The Hindu Business Line : Texmaco: BUY

The substantial pick up in demand for wagons, setting up of dedicated freight corridors, allowance of private sector participation in rail logistics and introduction of wagon leasing scheme by the Railways all point to strong prospects for Texmaco. At the current market price of Rs 1,315, the stock trades at about 18 times its likely FY09 per share earnings. This appears justified by the company’s diverse business mix and strong earnings visibility. Investors can accumulate the stock in phases given the volatility in the broad markets.

The demand for wagons is likely to pick up considerably in the near future given the latest rail budget, which aims to procure an all-time high of about 20,000 wagons this year. This apart, demand is also likely to get a boost from the entry of private players in rail logistics.

Fourteen new private players have already made forays into container rail logistics and have announced significant capacity additions. Further, the introduction of wagon leasing policy and investment scheme may also attract more private participation in the sector.

While Railway orders are typically awarded through an open tendering process, Texmaco’s established relationship with the Railways and proven execution skills positions it well to win incremental business. Texmaco also has a presence in steel castings and hydro-mechanical equipment space. The castings division, apart from meeting captive requirements also supplies bogies and couplers to the Railways and other wagon builders. While the castings division contributes mainly to cost savings, Texmaco’s presence in hydro-mechanical equipment holds potential to add significantly to revenues. The Government’s increasing focus on improving power infrastructure and the proposed capacity addition in various hydropower projects point to high growth prospects for the division. The company’s proximity to the untapped hydropower potential in North-East India may also help. Near-term growth may, however, be driven only by the wagon manufacturing division.

For the quarter ended December 2007, the company’s profits doubled on the back of 78 per cent growth in revenues. Operating margins expanded marginally to about 13.9 per cent. Margins are likely to improve over the next one-year given the order flows expected from the Railways.

In terms of risks, Texmaco’s earnings are susceptible to any slowdown or delay in orders from Railways, its dominant client. That apart, delays in procuring wheelsets, given their current shortage, may also pose execution risks.

Srividhya Sivakumar

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