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Sowmya Sundar

Considering the impressive turnaround, efforts at diversifying the customer base and attractive valuation, the Texmaco stock could outperform the market.

SHAREHOLDERS can consider investing in the rights issue of Texmaco. At the offer price of Rs 30 per share, the stock would be at a discount of five times its 2003-04 per share earnings on the post-issue equity. Considering the impressive turnaround, efforts at diversifying the customer base, the good order book on hand and attractive valuation, the stock could outperform the market.

On the flip side, the uncertainty on the new Government's wagon procurement (one of the main products) could have an impact on the earnings. It would, to some extent, be mitigated due to the company's focus on non-government clients.

Business: Texmaco makes railway wagons for carrying goods, hydro-mechanical equipment for hydel projects, heavy engineering machinery for shipbuilding and bridge construction, and industrial boilers and machinery used in oil and fertiliser industries. The orders for making wagons are decided on a yearly basis by the Government. There could be uncertainty and delay in placing the orders. Moreover, the company also has to face pricing pressures due to undercutting by the competition.

To reduce these risks, the company is diversifying its customer base and is concentrating on special purpose wagons. It has received a Rs 74-crore order for wagons from Concor to be executed thisfiscal.

The company has an order book of Rs 120 crore, which is 70 per cent of the 2003-04 sales. Special purpose wagons typically have a longer working capital cycle and the company intends to use the funds raised from the issue to part fund the working capital expenses over the next three years. Banks would finance the rest through loans. In addition, it has also been exploring the overseas markets. For 2003-04, exports contributed 12 per cent of the total turnover.

Texmaco has made a substantial improvement in its operations over the past couple of years and the company turned around in 2002-03. Aided by a good pick up in business and a sharp improvement in operating efficiency, the company reported a 69 per cent jump in operating profits and a near four-fold increase in sustainable net profit.

The company reduced its debt by 20 per cent; debt now constitutes 70 per cent of the shareholder funds. The cash position, too, has increased substantially. The cash flows could be used to retire debt and also part-finance the working capital requirement.

At five times, the valuation appears attractive. The company has also hiked its dividend from 10 per cent to 15 per cent in 2003-04.

Offer details: Texmaco plans to raise Rs 15.49 crore to fund its working capital expenses through a rights issue. One share at Rs 30 will be offered for every one held. The issue opened on May 21 and closes on June 7. The lead managers to the offer are SBI Capital Markets.

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