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

Good evening, ladies and gentlemen. I'm Vidya, moderator for the conference call. Welcome to the Titagarh Rail Systems Limited Q4 FY '23 Earnings Conference Call. We have with us today Mr. Umesh Chowdhary, Vice Chairman and Managing Director; Mr. Prithish Chowdhary, Director, Marketing and Business Development; Mr. Anil Agarwal, Director Finance, CFO and CBRO; Mr. Saurav Singhania, Joint CFO and Group Finance Controller. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand over the floor to Mr. Mohit Kumar. Thank you, and over to you, sir.

Thank you, Vidya. On behalf of ICICI Securities, I would like to welcome you all for the Q4 FY '23 and FY '23 Earnings Call for Titagarh Wagons Limited. Without much delay, I would now like to hand over the call to the management for the opening remarks, which will be followed by Q&A. Thank you, and over to you, sir.

Thank you very much. Very good afternoon to everybody. And once again, our own welcome, heartiest to the Q4 and '23 earnings conference call. As always, it's a great pleasure interacting with all of you. So just to give you a brief snapshot of the quarter gone by and the year gone by and then, of course, very happy to take questions and answer them to the best of [indiscernible]. I think FY '23 has been a significant year in the history of our company. It's the beginning of the second 25 years of the company. The first, we completed 25 years in July '22. And it's been a significant way to kind of celebrate the quarter anniversary or the silver anniversary because the company has moved from being just a wagon manufacturer to being the rail systems manufacturer, and that is significant from the change of the name also that has been implemented. So Titagarh Wagons now is called Titagarh Rail Systems, and that is reflective of the strategy that we would follow for the company in the future. We have also decided in the last quarter to segmentize the company into 2 business segments, the passenger rail systems business and the freight rail systems business. We have decided to merge the smaller businesses like the shipbuilding, et cetera, into the freight because they are quite significant in terms of the overall size and the potential that we have now. That doesn't mean that we are foregoing those business opportunities. But definitely, we are focusing on the existing opportunities that we have and keeping them in a slow burner so that we can raise the flame there once we have been able to stabilize our core businesses, which is a freight rail systems and the passenger rail systems. The other significant developments in the company has been that we have kind of gone to a transformational journey in terms of the size of business that we have. You'd be happy to know that when we declared our results for FY '22. We were with an order book of just about INR 1,600 crores, which, along with our share of the consortium that orders that we have won in a consortium with BHEL and Ramakrishna Forgings, our business goes up to almost -- order book goes up to almost INR 27,000-plus crores. So that's a quantum jump that we have been able to make during the year. In terms of performance also, we have continuously ramped up the performance quarter after quarter, reaching to INR 970-odd crores in the last quarter, and the total year revenue of INR 2,781 crores, which, of course, the quarter and the year are the best ever in the history of the company. We believe going forward, the passenger rail system, which was just about INR 500 crores out of this INR 2,700 crores has a long headroom available. We are currently operating at about 5, 6 coaches per month. We have delivered 17 trains by March '23. And we would be ramping it up in the beginning to 20 cars per month. And then our capacity planned for the passenger coaches over the next 2 to 3 years is to go up to 70 coaches, 70, 75 coaches per month. That's about 750, 800 coaches-plus in a year. In terms of the freight wagons, we are now around the run rate of 700 wagons, between 650, 700, and we intend within this financial year to take it up to 1,000 wagons a year. We have a very significant developments that have taken place during the year is, of course, our entry into the Vande Bharat train segment, where we won the contract from the Indian Railways for manufacturing 80 Vande Bharat trains in consortium with BHEL. As everybody knows, BHEL is a leader in electrical and propulsion and that is what their scope in the consortium would be. And our scope would be to manufacture the train. The prototype train will be made in the next 24 months. And thereafter, in about 4, 4.5 years, the balance trains will be delivered, which is followed by a 35-year maintenance contract, although the pricing has been a challenge because of competitive pressures, but we had factored in some part of it, and we believe that we will still be able to maintain overall average blended EBITDA margins that we are doing now, which is about 8% to 10% in this contract, in the supply portion also. The services portion may be -- the AMC portion may be a little better. But even in the supply, we should be able to achieve the 8% to 10% EBITDA margin. The other significant contract that the company has won is for manufacturing of wheels. And as is well known to most of you, and I think this has been one of the questions that has been asked in most of the investor calls is how do you manage your supply of wheel set because that's been always in short supply. So I think a country like India, which has achieved many scientific feats, has -- still dependent on foreign countries like China, Ukraine, et cetera, for availability of wheels. And kudos to the government of India and to the Railway Ministry for coming up with this very forward-looking concept of having a 20-year offtake agreement for buying 80,000 wheels per annum, which has enabled us to come in partnership with Ramakrishna Forging, which is undoubtedly a market leader in the forging business and they have a wealth of domain expertise in terms of the forging process. Combined with our domain expertise in the railway, it becomes a very strong win-win association between the 2 companies. And we would be setting up together a plant to produce almost 200,000 wheels per annum. This would probably, I'm not sure exactly, but probably be one of the largest, if not the largest, wheel manufacturing plant outside China, mostly manufacturing plant outside China. So out of that 200,000, 80,000 wheels are assured for the next 20 years by the Indian Railways and the rest will be used for our own wagons for exports, for Vande Bharat, et cetera. So these are a few very important developments that have happened in the course of the last year. Another important, very significant and important, development that has happened within the first while subsidiary that we had in Italy, that is Titagarh Firema, wherein the investment was infused by new investors, including the government of Italy in September 2022 as a result of which Titagarh Firema got converted from a subsidiary to an associate company. In terms of the operations of the associate company, the headwinds have been very strong in Europe, as most of you know. To start with was the COVID crisis, then was the inflation, Ukraine war inflationary crisis and so on and so forth. However, having said that, the company has been and is in the process of getting some very significant orders. And with the induction of the Government of Italy as an equity partner, we do believe that the company has a strong prospect. The turnaround of the company has been delayed, which we were expecting to happen last year FY '23. We've not been able to turn positive in FY '23. But we do estimate, based on the current order books, to be able to break even, at least on the EBITDA positive level in FY '24. We've been able to install a new management, which both the induction of the Government of Italy as a shareholder, the Board has to be reconstituted. The management has been installed with their consent. And we believe that the company is now on its way to recovery. So as far as the future outlook for India is and the outlook on the back of the very strong government policies for Atmanirbhar Bharat, Made in India and the infrastructure. And I was hearing an interview of the Honorable Railway Minister a few days ago, where he was explaining the economics of investment in the railway infrastructure and the payback to the economy. So this is the first time that it's a music to ears that at such senior levels such detailed and careful analysis of the return on investment in such infrastructure, particularly in respect to the railways, is being done and that makes us even more confident that this story of the railways turning around and companies like us being able to ride that wave effectively is something that is likely to continue. So with these opening remarks, I'd be -- I hand over the call to Mr. Anil Agarwal and Mr. Saurav Singhania, to maybe walk you through some of the highlights of the financials. And then most happy to take any questions that may be. Thank you.

So good afternoon, everyone. This is Saurav Singhania. So just few key numbers that I wanted to highlight in terms of the performance of the quarter. So in terms of the revenue, we had INR 974 crores during the current quarter as against INR 422 crores in the corresponding quarter in March 2022, which is 131% increase. EBITDA has gone up by 114% as compared to March '22 and profit before tax by 173%. In terms of the overall revenue from a year-on-year basis, this is 86% increase as compared to last year, 57% in EBITDA and 85% in profitable tax. Some key ratios, if you see, in terms of return on capital employed, we were at 6.5% in FY '19, which is in our presentation Page #13 and now we have gone up to 26% in FY '23. The return on equity has gone up from 5.2% in FY '19 to 15.3% in FY '23. In terms of net working capital days, we were at peak in FY '21 at 80 days, which has now gone down to 60 days as on FY '22. So in terms of the overall years -- in terms of the overall segmental performance, if you see in the current year, we were at -- from the paid rolling stock segment, the total revenue was at INR 2,250 crores and the revenue from the passenger division has been at INR 528 crores. The margin from the freight stock segment was at 10.47%, and the margin from the passenger rolling at 4.16%. So with this, I would open up the questions from the participants in the call. Thank you.

[Operator Instructions] First question comes from [ Kaushik Mohan ] from Ashika Stock Broking.

Congratulations for a great set of numbers. Sir, I have a couple of questions. Can you just give some light on Vande Bharat for us? For 80 trains order, what is the total value of this order and how much is your [indiscernible] and how much is your share? And in share, how much is for construction and how much is for maintenance?

Thank you very much, Mr. Mohan. So for the Vande Bharat contract, there are 2 portions to the contract, the supply portion and the maintenance. The contract value is about INR 9,600 crores and the -- plus PVC, which will accumulate over the period of time. And the maintenance is about 1.4, 1.5x of that. So the total contract value, including maintenance, is about INR 24,000 crores, plus the PVC, as I said. Our share on the overall basis is about 51%, 52%.

48% is [indiscernible] 52% and 48% is BHEL, sir?

Between 51% and 52%. So it's around 51, 52 percentage for us and balances for is BHEL. This is applicable both for the supply as well as the service.

Got it, sir. And my second question is on the [indiscernible] part. Sir, with what is your share between both of us and what is the total order value? And how many years will this go for?

So the initial contract value, which we have received is for 15,60,000 wheels, which has to be supplied over 20 years. The value of the contract is close to INR 30,000 crores and participation of both the companies is almost equal.

Sir, is this inflation adjusted or if the number has been exactly calculated current price?

This is not inflation adjusted. This is less PVC. Exact quantity is 15,40,000, yes?

15,40,000, I'm sorry, not 15,60,000. 15,40,000 wheels and the total exact value is closing to approximately INR 30,000 crores.

Sir, there is one recent bidding which happened for 50,000 wagons. When can we expect the results for this?

So there is no bidding that has happened until now because in the media that there is a tender likely to come out, but the tender has not yet come out.

The next question comes from [ Sunilji ], an individual investor.

First of all, my first question is regarding the decrease in the borrowings. If I consider the current and noncurrent borrowings is approximately INR [ 620 ] crores, which is fantastic. But there is an increase of INR 200 crores in that contract borrowing, -- sorry, yes, in the contract purchase. What does it mean? Does it also get some interest or is it purely a like vendor?

So sir, are you talking about the contract liabilities on the standalone financials?

Yes. Yes. Consolidated. Yes.

Yes. So these contract liabilities are the advance from customers that has been received against various contracts. So this has been disclosed separately in line with the requirements of the [indiscernible].

So if you can use the term advance from customer, it will be much better because it's too confusing and too misleading what this is, contract liabilities. Contract can include so many things. Contract can include about vendors, about [indiscernible]. So many things it can include so better to everybody write advances from customers only.

We take your suggestion, sir. Very valuable. We will examine this according to the accounting standards, and I've requested my team to examine. I think it's a very valuable suggestion.

Yes. And number two, I have seen all your press release. There is also some sort of incompleteness and [indiscernible] portion is there because you are writing, okay, 80 Vande Bharat trains we have received order in [indiscernible] but there is no mentioning that what is your share of the JV or the consortium in that particular press release. So we, as an investor, just like -- we just keep okay 90%, maybe 10%, maybe 20%, maybe 50%. So today, you only clarify. So going forward, whenever you [indiscernible] given kindly mention like any other company mentions to give the complete information. Otherwise, if you also [indiscernible] like also you can [indiscernible] of this required products, for example.

Again, thank you for your suggestion. But to the best of our knowledge, the press releases that have been issued by us and we cannot talk about press coverages, but press releases, we always give all the necessary facts that are to be given. If there are some that you have come across, which do not give the necessary details, we would request you to share this with our investor team, and we shall certainly look into it. But as a company, we are very conscious about press releases. Of course, we cannot control all press coverages because they...

No, no, sir. Sorry, sir. I'm not talking about press release. I'm talking about the corporate announcement, which we use [indiscernible] we don't rely on this media or the paper. So whatever corporate announcement you have given in the form of press release to look at, then there only -- we have seen that nowhere you have mentioned or your team has mentioned regarding that, what is the share of Titagarh Wagons or Titagarh Rail Systems in that particular JV consortium. So going forward, kindly mention this [indiscernible]

It's completely -- thank you very much take this up and inadequacy of information, we shall definitely make sure that it is corrected.

The next question comes from [ Bala Subramani ] from [indiscernible] Capital.

Congratulations for good set up numbers. My first question, like what would be the status for trial in propulsion systems for railway? And propulsion proportion systems, like is the kind of [indiscernible], so what kind of margin improvement do you may expect? Because right now, in a metro -- in the car side, around 20% to 30% of value comes from propulsion systems only. So after this indigenization, what kind of margin improvement we may expect?

Thank you, sir. The -- in terms of the process of approval of the propulsion system that is underway, some of the components we have already supplied and they are under the trial period. There is a very detailed step-by-step approval process for the propulsion system, which is actually quite tactic. We are pursuing that. And over this year, we should be able to receive some of the approvals and start bulk supplies, some of the approvals will get spilled over to the next year. So overall, I would say we are, by and large, as per our plan on the propulsion system. And in terms of your second part of your question that about margin improvements once we have our own propulsion system, definitely, it is going to impact the margins favorably once we start making our own indigenous propulsion system. But in order to reach that stage where we will be fully independent and we'll be able to do our own propulsion systems entirely by ourselves it is going to be a process of at least 2 to 3 years. So thereafter, there is definitely going to be a quantum jump in the overall margins of the PRS, that is the passenger rail system business. Having said that, I would also like to clarify that the passenger rail systems, even without the propulsion is business where we are expecting to get the same 8% to 10% EBITDA margin. The current low level of EBITDA is on account of the lower top line. In our business, the top line is what drives the bottom line. So since the business is at a nascent stage, till the business comes to a certain base level, the EBITDA margins are lower, but you have -- you would see that it has improved over the quarter. And going forward, once we have been able to reach a certain base level, we would be able to get to the 8%, 10% EBITDA margin on the PRS also.

Okay. Got it, sir. And sir, my second question on the traction motor side, what would be the volume on that monthly run rate? And what kind of target we have going forward?

So the capacity that we have, stored capacity, is between 150 to 200 traction motors per year, that 1,800 to 2,400 traction motors per year. But as I mentioned a little while ago, the entire process of approval is a time-taking one. We have already supplied fraction motors. Some of them have already undergone trials. Trials have been successful. And it is a process which is ongoing, and we will continue to travel this journey.

Okay. So we're manufacturing around 50 to 60 motors per month or like -- what you can numbers?

So now we are not. As I mentioned, that we have only made the trial production, the trials have to go on, and there's a process. I'm not able to elaborate the entire process because the entire certifications of the railways, but to be able to get to the rated capacity of 150 to 200 traction motors a month is going to be a 2-, 2.5-year journey.

Okay. Got it, sir. Sir, on the metro side, is there any big pipeline and what would be the status on Surat and Aurangabad metros, if you could throw some light on future opportunities that would be really helpful.

The metro business is a very attractive business. There are many metros that are coming up and that have been announced to come up. I would not be able to speak about specific opportunities, and we can only speak about them if and when we are successful in winning a bid. But all I can say is that being the latest entrant in this field and competing with large companies, we have been able to establish ourselves in a very significant manner as the only Indian fully Atmanirbhar metro coach manufacturer. And using this advantage of being established as a good manufacturer of metro coaches, we will definitely be a significant player in this segment in the years to come.

The next question comes from [ Vinay Chowdhary ], an individual investor.

Congrats on the great numbers. So on the wagons, how much would be the private sector wagon which had been produced in, say, FY '23? And what are the planned production for the coming FY '24?

Thank you, sir. As a strategy, we do not give the breakup between the private sector and the RFP values, but we do not announce those numbers. All I can say is that we are a leader in both the segments. We have order books which are probably equal to the largest or even the largest in the private sector wagon market also. And of course, we are, by far, the leaders in the railway wagon market. So in both the segments, we are quite actively present and are playing a very important significant role.

Sure. And what would be like the manufacturing? When can we expect the coaches manufactured for CRRC start?

The coaches are for Bangalore Metro on behalf of CRRC and the production is likely to start in the Q3 of the current financial year.

Okay. Okay. And if I got the information right, the current capacity for metro coaches is around 1.5 to 2 lakhs.

I did not get you, I'm sorry.

Can you throw some light on the current capacity for the metro coaches with the commencement of the stainless steel coaches set to begin production?

Okay. So for the metro, we will have a capacity of about 30, 35 coaches per month, and then we would have similar capacity for Vande Bharat. So overall, we are planning to build capacity of about 70 cars per month.

The next question comes from [ Lemar Shah ], an individual investor.

What was the wagon production for this current quarter, total wagon production?

So we have been able to get to approximately an average run rate of around 8,000 wagons. That's about 2,000 wagons in a quarter, but we would not be able to disclose the exact numbers as we don't -- we not put that in our presentation and we do not generally disclose the exact numbers. But we are now -- I mean, we have been able to achieve close to 2,000 wagons per quarter. And our target is the current financial year to grow it further to reach close to 3,000 wagons per quarter.

Okay. And sir, in this quarter's results, the freight rail system shows a top line of about INR 808 crores, and you've already merged the shipping business into that. So could we get a basic idea about what is the freight rail top line and a shipping top line because both are [ equivalent ] so we don't have an idea on that.

No, it is primarily the freight rails being not a very significant part. That is why the segment merged. So to start, divide the merged segment at this point may not be possible or [indiscernible]. But in the overall size of the company and overall scheme of things, it would be extremely small, the shipbuilding would be extremely small at this point of time. As I mentioned in my opening comments, that is true for this at this point of time. And by all means, we are planning to kind of downplay the shipbuilding for the long term. We believe that it does offer good prospects. But being able to concentrate both our capital allocation and management, the resource and time allocation. This reorganization has been considered appropriate and implemented.

Okay. And this Pune Metro, what percentage of the total contract is still pending to be executed? And by when will it be complete?

As I mentioned, about 50% of the contract has been completed in the last -- until the last financial year. The balance will be completed within the current year.

The next question comes from [ Ankur Agarwal ] from [ Wealth Solutions Private Limited ].

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The next question comes [indiscernible] from [ Triage Advisors ].

So a couple of things, sir. On these 2 contracts, 1 in consortium with RK Forgings and the other with BHEL, given the long tenures of these contracts, and specifically on your RCF project, where you are also creating extra capacity, a couple of things. Can you tell us how protected are you in terms of downside on the profitability side in these contracts? And b, given that you're creating [ 60% ] of extra capacity, spare capacity on the wheels side, how soon do you believe you'll be able to absorb the entire capacity, sir?

Thank you very much. In terms of the downside protection, you see there are 2 ways of downside protection. One is the price potential for the contract on account of inflationary tendency trend. So all the contracts, the large contracts that we have got, whether it is a Vande Bharat or the wheels are both with price variation, adequate price variation clause, which kind of protects the companies, whether it's our consortium with BHEL or our consortium with Ramakrishna Forgings from the inflationary trend. In terms of the...

I'm very sorry to be interrupting, but when you say inflation, would that be only on the input side or would that include fuel and other components as well, sir?

It is a very comprehensive price variation formula. I mean, of course, I would not be able to go into each element of that. But when the price variation formulas are worked out, they are worked out on the basis of the actual cost of production. So suffice to say that based on the experience of the company over the last 25 years, which is a very long period of time to be able to judge the efficacy of such price variation clauses. Barring a couple of quarters here or there where the price movements could be very steep and sudden. The price variation cost does compensate for the inflationary cost pressures. In terms of utilization of the capacity is concerned, if any venture is set up where [ 14% ] capacity is underwritten by a single customer for a long period of 20 years. That in itself gives you a very large, huge head start. So that is what we are looking at. We're looking at the glass half full and not the last half empty. The [ 60% ] capacity that we are building up is something which will be not a big challenge to kind of absorb or to be able to sell as we ourselves as a wagon manufacturer are always in shortage of wheel sets. Then after that, we would also have the Vande Bharat. And then the maintenance of the Vande Bharat. So the 35 years of maintenance of the Vande Bharat, which would also require wheel set. And then there is the export market and wheels are -- with the China plus One strategy which the world is following. Today, most of the wheels are being produced in China. So we do believe that there is a very good export potential, and we would be focusing on export markets as well for the wheels that we will produce.

Right. And sir, one clarification, sir. Would there be a meaningful import content in terms of raw materials? Is the steel available locally for the wheels or would you have a specific grade requirements, which you have to import at some point in time?

Steel is available locally, but I'm not able to give details about the kind of import versus domestic content. There is -- these tenders are under make in India, clause of the government, which means substantial local content is a must. But having said that, these are operational decisions, and we are talking about a contract which lasts for 20 years. So obviously, there are -- the strategies cannot be kind of decided at an issuer upfront.

Right. But there is no constraint in terms of local availability. But still, I get it that you retain the option, of course.

That's right.

And one last question, if I may, sir. I don't mind my belaboring the point. But the -- with just utilization 77,000 per annum effectively the wheel set. Would you at least break even at an EBITDA level, which is this number that is to say?

It would be going into too much of financial details. We will definitely disclose because this is a consortium of 2 listed companies. Whatever is possible to be disclosed. But once again, I would say that as investors, you would have seen many companies and at whatever levels we have seen. If a business is started a greenfield project is started wherein 40% of the capacity is underwritten for the next 20 years by a single customer, then the head start, it's like starting at a 50-meter or a 40-meter kind of handicap advantage in a 100-meter race.

Of course. So I appreciate the advantages, of course, sir. Just clarifying whether there is a longer gestation than what is available immediately. That is the only point behind the question.

We have a follow-up question from Kaushik Mohit from Ashika Stock Broking.

This is a question on -- I just wanted to understand on your current Pune orders. So how many total? What is the contract value for Pune and how much -- you told 50% has been deliver? That means another 50%, how long you have the time?

So the total contract for Pune was 34 trains. The value of the contract was about INR 1,100 crores. 50% has been executed. The balance will be over within this financial year.

Sir, per one train, how many coaches that comes out to be?

See, for 34 trains, it's 3 coaches each, 102 coaches.