Buy Titagarh Wagons - Nirmal Bang

Titagarh Wagons Ltd (TWL) is the largest private wagon manufacturer with capacity of 10k wagons pa. The company also manufactures customized products eg. Railway carriages, steel bridges, mining equipment. Wagon manufacturing accounts for ~82% of the company's business.

Lack of order flows from the Indian Railways had a negative impact on the performance

With the delay from Indian Railways in terms of giving out orders for wagons, TWL saw its order book shrink from ~3000 wagons in Q4FY11 to 1200 wagons in Q2FY12. This impacted its subsequent quarterly performances. A small order book became a concern on the earnings visibility front which led to a significant correction in the stock price.

Current order book of ~2900 wagons boosts earnings visibility in the near to medium term

The Indian Railways placed a large chunk of orders in Q3FY12 and TWL was able to bag significant amount of orders (2699 wagons of the 15700 wagons ordered by Indian Railways in FY12) thereby boosting its order book. The company was able to bag orders worth ~Rs 275 cr in Q1FY13 and has a current order book of Rs 846 cr. This provides a strong visibility in earnings for the near to medium term. With a topline driven business model as majority of price variations are pass through, we expect the company to post good set of numbers in H2FY13.

Strong Industry dynamics

For Indian railways to reach a target of 50% market share in freight movement, it will need additional wagons to be procured from the market. According to the "Indian Railways: Vision 2020" document by the Ministry of Railways, 2,89,136 new wagons need to be procured by 2020. This translates to more than 30,000 wagons to be procured annually from FY13 onwards.

Turnaround in its subsidiary (AFR & Cimmco) complete - to aid growth in future

TWL's first ever overseas acquisition Arbel Fauvet Rail (AFR) has a capacity to produce 2000 wagons per annum. TWL paid €1.92 million for the entire assets without any liability; book value of assets was € 60 million. AFR turned profitable in FY12 and had an order book of € 65 million. TWL became co-promoters for revival of Cimmco Ltd. in 2010. It successfully turned around the company in a period of 9 months. This is expected to aid TWL with profitable growth in FY13.

Valuation & Recommendation

At CMP, the stock is available at 11.5x on TTM basis. On the back of good order book in Q1FY13 we expect TWL to post good set of numbers in H2FY13. With the turnaround in its overseas subsidiary (AFR) complete, this will aid in growth of the company in FY13. Indian Railways in due to place its order for FY13 & FY14 at one go and this can provide a trigger for the stock to move up from current levels. Focus on high margin products (EMUs) will help maintain the operating margins in the 15% range. There was a fire at one of TWL's factories, however we do not see any major impact of that on the company's operations. We recommend Buy on TWL with potential upside of 15-20% from current levels.

Source : Equity Bulls

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