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

Ladies and gentlemen, good day, and welcome to Titagarh Rail Systems Limited Q2 FY '24 Conference Call hosted by Antique Stock Broking. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Dhirendra Tiwari from Antique Stock Broking. Thank you, and over to you, Mr. Tiwari.

Thank you. Good evening, ladies and gentlemen. On behalf of Antique Stock Broking, I welcome you to 2Q FY '24 Post-Results Conference Call of Titagarh Rail Systems Limited. We are very glad to 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; and Mr. Saurav Singhania joint CFO and Group Financial Controller. I would like to congratulate the entire team of Titagarh Rail Systems for reporting yet another quarter of very strong performance. Now I would invite Mr. Umesh Chowdhary for his initial remarks on the results and outlook. Over to you, Umesh.

Thank you very much, Dhirendra, and thank you for hosting this earnings conference call, Antique is holding -- is hosting this call for the first time. So it's a great pleasure to have you host the call. Very good afternoon to all the participants, and thank you for joining the call. The quarter has been, I would say, in line with what we have been expecting. I had mentioned earlier also that we would be maintaining for the first couple of quarters or 2, 3 quarters a run rate of similar nature, which we have done. As far as the 2 businesses are concerned, freight rolling stock and the passenger rail systems. So as far as freight rolling stock is concerned, the performance has been in line with what we had expected. Although we have been able to touch in a particular month, about 750 -- 760 wagons, 759 wagons output as has been disclosed in our presentation. We are very well on track to touch the 1,000 wagons mark by the end of this fiscal. The order book remains strong, and the railways growth trajectory also looks strong. So we believe that there should be good traction for the freight rolling stock business or freight wagon business in the years to come. As far as the passenger rail system is concerned, the quarter was very interesting because we had 2 new important contracts, 1 for Surat and 1 for Ahmedabad. And after the Pune Metro contract, while the company has got the Bangalore contract, while we are subcontracting from CRRC, these 2 tenders are the first direct tenders that we have received from the metro authorities in India. That is -- that makes these 2 contracts very significant. What is also significant is that these are the 2 direct stainless steel contracts, stainless steel car body contracts that we have received from a metro authority. The Pune contract we had was for aluminum coaches. So this kind of establishes Titagarh's forte into both aluminum and stainless steel metro coach manufacturing. This combined with the Vande Bharat order would give a very good visibility, very strong visibility to our passenger rail systems business. And all our energies and all our focus now is on the execution of the contract that we have got here. We believe we are confident of starting the stainless steel manufacturing for the Bangalore Metro project within December this year. So in about a couple of months, we'll start production. And the first metro coach should be dispatched within this financial year for Bangalore Metro. So it is -- the stainless steel line setup is very well on track. A quick update on the Vande Bharat. Vande Bharat project is also going very well on track. We have already progressed on the designing activity. The train is coming out very well. It would be in line with the expectations of the government and the people of India, and we expect to be able to offer to the people of India, a very modern and a very unique train travel experience by the new sleeper Vande Bharat that we will be launching or will be offering to the railways. As far as shipbuilding, we had a launch of the first driving support craft. Of course, the shipbuilding has been now merged into the freight rolling stock business. But -- that is also a significant development because for the Navy, this was one of kind of vessels that we have been able to get from an Indian source under the Make in India policy of the government. So on the whole, I would say that it's been a satisfying quarter pretty much in line with what our external expectations were. Going forward, we believe that we will continue the trust on growing the capacity of the production and the output of the wagon, and the passenger rail systems alike. We believe that the passenger rail systems have a much longer runway in terms of the potential that -- from where we are to where we have to go, there is a very long runway. So just a quick update about Pune Metro also Pune Metro, we have almost completed 60%, 70% of the contract and the rest would be completed within this financial year. With these few words, I would be very happy to answer any questions that may be there from the participants. Thank you.

[Operator Instructions] The first question is from the line of Kaushik Mohan from Ashika Institute.

Congratulations for the great set of numbers. So sir, my first major question is on the raw materials consume. If we see we have shown that our raw material cost is somewhere around INR 679.6 crores. So can I understand basically why are we having such a low raw material cost because of one impact on the raw material, our gross margins have increased from 21.8% to 22.9%.

The gross margin in our business is a function of the type of wagon that we are producing. When the mix of the private wagon goes up, the contribution percentages improve. In the current quarter, the share of the private sector wagon has been slightly higher than earlier quarters, and that is a result of that the gross margin percentages are better. Having said that, because of the volumes, because of the efficiencies, et cetera, we have been able to -- as is reflective from the last several quarters that we have reported, we have been able to upscale our expected EBITDA margins. But in this quarter, the margins have been even better because of the mix of the private versus railway execution.

So can we expect the blended margin to be upwards of 12% on the EBITDA level for the whole year?

We have always maintained -- earlier, we had maintained a margin guidance in the freight rolling stock for 8% to 10%. In the last call, I had mentioned that because of the various steps that have been taken we would be able to be on the higher end of the spectrum, which is, I'd say is about 10%, 11% or so. On a sustained basis, and I'm not talking about a quarter-to-quarter, but -- and I'm not also talking about 3 or 4 quarters, but on a sustained basis, let's say, over a 8-quarter period, the normal margin of the industry should be considered as 11% may be going up to 11.5%. But this is on a much longer horizon. As far as shorter horizon is concerned, depending upon the product mix, the margins can be up and down.

Sir, in our presentation, Page #3 in business update, we have mentioned that wagons for private players is consuming around -- contributing around 26% of FTRS. That means am I right to assume that INR 3,500 crores is coming from private players?

That's the order book for the...

I'm right with assuming that number?

I don't have the calculation with me, but yes, we can definitely do that calculation, and I'm sure it will be right.

And last and final question. I just wanted to understand, we have in the Page 14, you have told about that we are -- we're having a leadership position with 32% market share. Can I -- can you please explain that how this number is being arrived at?

Sure. Mr. Anil Agarwal, please reply to the question.

So these numbers are taken from the source of [Technical Difficulty] so this is based on the total number of wagons that has been dispatched in the respective years for 2021, '22 and '23. So that's how the number has been worked out and be presented over here.

Sir, I'm Sorry to interrupt. There's a distortion at your end, you're not audible enough.

Yes. So we've given the source of Indian Railways -- it's in the Indian Railway -- I mean the domain, which is given. And these numbers have been worked out based on the total number of wagons that has been dispatched in the year 2021, '22 and '23 orders.

Got it. So that means that whatever the Indian government has given us an order, that number is at 32%.

That's the percentage, yes.

Got it, sir. And then last and final question, how is the development on the wheel set plant?

So that's also on the track actually. So the ordering for the main equipment has already been done. Then the land we have already been already decided. So everything is on track.

Okay. So by Q2 -- sorry, by Q3 or Q4 of FY [ '24 ], can we expect the plan to be live?

Actually, contractually, the first wheel set has to be dispatched 3 years from the signing of the contract. So what we expect to do is that we should be able to produce the green shades before that and offer for inspection to the Indian Railways. That's our plan, and we are on track.

The next question is from the line of Nikhil Abhyankar from ICICI Securities.

Nothing is audible.

Line for the participant has dropped. We'll move on to the next person -- participant in the question queue. The next question is from Sudeep Anand.

And many congratulations for the very good set of numbers. Sir, just wanted to understand how should we look at the margins in your PRS which is really between 2% to 3% or in fact 3%. So once our capacity goes up to 17 cars per month, what kind of a margin improvement we can expect then?

Sure. So the current margins of the PRS is not reflective of the business margins because of the low volume, the fixed costs remain the same, the margins get impacted. We had mentioned that an approximate margin of 10% in this business is expected at normal margins -- at normal volumes. Normal volumes would mean about 20 cars, 50 to 20 cars per month for the current -- for the Phase 1 of the production cycle. We expect that by middle of the next financial year, we should be able to achieve that run rate and be able to get to the normal margin. The margin improvement in this business will happen once we are able to backward integrate with the propulsion and the components, which is what we are intending to do and which is what we have already on track. We have already set the ball rolling. That should take us another maybe 2 years, 2.5 years, or let's say, between 2 and 3 years, we would be able to backward integrate and we are working on different strategies to be able to become self-sufficient or [Foreign Language] on the propulsion side, and that will give us a substantive margin boost. So to answer your question, by middle of next financial year, we should be able to reach a base level of volume, which will give us an EBITDA margin of around 10%. And thereafter, in about 2, 2.5 years, we should be able to -- once we are able to get the backward integration piece in place, be able to improve this margin even further.

Okay. And sir, just one last one. So looking at our order book, Invitalia recently floated a tender for 20,000 wagons. So how are we placed to actually bid for the maximum number of wagons. So looking at the current order book, how are you placed, sir?

We are very well placed. We would definitely be participating in a very meaningful manner in this tender. The deliveries required in this tender are stretching up to end of 2025, December '25, which in case the tender is finalized, everything goes well, then -- December 2025, otherwise, it may be extended, which leaves us almost 23 months -- sorry, 27 months -- 23 months from now. And we have enough capacity available with us to be able to participate in a very meaningful manner in this manner.

The next question is from Nikhil Abhyankar from ICICI Securities.

Sir, can you just give us the breakup between private and government wagons that we have dispatched in Q2 or the revenue breakup basically?

As a matter of policy for competitive reasons, we do not give that. But the percentage of the wagon dispatched to private sector has been better compared to earlier quarters.

Okay. And sir, we were expecting a larger tender from railways, right, somewhere around 40,000 to 50,000 of wagons. So are we expecting some other tender coming up?

Well, our information is as good as yours in terms of newspaper reports and according to whatever we understand from those, total demand is not over by this tender that has been issued. This is only for one type of wagons. The other types of wagons that are required are yet to be tendered, and we are hoping that the tenders should come out in due course.

Understood. And sir, there was a moratorium on GPWIS wagons in March. So out of the sanction lot. How much is still remaining for delivery or for ordering or something like that? Can you give some highlight on that?

There are enough approvals that are already active for the GPWIS and we believe that the moratorium will -- by the time the moratorium is there, the pipeline will not get dried up. I do not have the exact numbers with me to be able to comment upon that. But in terms of the traction and the order pipeline, the GPWIS wagon have a very strong pipeline and traction both.

Sir, can you just give us the exact number, how much has been sanctioned till date?

That's what I said. I don't have the exact numbers with me as of now.

The next question is from the line of Shrinidhi from HSBC.

Congratulations on a great set of numbers. Sir, building on to this private wagon demand which continues to be very strong and it's very well reflected in your numbers. Wondering, sir, apart from the GPWIS moratorium, are there other factors which is driving the strong demand from private market?

The overall voice in the economic synergies is driving the wagon market. Wagon is a very attractive investment in terms of the return on investment or return on capital employed, any investment made into purchase of wagon is very attractive. And obviously, the users, when they -- the business -- the base volume of the business imports like it is for the different core sectors, they are investing into assets that can give them a better return. So the moratorium actually has nothing to do with the quality in the market. The moratorium was good because of different reasons. But we believe that the traction in the wagon market or the private wagon, whether it is in GPWIS, whether it is in the container train operators team, we've also seen a lot of traction on the container train operator scheme. We've seen a lot of traction on the steel plant buying wagons for their own use, of course, for the mining and power and all of that. So on the whole private sector wagon has seen a good traction. The one factor that can be attributed is more, I would say, user-friendly approach of the railways towards investment in 2 wagons, which has encouraged private sector to continue their investment in buying wagons.

Right, sir. Second question I have, sir, is on the potential new entrants in the wagon industry, we saw that industry almost doubling or even more than that in just a couple of years. So are you seeing new players entering in this wagon manufacturing industry? And can you also take us how long is the approval process for a new entrant to come in this industry?

So we've not heard of any new entrant apart from the ones that were already existing that are entering into the industry as of this moment. But of course, it's an open industry and people can enter. The normal cycle time for new entrants to get established and come to the regular bidding and regular order taking cycle because it's also a safety product and meet the railways on a mixed track. So as a result of that, normally, what we have seen is anything between 3 to -- 3 to 5, 6 years. And if we look at the last 2 or 3 entrants, they took at least 2, 3 years -- 3 to 5 years, I would say, for being able to establish themselves as a regular manufacturer.

Right. And last one, if I may. On the receivables, sir, we saw receivables increasing from March levels. Wondering what is really driving that? And what level one can expect that this stabilized by the year-end?

This is a temporary phenomenon because of the sales were back-ended in the quarter towards end of the quarter, and also the mix change between private and the railway. Normally, the payment terms are maybe just a couple of weeks more in the private sector segment. So this is a temporary phenomenon. As far as the working capital cycle is concerned, we are more than confident that we will be able to maintain our targeted working capital cycle of -- net working capital days of under 30 days as far as the freight rolling stock is concerned.

The next question is from Balasubramanian from Arihant Capital.

Congratulations for good set of numbers. Sir, I have feel that in the railways data, I think railway volumes have been declined, not only Titagarh other competitor players also like private wagons volumes have been increased. I just want to understand like these private volumes or export markets or domestic market have supplied, and if you could talk about what kind of export opportunities do you have any new order pipeline? And any about -- how about inquiry status under exports market?

So the private wagons primarily are domestic demands and indirectly, they are going to the railways only because they are operated by the Indian Railways. It is the procurement channel that we come through the private sector. And the usage is on the private sector, which in any case, even if the railway buys the ultimate customer into private sector of a core sector. As far as export is concerned, barring for any wagon export to neighboring countries or to some African countries, India is not -- there is not a huge export market for the complete wagons per se, the reason being the logistics cost that is to give a comparison of wagon that costs maybe about INR 40 lakh kind of occupies the same shipping volume compared to a coast, which costs about INR 10 crores. So the shipping cost as a percentage of the capital cost in wagon is very high, as a result of which, wagon is a more localized, domesticated industry and besides industry we have not investigated, but there are sporadic demands that keep on coming up for wagons. And as a company, we have also exported wagons to neighboring countries into some African countries.

Okay, sir. Could you please share volume number for freight and passenger rolling stocks for this quarter?

It is already given in the segmental. Your question, sorry, is freight and passenger?

Volume, sir. Overall volume.

Given the freight and the passenger in the technical reporting.

The next question is from Shirom Kapur from Prabhudas Lilladher.

Congrats on a great set of numbers. sir, I had a couple of questions. One is on metro. So in your presentation, you mentioned that...

Sorry, we can't hear you, Mr. Kapur.

We move on to the next participant from the name of Kunal Sheth.

My question is pertaining to the passenger rail segment. You did mention about the backward integration could lead to further improvement in margins. So if you can just talk us through about the -- what are the timelines that you're keeping in mind in terms of what is usually the timeline that it takes for some of these products to get backward integrated as in put up a line -- approval process -- are there any major approval process that are required to be in place?

Sure. So as far as the bulk of the backward integration margin, which is already on track is the propulsion system. And we have already set up our facility for the propulsion systems for some of the propulsion system, we have also received approvals, for example, the traction orders et cetera. But then they have to go through a very stringent trial process. And some of the other like professional propulsion, we are still way to develop those systems by way of our own engineering setup, and we are also exploring some technology tie-ups, et cetera. So all told, we believe for the propulsion system that we are now working to -- backward integrate in the first stage, we will be able to get this on track, as I said, between 2 to 3 years from now, wherein we expect that we will be able to utilize our own propulsion system for the metro coaches manufactured by us.

And for other products that you were planning to backward integrate any timelines and approvals on that one?

I'm sorry, I couldn't hear you.

So apart from propulsion systems, some of the -- any other products that we are looking to backward integrate and any timelines and approval process that we will have to go through on those products?

Yes. So those processes are already ongoing. Some of them have already happened. Some of them will continue to happen. And the timeline that I'm mentioning is including those approval processes.

The next question is from the line of Hemant, who is an individual investor.

Sir, congratulations on a very good set of numbers. Sir, first of all, I would like to know, like out of the total order book of nearly INR 28,000 crores, what is the share of Titagarh? Because as I understand, like we have the 51% or 52% share with the rail and the 50% [indiscernible] also, right? So out of the total order book, what is the share -- actual share of our company?

The order book reported is only considering our share of the order. So wherever the share of Titagarh is say 51%, the order book of INR 28,000 crores is considering 51% of that particular order. So INR 28,000-odd crores that has been reported is our share of the order book.

And sir, one more thing I wanted to ask you like we are planning to ramp up our production facility, right? From 20 coaches to 70 coaches per month and 700 wagons to 1,000 wagons per month. So what is the timing for the completion of this?

As far as the freight wagon ramp-up is concerned, as I had mentioned at the beginning of the call, we will be able to achieve that by the end of this financial year. As far as getting the capacity to 70 cars per month is concerned for the passenger coaches, it is going to take us about 3 years, 3.5 years from now to be able to reach that capacity.

And when will our coach wheel production starts, the joint venture...

Hello, Mr. Hemant, you are not audible enough.

Sir, I wanted to ask you, like when is the commencement of the coach wheel production? The joint venture which...

Coach wheel, according to the contract is supposed to start before April 2026 and we believe we will be able to be ahead of that.

Okay. Sir, any revenue guidance for the next year?

No, we do not give as a matter of policy, any revenue or any other guidance.

Any broad range will be...

The order book and the outlook of the company.

Sorry to interrupt Mr. Hemant, you can come back in the question queue for additional questions. The next question is from Viren Deshpande from Alpha Peak Investments.

Congratulations on the excellent numbers we are being able to do in this quarter as well as the first quarter. So do we expect the half -- second half of the year to be significantly better than the first half because our ramp-up of wagons, et cetera, will continue?