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Titagarh Wagons IPO Analysis
25 March 2008
Source: www.keynoteindia.net
Titagarh Wagons IPO details:
Price Band: Rs. 540 - 610 per share
Issue open between: March 24-27, 2007
Book Running Lead Managers: Kotak and JM Financial
To List on: NSE and BSE
Market Cap post-listing: Rs. 11.25 billion or $277.8 million (based on the cap price)
Highlights:
Titagarh Wagons Ltd. (TWL) is predominantly a railway wagon manufacturer (80% of FY07 sales) catering to the needs of Indian Railways (IRs) and non-Indian Railways customers (NIRs).
In order to de-risk its business model, TWL is diversifying into earth moving and mining equipment. Further, it has acquired a steel foundry and is in the process of setting up a wheelset assembly and axle machining shop, leading to backward integration.
In order to develop aluminium wagons which are lighter and more efficient than the steel wagons, TWL has signed a JV with FreightCar America, a leading manufacturer of wagons. It has also signed various other international JVs / MOUs for various products, creating entry barriers for competition.
We believe the healthy order book of Rs753Cr will get reflected in the financials in the next two years. Also the strong balance sheet with low post-issue gearing of 0.09x would help in exploring new opportunities including acquisitions. However, we believe the industry’s pricing power may be under pressure going forward, which may cap margin expansion.
Of the fresh issue proceeds of Rs126.15Cr, TWL has definite plans to deploy only Rs70Cr towards setting up of EMU, axle machining and wheelset assembly facility, modernisation of existing facilities and a corporate office. For the balance, there are no definite plans. TWL may require to infuse a further Rs35Cr into Cimmco Birla to help turn around the latter’s operations, which may prove to be a challenge.
The revenue and net earnings saw aggressive growth during FY04-07, @ CAGR of 69.6% and 90% respectively. Due to the higher base, we expect growth trajectory to taper off (CAGR of 39.5% and 34.9%) over FY07-10.
Positives include robust growth prospects of both industry (potential to divert road freight to cheaper railway freight) and company and presence of high profile pre-IPO investors including GE Capital, Blackstone and ChrysCapital.
Our concerns include poor track record of the promoter group in shareholder wealth creation (no dividends from group companies Continental Valves Ltd. and Titagarh Steels Ltd.) and also poor corporate governance track record (delisting of Continental Valves Ltd. from the BSE during 1999-2003).
The IPO pricing, at 18.5x FY09 and 15.7x FY10 earnings, is expensive vis-?-vis domestic peer Texmaco (16.5x FY09 and 12.5x FY10) and larger global peers FreightCar America (14.8x FY09 and 12.7x FY10) and American Rail Industries (9.5x FY09 and 8.7x FY10). Given the robust growth prospects of the industry and strong company fundamentals, we recommend investors to await listing.
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