Texmaco, Titagarh : On the fast track

Stocks of two of India’s largest railway wagon makers namely Texmaco Rail & Engineering (Texmaco) and Titagarh Wagons (Titagarh) surged 9% and 15.5% respectively in the past week, outperforming the S&P BSE Sensex’s 1% uptick in this period.

This rally was fuelled by approval of rail projects to the tune of Rs 9,598 crore by the Cabinet Committee on Economic Affairs (CCEA) on November 18. Other rail related stocks such as BEML, Hind Rectifiers, NELCO, Kernex Microsystems, etc too witnessed an uptick post this announcements. However, analysts believe Texmaco and Titagarh’s fortunes are more closely linked to the Indian Railways and hence stand to gain the more.

While Indian Railways contributed a fourth of Titagarh’s FY15 revenues, it formed about 10 per cent of Texmaco’s current wagon order book of about Rs 600 crore. However, with the higher capex in plans, Indian Railway’s share in these companies’ order books/revenues could rise further, estimate analysts. Even though historically, these two stocks have given handsome returns between November and February (when the annual railway budget is announced), the one year performance of these stocks has been robust this time as the government announced its highest ever capex plan for the railways in the rail budget of FY16. Commissioning of eastern-western dedicated freight corridors by December 2019 will also aid these companies growth in the medium term. The debt-free balance sheets of both these companies are also a key positive.

Texmaco is India’s largest wagon maker and with the recent acquisition of Kalindee Rail, the company can garner a bigger pie of the railway capex going forward. Importantly, the company now has a diversified presence in railways in the wagons, signalling, laying tracks/bridges, amongst others. Analysts believe the merger with Kalindee will also enable Texmaco to bid for larger projects. Consistent growth in the company’s exports of hydromechanical segment and steel casting will compliment higher growth in domestic railways business. Analysts on an average have a target price of Rs 150 on the stock, implying 8 per cent uptick from current levels.

Titagarh, however, has been operating at dismal capacity utilisation of 11-13 per cent over FY14-15. This is due to lack of any new wagon orders so far in this fiscal. But, this is set to change for the better. Analysts expect this metric to improve to 37 per cent in FY17 and 57 per cent in FY18 due to higher wagon demand from both railways as well as private sector companies. Higher utilisations will have a bigger impact on profits. Analysts at Elara Capital believe the company can clock in earnings CAGR of 104 per cent over FY15-18 on the back of improving volume growth. Overall, the average target price of analysts at Rs 146 indicate upside potential of about 17 per cent from current levels.