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

Ladies and gentlemen, good day, and welcome to the Titagarh Wagons Q3 FY '23 Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Aashna. Thank you, and over to you.

Thank you, Mike, and a very warm welcome to everyone. On behalf of ICICI Securities, I would like to welcome you all for the investor update call of Titagarh Wagons Limited. We will start the call with opening remarks from the management, post which we will have the Q&A session. I would now like to hand over the call to Mr. Prithish Chowdhary, Director, Marketing and Business Development for his opening remarks. Thank you, and over to you, sir.

Good evening, everybody. Firstly, thank you very much for taking time out to be a part of this call. I'm very proud and very honored to share with all of you that this quarter, the company has achieved its highest-ever turnover at INR 766 crores. Further, this year -- this quarter, we have seen a 101% growth in total income as compared to the last -- the quarter of financial year 2022. In terms of EBITDA, the company has reported an EBITDA of INR 83 crores, which is a 75% growth from quarter 3 FY 2022. This year, there are also several drivers this quarter that have been announced and that the company is looking upon very favorably and with a lot of interest. Firstly, the railways has seen its highest-ever budget allocation to the tune of INR 2.4 lakh crores. A lot of this budget will go into the -- into capital expenditures, such as Vande Bharat train sets, as well as train wagons, both of which are areas of interest to the company. Secondly, this quarter, the company has attained major successes through the supply of its first traction motor from the company's state-of-the-art facility in Uttarpara. This was accomplished in the month of November 2022, and this opens the potential to a huge market, which can be tapped into and can also be used for the captive production of metro cars that the company is engaged in. This may also result in a substantial cost benefit for the company. Thirdly, the existing capacity that exists with the company of 700 wagons per month. Against that, we have already achieved a production of approximately 630 to 650 wagons per month. This is almost the entire assessed capacity as per the Indian Railways. We are, however, working towards increasing this capacity further. Fourthly, the company has participated in the very prestigious and well-renowned Vande Bharat tender in November 2022. This tender was for the supply of 200 trains with a maintenance contract of 35 years as well. This contract will be awarded to the 2 lowest bidders in a ratio of 120 trains to 80 trains. And the estimated value -- the total estimated value is to the tune of roughly INR 72,000 crores. The company is 1 out of 5 potential bidders in a consortium with BHEL, making the company the only truly [indiscernible] consortium as both the consortium partners are fully Indian. Further, as I mentioned earlier, with the new budget allocation that the railways has seen, the company also foresees further demand for these Vande Bharat train sets, therefore, indicating larger markets that will be available in the near future, and future opportunities for the company. Lastly, the company has also participated in a tender for forged wheel sets in partnership with Ramkrishna Forgings Limited. And we have submitted a joint bid in response to the Indian Railways request for quotation. This will entail the company setting up a forged wheel manufacturing unit. If the company wins -- if the company is the successful bidder and wins the bid. The purpose of this bid will be to produce forged wheel sets in India for both the Indian market, as well as the potential export market, as well as to reduce the dependence on imported wheel sets from countries like China and other foreign nations. As on date, the company has a standing order book of INR 10,130 crores with a good subsequent visibility. Thank you very much. And I hand it back over to ICICI.

[Operator Instructions] We have the first question from the line of Kunal Sheth from B&K Securities.

Congratulations for a great set of numbers. My first question is pertaining to the wagons, the supply to Indian Railways. So you mentioned that we have reached about 650 wagons in terms of production, right? So what is our plan going ahead in terms of where do we aspire to reach over the next 2, 3 months, given the schedule that we have in terms of supply?

Yes. Thank you for the question. So as far as the capacity according to which the orders were placed by the Indian Railways was for 8,400 wagons per annum, which effectively means 700 wagons per month. As I had mentioned during the last conference call that our target will be to achieve 700 wagons per month. We have not achieved that target as of now in the last quarter, but we are confident of -- as was mentioned by Mr. Prithish Chowdhary just now that we have already touched 630 to 650 wagons in a month, not in the entire quarter, but in the last month of the quarter. And we are confident of being able to get to the 700 number in the next couple of months or so. And thereafter, we do intend to enhance it further to between 800 and 900 wagons. So to answer your question, as far as the obligation or the contractual commitment to the Indian Railways, we would be in line with that in any case now. In terms of exceeding the commitment so that we have more capacity for either the private sector wagon demand or for getting additional share from the railways in future tenders, that is something which is work in progress, and we will report back to the market as soon as we are able to achieve that.

Sure. My second question is pertaining to the private wagon market. In your estimate, what would be the size of the private wagon market per annum? And what would be our share in the private wagon market?

So historically, we have always maintained a good share in the private wagon market. As it has been mentioned in the presentation also, we have now an order book of almost INR 1,200 crores from private wagon, which is in itself a substantial sizable order book, I would say. It's the highest-ever order book for private wagon market that we have had in the history of the company. In terms of the total market size of the private wagons, it is not a very defined formula of the private wagon. The private wagon market depends upon the availability for wagons from the Indian Railways, the overall capital expenditure cycle from the private investors. But if we take a thumb rule, I would say, about 15% to 20% of the overall wagon addition or I would say anything between 10% to 20% of the overall wagon addition into the Indian fleet would happen from the private sector.

Sure. And sir, we mentioned about the supply for traction motors from our factory. And also, we have done a JV with R.K. Forgings for the forged wheel. So if you can give us some sense about how large this market potentially could be? And what could be our play in this market in terms of size?

So both are completely different from each other. The first one is the part of the transit and propulsion vertical. We have mentioned in the last investor call also, I had mentioned that in the last -- in the succeeding quarter, that is the Q3, we would intend to make the first sale from the propulsion division, which is what my colleague reported that we have been able to do that. It's just a developmental order execution. The prototype has been supplied for the traction motor. The propulsion division has 2 advantages. One is a strategic advantage, which will be useful to reduce our cost of production for the metro coaches and for the trains that we produce. And on the other side, the market advantage, which is an export and domestic market for both propulsion equipment, as well as traction motor. We believe that the market size is quite large. I mean, there are companies who were doing business worth thousands of crores in propulsion and electrical business, which is including the traction converter and traction motor, et cetera. And we have begun in a small manner, but we do intend to become an important and a significant player in this segment. As far as the forged wheel is concerned, this is a tender that we have participated and this is more by way of an information, which has been shared with the market. This is not a project which has already been taken up. This is subject to our winning the tender, the project will be taken up. So we would not be able to estimate the impact of this project on our financials or our initial future financials until unless we have a result of this tender, which is favorable towards us.

Sure. Got it, sir. And sir, my last question is pertaining to our CapEx. Can you help me with what kind of CapEx do we envisage over the next 3 years?

So we had already announced this in the last call also that, including the CapEx that has already been spent in the last 2, 3 years, we expect that for completing the entire projects that we have in hand that is likely to take another 4.5 or 5 years. The total CapEx estimated is about INR 1,000 crore. Having said that, our company has always tried to optimize wherever possible. And the CapEx is spent, not on the basis of a top-down approach, but a bottoms-up approach, which is effectively to achieve the capacity target. For example, to illustrate the wagon capacity of 650 to 700 wagons that we have achieved, we have achieved with very limited amount of CapEx. And if we really look at the replacement cost or a greenfield cost for setting up that kind of a capacity or even the incremental capacity that we have achieved, it would be far higher than the CapEx that we have spent. So the CapEx that we have incurred in the last 3 years is about INR 300-odd crores, including the development of some of the product intellectual properties, et cetera. And we expect that over the next 5 years, 4.5, 5 years, we should -- including the INR 300 crore, we should be spending around INR 1,000 crores.

Sure. And sir, would it be possible roughly to give a sense of where this CapEx will be split as in what projects and what division?

The 3 divisions. We are only operating in the 3 divisions, the passenger transit and propulsion, the freight and SBD, which is shipbuilding, bridges and defense. So we have -- we will not be able to give you the breakup of the numbers, but it is on an overall -- since all 3 divisions are part of the same company, and we do have some capacities and facilities, which are inter-fungible between the divisions. Therefore, I will not be able to give you the breakup of the 3 verticals.

Sure. And best of luck for the future quarters.

We have the next question from the line of Sarvesh Gupta from Maximal Capital.

So firstly, on the...

Mr. Gupta, your audio is not very clear. If you could go off the speaker phone once?

Yes. Is it better now?

Yes.

Yes. So first question is on the gross margin profile. So, I guess, this quarter, your gross profit, as well as the other competitors' gross profit has come down on a quarter-to-quarter basis. So are there some material price pressures that we are seeing to fulfill this current contract of the Indian Railways? Or because this is slightly counterintuitive because raw material prices have generally been on a downward trend? Or is it because of some contract-specific sort of the requirement that your margins are a little bit lower on this contract? So that's my first question.

So the -- as far as our contracts are concerned, sir, most of our contracts are with the price variation clause, which effectively are -- which means that the increase or decrease in raw material prices are passed on either which ways. So when there is a decrease in commodity pricing, the benefit of that is passed on to the customer. And when there is an increase in commodity or raw material prices, we are reimbursed for that increase or decrease. Having said that, on a quarter-to-quarter basis, I have always maintained that our EBITDA margin that we can expect is between 8% and 10%. And in the current quarter also, we have done 10.7% of margin, including -- or EBITDA margin, including the other income. If we exclude the other income, still we are at about 9.6% -- 9.48%. So we are pretty much in line with our target. I will not be able to speak about competition, but I can speak for ourselves that as far as we are concerned, we are pretty much on target. As regard the comparative EBITDA margins of previous quarters, I've also mentioned that quarterly comparison of EBITDA margin in our sector is -- will not give a very, very reflective picture because we execute many contracts. Some have a higher margin, some have a lower margin. And when we speak about our targeted margin levels, we talk about a blended margin of different contracts. So as far as the expected margin guidelines are concerned, we maintain that we would be able to keep a sustainable EBITDA margin of between 8% and 10% and there is no pressure on the margins for the reasons I explained just now.

So generally, in a manufacturing setup when you are aiming for almost now from a low -- very low capacity utilization, you're going for a very high utilization of almost 100%. There is an element of fixed cost, employee costs, corporate overheads involved. So shouldn't you sort of expect your EBITDA margins to grow and grow beyond the traditional band of 8% to 10%? Or when you take up such a large order, you sort of sacrifice your gross margin in a way that it comes back to your normalized margins? Because otherwise, because you have fixed costs and also ideally it should increase, right? It should not be in the same range as it was when your utilization was far lower than this?

It's a very good academic discussion, but I don't think that I'll be able to answer that. I would be only saying that when we do our -- there is always a trade-off in a tender of trying to get volumes versus trying to get margins and balancing the 2. So in the whole picture, we are able to position ourselves that we have been consistently the market leaders. And in order to be the market leader, sometimes one has to take a strategic pricing policy.

Understood. Now, in terms of your CapEx plan of INR 1,000 crores over the next 4, 5 years, even at the current profitability, this would mean almost 4 years of EBITDA or more than that. So how are you planning to fund it because this would again be slightly heavy on the balance sheet, even a INR 250 crore per year sort of a CapEx, given the current scale is sort of not -- it will lead to no generation of the cash as such? So how do you look at cash generation? And how do you look at this CapEx of INR 1,000-odd crores?

I mentioned that this is CapEx over a 8-year period. So it's about, on an average, INR 150 crores, and this is an approximate number, which will be based on projects that we are able to undertake. Many of them are project CapEx, so the cost can be charged to the project itself. So, of course, the company has maintained a very prudent policy. We have reduced our debt significantly to become a net 0 debt company, long-term debt company. And I can only say that the company maintains a very prudent and conservative policy in terms of overcommitting or leveraging itself.

[Operator Instructions] We have the next question from the line of Parvez Qazi from Nuvama Group.

Congrats for a great set of numbers. Sir, a couple of questions from my side. It would be great if you could update us about the status of the Pune Metro order and also the CRRC order?

Sure. As far as the -- am I audible?

Yes, sir.

Okay. So as far as the Pune Metro is concerned, we have already executed, delivered up to 15 trains and -- out of 34, and we are well within -- well on track to deliver the complete number of trains within the first half of the next financial year. As far as the Bangalore CRRC project is concerned, the facility setting up of the stainless steel line is already underway. We have already ordered all the major equipments, and we intend to start production in the second quarter or maximum the third quarter of this year -- of the coming financial year. So either in the second quarter or the third quarter of the coming financial year, we will start delivering the coaches.

And a couple of questions for Anil ji. Sir, what is our current gross debt and net debt for the Indian entity?

Parvez, Anil this side. So the net debt for the Indian entity is basically the working capital debt. So the net debt is at INR 150 crores as of December. And --. Just 1 second, Parvez, I'll just give you the gross number.

Maybe we can move on with the questions. He'll just come back with the answer.

Sure. And what is the current order book in Firema and how do we see that performance going ahead?

As far as Firema is concerned, as we've already said that the numbers are not consolidated in the parent balance sheet, in the Titagarh Wagons balance sheet. But having said that, Titagarh Wagons owns 49% shares with Firema. And the order book in Titagarh Firema is close to EUR 500 million and the performance is starting to improve now. The new contract for the Lazio is also under production. We expect that the production of the -- the targeted production of Titagarh Firema will be achieved in the first quarter of the coming financial year. That is from April onwards we should be seeing the targeted level of production in Titagarh Firema also.

Sure. And lastly, would it be possible to get a breakup of the order book segment-wise among the freight, passenger and the shipbuilding, bridges and defense?

It has already been given in the Page 4 of the presentation.

Parvez, it's in Page 4.

Unfortunately, we don't have access to the presentation.

Okay. So I just think we'll upload it, but we'll send it across. I can share the numbers with you. It is INR 8,600 crore for freight business, INR 1,176 crore for passenger rolling stock and INR 341 crores for SBD.

We have the next question from the line of Sanjay Awatramani from [ Hamara Capital ].

Sir, almost all my questions have been answered. But...

I can't hear you, Sanjay.

Sanjay, if you could go off the speaker phone, we are unable to hear you very well.

Hello. Are you able to hear me now?

Yes, much better.

Yes, it's better. Sorry, we weren't able to hear you before.

So this order book, which you mentioned of INR 10,000 crores, what is the time line to the execution for executing this order book INR 10,130 crores?

So different orders have different schedules of execution. But on an average basis, I would say this has to be executed in the next 2.5 to 3 years at the most.

Okay. 2.5 to 3 years?

That's right.

And if I may request that if you could provide me the breakup? I think I lost my line when you were giving the breakup of this order book.

So we shared in the investor presentation also, but I repeat it for you. It's INR 8,600 crores for the freight wagon rolling stock, INR 1,176 crore for passenger rolling stock and INR 340 crores for the shipbuilding, bridges and defense.

We have the next question from the line of Akshay Kothari from Envision Capital.

Sir, when is the Vande Bharat award expected to be out? Any details on that front?

Unfortunately not, it's a tendering process. So, I mean, the tender was submitted on the end of November, 30th of November, I believe. And normally, such large tenders take time for evaluation, technical evaluation and so on and so forth. But I would just like to add that this is a tender for 200 Vande Bharat as was mentioned by my colleague Prithish and the overall requirement that has been including the current budget announcement is for 1,000 Vande Bharat trains. So I believe that the opportunity for this segment is quite substantial. And our company is very uniquely positioned for several reasons. Number one, we are the only Indian company and in fact, the only company in India, which has facilities for both aluminum and stainless steel coaches. Once we have implemented the line in the next couple of quarters for the Bangalore Metro CRRC project, we would have the stainless steel facility also. So while we are very keenly awaiting the results of the current tender, I would also like to mention that there are adequate opportunities that we foresee coming up in this passenger train segment, whether it is in terms of trains, which is like MRVC or Vande Bharat or metros like Bangalore and Chennai, et cetera.

Okay. That's great, sir. And sir, what is the current situation of rail wheel sets, if you can throw some light on it?

So railway wheel sets you said, right?

Yes. Availability of rail wheel sets I guess.

Railway wheel set are yet to announce by the railway because the capacity is -- the wagon production has gone up and the wheel set capacity also has gone up, but not on the same lines. But having said that, I have always maintained that there can be pressures from time to time. But on an overall basis, the railways have done a brilliant job in planning the availability of wheel sets. And as you can see, the railways are also doing future planning. I mean it's in fact an interesting point that you raised because if you kind of look at the planning of the railways and the tenders that they have floated, whoever wins the tender whether it is our consortium or anybody else, the fact is the railways is going to give a guaranteed offtake for 20 years for 80,000 wheels per annum, which kind of sets the tone of what they're planning for the rolling stock market. So the railways have been doing their homework extremely well, exceptionally well I would say and have been planning the wheel sets also and have continued to do that for the future requirement.

Okay. That's right. Sir, now that we have deconsolidated the Italian subsidiary -- Italian associate I would rather say so I'm assuming that there won't be any qualifications as much as in FY '22 audit reports. And just to know because it was not very much clear. What was that material element which led to this qualification and to continue, currently what is the debt in the Italian subsidiary? I understand it is already deconsolidated, but still I think the Barrackpore land is still pledged so that hence the question.

Yes. So that's right, I mean it is deconsolidated and we've already disclosed all the facts in our results. So I think all the details are available in the results. In terms of there is -- I didn't understand about your point on qualification. I don't think there are...

There's no qualification on the stand-alone financials.

But there was a qualification on the consolidated part, right.

Yes. There is only a consolidation on the consolidated financials and that too also it is relating to the consolidation of the Firema results prepared on a management basis, which is we have clarified that in the results. So the stand-alone [indiscernible].

Sir, what is the current debt at Firema?

So the current debt -- the net debt at Firema is at INR 333 crores and the gross debt is at around INR 640 crores or INR 650-odd crores.

Okay. And one more in the other expense in FY '22, there were some irrecoverable claims of around INR 23 crores. So what was that actually?

In which? You're talking about which quarter?

I'm talking about the annual report, FY '22. So are these on the private side or...?

No, I don't think so. I mean what we can do is if you agree because we did discuss about the quarter and then you can...

I actually tried to reach out a lot of times through even the IR associate partners, but I think we could not fix up a meeting so that's why I have to ask. Anyway, we can take it offline then.

We'll make sure my colleague, Saurav Singhania, will ensure that he reaches out to you.

We have the next question from the line of [ Rajesh Bhandari ], individual investor.