Texmaco Ltd, the diversified engineering firm of K K Birla Group, manufactures and sells heavy engineering products. Incorporated in 1939, it has five factories near Kolkata. It provides equipment machinery and services to core-sector projects and process industries in India and internationally.Business: Texmaco has three segments — heavy engineering division, steel foundry division and others.The products comprise railway wagons, hydro-mechanical equipment for hydel projects, heavy engineering machinery for shipbuilding and bridge construction. It produces industrial boilers and machinery for oil and fertiliser sector, machinery for textile mills, boilers, super heaters, economisers, chimneys, pressure vessels and equipment for chemicals, paper, cement, coke oven and iron & steel industries.Its prowess also lies in coal and other solid material handling and conveying plants and railway rolling stocks etc. The steel foundry division caters to castings for railway equipment, sugar machinery etc.
Texmaco derives a major portion of its revenues from large-scale contracts for wagons. Rolling stock accounts for more than half of its revenues and is a steady cash generator. Texmaco is the largest wagon manufacturer in India, enjoying a 25% market share. A leader in commodity specific wagons, it has a capacity to manufacture over 7,500 wagons. Texmaco in 2007 formed a 50:50 joint venture with United Group for the biggest railway hub in West Bengal and more are on cards.
Hydro mechanical equipment comprising penstock, trash gates, sluice gates and hoists contribute 8-10% to revenues. Process equipment such as low-pressure boilers contribute 5-6% to gross revenues.
The steel foundry division contributes 17-18% of gross revenues. Texmaco has a steel foundry for manufacturing bogies and couplers. Texmaco is also focusing on exports. The hydro mechanical equipment and structurals have been key contributors to the export revenues.
Investment rationale: The opportunities offered by Indian Railways are immense. The 11th Five-Year Plan has proposed a Rs 2,30,000 crore expansion for the Railways. Demand for wagons is on the rise from both the public and private sector. Rising investments in steel, cement and power sectors have added to growth in freight despite slowdown. Expediting development of the freight corridor would add to efficiency and, in turn, boost demand for wagons. Mass rapid transport system including electric multiple unit and metro railways are expanding.
Texmaco is all set to exploit these opportunities and has entered into tie-ups with several multi-national firms. Texmaco has a JV with end-to-end rail technology solution provider United Group Ltdfor manufacturing hi-tech wagon and locomotive railway frames. The work on hi-tech high-payload steel wagons would focus on exports to markets such as Australia.
It would manufacture 1,000 wagons to start with, and aims at an income of Rs 400 crore. The JV will also manufacture locomotive bogie frames. Texmaco has also forayed into manufacturing of metro coaches. It had been shortlisted for the upcoming Kolkata Metro Rail project.
A greenfield plant for manufacturing metro coaches at a cost of Rs 200-300 crore is also planned. Texmaco has raised Rs 170 crore through qualified institutional placement route and the entire amount will be spent on new projects. The metro and EMU project is expected to take off by the next financial year.
Texmaco has an order backlog of around 5,500 coaches. It is participating in tenders floated by Indian Railways, which plans to procure 18,000 wagons in 2009-10. A tender for 5,862 wagons was floated in July 2009 and more are expected in the third quarter. Texmaco will get some share in these tenders, and benefits of added orders would accrue in FY11E.
Hydro mechanical equipment offer opportunities, however, hydro projects have long gestation periods. Order-book thereby remains stagnant at Rs 200-300 crore. The benefit to profitability from these is expected to be visible in next 2-3 years.
Concerns: Major impetus to growth will be provided by wagon procurements by Indian Railways. Any deviation in procurement policy by Railways or delayed procurement can affect Texmaco’s estimated revenues.
Valuations: Texmaco reported a topline of Rs 183.40 crore during the last quarter, a decline of 6.82% over the same quarter last year. However, reduced raw material costs pushed operating margins up 98 basis points. Net profit at Rs 20.55 crore saw a slight decline year-on-year over the Rs 22.82 crore posted in the same period last year. Texmaco has a strong order book that is expected to grow well looking at the increased procurement targets by the Railways. Increased activity in the metro and EMU projects as well as freight corridors, all offer greater opportunities for which Texmaco is gearing up its capacities and engineering prowess. Stock is thereby a good addition to portfolio.
