Titagarh Rail Systems Limited (TITAGARH) Earnings Call Transcript & Summary

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Thanks, Vikram. Good afternoon, all. We have the management of Titagarh Wagons with us, represented by Mr. Umesh Chowdhary, the Vice Chairman and Managing Director; Mr. Anil Agarwal, Director Finance; and Mr. Saurav Singhania, Group Financial Controller. We'll have initial comments from the management, followed by a Q&A.

So a very good afternoon, everybody. I'm Umesh Chowdhary. I am the CEO of Titagarh Wagons, and I'm joined by our CFO, Mr. Anil Agarwal and Group Financial Controller and Vice President Strategy, Saurav Singhania. Thank you, everybody, for joining this Q3 earnings call of Titagarh Wagons. I guess I had already covered in the last call the updates as far as the post-COVID situation for our industry is concerned. But -- and much of the performance has already been captured in the presentation that has been circulated. But I would just like to give an overview of the business, and rather than repeating the numbers, just give kind of a stock check of the environment. So just as a recap, now the company Titagarh Wagons operates in different segments: one is the freight mobility, which is the wagon business; the other is the transit and propulsion or the people mobility, which is the metro and propulsion business; the third is the water mobility, which is the shipbuilding business; and the fourth is the road mobility, which is the modular steel bridges. As far as the freight business is concerned, the rail mobility business is concerned, the performance has been pretty stable over the last 5 or 6 quarters. Apart from the quarter that was hit by the COVID, we've been able to consistently deliver the numbers that we had anticipated. Post the merger with -- of Cimmco with Titagarh, we have enhanced our capabilities for the freight wagon manufacturer in our plant in Calcutta, the Titagarh plant, where we are trying to make that as the center of excellence for the wagon production. Whereas the Bharatpur plant, while we will continue to make some quantities of wagons there, but small quantities, we will develop that primarily as the defense and the services. As and when it opens up, maintenance services, we'd like to develop maintenance services there and defense business there. The other business, which is the passenger mobility, that is the Pune contract execution is going on very well. The production has already started in our -- for the prototype in our plant in Italy. And we are expecting the first train to be dispatched from Italy in May 2021. We have targeted the first train to be produced in India in our plant in Uttarpara, which is being set up in August 2021. And we want to coincide this with the 75th year of Indian independents as the first Make in India aluminum coach that will be produced. We recently had our design center inaugurated by the Secretary, Ministry of Housing and Urban Affairs in January. We have set up a design center in Hyderabad, which will work very closely with the design center in Italy to indigenize the designs for the railway rolling stock and the metro rolling stock in India, and which will be our big step towards making ourselves Atmanirbhar and towards harnessing the full potential of Make in India. Apart from that, we saw in the budget a couple of days ago, a lot of impetus has been given on the different metro projects all over the country, which we will hope to participate and be competitive. The development of the propulsion business, along with ABB is also going on fine. We expect the prototype to be delivered to -- the prototype to be delivered in about July or August 2021, and thereafter, the series production to end by the end of the -- to start by the end of this year. As far as the shipbuilding business is concerned, we have participated in several tenders where we are very well placed. And while we had executed the previous orders, we are expecting new orders to come our way as and when they are finalized, and we shall report the same as soon as they will be realized in the near future. The bridge business, again, we -- effectively the joint venture, which we had with Matiere, which was then turned into a subsidiary, and we have received our first contract from NHIDCL and from certain PWDs in Maharashtra, West Bengal and others. So that's a business that is yet to pick up great momentum, but we do believe that over the -- we have now an order book of about INR 70 crores, INR 80 crores in that business. But we believe that we will be able to scale up that business over the next year or 2. So that's in effect, the overview. For the defense business, we have -- I just mentioned that Bharatpur unit we would like to dedicate towards defense. So we just got our -- a small contract for about INR 30-odd crores from -- for defense shelters, which the production has just started in Bharatpur unit. We have participated for larger tenders for a similar or equivalent type of defense equipments, and we are pursuing those to be produced in Bharatpur works. So with these few comments and as far as the financial performance is concerned, that is already given in the presentation. I'm most happy to take questions, and I'll try to answer them to the best of my ability. I just want to give a brief overview on the overseas operations. On the overseas side, Titagarh Firema, our Italian subsidiary, of course, started recovering from the aftermath of the COVID crisis and is now slowly -- just when it was starting to stabilize, the second wave hit Italy, and there was the Christmas-New Year vacation. But now the situation is starting to stabilize there. And we were able to ramp up production to some extent in the month of January. But we are pretty hopeful that from February onwards, we should be able to maintain and grow the production there. We do have a decent order book, and there are several tenders in the pipeline where we are well positioned. We are waiting for those tenders to be finalized. So while in December 2019 we had turned EBITDA positive in the company, but due to the COVID crisis, the company has incurred losses. And if you would see that in the current quarter and the current 9 months result also, the Indian operations is -- has done reasonably well. It is -- it has done an EBITDA of more than INR 100 crores in the first 9 months. But the Italian operations continue to lose money, which was primarily accentuated due to the COVID crisis. We are very hopeful that '21, '22, the Italian operations should also become a positive contributor into the company's consolidated balance sheet as far as EBITDA is concerned. And we are also trying to get it net positive, but we are fairly confident we'll bring it back to EBITDA positive in the coming financial year. So with these comments, I would open up the floor to any questions, please.

[Operator Instructions] We have our first question from the line of [ Agastya Dave from CAO Capital. ]

Umesh, can you hear me?

Yes, I can hear you.

Sir, my questions are related to the budget. There are certain things which I'm unable to understand because of this corona effect that we have had on spending. So if I look at the rolling stock allocation last year, they have said in the budget, it was INR 5,786 crores, and the revised estimate is saying INR 2,000 crores. So -- and for the next year, they have allocated INR 6,800 crores. So how do I read this? Will there be some problems with the receivables for this year? And if I adjust for everything, is there going to be a lower net-net expenditure next year? How do I read this? Second question, again, on the budget, during the speech, the Finance Minister is now saying that the DFCC will be commissioned in 2024. So when do you think that ordering will start? And then they have also said that government expects railways to monetize DFCC by selling or leasing, that the side, I really don't know, it was very -- it was lacking in details. So how do you see the DFCC playing out? Because they are already probably 3 to 4 years, maybe 5 years behind schedule on DFCC. So on the domestic side, how do you see wagon demand spanning out? These are my questions.

Thank you very much. I'll answer your questions one by one. And I must, in the sake of full disclosure, mention that the Pink Book, which gives out the details I have not been able to study that as yet. But based on the various interactions that I've had with the railway officials and the limited study of the railway budget that I have been able to do, my answers are caveated by that condition. So as far as the...

Umesh ji, sorry to interrupt you. Also, I am quoting from the expenditure budget, just for your information because if you want to check it. That's from...

I will be getting the complete Pink Book in any case, which is being analyzed at my end, at my office's end. So just to give you a sense that last year the railways had floated in a tender of 10,000-odd wagons. But ultimately, they ended up finalizing only 2,500, 3,000 wagon orders. So probably, what you are talking about the reduction in the total expenditure in the last rolling stock is correlating to that. Our company received a very substantial portion of that order. We got an order for about 1,800 wagons out of this 2,500 wagons that was placed. So we are -- as of now, we are comfortably placed as far as the order book is concerned. What we do understand is that the railways are likely to come out, and they made a wagon acquisition program for the next 4, 5 years. And that is giving a very ambitious target, as you will be aware that there is also a target to double the freight earnings. And doubling of freight earnings cannot happen without a substantive increase in wagons or in rolling stock. So we really do not see that there will be a curtailment in rolling stock procurement because the railways have invested tremendously, even on borrowed money in building up capacity. And if they do not buy wagons, they will never be able to monetize or utilize that capacity. And if they want to utilize the capacity, there is -- the only logical step for that is to buy more wagons. So we understand from our sources that a new tender is getting finalized, issuance of a new tender is getting finalized. And it is not going to be a bad quantity that they intend to procure. As far as the Dedicated Freight Corridor is concerned, to the best of my memory, she said that it will be operational in phases from 2022 and will be fully commissioned by 2024. So we do know that there are phases or there are parts of the DFC that are getting commissioned, and the work is going on pretty expeditiously. Of course, during the COVID, there was a bit of a slowdown, which is -- but understandable. But how the wagons will be procured, how the private sector will be brought in into the DFC, it is something which is not yet fully clear. But what we presume is that the infrastructure will be given by the railways. And the wagons will be procured by private players like in the Wagon Investment Scheme or the Container Train Operator Scheme or the Specialty Freight Train Operator Scheme, and they would be allowed to track -- to take the traffic or market the traffic. We believe that this will be much more cost effective. And I would say, forward-looking step on part of the railways to do so because the efficiencies of the private sector with the infrastructural backbone of the government will be able to get the maximum results. So the DFC is a reality, whether it is coming 1 year here or 1 year there. The wagon demand when so much of thousands and thousands of crores have gone into creating that infrastructure, obviously, that infrastructure can only be utilized if there are wagons commensurate to that.

[Operator Instructions] We have next question from the line of Sreeram Ramdas from Green Portfolio.

Two questions. I'd say it one by one. So like you just mentioned, the first delivery for the Pune projects, Pune Metro project aren't scheduled until May. But we are seeing revenues being booked under the Italian subsidiary. So I want to understand where this revenue is stemming from? Is it from the Catania project? Or are we getting milestone payments for the Pune project? How is it right now?

Sure. Pune project is only one of the projects that the Italian subsidiary has. The total order book of the Italian subsidiary has at about 200 -- about between EUR 250 million to EUR 300 million, out of which Pune is only about EUR 15 million to EUR 20 million. So the Italian subsidiary revenues are being booked by the different projects, whether it is TrenItalia, whether it is Catania, whether it is Metro Campania or SEPSA, et cetera, so those are the various projects that Italian subsidiary is executing.

All right. Understood. And sir, secondly, what is the delivery schedule for the Pune project and the Catania tender, like how much percentage of the work have we delivered in financial year -- this financial year? And how much do we intend to deliver in the next financial year, financial year '22?

As I mentioned, that prototype for Pune will be delivered by May this year from Italy. And the first train from India will be delivered by August of this year. And so we have not yet delivered any train for the Pune project. The same is for Catania. The Catania prototype is likely to be delivered, I mean scheduled according to the contract. It is scheduled to go by September '21, but we expect that we should be able to deliver it a couple of months ahead of schedule.

Okay, sir. Brilliant. Sir, just 1 more question, if you can take it. I just want to understand the partnership we have with ABB. So what progress have we made? And will we see this new propulsion systems starting to generate revenues in maybe 12 to 18 months' time?

Yes, sir, I just mentioned that in my opening comments that we are expecting the prototypes along with ABB to be developed by August, September this year. And by end of this year, we should start production for the propulsion, which is in collaboration with ABB.

[Operator Instructions] We have next question from the line of Nishit Shah from Aequitas Investments.

Sir, I want to understand the tender pipeline for wagons for us?

Sure. The tender, sir, have not yet been floated as yet. As I mentioned a few minutes ago that normally tender floating is followed by -- after the budget. So now that the budget reallocation has been done, we expect that the tenders should be floated over the next few weeks. We cannot give the exact quantity because it's not to been made public, but we do understand that the railways are planning substantive increase growth in the traffic targets. Therefore, we expect that the wagon quantities to be procured by the railways should be healthy. Having said that, as far as private sector is concerned, that's another positive kind of a feeler that we are getting from the private sector, which has started finalizing orders. We have booked some orders during the last quarter from private sector and which is very heartening to see because during the COVID period, the private sector wagon demand had completely dragged down. And that has come back again in the last 1.5 months or 2.

Okay. So sir, is there any Coal India tender out?

No, there is no tender out from Coal India. As we understand, Coal India is giving the mandate and the money to the railways to buy the wagons for them...

Okay. And sir, are there any execution challenges in wagons division now, like wheel sets or any other? Or everything is resolved?

No. Wheel sets no longer is a challenge. Rail Wheel Factory Bangalore has done a phenomenal job in ramping our production and they have -- they are one of the cost-competitive producers of wheel sets in the world now. The only limited challenge now, which I hope is temporary, is the continuing increase of steel prices and that does bring about a little bit of a concern for the industry, although majority of our orders are with the price variation clause, but there is always a lag between the price variation that we get from the client and the purchase price of steel because our price variation is linked to the wholesale price index, which moves at a lag of 6 to 8 weeks. So we do hope that with the government addressing the issues on import duties and all of that, the rampant increase of almost on a weekly basis of the steel prices will be checked.

Okay. And sir, I read somewhere that there were some shortages of wagons for logistics purpose. Is that true that the demand was so strong?

Yes, the demand had suddenly picked up. The railways did not anticipate the -- this is again what we've also seen from media reports and based on various discussions that we've had. That covered wagons had become very, very scarce. And the railways did not expect that suddenly, the demand for covered wagons will pick up in such a healthy manner. But then the railways was quick to finalize orders. And as I said, we received some orders, and we've already started production for the covered BCNA wagons also.

Okay. Sir, what size our order book as on December or latest, if you can share for India and consolidated basis?

Sure it's given in the presentation, but I will just request my colleague Anil Agarwal to give it.

Yes. So it's around INR 5,100 crore, and it's more or less equally distributed between India and overseas.

Okay. And sir, wagon dispatch numbers for the quarter?

On a -- for the first 9 months, we have dispatched something around 2,000-plus wagon. And the first quarter, of course, was very, very low. And it's more or less equally distributed in the second 2 quarters, more or less.

Okay. And sir, out of our order book, how much will be from private?

So about 80%, 85% of our wagons are now from railways and about 15% are from the private. But this figure keeps on varying based on orders being finalized by private sector because private sector unlike the railways do not go for a mega tender. They finalize orders on an ongoing basis.

Okay. And sir, private will be more of fixed and railways would have a price variation clause, right?

I didn't get your point, sorry?

Railways orders will have a price variation clause and private orders would have a fixed price contract, right?

That's right, most of the cases.

Yes. And sir, last question from my side. So do we still target this debt -- net debt-free target by March '21 for stand-alone Titagarh?

For stand-alone, our net debt has already come down to around INR 65 crores at the end of December. And if you see from '19 -- 2019 March, the net debt was?

Around INR 300 crores plus.

So more than INR 300 crores. So there has been a significant reduction. We are still trying. But of course, there have been challenges this year, as everybody knows. But our endeavor is still to target to get either become debt-free or near debt-free on the Indian -- net debt-free on the Indian operation by the end of March.

[Operator Instructions] We have next question from the line of Vipin Goel from ICICI Securities?

Hello. Am I audible?

Yes, you are.

Sir, sometime back, we had signed in a technology agreement that gave us entry into the LRV segment. So that was under the Metro Coach segment. So have we seen any orders there? And if any, then what's the outlook there that you see?

So the LRV segment agreement that we had signed was to acquire the design rights for platform, which is basically Metro Lite. As you would have heard in the budget speech of the honorable finance minister, she announced that the next-generation of metros for smaller cities would be introduced, which would be Metro Lite and Metro Neo. So the designs that we did acquire was Metro Lite design. The tenders have not yet been issued for these, but we understand that there are several Tier 2 cities in India that will be going for Metro Lite. And the acquisition of this design rights will enable us to compete in those tenders.

Okay. Okay. And then, sir, on the private wagon side, you commented that 15% of the current mix is private.

That's a ballpark that I have given. Not exactly, but -- yes.

Yes. So broadly, just what's the demand that you're seeing there? Any particular players or any large orders that you are seeing from this side?

So there are a number of companies that are finalizing orders. I mean all the private orders -- the only segment in the private business that has not seen new orders is the Container segment, which is probably because of the reduction in the Exim traffic. But apart from that, there is a healthy traction that we have seen in the WIS, in the AFTO, that is the automobile wagon. The steel companies or the cement companies are doing very well now, so there we have seen that they are coming up with renewed demand for buying wagons. So this is -- the private wagon business is something which does not work on great deal of future visibility. The tenders come up based on requirements. And normally, the cycle times of tender coming up, to ordering, to supply is much shorter than that of Indian railways cycle.

Okay. Okay. And then, sir, just this one on the navy side. So earlier, we were like quite positive on wagon orders from the navy. Especially, I think we are in the special vessels segment that we cater to within shipbuilding. So any activity there concerning the positive budget?