The Hindu Business Line : Texmaco: Buy

Investors with a two/three-year investment horizon can consider exposure to the stock of Texmaco, a leading supplier of wagons to the Indian Railways.

At the current market price, the stock trades at about 22 times its expected FY-08 per share earnings. Given the increase in capacity by the Railways, Texmaco's wagon division is likely to witness a significant growth in demand.

This apart, privatisation of container freight movement and entry of private logistics players into the railway freight business may also contribute to higher demand for wagons, leading to further growth potential. The proposed doubling of capacity of the steel foundry division and a robust demand environment for Texmaco's hydro-mechanical equipment and structurals division also lend optimism to earnings prospects.

Investment argument

Driven by increasing demand from the Indian Railways and the private sector, Texmaco's rail wagons division may be set to witness robust growth.

The government's proposal to expand the railway network, increase capacity of existing wagons and introduce higher capacity wagons are likely to scale up its revenues over the next two/three years.

The proposed setting up of dedicated freight corridors on Delhi-Mumbai and Delhi-Howrah sections could also contribute to topline growth. The introduction of wagon investment scheme, entry of wagon leasing companies and allowing private participation in inland container transport could also create a healthy demand scenario for Texmaco.

On the back of an on-going power shortage scenario, the government's planned capacity-addition in various hydropower projects is encouraging.

It is likely to open up newer markets and revenue outlets for the hydro-mechanical equipment division of Texmaco, which makes gates, penstocks, electromechanical and hydraulic hoists for dams, barrages and power stations. Also, given the untapped hydropower potential in the North-East India and Texmaco's proximity to it, it is likely to have an edge over other companies in procuring such orders.

The process equipment division, which caters mainly to sugar, industrial gas and space industry, on the contrary, could be a drag, given the slowdown in orders from the sugar industry.

The steel foundry division, apart from meeting the captive requirement of the wagon division, is a major supplier of bogies and couplers to other wagon builders. It is also the largest supplier of bogies and couplers to the Indian Railways with a market share of about 32 per cent and 42 per cent respectively.

A healthy demand scenario, doubling of capacity and the thrust on export lend confidence in the revenue visibility of this division. Consequently, the foundry division is likely to emerge as a growth driver in the future.

For the quarter-ended December 2006, Texmaco recorded a 61 per cent rise in revenues compared to the corresponding previous quarter. The operating profits margin, however, remained stable at about 13 per cent despite a rising cost scenario.

Concerns

Since a significant portion of the overall revenues is contributed by the Indian Railways, any slowdown or delay in orders could affect the earnings negatively.

Texmaco also faces the risk of under-utilisation of capacity, given the dependence of its wagon division arising from erratic planning and off-take of Indian Railways. Hence, when there are no orders from the Railways, margins could come under pressure.

This apart, an unprecedented rise in raw material cost, increase in competition and any unfavourable change in government policies also pose a downside risk to our recommendation.

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