Titagarh Rail Systems Expects To Steam Ahead With Steady Cash Flows

Titagarh Rail Systems Ltd. is confident of achieving steady cash flows and has not seen any payment delays in the last 25-26 years, despite being involved in the business-to-government space, according to its management. 

“Cash flow problems happen with the EPC (engineering, procurement, and construction) contracts. Our business model is equipment supply and we do not undertake any project work,” Umesh Chowdhary, vice chairman and managing director at Titagarh Rail Systems, told BQ Prime’s Niraj Shah. 

In the freight segment, the company is the largest manufacturer in the country, with its current order book standing at Rs 28,000 crore. Titagarh Rail Systems plans to increase its operating capacity from 600-700 wagons per month currently to 1,000 wagons per month.

Titagarh Rail Systems will see strong demand as long as the "India story" continues, and it has a long way to go, according to Chowdhary. “If the GDP grows by 7% and replacement demand is around 4%, additional rolling stock of 11% has to be added every year,” he said. 

“In the last 9-10 years, infrastructure development skyrocketed in India, and the whole infrastructure story of the country is undergoing a complete transformation,” Chowdhary said. 

With the infrastructure base already developed in the country, the demand for wagons and coaches are seeing an uptick, he said. New tracks, additional signalling systems, and metros being announced have added impetus to the demand for wagons, according to him.

As a conscious strategy, the company has exited certain businesses as part of the restructuring over the last 3-4 years.

“We exited earth-moving equipment, tractors, construction and mining equipment, and our focus today is on the passenger rail system and on the freight rail system,” Chowdhary said. 

There will be no capital allocation for the shipbuilding business for the next couple of years, but the company will be executing the old orders. “The shipbuilding business will be a booster for growth once the passenger rail and freight rail system are fully stabilised,” he said. 

Forged wheels have historically been in short supply in India, Chowdhary said. “India is importing more than 500 crore wheels from China every year, but nobody encouraged setting up wheel manufacturing,” he said. 

Titagarh Rail Systems recently received their International Railway Industry Standard certification for the export of passenger rail systems. “There is a large export market for passenger rail business and the IRIS certification helps in exporting to European and other developed countries,” Chowdhary said. 

Exports are not easy in the freight business and Titagarh Rail Systems will look to grow its international business, he said. A production-linked incentive scheme for railways will give a boost to the railway manufacturers, who want to make India an international player in the railway space, Chowdhary said.   

As India’s railway network is gearing up to get bigger and busier, there exists a significant growth opportunity for Titagarh Rail Systems, according to HSBC.

In a July 18 note, the brokerage said that healthy margin in recent quarters and price variation clauses allowed Titagarh Rail Systems to generate good profit as it fulfils its orders. 

It cited significant dependence on one government-owned entity and slower than expected execution ramp-up of its order backlog as key risks for the company. 

The brokerage expects a sevenfold increase in passenger coach shipments over FY23 to FY26, almost entirely from its existing order backlog. From 4.2% in FY23, the Ebitda margin will touch 7.5% by FY26 as its operations ramp-up significantly, the note said.

Shares of Titagarh Rail Systems were down 0.52% as compared with a 0.16% rise in the benchmark NSE Nifty 50 on Thursday. The relative strength index was at 51.64.

All seven analysts tracking the company maintain a "buy" rating, according to Bloomberg data. The average 12-month analyst price target implies an upside potential of 15%.