT cranes, trash cleaning machines, penstock and heavy steel. Texaco has an outstanding record in execution of prestigious mega projects financed by national and international Institutions such as the World Bank and the ADB.
Texmaco is the largest supplier of wagons to both the IR (market share of 25%) and private sector (market share of ~50%). It is also the largest supplier of steel castings to the IR. It has a long-standing relationship and excellent track of timely deliveries with the IR, NTPC, National Hydroelectric Power Corporation (NHPC) etc. Notably, timeliness is crucial as it serves as pre-qualification criteria in the bidding process. Texmaco is also the only company qualified by the NHPC to participate in international bids.
Texmaco has near monopoly in the high margin & high growth specialised wagons such as BCCW (covered car for transportation of bulk cement and fly ash; contribution 3-4x higher than a common wagon) and BCN HL (covered bogie wagons with higher axle load and stainless steel body). It has significant share of BLC wagons, used to transport container flat trains, and BOBRN HS (rapid pneumatic bottom discharge hopper car, with high speed bogies).
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Chart 14: Texmaco leads in high-contribution products
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Source: Company data, I-Sec Research While PSUs have been operating inefficiently and largely defaulting on deliveries, Texmaco is being regularly awarded additional orders by IR, which diverts orders from the non-performing units to the company.
IR removed couplers and bogies from free supply items. Going forward, more items such as steel may be removed from the free supply list. Texmaco stands to gain due to in-house manufacturing capability of such items. IR has also allowed manufacturers to submit their own design for wagons for manufacturing.
Experienced management Texmaco management has over 50 years of experience in manufacture of wagons and the rail industry. The management has been judiciously using capital, adding to its high-end infrastructure capabilities via internal accruals. The company is part of the well-diversified Dr KK Birla Group, which has presence in a wide range of industries such as Chemicals, Fertilisers, Sugar, Media, Textile and Engineering. The company is widely acclaimed for its ethical standards and holds the record for industrial harmony over the past five decades.
The Management values human assets and has committed substantial resources to harness these assets. The company has entered into collaboration with the renowned Birla Institute of Technology & Science (BITS), Pilani to promote industry-centric knowledge and skills upgradation. It has set up BITS-Texmaco Centre of Excellence at its premises that offers work-integrated-learning modules. The company has also initiated various other programmes to upgrade technical skills of the workmen and communication skills of staff at all levels. Texmaco’s efforts to create a social infrastructure and ecosystem for development of workers and the staff has had effect – not a single man-day has been lost at the company for the past 40 years.
The company follows the highest standards of internal quality controls, resulting in no delay in deliveries.
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Foundry, JVs and real estate to provide upside Texmaco has one of the most modern and state-of-the-art steel foundries in India, with cumulative capacity of 30,000mtpa. In-house casting division gives Texmaco significant cost advantage over competitors as well as opportunities to tap the global and domestic markets. Its steel foundry division achieved the highest-ever production of 18,150MT during FY09 and is currently running at 60% capacity. EBITDA for the division has seen 39% CAGR over the past three years. In FY08, Texmaco installed a new state-of-the-art foundry with 15,000mtpa capacity, equipped with a high-pressure moulding line imported from world renowned Kunkel Wagner, Germany; for Rs530mn; the foundry operates at ~100% utilisation capacity.
Stringent pollution norms and high labour & capital costs have led to exports from the steel foundry. Texmaco has booked export orders for high-tech castings from the USA and Australia, and has exported two pilot batches. The high-tech new foundry unit is capable of high precision castings for catering to the export market. Texmaco has been approved by the Association of American Railroads to manufacture and supply bolsters, side frames and centre plates to the US market. It targets the US for side frames and bolsters as well as CMS crossings for railways and Australia for industrial castings for mining equipment makers.
Texmaco has been forming JVs to bag emerging opportunities in the railway segment. These include entry into EMUs, metro coaches, special wagons and locomotives.
Texmaco has a 50:50 JV with the United Group, one of Asia’s leading end-to-end rail technology solutions providers, and plans to foray into the production of special wagons, locomotive underframes & bogies and EMUs & metro coaches.
The company is in the process of forming another JV with Kawasaki, Toshiba, Mitsubishi Corporation and Mitsubishi Electric Corporation for the proposed electro-locomotives project. The project would have capacity of 120 locomotives and is likely to be located at Madhepura, Bihar; Texmaco has filed technical bids for the same. The winning consortium will form a JV with the IR (24%), thereby assuring volume & price realisation for the Rs14-bn project.
The government is focused on ramping up hydro power capacity. The location of Texmaco’s factories, close to the NorthEast, provides an edge over others’ in the hydro mechanical equipment segment. Total addressable market size for hydro mechanical equipment is 147bn in the next 10 years and, we believe, that Texmaco will be able to encash on this opportunity owing to its proximity to the market.
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Chart 15: Planned hydel capacity addition (MW)
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Source: Central Electricity Authority Within real estate, Texmaco owns 34 acres at a prime location in Delhi (legal issue pending with Supreme Court), the developable area of which would depend on the outcome of the case, between 1.3mn sqft and 2mn sqft – We have ascribed Rs20bn or Rs18/share as the minimum option value to the property. The company also owns 144 acres in Sankrail, Kolkata (also under litigation), which it intends to develop as a food park; we ascribe Rs2bn or Rs2.6/share as the option value to the property. Further, Texmaco owns 0.06mn sqft office property in Gurgaon, which is rented to MNCs and yields Rs90mn as annual rental.
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Attractively valued We have valued Texmaco at Rs16.1bn or Rs146/share. This is based on SOTP valuations of Rs15.4bn or Rs139/share for Texmaco’s core business and Rs750mn or Rs7/share attributable to its leased property in Gurgaon (NCR). Further, we believe that real estate and investments could provide healthy upside to our valuations – we have ascribed Rs2.9bn or Rs26/share as the worst-case option value, if there is value unlocking through these assets.
Table 6: Valuations Segments Rs mn Rs/share Texmaco core business 15,390 139 Gillette Tower 750 7 Total Valuation 16,140 146 Option Value Delhi Land 2,001 18 Sankril Kolkata 288 3 Investments (at BV) 588 5 Total 2,877 26
Source: I-Sec Research We estimate Texmaco’s core business based on average of DCF- and P/E-based methodologies at Rs15.4bn or Rs139/share. For our FCFF-based valuations, we have assumed WACC of 11.7% and terminal growth rate of 3%. We have ascribed FY10E P/E of 17x based on FY10E PAT of Rs882mn. Given the attractive growth opportunities, high earnings visibility, healthy RoE (27-24%) and astute management, we believe Texmaco could trade at a premium P/E. We expect earnings for the company to post 19% CAGR over the next three years.
Table 7: Valuations of core business (Rs mn)
DCF - FCFF FY10E FY11E FY12E FY13E FY14E TY PAT 880 1,041 1,269 1,586 1,983 2,042 Add: Depreciation 116 134 156 195 243 251 Misc expenses written-off 2 2 - - - - Interest 97 108 140 174 218 225 Less: Increase in working cap 287 67 797 477 596 89 Capital expenditure 300 400 430 200 200 100 Tax on interest 33 37 47 59 74 76 FCFF 476 781 289 1,219 1,574 2,252 PV 426 626 208 783 905 13,332 Total PV 16,280 Less: Net Debt 496 Value of Equity 15,784 Relative valuations FY10E PAT 882.2 P/E (x) 17.0 P/E based value 14,997
Source: I-Sec Research We expect Texmaco to post earnings CAGR of 19% over FY09-12E. However, we have not included any upside from real estate, expansion in foundry division and earnings from new JVs in our estimates.
Chart 16: Growth in earnings
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Capex details FY10 FY11 Remarks JV with UGL 500 Short term requirement ,to be put in JV Foundry Expansion and Modernization 500 Expanding capacity by 10,000mnte JV with Kawasaki 400 400 Phased investment in JV for Locomotives Agarpara facility 600 Modernisation and expansion Total capex 2,000 400
Source: I-Sec Research
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Risk factors
Dependent on IR for orders – Customer concentration The IR is the largest customer for wagons in the country, of which Texmaco has bagged ~25% market share. Demand from IR constitutes ~70% of revenues for Texmaco; thus, earnings are largely correlated with wagon procurement by IR. The company also enjoys benefit of a favourable tendering system by the IR. A delay in order placement by IR or decrease in selling price of wagons may adversely impact revenues and Texmaco’s bottomline.
Slow progress on infrastructure projects may affect growth Key projects such as the DFC and introduction/expansion of the Metro in various cities is an important growth driver for Texmaco as such programmes would create additional demand for wagons. Delay in execution of these projects will affect Texmaco’s topline going forward.
Macroeconomic factors Slowdown in global trade activity might lead to slowdown in demand, leading to deceleration in exports. Further, the industry depends on the liquidity position of private & public developers. Liquidity constraints with large infrastructure developers could delay projects, making Texmaco’s order book lumpy; this leads to risk of cancellation.
Private sector demand depends on government policy/incentives Schemes such as Wagon Investment Scheme and Wagon Leasing Scheme have helped create demand for wagons in the private sector. Texmaco caters to half the demand of the private sector; thus, withdrawal, reversal or substantial change in the schemes may impact the company’s revenues and profitability.
Shortage of wheel sets Wheel sets are in short-supply and currently being imported from various countries. They are a key ingredient of a complete rake and unavailability of the wheel sets presents major risk. The Rail Wheel Factory (subsidiary of IR) has recently increased production capacity; also, Texmaco has tied up with certain Chinese manufacturers for assured supply. Moreover, Texmaco is mulling its own wheel & axle manufacturing facility that will reduce dependence on imports and other external sources. Further, supply of wheel sets to Texmaco has seen fewer delays.
Volatility in raw material cost to affect margins The main raw material in the manufacturing of wagons and heavy engineering Division products is steel; volatility in steel prices could affect margins of Texmaco’s non-IR order book.
Texmaco, July 13, 2009 ICICI Securities
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Company overview Texmaco was incorporated in 1939 by Dr KK Birla, son of the legendary Indian Businessman, Late GD Birla. It was started as a textile machinery manufacturing company and later diversified into other engineering fields. It manufactures a varied and diversified range of precision & heavy engineering capital goods & equipments, including railway wagons, steel foundry for railway equipment & other precision castings, hydraulic steel structure & hoisting equipment, pressure vessels & heat exchangers, turnkey sugar mill plants, agro machinery etc.
Its main operating divisions are Rolling Stock Division, Hydro Mechanical Equipment, Steel Foundry and Process Equipment & Agro Machinery at present. Also, it has real estate assets and four factories on the outskirts of Kolkata in Agarpara, Belgharia, Sodepur and Panihati.
Chart 19: Timeline
Source: Company data, I-Sec Research
1939
1954-1960
’06
’00
’07-08
’13
Established by young KK Birla as a Textile machinery manufacturing company
Started manufacturing railway freight cars and steel castings Sugar mill machinery in collaboration with Stork-Workspoor Water tube boilers in collaboration with CE, USA Hydro mechanical equipment in collaboration with Voest, Austria
Established a most modern, state-of-the-art steel foundry with capacity of 15,000mtpa, equipped with high-pressure moulding line imported from world renowned Kunkel Wagner, Germany for Rs530mn
Order book crosses Rs20bn 50:50 Food Park JV with international food processing player Agreement with Australia-based United Group, the leader in freight car
manufacturing in Asia-Pacific, for manufacture of modern design freight cars, loco underframes, loco bogies and EMU coaches
Agreement with Kawasaki-Mitsubishi for manufacturing of high-capacity locomotives
Maintain high growth rate and leadership position across wagons, steel castings and hydro mechanical equipment To establish itself in the new fields of locomotives, EMUs, real estate etc
Listed on the Bombay Stock Exchange
’04 Listed on the National Stock Exchange
Texmaco, July 13, 2009 ICICI Securities
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Chart 20: Manufacturing facilities
Facility
Belgharia Works
Panihati Works
Sodepur Works
Agarpara Works
Steel Castings:
Old Plant: 13,000mtpa
New Plant: 15,000mtpa
- Total capacity to be
increased to 39,000mtpa
-Wagons:
-7,500 vehicle units
Structurals:
20,400mtpa
Water Tube Boilers:36 units
Pressure Vessel, Heat Exchangers:
1,500mtpa
- Steel foundry division manufacturing castings
- Implemented a Rs530-mn capex for state-of-
the-art, highly automated operations
- Also manufactures agro equipment
-Facility available for future expansion of JV
with United Group
- Assembly unit for steel foundry
-Structural/mechanical work
- Manufactures wagons and hydro mechanical
equipment
- Manufactures wagons, hydro mechanical
equipment, process equipment
Belgharia Works
Panihati Works
Sodepur Works
Agarpara Works
Steel Castings:
Old Plant: 13,000mtpa
New Plant: 15,000mtpa
- Total capacity to be
increased to 39,000mtpa
-Wagons:
-7,500 vehicle units
Structurals:
20,400mtpa
Water Tube Boilers:36 units
Pressure Vessel, Heat Exchangers:
1,500mtpa
- Steel foundry division manufacturing castings
- Implemented a Rs530-mn capex for state-of-
the-art, highly automated operations
- Also manufactures agro equipment
-Facility available for future expansion of JV
with United Group
- Assembly unit for steel foundry
-Structural/mechanical work
- Manufactures wagons and hydro mechanical
equipment
- Manufactures wagons, hydro mechanical
equipment, process equipment
Description Capacity
Source: Company data, I-Sec Research
Chart 21: Business divisions
TexmacoTexmaco
Rolling stockRolling stockHydro
mechanicalequipment
Hydro mechanicalequipment
Steel foundrySteel foundryProcess
equipment&
Agro machinery
Process equipment
&Agro machinery
New ventures &
other assets
New ventures &
other assets
Manufactures
general purpose as
well as commodity
specific wagons for
both Indian
Railways and
private sector
players
Fabricator of
equipments for
projects in Power
Generation,
Irrigation and Flood
Control. Also
manufactures
heavy steel
structure for
industries
Manufactures
railways steel
castings such as
bogies and couplers
for captive and
market use as well
as industrial
castings mainly for
mining industry. Has
started exports to
North America &
Australia
Products include
steam boilers,
chemical plant
machinery, sugar
plant machinery,
pressure vessels &
cryogenic vessels.
Manufactures
power tiller under
brand name
Texmaco Dhanwan
JV with the United
Group to
manufacture new
design wagons,
loco components
and EMUs
JV with Mitsubishi-
Kawasaki-Indian
Railways to
manufacture
electric locomotives
Real Estate
TexmacoTexmaco
Rolling stockRolling stockHydro
mechanicalequipment
Hydro mechanicalequipment
Steel foundrySteel foundryProcess
equipment&
Agro machinery
Process equipment
&Agro machinery
New ventures &
other assets
New ventures &
other assets
Manufactures
general purpose as
well as commodity
specific wagons for
both Indian
Railways and
private sector
players
Fabricator of
equipments for
projects in Power
Generation,
Irrigation and Flood
Control. Also
manufactures
heavy steel
structure for
industries
Manufactures
railways steel
castings such as
bogies and couplers
for captive and
market use as well
as industrial
castings mainly for
mining industry. Has
started exports to
North America &
Australia
Products include
steam boilers,
chemical plant
machinery, sugar
plant machinery,
pressure vessels &
cryogenic vessels.
Manufactures
power tiller under
brand name
Texmaco Dhanwan
JV with the United
Group to
manufacture new
design wagons,
loco components
and EMUs
JV with Mitsubishi-
Kawasaki-Indian
Railways to
manufacture
electric locomotives
Real Estate
Source: Company data, I-Sec Research
Texmaco, July 13, 2009 ICICI Securities
22
Rolling stock division
The rolling stock division provides wagons to IR as well as the private sector. Texmaco has five decades of experience in wagon manufacturing and the segment is the main growth driver for the company; it contributed 70% of gross income in FY09. The workforce of the division includes 684 workers, 116 engineers & technicians and administrative staff.
The division has the largest line of wagon products; along with BOX wagons for IR, it manufactures special wagons such as container wagons, coal Hooper wagons, covered wagons for transport of bulk commodities such as alumina, caustic soda, food grains, cement, iron ore and coal, and tank cars for chemicals.
Texmaco’s current order book is 5,861 wagons, with capacity utilisation of 54.3%. Wagon delivery for FY09 stood at 4,071 wagons.
Some key demand drivers for the segment include demand for metro coaches/EMUs, growth in container traffic, development of the DFC and increase in port traffic.
Chart 22: Wagon segment growth
0
2,000
4,000
6,000
8,000
10,000
12,000
FY06 FY07 FY08 FY09 FY10E FY11E FY12E
(Rs
mn)
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
(No.
of w
agon
s)
Net Sales Wagons Delivered (RHS)
Source: I-Sec Research
Steel foundry division
The steel foundry division manufactures steel castings such as bogies, couplers, draft gears and other industrial castings (such as yokes, flanges and tooth points), and has a workforce of 335 workers and 115 technical staff.
Current production capacity of the division stands at 30,000MT.
Major share (>90%) of the production is utilised in-house. The company is the largest supplier of steel casting to IR. It has manufacturing facilities at Belgharia near Kolkata and carried out Rs530-mn expansion in ’06 to implement automated operations sourced from Kunkel Wagner, Germany. The facility consists of controlled high-pressure moulding line and automated sand plant.
Texmaco plans to increase focus on exports, which have higher margins. The division has booked export orders for hi-tech castings and exported two pilot batches of castings – one to the US and the other to Australia. It targets US for side frames,
Texmaco, July 13, 2009 ICICI Securities
23
bolsters, CMS crossings for railways and Australia for industrial castings for mining equipment makers.
We expect the division to post EBITDA CAGR of 26% over the next three years, with production reaching 25,000mnte by FY12E. Further, management expects increasing capacity of the division to 40,000mnte in FY10/11E.
Chart 23: Leading supplier of castings to IR
24.58 29.63 34.4624.01 27.6
13.7216.91
17.7420.94 20.2
21.7618.17 13.62
14.3918.4
8.539.53
5.39
11.95.484.61 4.73
9.54
3.625.94 19.36 19.93 25.74 18.2
11.32
0%10%20%30%40%50%60%70%80%90%
100%
FY04 FY05 FY06 FY07 FY08
TEXM ACO TSL BESCO HEI Simplex CastingJ it A ll O i t St l B d All BWT/A B St d d/H hOthers
Source: I-Sec Research
Chart 24: Steel foundry – Growth in production and capacity
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
FY06 FY07 FY08 FY09 FY10E FY11E FY12E
(mnt
e)
Capacity Production
Source: I-Sec Research
Hydro mechanical equipment
The hydro mechanical division produces hydro mechanical items such as radial gates, vertical gates, hoists, gantry/EOT cranes, trash cleaning machines, penstock and heavy steel structures, and has workforce of 315 workers and 136 technical staff.
It holds the record in execution of mega projects financed for design, erection and commissioning of hydraulic steel gates, hoists, penstocks, heavy steel structures etc. Texmaco has exported to various projects globally, including Wadi Ghan Dam, Libya, N’Kula Falls ‘B’ HE Project, Africa, Tenom Pangi Power Project, Malaysia, Tuanku Ja’Far Power Station, Malaysia, and Kaligandaki HE project, Nepal
Texmaco, July 13, 2009 ICICI Securities
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Recently, Texmaco was awarded the largest order for hydro mechanical equipment in India for the 2,000-MW hydro electric project of NHPC in Subansiri, Arunachal Pradesh (under execution)
Other customers include NHPC, NTPC, North Eastern Electric Power Corporation (NEEPCO) etc in the public sector, and Mitsubishi Heavy Industries, Jaiprakash Industries etc in the private sector.
The total hydro power potential in India is 150,000MW, of which the exploitable hydro power resource, as per the XI & XII FYPs, is 46,500MW. NorthEast accounts for 66% of total capacity, which translates into 30,690MW. An investment of Rs60mn is required to generate 1MW of hydro power, which translates into market size of Rs1,840bn, of which hydro mechanical equipment accounts for 8%. This, in turn, implies market size of Rs147bn in the next 10 years, which would be Texmaco’s addressable market. The company’s factories in Kolkata provide it substantial location advantage to make it a key player in the segment.
The process equipment & agro machinery division makes steam boilers, chemical plant & machinery, sugar machinery and agro machinery (power tiller).
It has a workforce of 215 workers and 90 engineers & technical staff.
Steam boilers. Texmaco manufactures industrial waste heat recovery boilers and multi-fuel boilers of up to 150te/hr capacity and 75kg/sqcm (g) pressure, which is suitable for oil, coal, bagasse, paddy-husk etc, and fitted with different firing systems.
Chemical plant & machinery. Pressure vessels manufactured include LPG bullets and mounded tanks, Horton spheres, double-walled cryogenic vessels, gas receivers and buffer vessels, heat exchangers etc.
Sugar machinery. Texmaco commenced manufacturing of turnkey sugar plants of 1,250tcd capacity, as one of its earlier product lines, in technical collaboration with M/s. Stork Werkspoor Sugar B.V. of Holland and subsequently with M/s. Walkers Limited of Australia. Current facilities have capacity of up to 16,000tpd of crushing capacity. The equipment ranges from self-cutting constant ratio mills to pressure feeders and heavy-duty shredders developed in collaboration with Walkers, Australia.
Majority of the boilers are supplied to sugar mills of group companies such as Upper Ganges and Oudh Sugar. Other customers include Balrampur Chini and Dwarikesh Sugar.
Competitors in process engineering include Thermax, Walchand Industries and Triveni; in agro machinery, the company faces competition from Chinese power tiller companies.
Real estate
Texmaco owns 145 acres in Sankrail, Kolkata, where it plans to develop a food park, and has formed a JV with LMJ International for the same. The property is in dispute in the High Court regarding ownership with the West Bengal Government. Texmaco also owns 34 acres at a prime location in Delhi (Legal issue pending with THE Supreme Court); potential development area of the land could be 1.3-2mn sqft, depending on the outcome of the Supreme Court decision. Texmaco also owns an office property in Gurgaon, comprising 65,000sqft, which it rents to multinationals and other companies with a lock-in period. It yields annual rental income of Rs90mn.
Texmaco, July 13, 2009 ICICI Securities
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Annexure 1: Financials Table 11: Earning statement (Rs mn, year ending March 31)
Charts Chart 1: Rail freight traffic in line with GDP growth .............................................................. 3 Chart 2: Growth in freight traffic ............................................................................................ 3 Chart 3: Rise in railway traffic ............................................................................................... 3 Chart 4: Sector-specific freight traffic to grow....................................................................... 4 Chart 5: Increasing demand for coal..................................................................................... 4 Chart 6: Increase in road traffic............................................................................................. 5 Chart 7: Eastern corridor....................................................................................................... 6 Chart 8: Western corridor...................................................................................................... 6 Chart 9: Increasing traffic at ports......................................................................................... 7 Chart 10: Containerised traffic at ports on the upswing........................................................ 8 Chart 11: CONCOR container freight handling (mn TEU).................................................... 8 Chart 12: Dispatches by wagon manufacturers.................................................................. 10 Chart 13: Texmaco – Leader in non-IR segment................................................................ 10 Chart 14: Texmaco leads in high-contribution products ..................................................... 13 Chart 15: Planned hydel capacity addition (MW)................................................................ 15 Chart 16: Growth in earnings .............................................................................................. 17 Chart 17: FY09 revenue break-up ...................................................................................... 17 Chart 18: FY09 EBITDA break-up ...................................................................................... 17 Chart 19: Timeline............................................................................................................... 20 Chart 20: Manufacturing facilities ....................................................................................... 21 Chart 21: Business divisions............................................................................................... 21 Chart 22: Wagon segment growth ...................................................................................... 22 Chart 23: Leading supplier of castings to IR....................................................................... 23 Chart 24: Steel foundry – Growth in production and capacity ............................................ 23 Chart 25: Order book position at beginning fiscal............................................................... 24
Texmaco, July 13, 2009 ICICI Securities
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ICICI Securities Limited has been mandated by Texmaco for fund raising activity. This report is prepared on publicly available information.
I-Sec investment ratings (all ratings relative to Sensex over next 12 months) BUY: +10% outperformance; HOLD: -10% to +10% relative performance; SELL: +10% underperformance
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Texmaco, July 13, 2009 ICICI Securities
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