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

Ladies and gentlemen, good day, and welcome to the Q3 FY '22 Post Results Conference Call of Titagarh Wagons Limited, hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rushad Kapadia from ICICI Securities. Thank you, and over to you, sir.

Thank you, Rutuja. Good afternoon, ladies and gentlemen, and welcome to the Titagarh Wagons Limited Q3 FY '22 Results Conference Call. We have with us from the management: Mr. Umesh Chowdhary, Vice Chairman and Managing Director; Mr. Anil Agarwal, Director of Finance; and Mr. Saurav Singhania, Group Financial Officer. So without further delay, I would now like to hand over the floor to the management. Thank you, and over to you, sir.

Thank you very much, Rushad. Very good afternoon, everybody. My name is Umesh Chowdhary. The -- I already started with the opening remarks on Friday when there was a problem with the network. So I would probably just give a very, very quick overview of the performance of the Q3 for the company, and thereafter open up the floor for any questions. So Q3 FY '22 was an interesting quarter for us. On a stand-alone basis, this is the highest-ever revenue that the company has clocked in the history of its existence. In terms of the 3 business segments, I will just give a very quick data points or the highlights of the 3 business segments that we have and the freight wagon we continue to do as per expectations. The new requirement for freight wagon is likely to be very healthy because the railways have for themselves a very ambitious or a very regionally freight loading target. If this target has to be achieved, then the wagon requirement at the other procurement target has to be enhanced substantially going forward. And the company is in a very good position to be able to cater to that demand. In terms of the transit and the propulsion business or the passenger mobility business, the company's first train has been successfully commissioned which -- in Pune Metro, which was supplied from our plant in Italy. The second train also has left, and the third train from Italy would be dispatched within this month. In the first train that is being produced in India is in advanced stage of production, and we are expecting that in this quarter, we will start the supplies of the train manufactured that is in Q4. The trains produced in our facilities in Calcutta would start getting supplied to the Pune Metro. In addition to that, the company has participated in some other metro vendors and also in propulsion tenders where the propulsion tender company is well placed and is expecting additional orders. We are also expecting to start the supply of the traction motors and the traction converters from our facilities in either this quarter or the first quarter of FY '23, which is going to be a very important milestone for the company because it would move the company into a high-technology area of propulsion electronics. In terms of the third business segment, that is the SBD, which shipbuilding, bridges and defense, the company acquired a facility, asset and infrastructure of Precision Shipyard from a particular bank. And this is very strategic for the company because it gives us access to infrastructure of the outside of the Howrah Bridge, which complemented with our existing facility, will enhance our shipbuilding capabilities much further. So this is, in a nutshell, as far as the company's performance in India is concerned in operation. The overseas operations and the Italian operations, there are 2 or 3 important data points, which I'd like to share before I close my opening comments. The first one is that the legacy contracts that the company has been facing are coming to an end. We expect that within the Q4 of this year, maybe a little bit of spillover to Q1 of next year, we will complete all the legacy contracts, of the onerous contracts that we have in the Italian subsidiary. The company signed a very interacting contract for the Rome region, Lazio region, for about EUR 300 million for trains that will be manufactured in our company, design and manufactured by us. This takes up the order book of the Italian subsidiary, including the framework contracts that we have, to about EUR 500 million. And EUR 500 million would be of the new order that is not of the legacy contract, not of the onerous contracts. And therefore, the visibility going forward for the Italian subsidiary looks good. These are, in effect, the opening comments, and I'm happy to take any questions that you have. Thank you.

[Operator Instructions] The first question is from the line of Sreeram Ramdas from Green Portfolio.

First question is on the margins in the shipbuilding segment. This time, it has been quite unusual. It is I think around 50%. So what's the reason behind this? Is it -- I'm sure it's not sustainable. But how do you see the margins going forward, considering the fact that we have acquired another shipyard?

Sure. So on a blended basis, our margins in India as we have always maintained that EBITDA margin of around 8% to 10% is what we are expecting. And that is across the business segments, the 3 business segments, on a blended basis. The margin variations can happen on a contract-to-contract, on a quarter-to-quarter basis in our business. And this is primarily because of some spare sales that we booked during the quarter where the margin can be higher than the normal construction margin. But in terms of the margin guidance, again, as I said on a few contracts, maybe we can get a couple of percentages higher or a percent -- or a couple of percentages lower. But on a blended basis, 8% to 10% EBITDA is what is strategically what we look at when we are pricing our products.

Okay. And secondly, nearly 34%, 35% of the Dedicated Freight Corridor, DFC, has been operational. And has the railways released any new tenders, in the operating comments you did mention. And if possible, are we L1 bidder for any of these tenders?

Sure. So there are a number of requirements that are coming up, not only for the Dedicated Freight Corridor, but also, the government has announced that they would be looking at doubling their freight loading in the next few years. That would essentially mean much more number of agents that they will have to procure or acquire. And I have always maintained that the railways have spent a lot of money on capacity creation in terms of investing in signaling infrastructure, track laying, et cetera. And now they will have to invest in capacity utilization, which means more and more rolling stock. So there will be a demand, which will come up. There has been -- we have been expecting this demand to come up over the last few years, but the railways have focused more on the infrastructure development in the last years. But what we hear from the meetings that we've had recently with the railways and from the announcement that we have seen that there is emphasis being given on growing the revenue or the freight-loading targets. And that means that there will be an enhanced demand for wagons. In terms of our being L1, these are regular tenders that keep on going on. So we would not like to mention anything on our interstate position right now for competitive reasons until and unless the tenders are finalized.

Okay. Makes sense. And sir, last question is on the propulsion system with ABB that we're doing. So until when, I mean, can we expect us to get into regular production? I mean I know we're going for a couple of tenders now. But when do you think that we can get into the regular production? We have a good set up manufacturing base to get into regular production. Any time line on this?

Yes, I mentioned that in my opening comments. It will be in Q4 of '22 or Q1 of '23 that the regular production would start. So the facility creation has almost been completed. We have almost all the facilities already installed. They are under commissioning and testing. So we are expecting that in the current quarter or the next quarter, we will start the production for both the traction motors as well as the propulsion systems.

Okay. Great results. And as always, you have followed up with the previous guidance and all the ventures that you did, it has come in line. Great job.

Thank you very much.

The next question is from the line of [ Sanjay Obdharami ] from Envision Capital.

Sir, what is the total order book currently we have? And what is the revenue guidance for FY '23? If you can highlight some things on that.

Sure. So as far as the order book is concerned, our Indian operations have an order book of about INR 2,500 crores. And the consolidated order book that we have between India and the gain in subsidiary is about INR 7,000 crores. In terms of revenue guidance, we have never given forward-looking numbers. So we would refrain from giving any revenue guidance for the FY '23. But what we would like to -- what I would like to say is that we have 3 clear distinct verticals that we have. And that's how we've structured the management of the company, the operations of the company. Everything is based on that. And that's how we've also now started segmental reporting, so that the investors can have a clear vision as to how the company and all the 3 business verticals of the company weigh. We believe that the freight wagon, freight vertical should continue to do in the same pace and the same manner that we have been doing. The real growth should come in from the transit and propulsion as well as shipbuilding, bridges and defense. As far as the transit and propulsion is concerned, we will start seeing the revenues coming in, in FY '23. In the shipbuilding, bridges and defense, it will although be smaller in FY '23, but we believe that in the next 2 to 3 years, the revenues will slightly increase. So all the 3 business verticals are going to be giving us to their full potential in the next 2 to 3 years. And that's how we are targeting internally. So if I could just give you a data point here again, which is going to be relevant to understand how the company has been moving. So if we put the company into 3 years' perspective, in the year '17, '18 and '19, the company did an average revenue of about INR 350 crores, INR 350 crores, Indian operation. '20, '21, '22, the average revenue has been about INR 1,000 crores. And if you look at the 3-year horizon thereafter, we are expecting that we should be able to get to the next level because of all the 3 business segments coming in. So I hope that answers your question.

Yes, sir, I'm -- this was clear. And so I just wanted to confirm that Indian order book, you mentioned that it is currently INR 2,500 crores, and Italy and Indian combined is INR 7,000 crores. Is this correct?

That's right, including the framework contracts that we have released.

[Operator Instructions] The next question is from the line of [ Vasily ] from Edelweiss.

Congratulations on a great set of numbers. Sir, on the order book front, I just wanted to clear that the INR 7,000 crores, does that include the EUR 280 million order that we got in January?

Yes, it does. It does.

Okay. Okay. And so, sir, what would be the [ list ] of order book of -- like out of the EUR 7,000, what would be the wagon order book is specifically what I'm concerned, of the total order book?

We've given in the investor presentation that has been uploaded on our website also the breakup on business-wise order book for the Indian operation. I would like to mention that the ordering for FY '22, '23 is yet to be finalized. So the order book for the wagon is going to undergo a change once the tenders are fine with it in -- maybe in the next couple of months.

Okay. Okay. And would it be possible to give us the [ list ] of the wagon order book between public and the private sector?

We have already given the disclosure to the maximum extent possible without compromising on competitive landscape. So that has been given in the investor presentation in -- which has been shared with all of you.

Okay. Okay. Got it. And sir, could you give us the debt figures in the India business and the Italy business?

Sure. In India, we are -- on the long-term basis, we are net debt-free. On short term, we continue to use the working capital facility as and when required. So there are quarters that we end up using the working capital facilities in India. But on the next long-term debt basis, India is now debt-free. In Italy, we have a total debt of about EUR 80 million.

Okay. So...

EUR 80 million, EUR 85 million, approximately.

Okay. Okay. Okay. Got it. Got it. EUR 80 million, EUR 85 million. Okay. And sir, if you can give me how many wagons were dispatched in the third quarter and YTD in FY '22.

I am joining the call from Europe, so I'll request my colleague, anil Agarwal, to give this number.

Yes. So roughly around 3,000 wagons are supplied in the 9 months. And in this quarter, it was around 850 wagons.

850 wagons. Okay. Great, sir. And sir, now that DFC wagon ordering has started, so how do we like to approach that? Like what are our views for the DFC wagon ordering?

Our views remain constant. We believe that not only for the DFC but for the regular group also. So we don't see DFC as a separate entity altogether, but we see that it is enhancement of the overall capacity of the railway. And that's what I mentioned earlier that capacity has spent -- sorry, the railway has spent a lot on capacity creation, and now they will have to utilize that capacity in order to service the investment that has been made. And for that, the natural corollary is going to be that they will require more capacity. So we are now waiting for the railways to come to that stage where they are able to achieve the trade coverage that they have set for themselves by acquiring more of that.

Okay. Okay. And sir, on the [indiscernible] performance, like can you share that about now it has done EBITDA positive? And how is it likely to go ahead?

So as far as the Italian operation is concerned, I just mentioned that we are concentrating on executing the legacy contracts. So we are fairly confident that Q4 of the current financial year and maximum Q1 of the next financial year, we will close all the old contracts, which are the onerous ones, which are the loss-making ones. Thereafter, we are going to be operating or executing only the new contracts which are profitable. So we believe that Q4 and Q1 of next year are going to be still challenging as far as the Italian operations are concerned. Thereafter, the situation should be much better [indiscernible].

So that's great, sir. And sir, do we have...

I mean I do add here on the Italian operation. The important data point is that in the next last 2 years, we have initially developed 2 new trains right from the concept stage. That is the design stage up to the prototype manufacturer and clearance of all the tests. One is for the Sicily Metro, and one is for the Pune Metro, which in itself is a very big achievement and kind of speaks volumes about the technology and the technical expertise and capabilities that Italy -- the Italian operation has.

Great, sir. Great. And sir, do we have any beta pipeline?

Sure. Absolutely. We have several tenders that we have participated in, more in India than from Italy, but we would like to speak about them only once [ they are with us ].

Okay. Okay. And sir, final question from my side. What is the CapEx that we've done in this quarter? And what are your targets for FY '22 as a whole?

In terms of the CapEx that we have done, the numbers are there in the results, and maybe Anil Agarwal can complement and give you the numbers. But we have spent a lot of money in terms of all the infrastructure creation for the metro and the propulsion and also upgraded our existing facility in the wagon. This has been entirely done by way of internal approvals. Going forward, we are looking at enhancing our capability on the metro side as well as on the shipbuilding side. So we will come back to you once we have finalized the numbers and the same have been approved by the Board.

The next question is from the line of Aashna Manaktala from ICICI Securities.

Sir, my first question is in concert with the previous question where you mentioned that you're planning for CapEx in sorting capabilities around the shipbuilding. So if you can give some highlight on what are the capabilities that going forward you're planning to build out.

We are talking specifically about the shipbuilding?

Sir, about the shipbuilding and even for the [indiscernible] business.

So right now are the facility that we have set up in -- for the metro coaches and for the passenger coaches as well as aluminum coaches. And in fact, the company is the first Indian company or the first company to have supplied aluminum coaches to any metro system in India, which is in itself a very important achievement. But going forward, we are also contemplating setting up facilities for other types of metro coaches and coaches, which is including stainless steel, enhancing our capacity as well as going deeper into the electrical and propulsion business. So all of this will require some CapEx. The exact quantum once it is firmed up and approved, we will definitely come back and announce that to the market. In terms of the shipbuilding, we would continue -- our strategy is to continue to be in the specialized shipbuilding segment. We are not looking at getting into the commodity shipbuilding segment. So we are looking at the naval and the research vessels, the naval vessels and so on and so forth. So both the facilities, the new shipyard that we have acquired will have to be upgraded substantially and as well as the existing facility that we have in Titagarh, both will be complemented with each other to make an integrated shipyard facility, catering primarily to the naval and to the research vessels and specialized vessels in the market.

Okay. So for the Precision Shipyard that you just acquired, as you mentioned, you'll be needing additional CapEx for that. So should I assume that from that shipyard, the incremental revenue will take some time? Or how is that going to pan out?

As I mentioned that we are already producing ships in our existing shipyards. This is to enhance the capabilities because there were certain constraints that we had on account of water drop and air drop in the existing shipyard. We have an order book of about INR 400 crores in machine building. And this will enable us to participate in many much -- many more tenders that we were not able to participate in the past due to this constraint.

Okay. Okay. And as you mentioned...

Revenue will be there, but it has -- revenue has been coming only in a couple of years once all the shipyards are fully operational.

Okay. Got it. Got it. And sir, in terms of the very recent incremental buildup in CapEx that was announced, what would be the tentative opportunity size for -- especially the wagon and for the metro business for you?

The metro does not fall under the railways. That would be under the Ministry of Housing and Urban Affairs, but I saw that the Honorable Minister made a comment or statement in the parliament that there are 16 new metro projects that have been requested by different states. So there is obviously a very large pipeline for metro projects that will be there. So in terms of the opportunity in the railway budget, obviously, there is a large target that has been set up for the freight loading and a very ambitious one. So that would culminate into very large wagon tenders that should be issued. But once -- we will only know the quantum once it's really been issued. So we should wait for maybe a few weeks, a couple of months to see how the procurement sizes pan out. But we are extremely optimistic about it.

Okay, sir. And sir, in terms of the propulsion systems in ABB, so like you mentioned that it could take another 1 or 2 quarters for you to get it into full production. So what could be the incremental revenue from that business we could see in the coming couple of years? And are there any incremental CapEx that would be required for that once it goes into full production?

So in terms of the incremental revenues, the revenue until now for the propulsion was low, so the entire revenue of the order book that we have now is a very small one. It's not INR 100 crore. But we -- the market size is almost INR 3,000 crores, INR 4,000 crores. So we expect that there will be an opportunity for the company to tap into that market size. For the CapEx, we have already spent the amount in the last maybe 6 quarters you set up this facility. Now the CapEx required for the propulsion would be when we want to enhance the production capacity, and that is then going to be an ongoing exercise. It's not going to be something, which is going to be an exceptional one-off CapEx. Bulk of it, I would say, 60% of the CapEx that was required in the propulsion, maybe even more, has already been either spent or invested.

And sir, if I may, like who are your competitors in this propulsion system business? Like who are the other players who have the capability in this?

There is Alstrom. There are -- there's Bombardier. There is, to an extent, BHEL. There are Siemens. So there are a number of companies which are there, but there are a different bunch of companies, not the same as the ones [ with wagon ].

Okay. Okay. Got it, sir. And one final question from my side. What is the size of the legacy contracts that are there that you mentioned in the Italian operations? If you can give that number...

I'm sorry, I missed your question. I missed your question. Can you repeat that, please?

Yes. So for the Italian operations, you mentioned you have the legacy contracts, right? What would be the size of those contracts that is still appending? And the new contracts that you mentioned, they are -- as you mentioned, were on higher margins. So are they fixed-price or are they [indiscernible] -- priced contract? That's -- these are my last questions.

So as far as the Italian contracts are concerned, they are mostly on a fixed-price contract, but we also have a back-to-back finalization of contract for important materials on a fixed-price basis. So we try and make sure that the price variations, the risk of that is mitigated to the maximum possible extent. As far as the overall legacy contract is concerned, out of the order book, I would say just about 5% of the contract, 5% to 7% of the overall order book would be now legacy contracts, and 93% to 97% -- 95% would be the new contracts.

The next question is from the line of Nishith from Aequitas.

Sir, I would like to understand, with the increase in alumina prices, will that affect our margins?

So I just mentioned that with the contracts, we time line, we kind of try and make sure that we tie up on a back-to-back basis in Europe. In India, most of the contracts come with a price variation. So to an extent, we are naturally hedged by the price variation for it.

Okay. And can you briefly touch upon your point...

I also must mention that I had mentioned it in the earlier call that there are the -- there are always possibilities of some quarter-to-quarter variations in terms of the movement of the wholesale price [ in debt ] to the actual price increase. So the margins can get impacted also in the Indian orders by maybe a couple of quarters, 3 quarters. But on the whole life cycle basis, we're able to recover the cost increases to a substantial extent.

Makes sense. And sir, you briefly mentioned that you are also planning to enter into the stainless steel purchase market. So first, I would like to understand what will be the price difference between an aluminum coach and a stainless steel coach.

So that would be going into a little bit of more technical details, and probably we can -- my team will be happy to discuss that off-line. But effectively, the client preferences are what will decide the offering of the product. There are certain clients that are preferring stainless steel. There are certain clients which are preferring lightweight aluminum coaches. So we want to increase our bouquet of offering. And that's how we want to be present in all segments. And whatever the clients prefer, we should be able to offer that.

Okay. And sir, for manufacturing stainless steel coaches, will we require new tires or manufacturing facility? What kind of CapEx will that require? Any color on that?

Definitely, additional CapEx will be required, additional investment will be required, and that's what I mentioned a few minutes ago that we will -- once it's finalized and approved by the Board, we will come back to -- but in terms of capabilities between our Indian and Italian facility, we have the technology and the expertise to be able to produce. So no, we don't need to go outside to buy technology.

[Operator Instructions] The next question is from the line of [ Vishnu ], an individual investor.

So first question is regarding the shipbuilding. I believe you were trying to acquire a shipyard south of the Howrah River -- south of Howrah Bridge [ in January ] 2012 and really [indiscernible], right? What happened then? Why [indiscernible] time? And are you looking to acquire additional...

Sorry, I'm not able to understand. Sorry, I'm not able to understand the question. Can you just maybe repeat that?

Can you hear me now? Hello? Acquire a shipyard [indiscernible] back in 2012, but...

I'm sorry to interrupt you, but Mr. Vishnu, we cannot hear you. May I request you to please rejoin the queue? The next question is from the line of [ Chakravarti ], investor.

My question is regarding the Italian operation, which is that from this quarter, we expect the Italian operations to start contributing to the consolidated bottom line. And kind of when I'm seeing the figures, it seems like the Italian operations could be as big as the Indian operation. So can we assume that the total profitability of the company will almost double when the Italian operations go full steam?

Thank you, sir. So as far as the Italian operations are concerned, we believe that in FY '23, we should be able to turn the corner. I would say that FY '22 -- '23 first quarter is by when we expect to close all the legacy contracts. And the next 3 quarters, we should be able to concentrate and focus on the profitable contract. In terms of the full year advantage, we should be able to have that from FY '24 as far as the Italian operation is concerned. In terms of the size of operation, you are absolutely right, the type of operations of Italy are as big or, I would say, as close to the Indian operations. Of course, the Indian operations are likely to grow further. In terms of the margin, the Italian business normally has a different dynamic of EBITDA expectations. So actually, we expect an EBITDA of between 6%, 7%. And that's how the Italian numbers are going to add up to the consolidated EBITDAs.

Okay. And if I may add another question, is it that right now, you are saying about -- you have about EUR 500 million of orders in the Italian operations, which are excluding the legacy work. So this EUR 500 million is for the next 3 years or something like that, if I may ask?

This was to get executed. I mean there are certain framework contracts, which will get extended up to 4 or 5 years. So the different contracts have different indication time cycles. But if you look at the entire package, it would be another 4 to 5 years. And then, of course, there would be additional contracts that would come on -- to keep on coming in as we go along.

[Operator Instructions] The next question is from the line of [ Nitin Gandhi ] from Green Street Capital.

Sir, as far as Italian operation is concerned, can you just take us -- walk through how does it shape up of the -- in terms of execution from the time you received or the first year [indiscernible] and how much execution happened, where the revenue comes in second or third year or like something like that?

Sure. So as far as the passenger train is concerned, it's a highly engineering-oriented product. Whenever a contract is signed first couple of years, maybe between, I would say, 12 to 34 months, we've taken for the design and design approval. But having said that, the revenue recognition does start as soon as the activity on the production side, floor start, which is concurrent to the designing activity. So to give a very broad perspective, a normal train, the first complete train is normally supplied in 2 years from signing of the contract. And in between that 0 to 2 years, there is different changes of manufacturing that goes on.

So typically, first year is low revenue, maybe as low as below 15%, 20%; and the second year of post the contract is maximum revenue, right?

Yes. And then as the train schedule, then delivery schedule is very -- so let's say, it's 50 train and as you deliver the train, then the revenues keep on getting recognized.

Right. Is there any retention or something, which is held back?

It's on a contract-to-contract basis. There is not -- no one size that fits all, but there are certain contracts where there is a retention, there are certain that there is not, so there is a contract-to-contract basis.

For our order book, can it resume 5% retention?

I would not be able to give you a number like that right now because different contracts, as I said, have different clauses of payment. There are certain contracts, which have an advance. There are certain contracts that did not have an advance. There are certain that has a stage payment. So to give a kind of a blanket answer that we have a 5% retention would be around -- I would say, would be more speculative.

Maybe next one...

But there are contracts that normally have. Some of them, they have retention. Some of them didn't want.

Maybe next con call or con call thereafter, if you can start sharing some average expected retention or some broad range, then it will be more helpful.

We shall definitely evaluate this suggestion.

The next question is from the line of [ Vishnu ], an individual investor.

Hello, sir, can you hear me now? Is it better?

Yes. Yes, it's better now.

Yes. So first one should relate in the first -- as you mentioned, you had all of the costs for 18 ships [indiscernible]. But if I check your releases, you have 5 [indiscernible] support and 9 [indiscernible]. So where's the additional 4 coming from?

Sorry, [ Vish ]? Hello?

Hello, sir, can you hear me?

Yes, yes. I didn't get your question.

No. The investment of 4 ships or vessels in your order book for the shipbuilding because [indiscernible] have an order from Indian Navy for 5 lines or 4 vessels and [indiscernible], right? So...

Your comment is understood. I'm asking your questions, however, your question is not clear to me. One is, of course, for the hearing -- I mean, the line problem, but if you can specify your question, please?

Okay then. So apologies for that. Fine. That's okay.

[Operator Instructions] As there are no further questions from the participants, with that, I now -- I would now like to hand the conference over to the management for closing comments.

So thank you very much, everybody, for joining on this call. The questions were very insightful. And we'll try to answer the same to the best possible extent. If there are any further questions, our investor relations are always available to be reached, and we shall try to share whatever further information to the best possible extent. We believe that the coming period is going to be very interesting for the railway industry. The railway ministry has been setting very, very visionary targets for themselves, and that would culminate into a large-scale CapEx spend. The budget that has been announced by the Indian government is also towards a higher CapEx and infrastructure creation. And the company being in all fields of infrastructure, all the 3 business articles being present in the infrastructure field, we believe that it should give us a substantial amount of tailwind. So thank you very much once again, and I hope to reconnect once we declare the Q4 results.

Thank you.

Thank you. On behalf of ICICI Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.