Saturday, December 26, 2015

Indian Railways' tender for nearly 15,000 wagons among other equipment holds promise for firms, but margins are a key to watch

Hamsini Karthik December 25, 2015 

Stocks of companies with exposure to the railways sector typically see traction a couple of months prior to the Railway Budget. A recent IIFL report, in fact, says that these stocks have given average returns of 28-53 per cent during November-February (four months) in the last four years. 2015 is no exception with Titagarh Wagon, Kalindee Rail and Texmaco Rail and Engineering (Texmaco) seeing good gains of 16-47 per cent so far since November. On a year-to-date basis, they are up 155 per cent, 13 per cent and 11 per cent, respectively even as broader indices are down six per cent. But, the key question is whether these gains will sustain, given that past performance has been mixed with some stocks losing ground post Railway Budgets.

Government's emphasis on increasing railway spends, specifically earmarking Rs 102,000 crore of capex toward increasing wagon capacity by 2020, has largely supported the stock movements. However, these are not fully reflecting in the financial performance of companies. Though in H1'FY16 Titagarh returned to profits compared to a year ago's performance, adjusted profits (for one-offs) at Rs 3.6 crore are less than half of the year ago figure of Rs 8.2 crore. Total income at Rs 153 crore also lagged H1'FY15 figure by nearly 7 per cent. Though Kalindee's (Texmaco's subsidiary) total income is up 37 per cent, it reported a loss of Rs 9 crore in H1'FY16 versus an Rs 81 lakh profit in year ago period. Texmaco is the only player to see an improvement in topline and bottomline - losses shrunk to Rs 1.74 crore versus Rs 4.5 crore in H1'FY15 while topline grew 46 per cent year-on-year to Rs 257 crore (but still lower than Rs 281 crore of H1'FY14).


Over the past few years, Texmaco and Titagarh, the two wagon markers, have operated at sub-optimum capacities. Capacity utilisation of Texmaco (Indian Railways account for 10 per cent of total orders) though up at 21 per cent in FY15 from 8 per cent in FY14 is still abysmal. Similarly, Titagarh's (Railways constitutes over 50 per cent of order book) was 11-13 per cent in FY14-15. While order flow has been muted so far in FY16 in the rolling stock segment, low utilisation rate also means enough capacity at hand to scale up topline and profits as order flow improves.

January 2016 thus would be crucial as these companies would participate in Indian Railways' tender for 14,777 wagons. Analysts believe that Titagarh, which has higher exposure to Indian Railways, could benefit more from the tender. That said analysts are cautious about the intensifying competition due to the build-up of capacities and its resultant price war which could impact the wafer thin margins (4-8 per cent) that companies currently operating at. Elara Capital notes that earlier this year private sector wagon manufacturers did not accept orders (8,500 wagons) from Indian Railways due to low prices quoted a new entrant, Jindal Rail, which won the bid.

While the long-term story looks promising given Railways huge plans, investors wanting to take fresh exposure to railway stocks could wait for more visibility on order recovery and margins given recent up-move in the stocks.

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