Titagarh Rail Can Rally Up To 24%, Says Morgan Stanley After Initiating 'Overweight'
Shares of Titagarh rose as much as 8.73% during the day to Rs 1,124.40 apiece on the NSE.
Morgan Stanley has initiated coverage on Titagarh Rail Systems Ltd. with an 'overweight' rating. The research firm forecasts a 28% compound annual growth rate in earnings for financial year 2024–27, driven by execution of order backlog across the freight and passenger businesses and supported by backward integration. The brokerage has a target price of Rs 1,285 apiece, with a potential upside of 24% from the previous close.
Morgan Stanley sees strong evidence of a revival in India's railways, which are economical and environmentally friendly. An increase in rail-freight share will reduce logistical costs and improve India's manufacturing competitiveness globally in the current multipolar world.
Indian Railways is investing in building three new corridors that would augment capacity for both freight and passenger trains in the currently congested network.
It expects rail freight's share in India's rail modal mix to increase from 29% in fiscal 2024 to 35% by fiscal 2031. "There is a large metro network expansion underway (from 889 km currently operational to 4,007 km) across large cities in India," Morgan Stanley said in a May 6 note.
Big Beneficiary Of Rail Theme
Titagarh specialises in the design, manufacture, supply, commissioning and servicing of various types of rolling stock and metro coaches. Its earnings visibility has been improving, driven by policy initiatives like self-reliant India and Make in India, according to Morgan Stanley.
Combination Of Cash Cow, Growth Engine
The freight business has been a cash cow for Titagarh and the market leader should see stronger wagon demand as share of rail freight increases in the modal mix, the financial services firm said.
"We view the passenger coach business as Titagarh's new growth engine, but the market is not yet factoring in its earnings potential. We expect this growth to be driven by new products (Vande Bharat, Amrit Bharat, and bullet trains) and rising metro demand," it said.
Key Downside Risks
Supply-chain issues (foundry/labour) adversely affect execution of existing order backlog.
Slowdown in wagon ordering that hurts operating margins (lower absorption of fixed costs).
Delayed execution of contractual obligations in coach order book, implying liquidated damages.
Lack of new orders, adversely affecting margins (Titagarh is ramping up capacity from 250 to 850 coaches).
Shares of Titagarh rose as much as 8.73%, the highest jump since March 21, 2023, during the day to Rs 1,124.40 apiece on the NSE. It was trading 6.77% higher at Rs 1,104.20 per share, compared to a 0.79% decline in the NSE Nifty 50 at 11:36 a.m.
The stock has fallen 5.68% on a year-to-date basis but risen 4.30% in the last 12 months. The total traded volume so far in the day stood at 10 times its 30-day average. The relative strength index was at 72, indicating that stock may be overbought.
Nine out of the 10 analysts tracking the company have a 'buy' rating on the stock and one recommends a 'hold', according to Bloomberg data. The average of 12-month analyst price targets implies a potential upside of 10.5%.
