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

Good day, ladies and gentlemen, and welcome to the Q1 FY '23 Earnings 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 Ms. Aashna from ICICI Securities. Thank you, and over to you, Ms. Aashna.

Thank you, Michelle, and good day, everyone. On behalf of ICICI Securities, I would like to welcome you all for the Q1 FY 2023 Earnings Conference Call of Titagarh Wagons. The management today is being represented by Mr. Umesh Chowdhary, Vice Chairman and Managing Director; Mr. Anil Agarwal, Director of Finance; and Mr. Saurav Singhania, Group Financial Controller. We will start the call with the opening remarks on the results and the outlook by the management. With that, we will have the Q&A session. I would now like to hand over the call to Mr. Chowdhary for his opening remarks. Thank you, and over to you, sir.

Thank you very much. Very good afternoon to everybody, and thank you for joining in the Q1 FY '23 results conference call. The quarter has been pretty much in line with what we had expected. There have been -- the company bagged its single ever largest contract from the Indian Railway during the quarter, which is, in fact, the largest wagon contract placed by the Indian Railway for 24,177 wagons. I'm happy to inform that we have already started execution against that contract. And the contract has to be executed over 39 months from May 2022 when we received the contract. And we are well on our way to ramp up production in being able to achieve this target. In terms of the results, the presentation has already been circulated, but just to give the highlights, we did -- on a stand-alone basis, our revenue of about INR 437 crores, which is about 27% higher on a quarter-to-quarter basis. In terms of EBITDA, we did an EBITDA of INR 48.8 crores, which is at 11% EBITDA margin. As I have maintained in the past that our company targets to keep an EBITDA of between 8% to 10%, so on quarterly basis, there can be fluctuations. But on a blended basis, going forward, we expect to continue to be able to maintain 8% to 10% EBITDA margin, but drive the revenue further towards growth. In the other segment, which is the passenger rolling stock or the transit and the Propulsion segment, the company has started executing the contract for Pune Metro and is continuously supplying trains to Pune Metro, which has been put into passenger service. An important milestone was reached by the company when we signed a contract with CRRC, which is the Chinese Railway Rolling Stock Corporation and Bangalore Metro. The genesis of the contract is Bangalore Metro has placed a contract on CRRC to supply 200-odd coaches. But because of China, if CRRC not able to fulfill the Make in India condition, the contract will not moving forward. We are able to step in and sign the tripartite contract to produce these coaches entirely in our plant in Titagarh. The advantage apart from a contract -- acquiring a contract, the advantage that we get is that this will also bring us into the stainless steel coach manufacturing arena, we will be able to get the technical expertise know-how from CRRC and also the credentials to be able to manufacture stainless steel coaches. And this would make us as the only -- first and only company in the passenger rolling stock to have facilities and capabilities to produce every type of passenger coach, which is carbon steel, as we have done in the case of BMU and MEMU aluminum, which we are doing now for the [ Pune ] and stainless steel, which we will start with Bangalore Metro. On the third segment, which is the shipbuilding, bridges and defense, we have already started executing the contracts for the shipbuilding, which we had acquired over the last few quarters. We successfully launched our first warship for the Indian Coast Guard in cooperation with GRSE. We were subcontracting manufacturing for GRSE for that and it was successfully launched during the quarter. Apart from that, we also launched the first export vessel, which was for Ghana, again, with GRSE being in the front. So all the 3 verticals have been contributing this time to our top line and bottom line. In terms of our overall order book stand-alone basis, it is at about INR 10,000-odd crores. which is a healthy order book. And going forward, as I said, we would continue to focus on building on this order book and building on execution, ramping up execution. On the overseas subsidiary, that is Titagarh Firema, there has been a very important development or milestone that we have been able to achieve in terms of signing an agreement with the government of Italy wherein the government of Italy would acquire a minority stake into Titagarh Firema. This is going to have a very important strategic advantage for the company to have the government on our side of the table as an equity partner in the company. Apart from that, we've been able to come out of the COVID aftermath. Of course, there have been a lot of challenges in Europe in terms of supply chain disruptions increase in costs, unprecedented increase in cost on account of the Ukraine war. But we have been able to kind of try to address most of them, and we are still hopeful that we should be able to stay with our target of trying to achieve an EBITDA base even this year and the next breakeven in the following year. The order book in Italy stands at about EUR 500 million. In terms of the legacy contracts, which we had expected to be completed within the first quarter, there is a spillover for 1 or 2 months. But within the current quarter, very small quantities are left and within the current quarter, we will be done and dusted with the entire legacy contract, following which we will be focusing on building new trains against the newly signed contract for Rome that is Latvia region as well as Catania or Sicily metro. From our side, that is the opening comments, just of the quarter [indiscernible] side. And I'm most happy to take any questions and answer them to best possible stand. Thank you.

[Operator Instructions] The first question is from the line of Chetan Vora from Abakkus Asset Manager.

Wanted to understand how many wagons would we have manufactured during the quarter?

My apologies, your voice is breaking up.

How many wagons you would have manufactured during the quarter?

During the quarter, the total number of wagons we produced was 800.

Okay. And for the passenger coaches?

We have delivered up-to-date about 8 trains. And now the production is being ramped up, we will -- we are targeting to reach 3 trains per month in the next 2 or 3 months.

Okay. And this 800 wagons what we did this quarter, what was the number last quarter -- June, in the preceding quarter?

I would be unable to give you the exact number. I will -- we will come back to you with the exact number but it was about the same.

Okay. So would you mention why there was a flattish growth because we got the order from the railway of nearly over [ 8,000 million ]. So by when this versus start picking up?

So the order was awarded at the end of May, 29th of May, if my memory serves me right. And normally, it takes 3 months or the execution to begin. That's how the contracts are structured. We have been able to start execution before that. So we've already -- as I said, within the month of -- within the first quarter itself, we have started execution of the part of this contract. So we will be ramping up to reach the desired level, I would say, within the next couple of months. The contracted rate of delivery is about 700 wagons a month, and we should be able to get there in the next 2 to 3 months.

700 wagons per month to start going in from -- by the end of quarter 2. Is it right to assume?

End of quarter 2 or beginning of quarter 3, I would say -- beginning of quarter 3 would be more likely.

Okay, sir. And sir, I was just looking at the EBIT margins of the wagon -- on the trade rolling stock, the margins have declined from 14-odd percent to nearly about 10% on a y-o-y, despite the number of wagons being the flattish. Could you throw some light on that?

I've always maintained that on a quarter-to-quarter basis, the margins can vary because of the type of wagon the customer makes, et cetera. But on a blended basis, if you look at the average of several quarters, and that's how we typically finalize our business strategy while bidding for contracts and we have to strike the balance between volume and margin. So in our industry, in our segments, blended EBITDA margin of 8%, 10% is what is a sustainable EBITDA margin. So our request would be not to compare with one quarter or the other. But compared with the benchmark guidance that we are providing, which is an EBITDA margin of between 8% and 10%.

On an annualized basis, it [indiscernible] in for last year, 13% even the year for what they did it nearly as 14%. So would it fair to assume that on an annualized basis, the EBIT margin on the [ trolling ] for should be in the range of plus-minus 1%.

No. On an annualized basis, as I said, the EBIT margin would be around 10% between 8% to 10%. Last year, the volume was less, and there is always the trade-off between achieving higher market share or maintaining higher margins. And in order to grow the market share, in order to grow the volumes, we would continue to target and achieve with around 10% of EBITDA margin. Having said that, in case there are tailwinds to support, obviously, the EBITDA margins could be better. But on a long-term basis, the guidance I would give would be about 10% of EBITDA margin.

This is the overall margin, right, you can say?

That's right.

Overall, 10% margin.

That's right.

Okay, sir. And sir, lastly, what -- the number of wagon we are guiding for FY '23 and '24?

We are not giving any guidance in terms of the top line or -- but what we have shared in public domain is the quantity of orders that we have received and the targeted execution schedule, which is there for daily orders.

All right. And sir lastly on the Italian business, the legacy orders will be done, say, in a month or 2. So going forward, the order what you have received in the month of January would be at what margin kind of ballpark number? INR 4,000 crore of order book of that, how much is the legacy order and the balance part of the order, which is the high margin or as you have stated in your presentation. So what would be the margin range on both legacy?

So in European territory, normally, the business that the segment we operate on delivers about a 5%, 6% EBITDA in the European context. So the -- in terms of the legacy contracts that are in the order book would be hardly 5% and even less than 5%. 95-plus percent is the new contracts, which would be able to deliver as positive EBITDA margins.

Right. And what will the debt level at this standalone in the console level of the Italian business?

On the Indian -- on the stand-alone, we have a long-term net debt 0. However, there is working capital utilization of about INR 140 crores. This keeps on fluctuating because this is on a particular moment of time. And depending upon the cycle of the execution of the contract, typically in the beginning of the cycle of the execution, the debt level goes up or the utilization of working capital goes up. So the debt level, I would say, in India is pretty low on a stand-alone basis. On a consolidated -- on an overseas, we have a total debt of about EUR 80 million, net debt of about EUR 80 million.

Okay, sir. And lastly, sir, a final question from my end. What would be the margin profile on the annualized [indiscernible] for the passenger coaches because now you will be the start getting the benefit of the economic scale also, right?

Could you just repeat the question?

On annualized basis, what should be the margin profile on the passenger coaches in the stand-alone?

It would be almost similar to the trade. We have always said that a blended basis margin guidance is what we have been providing of 8% to 10%. In the transit business, we are new entrants. So our transit strategy is a little more aggressive. So maybe in the initial years, we will have lesser margins. But that would be essential in order for us to establish ourselves as an important player in the segment. We are already market leaders in the freight wagon segment. Now we are targeting to become at least substantial players, if not market leaders in India in the other segment as well.

Before we could take the next question, I would request the participants to use their handsets to ask a question as the management is not able to hear them properly. The next question is from the line of [ Costa Bona ] from BMSBL Capital.

Is there a shortage of wheel sets in the industry? And if so, how come our company has not been affected by that materially?

No, we've not faced shortage of wheel sets in the recent past. The rail wheel factory has been able to ramp up production. Of course, from time to time, in case there are supply chain issues or some manufacturing issues with the rail wheel factory, the supply does get disrupted. But by and large, I would say, over the last few months, the supply of wheel sets from the rail wheel factory has been normalized.

Is it true that the government has instructed that wheel sets be used for public orders over private orders?

These are policies that keep on coming from time to time, and we will not be able to comment on individual policies or directions of the government because that is not correct for us to do so. But I can only say that the railways have given adequate time to the industry. The railways have been very transparent with their policies. And as we understand that railways have also made a very strong supply chain plan in order to ensure that the wagons that have been projected or ordered on the industry are not stranded for the want of wheel sets. So of course, we will have to see how story unfolds in the future, but we are pretty...

Sir, I would request you to repeat the last line as we couldn't hear you properly. Sir, your voice was breaking.

I'm sorry, am I better, audible now?

Yes, sir, please proceed. I would request you to repeat the last line, please?

Okay. I don't know at what stage was not audible, but I'll just mention that we will have to see how the story unfolds going forward. But as we understand, based on our interaction with the railways that the railways have made a very strong backup plan for ensuring that the orders that have been placed for wagons are not stranded for want of wheel sets. They have planned to increase their capacity or sourcing of wheel sets and make it available to the wagon manufacturers.

Okay. Great, just last question. Just overseas, what is the company's exposure for value orders to the private sector, do we have an order book over there? Or are we mainly catering to the public sector like how we got this big order recently?

We have always had a healthy balance of private sector and government orders. But of course, we have to -- having got these very large orders from the railways. Our focus now is to stabilize our production for the wagon orders that we have signed with the Indian railways. But definitely, we do have an order book, and we are executing orders for private sector as well.

So there's no shortage of wheel sets for those private sector orders basically in short?

We've been able to organize wheel sets and deliver wagons as per commitments or agreements with our clients.

The next question is from the line of Panjul Agarwal from Green Portfolio.

I have a few questions regarding our Italian subsidiary. Sir, first of all, what is the rationale behind equity investment of Italian government in the subsidiary? And how will it help in the Italian operations?

Sure. The rationale is that we are operating in a foreign territory where most of our customers are the government entities. And if we are able to -- we've been discussing with the government of Italy for some time -- for quite some time. And if the government of Italy comes in as an equity partner, it definitely has -- brings in a huge amount of strategic advantage, also positioning advantage apart from the liquidity that gets infused by way of this equity contribution. So it is a very strong strategic move for us to get the government officially as an equity partner into the company.

All right, sir. And sir, what is our exposure in the Italian subsidiary? I need the direct as well as the indirect exposure?

Our exposure in terms of the Italian company subsidiaries, the equity that we have infused. We don't have any indirect exposure in terms of guarantees, et cetera. So the total investment that we have made is by way of the equity investment.

All right, Sir, now a couple of questions on the contracts. Sir first of all...

I'd like to correct myself. We have also given a lane on one land of Bharatpur, which is our indirect exposure to the lenders of the Italian subsidiary.

Okay. All right, sir. Sir, I want an update on the projects like the Catania project, Metro. So have the supply started?

Yes, the supplies have started. The trains have already been put into passenger service, and it has been very well received by the population and the market at large.

Sir, what is the duration of this project, like when will it end?

It's a framework contract of 54 trains. And until now, our company has got the execution clearance for 25 trains. Typically, the way the market works is that the execution clearance is issued in batches based on the infrastructure progress or building of the infrastructure by the client.

Okay. So how much duration is left on this contract?

It is still about 4, 5 years. They have time for another 4 -- 3 or 4 years to execute or to issue the execution contract for the balance trains.

Okay. And sir, we see another contract in the Latvia region for like EUR 280 million. Sir, has the delivery started for that?

It's Latvia region, it that Latvia is a region of Rome. We have got this contract for EUR 280-odd million. And out of this, their customer has already issued the execution for about EUR 230 million -- EUR 220 million to EUR 230 million, and that is EUR 40 million, EUR 50 million is similar to what I explained under Catania. We have already started the engineering work for the trends, and we will start the physical production of the train by end of this calendar year.

Okay. And sir, for the Bangalore metro project, when is the delivery begin?

For which project?

So the Bangalore project, the one with the Chinese company.

Yes. So that will start in the next financial year. In the first quarter of FY '24, we will be able to start the production on -- we'll start production at the end of this financial year, but it will be substantially done in the first quarter of next year.

Okay. So and one more question. Sir, regarding the Pune Metro project. Sir, how many changes have been delivered? And what is the schedule for complete delivery for all the trains?

As I just mentioned a few minutes ago, we delivered 8 trains till now, and we are ramping up production to be able to deliver at a rate of 3 trains. We should -- per month, we should be able to achieve this target over the next 2, 3 months' time.

Okay, sir. Sir, one more question. Sir, we have acquired a new shipyard, I think, which was on the south side of Howrah Bridge. So when will the commercial operations begin on that? And how will it change our shipbuilding business?

As we explained in the press release that we had issued when we acquired the shipyard. Our existing shipbuilding activity is done in Titagarh, which is on the north side of Howrah Bridge. This limits the type of ships that we can directly undertake because of 2 reasons. One is the water draft and the second is the air draft because there are 2 bridges, the old Howrah Bridge and the new Howrah Bridge, which the ship has to sail under in order to reach the open sea. With this shipyard that we have acquired, we will be able to synergize our existing and the new shipyard, which will enable us to partially construct the ship in Titagarh, and partially completed in the new shipyard in Falta. It will take some time for us to be able to complete the shipyard. It will take about 1.5 years or so. We -- This was basically an infrastructure that we acquired from a bank under [indiscernible]. And another 1.5 to 2 years, we will continue to produce the ships in Titagarh. But after that, the advantage from the shipyard will start getting available to us.

The next question is from the line of Akshay Kothari from Envision Capital.

I missed in the opening comments, this Bangalore Metro project, which we have received, we have received from CRRC, right?

That's right.

So I could not understand like what is the role of CRRC in this project? Like could we not directly get it from Bangalore Metro?

So this was a contract that was awarded to CRRC quite some time ago. This was under dispute between CRRC and Bangalore Metro because the contract entailed local production under the Make in India scheme. Bangalore Metro -- sorry, CRRC and Bangalore Metro and ourselves were able to finalize and we've got the approval from the Bangalore Metro to be able to produce these metro coaches in our facility on subcontracting. So CRRC is providing us with the material, and we are manufacturing the coaches as per their design. This will entail us to set up a stainless steel coach manufacturing facility. The technology or the know-how for that will be provided by CRRC to us. And it will not only set up apart from getting the business for these 200 coaches, production of these 200 coaches. This will also enable us to set up a stainless steel production line and get the know-how, expertise and credentials to produce stainless steel coaches.