Texmaco Rail & Engineering Limited (TEXRAIL) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Welcome to the Texmaco Rail & Engineering Limited Q3 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now hand the conference over to Mr. Navin Agrawal, Head, Institutional Equities at SKP Securities Limited. Thank you, and over to you, sir.

Good afternoon, ladies and gentlemen. It's my pleasure to welcome you to this earnings conference call on behalf of Texmaco Rail & Engineering Limited and SKP Securities. We have with us Mr. Ashish Gupta, Managing Director; along with Mr. Ravi Varma, VP, Corporate Affairs and Company Secretary. We'll have the opening remarks from Mr. Ashish Gupta, followed by a Q&A session. Over to you, Mr. Gupta.

Good afternoon, and I welcome all the investors and shareholders in the investor call. Yes. So let me start by summarizing the financial performance of the company. Basically, we ended the quarter with almost INR 480 crores turnover with an EBITDA of around INR [ 45 ] crores, compared to a gross revenue of INR 463 crores in comparable quarter last year. And there is a slight drop in EBITDA, which was INR 54 crores last year. This year is INR 45 crores. So this is on the financial numbers. The 9 months up to December, gross revenue is INR 1,196 crores and EBITDA of INR 130 crores, compared to revenue of INR 1,100 crores and EBITDA of INR 85 crores, which was last year. So our first 2 quarters were quite bad because of COVID, oxygen shortage. There was a lot of problems due to, I would say, climate change because of excess rainfalls. The entire city was [ flooded out ], which impacted operations. Then there was a very unique situation where the only supplier of rail wheels, the Indian wagon industry went down to 2 months and the entire industry suffered for 2 months where we could not produce enough. So there was, in a way of speaking, very, very difficult 3 quarters for us, we are beyond our control, but still, we have been able to do a lot of work within our various divisions to improve the performance. Also, we are all aware of the impact of steel prices and various commodities, which has been impacting all the industries very adversely. So we were also not untouched by those type of increases. So this is, in a nutshell, as to what happened in terms of the operating performance across various divisions. So this is as far as [indiscernible] manufacturing is concerned. Then if you look at our business of EPC, which is [ wide spread ] currently. There were disruptions earlier in the year because of COVID, we had to demobilize the sites. Mobilization of sites happened, and then we had a very good quarter this year. Last quarter was very good. We touched almost INR 200 crores revenues on the EPC business. So it came back really strongly, the entire EPC business. Steel Foundry is, a lot of orders we have for exports, but impacted by shortage of containers as you're all aware, the shipping prices and shortage of containers is impacting all the exporters. But we had a good overall performance in the company. Going forward, the budget has been extremely encouraging. Very, very encouraging budget and we see a lot of traction already in the market in terms of what's happening with the current inquiries and what Railways is going to order. And so we see a lot of announcements, which have happened. There's a very large outlay for CapEx, not only for Railways, but also for other infrastructure segments, which is further going to actually drive investment into Railways. So we are very upbeat about the announcements made in the budget. So this is a very small summary of what we have been doing in terms of the operating performance and a very slight -- small glimpse of what the outlook for future looks like to us right now.

[indiscernible] that's it from our side. We can now open for the question and answer.

[Operator Instructions] The first question is from the line of Pankaj Rawal, Ace Lansdowne.

So my question is, sir, can you think of any long-term [indiscernible] quarter-on-quarter guidance. So for the next couple of years, do you [indiscernible] how much will be revenue and the margin guidance? And my second question is -- there is -- on high receivable levels. So any reason for that? And what are the steps taken by company to control it [indiscernible] working capital cycle?

I did not get the second part of the question.

Sir, the receivable levels are [indiscernible]. So any specific reasons for that? And any steps taken by company for controlling it?

You're talking about debtors or debts?

Debtors, debtors, receivables.

So I'll take both the questions simultaneously. So on the first one, in terms of outlook, I just informed a little bit earlier that we are expecting very large orders from Railways and the private sector. And this is a really large capital outlet. And I think there should be very strong volumes for the wagon industry. And also the plans which have been announced for various Metros and Railway expansion should be a very strong demand for the EPC business also. So that is what -- as far as the demand is concerned. If you look at the debtors, we have a lot of projects which have been continuing for a very long time. Because in the EPC space, we have a lot of projects which are extended up to 8 years, 10 years, et cetera. And so those projects typically have these issues with payments and receivables. So this is normal in long term -- with projects with large gestation period. This is something which is not really abnormal, but we are making efforts to bring it down to reasonable levels.

Okay. And any guidance on margin, EBITDA margin and what the sustaining EBITDA margin going forward?

I don't think I can share that in an investor call like this because [indiscernible] not permit.

Okay.

But I would say that even if market looks good, we are doing a lot of work on cost reduction. We have appointed external consultants who are working [indiscernible] now to improve performance. And so we expect to improve our margins going forward. So that is what I can tell you.

Our next question is from Subrata Sarkar with Mount Intra Finance.

Sir, can you give a breakup of each segment order book, like what is current order book vis-a-vis maybe 12 months back, sir? And out of which, like how much have we executed in last 12 months?

So our current order book, I will first start with the gross level order book. The gross level order book is close to INR 2,800 crores. Out of which, if you go to segment-wise, so Steel Foundry is around INR 150 crores. The Rolling Stock business is INR 570 crores. The Hydro Mechanical Equipment business is INR 350 crores. And on EPC, our order book outstanding is close to INR 1,500 crores. So we started the year with an order book of approximately INR 3,400 crores. We are back to INR 2,800 crore order book, and we expect to go very closer to the order book position of last year as we close Q4.

I'm just trying to know like EPC, current now, we have got INR 1,500 crores order book. So if you take vis-a-vis last 12 months, so what was the order book and out of which how much we have executed in last 12 months?

Okay. So if you look at our EPC business, we have a total order book of INR [ 1,530 ] crores. And last year, we had approximately the same level of order book. And this year, execution has been just prolonged. It has been -- just give me a second. So this year's execution has been approximately INR 400 crores in the 9 months.

Okay. So we -- sir, let us assume that we have got new order of INR 400 crores in last 9 months, and we have executed around INR 400 crores. Is it...

Between INR 300 crores to INR 400 crores. These are approximate numbers. If you want, I can give you the...

Don't want, sir. I'm talking about approximate number only.

Yes. So we have got new orders also, yes.

Sir, can you throw some light like what is the current debt situation as well as what will be the working capital -- net working capital situation, sir [indiscernible]...

Yes, I will -- our current debt is approximately INR 700 crores, out of which -- INR 675 crores, out of which long-term debt is INR 25 crores. Balance is all tied up in working capital.

Okay. Sir, like now we have done the rights issue, and we have repayment partly like ICD or -- ICD. So now our balance sheet is -- relatively have more strength. So are we looking for like replacing this debt with some lower cost debt, particularly given the environment like now -- still now interest rate is quite low?

Could you repeat your question, please?

No. Sir, I'm just asking, sir, now we have done our right issue. So now some fund has come into our company. And because of that, sir, our debt -- working capital debt has also come down to some extent. Now residual debt which we have, like it is like around 14%, 15% of cost [indiscernible]. So are we thinking of replacing that with some low-cost debt, sir, which will help us to save the interest outgo?

No. See, most of the debt is with the bank. So we are already in a good interest rate. And earlier, we had high-cost ICDs, which have mostly been replaced.

Okay. So now what will be our current cost of working capital or total debt, sir? How much will be the interest rate for that, sir, yearly interest rate or cost of funds, sir?

I will tell you the interest expense we have. The finance cost is already published, is around INR 25 crores per quarter. So this will go down from next quarter onwards, because of the rights issue.

Okay, sir. Any ballpark number, sir, how much it will save cost now from next quarter onwards, sir?

So I would say the reduction because of rights issue. When the interest cost would be in the region of approximately, I would say, INR 12 crores to INR 15 crores, so on a quarter-on-quarter basis around -- you can expect [indiscernible] crores of reduction.

Sir, just one understanding, sir, like for DFC, we require like a flat wagon. So are we into that business, sir? And if so, then what can be the opportunity size for us, sir?

Which type of wagon are you talking about?

Sir, for DFC, sir.

Okay. Okay. So for DFC, typically 2 different types of wagons will be used for carrying containers. And we see a lot of demand from the market right now already. Not only [ Concor ] but other private sector players in the container train operator space are ordering a lot of these rakes, because sort of freight [indiscernible] and moved faster on rakes. So that's already happening. And we are -- we also noted a lot of orders for these wagons. And there is going to be a very, very good, robust demand for [indiscernible].

Okay, sir. Perfect. Sir, now one question on the defense side. We had some -- Yes. Sir, just update from your side, sir, our Bangladesh -- Agartala-Akhaunt project, is it complete, sir? Or is it like -- what is the status, sir?

The likely -- we should be able to finish the project next quarter.

Okay. In this quarter, sir, we will be able to finish it, sir.

Next quarter. Next quarter.

Next quarter, okay. So sir, like you were talking about 3, 4 projects in Bangladesh. So apart from this, which are the large projects, sir, and what will be the order sales there, sir?

No, there's only one more project in Bangladesh, which is another track linking project between [indiscernible], which is around INR 450 crore project. And this is -- this project is slightly delayed for various reasons like land access, corona, et cetera. So we are currently negotiating a revised completion time schedule for the project with the Bangladesh Railways.

So when we are expecting to complete this project, sir?

End of 2023.

Okay, sir. Okay. Okay. Just -- since it's an international project. So like whether the payment terms and all those things, whether it is favorable to us, sir, like we have been able to -- or a major part of the receivables are related to this project.

No, these are all Indian government-funded projects, either through a grant or through [indiscernible] of credit business. So those issues are not there.

So there is no receivables issue on that. Sir, what is our total receivable in this case, sir?

Total receivables. Total trade receivables are around -- it's around INR 630 crores.

Mr. Subrata, this is the operator. If you have more questions, please join the queue afresh. Our next question is from Vikram Kotak with Ace Lansdowne.

My question is the broad strategic guidance or direction of the company for, say, over the next 3 years since you took over as CEO and MD for -- in the recent times. And we've seen in the past because of the government orders and the market situation, the numbers are very lumpy, either lumpy or either you have a lot of volatility in the EBITDA and margins and all that. So how do you see the, say, glide path over the next 3 to 4 years? What are the key strategic priorities of the company in, say, next couple of years or maybe 2, 3 years?

Wonderful question. I think, as you said, lumpy and patchy. And for various reasons beyond I think the last 2 years have been lighter for most of us. But with this new thrust on investment and government actually is -- actually is looking at a 3-year plan and the 5-year plan, which is quite robust. So I would say that would form a very, very solid base. And that should give a very, very stable operations to the factories and to various businesses. Over and above that, we are very focused on the export market now. So we have now bagged 200 wagon orders from Africa, 3 countries. So we are actively strengthening our design capability to be able to actually tap the new frontiers, basically, which is going to be Africa for us. Very, very focused on Africa right now. So in terms of product strategy, I would say we are trying to create a niche and try to rationalize our other product mix, getting into new designs to cater to the new customer requirements. So that is something we are doing. And so that is as far as the Rolling Stock is concerned. Our Signaling, we want to grow the portfolio significantly. So we are actually in the process of streamlining our operations in the sense that we had a lot of very, very old projects running for years together, and we are actively going to form a team, pursuing the teams to close all these projects [indiscernible] organization -- organizations bandwidth could be freed up to do more value-added work and get more contracts. So these are 2 definite areas. On Steel Foundry, we are restructuring our geographical portfolio in the sense that we would like the factory in Kolkata to focus only on export market, which is very good, very lucrative because in [ your system ] also, a lot of investments are going in. And you've only certified [indiscernible] supplier from India actually for -- for the Steel Foundry material which gets into Railways. And the Urla plant would be focused on the basic castings, et cetera, for wagons. Then on Bright Power and -- sorry, the Railway electrification and EPC business, I already told you, we are now looking at getting more and more smaller contracts to build the order book and also to build credentials. We are very focused on getting more work in the Metro space, typically the ballastless tracks. And we're [ anticipating ] in a lot of tenders. So we want to significantly -- we have corrected the order book in terms of -- on the EPC side in terms of old contracts going out of the system and trying to get into new ones. So there will be a lot of focus for the next financial year to build a very strong order book for ballastless tracks and Signaling business, as far as the Rail EPC business is concerned. We are also trying to increase our order book size for the Hydro Mechanical Equipment and [indiscernible] also, we have been -- we have been rationalizing the portfolio, getting rid of old contracts in terms of finishing them and clearing up things. So the cleanup is -- has been quite good, and we have been able to close a lot of old issues. And going forward, I would say, in the EPC business, what we build as order book next year would show in results a year later. So the next year's focus is typically to build an order book of excess -- much in excess of what we currently have.

Right, right, right. So I just have one more question on the same lines you narrated very nicely. What are the preparation as organization you need to do in terms of, say, technological advancement or manpower or beyond the execution, and I'm not going to execution, but in terms of building a working capital because if you have large orders, you will need a larger size working capital? So what are the 2, 3 top priorities or company to go into the next level of technology? What are the areas you think are the immediate priorities in which you are building up?

So let us look at the manpower. So we have a very good new team now. We have hired a lot of youngsters. And we are now restreamed the organization for future. So typically, industry used to deploy nontechnical workers, most of them trained in-house, but now we are actively pursuing employment of engineers and deployment on the short floor, trying to change the production side to build a cadre of people who can do more technologically advanced products. We are building a good design center now, and we already procured all the software, which is required to design wagons. We are in the process of strengthening our design [ sale ], recruiting more people, even looking at the possibility of tying up with design houses, which could help us with support on new wagon designs. Thus, the new wagon design policy of Railway [ station ] is completely liberalized now. So we can actually design whatever we -- not whatever, but we can design good wagons, get them independently certified and put them on tracks. So in terms of -- this is one part in terms of the Rolling Stock and the Steel Foundry business where we are strengthening design and research capabilities because as things open up and liberalize, we should be able to leverage our design capabilities 3 to 5 years from now, Because these capabilities would take time to build. On the EPC side, we have had a very significant [ reduction ] in our headcount in the last 2 years, close to 40% people, have been rationalized primarily on account of [indiscernible] projects. We are also trying to [ chase ] a mix of people there. In terms of the technical skills, we are looking at working with very good outsource -- outsourcing partners and move away from a typical labor supply contract situation. So yes, so those are the type of things we are doing. And these are important things to do, but the results should take time to show.

We have the last question for the evening from the line of [ Tushar ] with Ratnabali Securities.

And sir, like still now we have some plans. So any development on the defense side, sir? Or what we are foreseeing in next 1 or 2 years, sir?

No, we are still exploring options and opportunities, but there is no development on the defense side.

Okay, sir. As of now, sir, there is no development. So sir, okay, now onwards, sir, then we are like mainly concentrating on the Rail EPC as well as the wagon side, sir, is it right understanding, sir?

So Rail EPC, Wagon manufacturing, then Hydro Mechanical Equipment and Bridges, and also Steel Foundry business.

Okay. Okay, sir. Okay. So defense, sir, we are not really concentrating right now, sir.

[Operator Instructions] We have the next question from the line of Ritesh Gandhi with Discovery Cap.

Sir, given the large outlay for the capital expenditure expected in this sector, I just wanted to understand how do you see the [ competitive ] intensity playing out in terms of profitability in terms of margins going ahead? Because [indiscernible] the problem [indiscernible] when people have extra capacity, people do it aggressively and therefore, in general, the profitability of these industries typically will hinder. So just wanted to understand how you guys are looking at this.

It's a wonderful question. Actually, you are absolutely right. Industry suffering from a premier issue of overcapacity. The order books that we are looking at right now for the entire industry, we should be able to come out of the situation. And I think there should be healthy competition without actually booking loss-making orders, which most of the companies are doing just to keep the factories on. So while we understand that we can't be profiteering also. So I think the industry should see better and reasonable margins going forward because of higher order loads and better capacity utilization.

Got it. And so effectively, is there -- are you seeing on new orders, which we have seen. Are we seeing a level of this discipline happening from our competitors and ourselves and as new orders are being taken at reasonable levels of profitability?

So if you look at -- if you look at the orders on private sector, so those orders have already been handled differently by the industry and because each -- most of the buyers have their preferred wagon manufacturers. So these are all very long-term relationship-based contracts. So they behave very differently. But if you look at the Indian Railway orders, so the order book is large. The industry behavior is very different, and industry behaves more responsibly and try to make a decent -- not, I would say, try to make optimum profits. These order books are very, very small. So you can understand what happens [indiscernible]. So I think I don't really anticipate [indiscernible] forward because the order books from Railways is expected to be quite large actually. The [ projection ] with Railways has given its 102,000 wagons to be procured in the next 3 to 4 years. That is something which Railways has never done, and that should consume almost the entire capacity of the industry.

Sir, then how much -- if you could maybe outline for us broadly, what's the overall capacity of the industry would be and who -- and -- in terms of the annual capacity?

I would say industry capacity keeps -- there's a lot of capacity, which can be turned on overnight, but the confirmed capacities are close to 32,000 to 35,000 wagons per year, which includes everything, both the private and public sectors. So if the Railway orders are going to be in the range of 25,000 to 30,000 wagons, then you're almost talking of almost a full capacity utilization plus the private sector orders, which normally are in the range of 2,000 to 3,000 wagons minimum every year.

Our next question is from [ Tushar ] with Ratnabali Securities.

Sir, could you please give some guidance on the significant AFC division? Like what are your plans going forward? And what is the current situation right now?

Okay. So on the AFC front, which is the Automated Fare Collection system, we are currently executing one order in the Mumbai Metro. We are now looking at a very -- we are now planning to build an order pipeline, next financial year for the AFC business also because lot of new Metro projects are coming up. And typically, AFC orders are awarded after the construction is almost complete because you have to fit it in on Railway stations and the Metro stations and other stuff. So we will be targeting to get some orders next year. So these are all orders based on competitive bidding. It's difficult to put a number on what it's going to be. But the overall market size for AFC next year should be in excess of INR 1,000 crores. Then we would be the order tenders on which we will bid. That is one part which is AFC. On Signaling, we typically like to do large EPC contracts like the DFCs and all. So currently, we're executing the last phase of the contract in DFC, which is going to take another 2 years to complete. And we have taken smaller orders in various divisions of Railways. And typically, we are looking at right now in the absence of very large EPC work coming up. We are looking at more and more orders, which are typically spread across 12 to 18 months. So that we are able to complete these orders faster, turn the cash around and then be ready for the opportunities as they come for larger contracts.

Okay. Okay, sir. Sir, that was great -- that was a nice explanation. Sir, could you please also elaborate on what -- our EPC division, like what are the current major projects going on and what we are -- we have in our order book going forward?

Okay. So if you look at the major projects going on right now, we are currently doing the [indiscernible] track laying for Bangalore Metro. Then we are doing the signaling and telecommunication network in the Western DFC. There is a project going on for track laying on the Eastern DFC. We have 2 projects in Bangladesh. So these are the larger projects. And then we have a lot of small, small projects, which are typically INR 50 crores, INR 60 crores, INR 70 crores, INR 80 crores, type of projects. So that is how it looks like. Plus, we have Railway electrification projects. These are, again, smaller [indiscernible], 50 kilometers, 100 kilometers. We also got into the maintenance of the OHE systems now. In fact, we are the one of the few companies in India who can actually have the credentials to maintain a complete circuit of 200 to 300 kilometers today. So that is one sector we are looking at very, very aggressively, which is to get into the Railway services of maintenance of OHE, tracks and the network equipment.

Okay. Okay. Sir, just one last question, like could you just give a breakup as to our receivables, like how much of the component is of government or government companies or agencies and how much of this is of private players?

Almost all of our receivables are from government companies, almost all. Very miniscule from the private sector players.

Our next question is from Subrata Sarkar with Mount Intra Finance.

Could you please elaborate on the new wagon design companies, the company's projections with that or what the company plans to do with it?

Okay. So see, the earlier process was that the entire design process was tied up to RDSO and had a very cumbersome and an elaborate process of approvals. And typically, a design approval could take anything between 2 years to 4 years, maybe 5 years also. Now the liberalized policy, wagon manufacturer today could design a new wagon and get it certified through independent [indiscernible]. So -- so that is -- so there's a significant change, which should improve the pace at which designs would happen and get approved. And we would be free to get new international designs or adapt more international designs to the Indian conditions. So that is a significant change in policy.

So do you see any particular sales or particular customer you will be able to cater to now, which you weren't able to cater to earlier?

So I'll give you a very small example. For example, if you look at the movement of cars through trains, these auto carriers. Now with the product mix changing significantly to 58% SUVs. So it's not possible to transport 2 vehicles on top of each other because you needed taller wagon design, which doesn't exist in India. So now we've been trying to do this with a lot of people earlier. Now we can hasten on the entire process. And this is something, which is a latent demand in the market. That is one. Second is various types of wagons for specialized commodities like slag or I would say fly ash, covered wagons, wagons with rotary tipplers. So a lot of possibilities would be there, which will improve the efficiency of operations of our customers.

Okay. So just on last question related to [indiscernible]. So let's say you design a wagon, do you own the IP to it? Or is it exclusive to you? Or is it open for all to make henceforth?

See, currently, the process is that the IP is jointly owned by RDSO and the company, which is designing and anybody applying to use the design [indiscernible] to both RDSO and the inventor.

[Operator Instructions] That was the last question in the queue. Since there are no further questions, I would now like to hand the conference over to Mr. Ashish Gupta for closing remarks.

I would like to thank all the investors first for supporting us for the rights issue. Thank you so much to all the investors. It was very useful. It was a great confidence booster for the entire organization and the employees. So from our promoters, from the management, heartful thank -- heartfelt thanks to all the investors. That is one. Second is, we are working very hard as an organization to improve operations and improve execution. And going forward, as you look at the markets and the spend on infra, I think the key thrust would be to improve the capability to execute and reduce cost and improve efficiency. And that is what your company would be focusing on. Thank you so much.

Thank you very much. On behalf of SKP Securities Limited, that concludes the conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines. Thank you.