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

Ladies and gentlemen, good day, and welcome to the Titagarh Rail Systems Limited Q1 FY '25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Parth Patel from Orient Capital. Thank you, and over to you, sir.

Thank you, Niha. On behalf of Titagarh Rail Systems Limited, I extend a very warm welcome to all participants on Q1 FY '25 financial results discussion call. Today on the call we have Mr. Umesh Chowdhary, Vice Chairman and Managing Director; Mr. Prithish Chowdhary, Deputy Managing Director; Mr. Saurav Singhania, Chief Financial Officer. Before we begin the call, I would like to give you a short disclaimer. This call may contain some of the forward-looking statements, which are completely based upon our beliefs, opinion, expectations as of today. These statements are not a guarantee of our future performance and involve unforeseen risks and uncertainties. And with this, I would like to hand over the call to Mr. Umesh, sir. Over to you, sir. Thank you.

Thank you. Thank you, Parth. Very good morning to everybody, and thank you very much for joining this quarterly earnings conference call of Q1 FY '25. To begin with the -- as far as the quarter has been concerned, the numbers have already been published. I will speak about the 2 segments separately. As far as the Freight segment is concerned, the performance has been slightly muted compared to the Q4 of FY '24. However, if you compare on a year-to-year basis from the previous year, we have been able to improve our performance. Overall revenue is about 12% higher compared to the last year's same quarter. Traditionally, the Q1 is a slower quarter in our industry, but this year was exceptionally -- an exceptional quarter because of the severity of the heatwave in Eastern India. There was substantial absenteeism, which was also aggravated by the election season, as a result of which, they was -- not only in our case, but also in the supply chain base, there was disruptions. However, things have already sprung back and we are picking up. And we are still 100% sure and confident that we'll be able to achieve our targets. We expect that from the last year of 8,400 wagons, we'll be able to achieve a growth and get to definitely a 5-digit kind of a number. As far as the Passenger segment is concerned, as was already shared in the last quarter, we had completed -- so if you compare it on a year-to-year basis, there has been about INR 100 crore gaps in the revenue that we had achieved in June '24 versus June '25 (sic) [ June '23 versus June '24. ] That is only because of the fact that Pune Metro was executed in that quarter. And now we have just begun the production of Bangalore Metro in this quarter. The first train for Bangalore Metro will be dispatched in Q2 of FY '25, and the gradual ramp-up is absolutely on track. As we had planned and targeted that we will be able to reach production run rate of between 10 to 15 cars by Q3 or Q4 this year. And that will continue to grow as Surat and Ahmedabad production happens and Vande Bharat starts next year. A few of significant developments on the PRS is we have been able to export our first traction converters to Europe. This is in the propulsion side of the PRS. The shipment happened a few days ago. And of course, the production line that has been set up, the stainless steel production line has begun operations. I think that's a broad summary of the quarter, and I'm happy to take any questions. Thank you.

[Operator Instructions] The first question is from the line of Vikas [indiscernible] from Lakshmi Kala Investments.

Sir, congratulations. And normally, Q1 is a slower quarter in the industry, right?

That's right. Absolutely.

Yes, yes. Sir, are we confident to reach our earlier targets which you have taken the 12,000 freight wagons per year, which is 950 to 1,000 wagons per month. So are we confident to reach our target?

Yes, we are fairly confident that we will reach the target of 950 to 1,000 wagons a month, and we are also confident that we will do a substantive growth almost from the previous year. And the first quarter that has been, as I said, an average of around 700 is not going to be the constraint going forward.

Yes. As I can see, in the passenger rolling stock in this FY '25, there is a decrease as we compare year-on-year, 63% revenue decline. So could you just elaborate and what is the execution in coming quarters?

As I had explained in the previous conference call also, and also we had given it in our results, we -- in the passenger rail segment, we have completed the Pune Metro dispatches, and the Bangalore Metro was to be started. It was delayed because of nonavailability of the visas, this is in cooperation with CRRC. We are subcontractors of CRRC for Bangalore Metro, and there were some problems for getting the Chinese visas. That was resolved. The production has started. And we are confident of being able to ramp to 10 -- between 10 and 15 cars per month within this financial year.

The next question is from the line of Sudeep Anand from Systematix Group.

Sir, just one question on IFRS. So if you look at the per wagon cost of -- per wagon revenue of last quarter was somewhere around INR 37.7 lakh, while if we calculate this quarter, it's around INR 40.6 lakhs. So is it because of higher execution of private wagons? Or was it -- what's the mix if you can just give us?

So the information that can be disclosed has already been disclosed in terms of the numbers in the investor presentation. And yes, absolutely, you're right, that the mix of private versus railways or even within the railways, the type of wagon that has been executed during the quarter continues to change the overall revenue. So that is not a kind of a constant KPI that can be taken in the wagon pricing because there are different types of wagons that whether the railway buys or the private sector buys, and each one of them has a different pricing.

Okay. And another on PRS, how do we see the pipeline of metro contracts? So any new metro order which is expected to come or where we have bid, any color on that?

So there is -- absolutely there -- in public domain, it is there that there are a number of metro tenders that have already been floated. There are ongoing, as we speak, 6 tenders of different cities that are in the pipeline. There have been -- tenders have been floated or prices have been submitted, whether prices are yet to be opened. So -- and also in terms of the government's clear policy to push the metro or urban mobility forward, we believe that several cities will be undergoing an expansion or further capacity enhancement in terms of carrying passengers for other mobility, which will continue to bolster the demand of metro coaches.

The next question is from the line of Koushik Mohan from Ashika Institutional Equities.

Sir, I just wanted to understand what is currently our capacity in this quarter that we are running for wagon side? And basically, where is -- what's the margin is also sustained in this quarter?

So the numbers have already been given in the investor presentation. But broadly, I can share with you that, last year, we did an average, if you look at an annual average of 700 wagons. This quarter also, we were at the same average. In terms of the growth on a year-to-year basis, Q1 of FY '24 to FY '25, there is definitely a growth, which is, if extrapolated, is a very clear sign that the first quarter is actually a certain percentage which is not equal to the balance quarter. So in terms of the margin profile is concerned, we have always mentioned -- maintained that in the freight wagon, the sustainable margin and a quarter-to-quarter margin is not really a proper reflection or a proper again KPI for our business. But on the blended margin of 12%, 12.5% is something that we are confident to maintain.

Got it. Sir, and also if I look at closely on your numbers. I can see there has been an increase in the employee cost as a percentage of sales. So are we increasing our employee count in the factory? .

Yes, absolutely. We are definitely increasing our employee count. We have started, and in fact, this is one thing which I forgot to mention. We started our design center in Bangalore. So we are moving -- the whole target of the company is rather than being a manufacturing company alone, we are looking at becoming a more technological company. And as a result of which, a lot of bandwidth creation is going on in terms of developing technology or making products of higher technology. The very fact that we've been able to achieve our first traction converter export, which is a very, very high technology item, I mean, on a technology scale to the wagons and other products, it is a completely different ballgame altogether. That can be only achieved with very high -- highly qualified and skilled people at all levels, whether it is at very senior levels or at even worker levels. So we are continuing to build up our talent pipeline. Last year also, we recruited hundreds of graduate engineers that we are training in also. All of this is reflective of this employee cost.

Got it. Got it. Sir, we have an operating leverage for -- financing leverage because of interest was going down. So in the full year basis, what could be our total interest cost on the P&L?

We are net debt free today. So our cost of interest is, on a net basis, is negligible or not there. Our cost comes primarily on account of the guarantees and LCs, et cetera, that have to be opened in our business, which is very high. And that also will be further optimized because of the credit upgrade -- credit rating upgrade that the company has been able to receive during this quarter from A+ to AA- by CRISIL.

Got it, sir. And sir, I want to understand our visionary numbers that we would reach over next 5 years, how do we look -- Titagarh Rail Systems over the next 5 years?

We have already given our outlook about our targets, the business plan that we are creating, capacity to produce between 800 to 850 passenger cars and 12,000 freight wagons. So that is the capacity that we are creating. As far as reaching the revenue targets are completely utilizing that capacity, of course, that factor of demand, market dynamics, economic situation, et cetera, et cetera, of the macroeconomic situation and interest rates. So definitely, but we believe that India is on a growth path. The infrastructure in India is going to continue to grow. We have seen that even at a very large base of infrastructure spend, the government has further enhanced the budget for infrastructure, 3.4% of the GDP is being spent on further infrastructure growth. So we believe that the capacity that we are creating is something that is going to get utilized or taken away or taken up by the government in its infrastructure pipeline building.

Sir, and in Freight Rail System, how much is the shipbuilding numbers have been added? Because now shipbuilding sector is on booming side, I can see there a set-up with a lot of orders and all, how is that shipbuilding division doing altogether?

Shipbuilding division is not a very significant part. And the numbers that have been shared in the presentation is that we have -- we can disclose also on this call. But what we can say is that we had announced in the past that we had created a Board committee to look into the strategic future of the shipbuilding and the defense. And within the next period of time, short period of time, we will be coming up with the final plans for the shipbuilding and defense.

Okay. And last one final question, sir. When can we expect our Passenger Rail Systems will be a major contributor to revenue? If my assumption is right, if I assume FY '25 Q3, we'll be starting progress on this? Or it is FY '26, should I assume?

As I had mentioned, our capacity that we are building will continue to get ramped up. We are confident of achieving between 10 to 15 cars in Q3 or beginning of Q4 per month. But the target that we have is in 2- to 3-years' time. I would say, more like 3 years' time to reach 70 cars per month. So it will be not an overnight jump, but a gradual move towards on -- let's say, 3 cars per month of the previous year to 70 cars per month in 3, 4 years that we are going to achieve.

In that, how much can be from Vande Bharat?

We are not segmenting, but we have a large order. We have 1,280 car orders from Vande Bharat. And we believe that the demand for both Vande Bharat and the metros will continue. And similar to wagon, it's not -- the capacity is fungible between Vande Bharat and metro to an extent. And therefore, we would just stay with the passenger coach. But broadly, I would say, half and half is what we can envisage in the next at least foreseeable future.

Got it. Got it. And sir, how are we looking at our improvement, because Passenger Rail System is every time is a higher-margin business and in the blended level you're telling that we can make around 11% to 12% on the EBITDA level. So how are we looking? This will be sustaining? And do we need any CapEx to be done in the future for our business now? Because in the past we have done heavy CapEx, right? .

It is a dynamic situation. I don't think that the decision-making or anything that can remain constant in a dynamic kind of scenario that the country is going through. As of now, as far as margin projections are concerned, what I had mentioned is for the freight wagon is 12% approximately. For the passenger, whilst we had explained in the past calls also, without propulsion, the margins are at the level of 10%, 11%. With propulsion, it increasing by another 4%. So with this whole propulsion integration, the future outlook would be to target margin leverage of 14% to 15% in the Passenger Rail segment side.

So how about our deal size...

I request you to come back for a follow-up question. The next question is from the line of Sandesh Shetty from HSBC Securities.

Sir, first question will be, sir, what will be the CapEx for the current year, for FY '25? .

So the CapEx that we had announced of close to between INR 700 crores to INR 1,000 crores, this will be primarily spent within the current year and I would say in the first part of the next financial year, because in order to get the production lines going for Vande Bharat and the other propulsion and stuff like that, the CapEx will be front-ended. So I would say is that INR 700 crores to INR 1,000 crores will be spent within this and between the first part of the next financial year.

So for next 1.5 years, INR 700 crores to INR 1,000 crores is what you're expecting including...

Including what we have already spent over the last 5, 6 months, I would say.

Okay. Okay. And sir, you mentioned -- sir, for this quarter, the PRS margin has been around 6.5%, so it's on slightly on the higher side. So is it because the design component accrues a higher margin? Or is my understanding incorrect, sir? .

So the PRS follows a percentage of completion method according to the accounting standards. And with the new contracts coming in, that is how the margin recognition goes forward. Of course, the operating leverage plays a very important part because, as was also rightly pointed out by another gentleman a little while ago, we are continuously building our talent pipeline. This business requires a very, very deep talent pipeline. And therefore, the fixed cost continues to get incurred. And the operating leverage or the margin starts coming only when the right volume comes in our business It's typically one that where the bottom line will follow the top line. So our focus is now to grow the top line. And as soon as that happens, the margin profile will improve. But the recognition of the margin happened, as I said, on percentage of completion method and this is because the new contracts are coming up. We don't separately book margins for design or production.

Okay. Got it, sir. And sir, one last question. Sir, you mentioned that you have sent your first consignment for traction converters. This is an export order. Sir, going forward, how do you see this traction converter exports panning out like Titagarh, you have sent it to Firema, so it's like a captive sister concern. So do you look at other opportunities also outside of Firema for exports? How do you look at that opportunity, sir? That would be the idea.

So the -- as far as the exports are concerned, once your product gets invested, once it gets approved, it just becomes -- the world opens up as the market. And yes, the first one has gone to Firema, but it is going -- it has to go through all the approval processes, including acceptance by the final customer, which is the Rome region or the Lazio region for the trains that will run in the capital city of Italy. So therefore, the quality standards, the technical standards, the facilities, all of that have to be up to the mark in order to achieve this kind of approvals. Once that is done, then whether it is Firema or anybody else, the market opens up. . We also understand from newspaper reports that the government is really focusing and is likely to come up with teams to support exports of railway components. And we believe that further will give us some kind of an advantage or some kind of a boost to enhance our international presence or international markets.

The next question is from the line of Balasubramanian from Arihant Capital.

Sir, one of [ EMS ] players talked about some delay in metro projects, especially in Mumbai, as well as a delay in 200 Vande Bharat trains and because of shortage of supply systems -- subsystems. So what's your thought process on the shortage of these subsystems? And like what's the -- this budget also government have not much focused on railway side. And like what kind of growth aspects we can expect in this financial as well as next financial? As well as what kind of execution challenges we have as of now?

So as far as supply chain constraints are concerned, they are a part of the business, they happen on a day-to-day basis. That is not something that is new. And that is exactly where the work of the companies are, the management of the company is to ensure that these constraints are removed. But we can divide it into manageable challenges and unmanageable challenges, and I can confirm that there are no unmanageable challenges. They're all manageable challenges that we are facing or we have faced in the past. And in fact, if I can also confirm that there is no particular specific challenge, which kind of it a show-stopper and it's a day-to-day affair. In terms of the infrastructure for Mumbai, et cetera, we are all aware that was also on account of certain delays for certain plant regions, et cetera. This is again a very, very normal process of any metro or infrastructure project. But the work is going on very well. There are 3 Metro tenders, Metro coach tenders that have been floated by Mumbai Metro as of this moment. And we do not see that is going to be a challenge. And the third point in terms of the focus of the government on railways going down, I really do not -- I do not understand where this question comes from. Because if you look at the budgetary allocation, on a very high number that was existing last year, there has been a further enhancement. So the focus of the government on the railways, I don't see has come down. We must also appreciate that infrastructure is a long-term project. So let's say, the Vande Bharat contract that we received is going to be executed over 4, 5 years. So every year, the orders are not something that will continue on the same level. but it is a cycle where in the first orders have to start execution and then the second one is coming. So it is pretty much, I would say, on the track as per the game plan that we had envisaged or we had hoped for. And we do not see any negative or any concerns in the overall budget that was presented for the railways. .

Got it. Sir, on the wheelsets plant, another partner with Ramakrishna Forgings, they talked about INR 1,800 crores kind of CapEx. Earlier like if we look at it 1 year back the CapEx, that was around INR 1,200 crores, INR 1,300 crores kind of range. Right now INR 1,800 crores, like any further explanations, we can expect -- one of our competitors also aggressively expanding this wheelsets CapEx side. So whether -- what kind of opportunity do we have? And whether -- how you are confident to execute in those CapEx and business opportunities?

Yes, I will not be able to speak on the competitors here because I'm not fully aware of what exactly is being done. But what I can speak about is our joint venture with Ramakrishna Forgings is absolutely on track. The overall CapEx of INR 1,800 crores is in 2 phases. And we are the only company or our joint venture is the only company in the country. which has a long-term contract from the railway. So I'm sure you are aware that our project is being set up on the back of a commitment from the railways to purchase 80,000 wheels per year for the next 20 years. So that gives us plenty of the capacity utilization, apart from our own requirement, which in itself is substantial as well as the exports, which is going to be there. So the total capacity that is being created by joint venture is around 200,000, 220,000 wheels out of which 80,000 wheels is underwritten by the railways. And the balance is going to be consumed or sold to our own captive consumption requirement or to market requirements.

Got it. Got it. Sir, my last question, one of the...

Sir, I request you to come back for a follow-up question. [Operator Instructions] The next question is from the line of Parvez Qazi from Nuvama Group.