Amber signal for rail gear makers

With railways expected to have more funds at its disposal for capital expenditure, analysts believe prospects of rail equipment companies should improve
JITENDRA KUMAR GUPTA ecent initiatives as well as the fare hike (the first time in the last 10 years) have ignited hopes of better days for the Indian Railways. This should also translate into opportunities for some of the companies catering to the railways sector, triggering a rerating of their stocks. Estimates suggest that the fare hikes will enable Railways to mop up an additional ~6,600 crore annually. This sent a strong signal to the markets considering that a gradual fare hike will mean better cash flows and higher capex in the Railways, which has seen under-investments due to lack of funds in the past. That apart, the news pertaining to the dedicated Delhi-Mumbai freight corridor gaining traction is positive. Given that it requires investments worth about ~96,000 crore, it should lead to higher growth opportunities for railway equipment makers. Till last year, railway procurements were low. But, with the change at the top level in the railway ministry and the need to revive Indian Railways, things are improving. We expect orders from the Railways to improve in the coming days, says Sunil Jain, head of research, Nirmal Bang Securities. Put together, there are potential gains for most railway equipment companies. But, analysts are more bullish on Titagarh Wagons and Texmaco Rail, even as they see growth opportunities for companies like Kalindee Rail Nirman and Stone India. Wagon of opportunities The Railways had earlier lowered their procurement target of wagons or FY13 to 13,000 as against 18,000 in FY12. However, analysts are now expecting the procurements to rise in the coming years. The Indian Railways Vision 2020 suggests that there will be a need for 289,136 new wagons, to be procured by 2020. This, analysts believe, will translate into procurement of more than 30,000 wagons annually from FY13 onwards,

HOW THEY STACK UP

In ~ crore Net sales % change y-o-y PBIDT % change y-o-y Net profit % change y-o-y EPS (~) CMP (~) PE (x)

Texmaco Rail Titagarh Wagons Kalindee Rail Stone India

702.1 446.3 263.1 96.4

-25.2 -40.5 20.6 -0.6

147.1 81.6 26.8 7.0

-21.5 -44.0 19.0 -43.6

90.5 38.7 9.3 -1.4

-24.0 -57.6 3.8 NA

5.0 19.3 7.5 1.5

63.2 331.5 93.7 32.3

12.7 17.2 12.5 21.9

All financial figures and PE are standalone and for trailing 12 months ending September 2012

Source: Capitaline, CMP as on January 22, 2013

and that provides good visibility. Additionally, there are opportunities in the form of replacing existing wagons, besides strong demand from metro railway and mass transport networks in urban areas. In the wagons space, Titagarh Wagons and Texmaco Rail are the biggest players in India and are expected to be key beneficiaries of the emerging opportunities. Titagarh Wagons has an order book of about 3,000 wagons and is more diversified in terms of private and public sector clients. Titagarh is a good pick given its positioning and attractive valuations. The share price is not truly reflecting the strength of its core business. It is demerging its coach business, which should create more value. Additionally, it has holding in a French company, which is doing well. It also has stake in Cimmco, which is a listed company in India. These things, put together, make it an attractive investment, says Jain. Further, the capex in the corporate sector could also prove to be good for railway equipment compa-

nies, especially Titagarh, which is focusing on private sector clients. Recently, Coal India said it plans to spend an additional ~14,500 crore towards development of its rail infrastructure. Further, there are huge investments taking place in the port sector and connectivity of the same will require large investments in rail infrastructure. Earlier, the Railways had said that they expect investments of about ~3,800 crore to come in from the private sector for six port connectivity projects. This should also prove beneficial for wagon maker Texmaco, which also has strong visibility with an order book of about 5,000 wagons. Additionally, the company is looking to participate in the dedicated freight corridor project and working with the Japanese consortium. Texmacos order book may receive further fillip with start of UGL Australia joint venture (JV) operations from November 2012 and wagon leasing JV with Touax, France, says Chetan Kapoor, who tracks the company at IDBI Capital. Analysts also believe that bene-

fits could flow to companies like Kalindee Rail, which provides services for projects relating to railway tracks, signalling and telecommunications. Similarly, Stone India could emerge as a major beneficiary. The company deals in different kinds of brake systems used for carriage and freight besides diesel and electric locomotives. The key risk here is the pace of implementation of the projects by the public sector giant, which is inherent to the business. Also, majority of these companies are mid-caps, and have seen their topline and profits come under pressure (Stone India has reported a loss) in the trailing 12 months ending September 2012. Texmaco though has recorded a 19 per cent year-on-year growth in sales, while profits are up 50 per cent in September 2012 quarter. Likewise, for June and September 2012 quarters, Kalindee too has reported good performance. On the flip side, Titagarh and Kalindee have seen a surge in interest costs, which need to be monitored.