Flying Train

Flying Train

India Railways2 November 2015

Elara Securities (India) Private Limited

Ashish Kejriwal

[email protected]

+91 22 6164 8505

Parin Vora

[email protected]

+91 22 6164 8519

Table of Content

A) State of Affairs……………………………….……………………………….……………………………….…………………………………………………. 2

Losing its way

Roads to Railways: the story gets bigger

IR – USD 140bn opportunity

Win-win proposition with Make in India

Coal’s revival underlines affiliation with IR

Railways evolving as a safety cop

What has changed – breakneck execution

B) Traffic that returns……………………………….……………………………….……………………………….………………………………………….. 3

Passenger traffic gets a boost (5% CAGR over FY16-20)

Freight traffic builds momentum (6% CAGR over FY16-20).

C) Safety takes no holiday

Investment thrust of INR 8.5tn……………………………….……………………………….……………………………….……………………… 4

Safety with speed (capex of INR 5.0tn over FY16-20)………………………………………………………………………………. 4

Tracks & bridges (13,000km revamp over FY16-20) ……………………………….………………………………………………. 5

Electrification & signaling (10,000km underway over FY16-20) ……………………………….…………………………… 6

D) Other key reforms

Station development & logistics parks (capex of INR 1.00tn over FY16-20) …………………………………………….. 8

Rolling stocks: ferrying hopes (capex of INR 1.02tn over FY16-20) ……………………………….………………………….. 9

High speed corridors (capex of INR 1tn) ……………………………….……………………………….…………………………………….. 9

E) Show me the money

Money maker faces crunch (only ~12% available from internal sources for capex) ……………………………… 11

PPP & institutional investment – a new initiative (~30% capex over FY16-20).……………………………………….. 12

F) Trickle-down economics at play

Coal: direct beneficiary of reforms (volume CAGR of 13% over FY15-21)………………………………………………… 14

Capital Goods: huge windfall…………………………………………………………………….……………………………….…………………… 18

Ports: making the right connections (container volume to grow 1.45x over FY15-19E) ………………………. 23

Rolling stocks: rollicking ahead (14,000-16,000 wagons per year until FY20)………………………………………… 25

G) Appendix – I

How IR lost its mojo…………………………………………………………………………………….…………………………………………………… 26

Current state of Indian Railways……………………………………………………………….……………………………………………………. 28

Financials…………………………………………………………………….……………………………….……………………………………………………. 29

Challenges…………………………………………………………………..……………………………….…………………………………………………… 30

Need of the hour: rescuing IR 30

Privatization answer: muted so far…………………………..……………………………….……………………………………………………. 31

Attracting FDI …………………………………………………………….……………………………….…………………………………………………… 31

H) Case Study – China’s railway dreams………….……………………………….………………………………………………………………… 32

I) Appendix – II

Railway Budget of FY16…………………………………………….……………………………….…………………………………………………… 34

Dedicated freight corridors (DFC)…………………………………………………………….…………………………………………………… 38

Company Section

Texmaco Rail & Engineering – at the cusp of revival (TXMRE IN, Accumulate, CMP: INR 129, TP: INR 141) 41

Titagarh Wagons – back on track (TWL IN, Buy, CMP: INR 111, TP: INR 133)………………………………………………….. 57

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Ashish Kejriwal • [email protected] • +91 22 6164 8505

Parin Vora • [email protected] • +91 22 6164 8519

Flying Train

Indian Railways has suffered from underinvestment for a long time.

This is set to change. The Central government is revamping its

fortunes. A five-year roadmap targets an investment of INR 8.56tn

(more than the cumulative capex since 1947), which would have a

multiplier effect on GDP growth. Immediate goals include improving

safety, increasing capacity and finding new sources of funds. Execution

focuses on partnerships, resource utilization and systems & processes.

USD 140bn opportunity = 1.8x of the past 15 years

In the 2015-16 Indian Railways (IR) budget, Railway Minister Suresh

Prabhu outlined a five-year capex plan of INR 8.56tn (USD 140bn),

which is 1.8x of what IR spent in the past 15 years (~INR 4.6tn).

According to a report by an expert group on modernization of IR,

headed by former advisor to the PM, Sam Pitroda, IR has the potential

to contribute an additional 1.5-2.0% to GDP.

Show me the money = financial avenues like State JVs & PPP route

The private sector is set to play a bigger role in IR’s revamp. While

Railways makes just enough money to meet its day-to-day needs, it has

been unable to fund capex, and the Centre’s share may not increase

forever. Hence, IR is trying to tap into newer sources of funds,

including JVs with PSU & the States, partnering with multilateral &

bilateral organizations and the public-private partnership (PPP) route.

The Ministry plans to finance ~30% of the proposed investment

through contributions from the States via the JV & PPP route;

however, IR has had limited success through the PPP route.

Trickle-down economics: cap goods, coal & ports key beneficiaries

IR remains a sustainable source of order inflows for the CG sector.

Firms benefit via specific project works and EPC & product supply

contracts across the value chain of locomotives, coaches, tracks,

transformers, traction, signaling and telecommunications. Coal too

would be a direct beneficiary, as most of it is transported via rail; any

improvement in speedy evacuation would help Coal India (COAL IN,

BUY, CMP: INR 333, TP: INR 398) meet guidance of 1.0bn tonnes by

2021. The WDFC is expected to benefit the West Coast (Gujarat &

Maharashtra) ports significantly, as they account for more than 70% of

total container volume handled at ports.

Initiate coverage on Texmaco Rail & Titagarh Wagons

Of INR 8.56tn capex, ~12% (INR 1.02tn) will be in rolling stocks. This

provides a huge opportunity for two of the largest wagon makers in

India — Texmaco Rail & Engineering and Titagarh Wagons. Texmaco is

the more diversified of the two, as along with wagon maufacturing, it

is also into laying tracks, setting up signals & telecommunications.

India | Infrastructure 2 November 2015

Initiating Coverage

Railways

Next five-year capex = 1.8x of past 15 years

Source: Indian Railways; Elara Securities Research

Source of funds: INR 8.56tn until FY20

Source: Ministry of Railways

Consistent wagon demand from IR likely


Peer valuation

Company Rating

Mcap (INR mn)

CMP (INR)

TP (INR)

PAT CAGR

(%)

EBITDA

margin (%) P/E (x) ROE (%) ROCE (%)

FY15-18E FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E

Texmaco Rail Accumulate 27,046 129 141 111.2 10.5 14.2 38.4 20.9 7.6 12.8 7.5 12.6

Titagarh Wagons Buy 12,790 111 133 104.1 11.6 13.8 26.3 15.3 6.0 9.7 6.2 9.9

Note: pricing as on 26 October 2015; Source: Elara Securities Estimate

0

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Railways

2 Elara Securities (India) Private Limited

State of Affairs

Losing its way

IR, an important enabler of GDP growth, has lost its

market share from ~89% at the time of Independence to

~30% today. It has been plagued by long-term, chronic

underinvestment and often been the victim of political

upheavals.

Exhibit 1: Railways expenditure as a % of total

transport expenditure declines sharply


The exhibit illustrates that although railway capex has

been increasing, it has been unable to keep pace with its

requirements. The new government aims to change that.

Roads to Railways: the story gets bigger

Former PM Atal Bihari Vajpayee had focused on

improving roads infrastructure, birthing the 5,846-km-

long Golden Quadrilateral connecting Delhi-Mumbai-

Chennai-Kolkata, changing India’s transport landscape.

Today, PM Modi is focused on transforming Indian

Railways.

IR – USD 140bn opportunity

During February 2015 Railway budget, Minister Prabhu

outlined his government’s five-year capex plan of INR

8.56tn (USD 140bn). This amount is 1.8x bigger than

what the Railways spent in the past 15 years.

Win-win proposition with Make in India

The “Make in India “initiative can be made more fruitful if

IR regains its lost mojo. The recent Economic Survey by

Ministry of Finance shows that increasing railway output

by INR 1.0 would raise output of the economy by INR

3.3. This would have a cascading effect on the coal and

manufacturing industries.

Coal’s revival underlines affiliation with IR

During FY10-15, Coal India posted a sales volume CAGR

of mere 3% to 489mn tonnes. Before May 2014, no one

believed Coal India could post a sales volume CAGR of

8.0% YoY. During 1HFY16, it grew even faster at 9.3%

YoY, and we believe it can keep pace hereafter. An

interesting thing happened at the same time. The

average railway rake availability rose by ~12% YoY even

without IR increasing the number of overall wagons in its

portfolio. This happened due to rationalization of coal

procurement from different coalfields of Coal India. This

small step helped decongest traffic at a few busy

locations (for example, the Mughalsarai section in UP

which helps transport coal to power companies over

there) and increased the turnaround time of wagons.

We believe a similar focus will reduce inefficiency in IR.

Railways evolving role as traffic cop

India’s transport sector is significantly overstretched.

Some heavily traversed sections are working at more

than 100% capacity utilization. Some tracks cannot carry

heavy loads while others cannot run trains at higher

speeds. This situation can worsen. Traffic needs are likely

to double in the next decade, and hence this will require

huge investment for capacity expansion.

What has changed – breakneck execution

Cut short approval process by 18 months: for eg,

since February, 73 out of 77 line-doubling projects

have reached the advanced stage of tendering

(earlier this used to take 2-3 years).

GM armed with fast track approval: Zonal managers

can now okay projects < INR 10bn (earlier INR 3bn).

Better coordination between Centre-States: Since

February, 17 States have agreed to form JVs to help

in faster resolution of land acquisition issues.

FDI route: Global firms (for eg: Alstom & GE) have

pledged to set up domestic locomotive factories in

Bihar for INR 33bn.

DFC becomes a reality: INR 175bn awarded projects

since November 2014 vs ~INR 104bn since 2006.

High speed corridor: Faster passenger movement

across state lines, spurring industrialization and

urbanization (JICA has agreed to provide assistance).

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Railways Exp as a % of transport sector exp (RHS)

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Passenger traffic gets a boost

IR reported a modest rise in passenger traffic (number of

travelling passengers) since 1951. It posted passenger

traffic CAGR of 3.0% during 1951-2014 to ~8.4bn.

Continued rise in urbanization and improving urban-

rural connectivity by IR have been major contributors.

Increasing income levels in the urban as well as rural

areas and low fares have made rail travel affordable for

most Indians. With continued urbanization, we expect

passenger traffic CAGR of ~5.0% to ~14bn over

FY15-25E.

Exhibit 2: Rising urbanization boosts passenger traffic

Source: Ministry of Railways, Elara Securities Research

We believe this growth will lead to an increase in

demand for electric multiple units (EMU) & diesel

multiple units (MEMU) for inter-city and short-distance

intracity travel. It also will increase demand for upgraded

AC coaches in express trains, and coaches for trains, such

as the Rajdhani & Shatabdi, and high frequency

locomotives, which help in speedier movement of trains.

Freight traffic builds momentum

There has been a sharp increase in originating freight

traffic, which rose at a higher CAGR of 4.3% during

1951-2014 to 1,054mn tonnes. This increase was due to

rising levels of industrialization across the country. We

expect the pace to increase even further in the next five

years, and, with continued industrialization IR would be

able to meet most of the incremental demand.

The following are two growth drivers of freight traffic —

the commissioning of three critical railway lines at

Chhattisgarh, Odisha & Jharkhand, which can evacuate

~175mn tonnes of coal of Coal India, and the

commissioning of the eastern & western dedicated

freight corridors by 2019, which would shift some road

traffic to rail. Hence, we expect originating traffic CAGR

of ~6.0% during FY15-25E to ~1.9bn tonnes, with most

growth coming in post FY19.

Exhibit 3: Industrialization aids in freight traffic

Source: Ministry of Railways, GoI

Freight business — a play on volume

Railways profitability depends on high freight volume,

which also helps in increasing market share in overall

transport. However, higher market share and margin will

be driven by 1) proper & efficient signaling, leading to

increased safety, 2) tracks capable of running high speed

trains, and 3) higher capacity wagons.

DFC – IR’s “one stop” freight solution

The commissioning of DFCs is expected to solve freight-

related issues, which IR is facing today. DFCs will benefit

by 1) creating additional freight capacity to meet

demand, 2) introducing time-tabled freight services to

ensure better services, 3) implementing improved

wagons, leading to lower turnaround time and higher

productivity, and 4) increasing rail freight share through

dedicated logistics services.

At peak capacity, the two DFCs will be able to carry more

than 500mn tpa of traffic. Container traffic would be an

important constituent of the WDFC while coal traffic will

boost EDFC.

Exhibit 4: At peak, both DFCs will carry >500mn tpa

Source: Dedicated Freight Corridor Corporation of India

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Traffic that returns

Urbanization and rising income to drive a passenger traffic CAGR of ~5.0% during FY15-25E

Industrialization to post an originating freight traffic CAGR of ~6.0% over FY15-25E

Two dedicated freight corridors to carry >500mn tonnes pa at peak

Railways


Investment thrust of INR 8.56tn

Minister Prabhu says huge investment is needed to

modernize railways in India. The following exhibit lists

the proposed capex plans for the next five years:

Exhibit 6: Five-year capex plan (FY16-20)

(INR bn)

% of Total

Network decongestion (including DFC, electrification, doubling including electrification & traffic facilities)

1,993 23.3

Network expansion (including electrification) 1,930 22.5

National projects (Northeastern & Kashmir connectivity projects)

390 4.6

Safety (track renewal, bridge works, ROB, RUB and signaling & telecom)

1,270 14.8

Information technology & research 50 0.6

Rolling stocks (locomotives, coaches, wagons –production & maintenance)

1,020 11.9

Passenger amenities 125 1.5

High speed rail & elevated corridor 650 7.6

Station redevelopment and logistic parks 1,000 11.7

Others 132 1.5

TOTAL 8,560 100.0


Safety with speed

Minister Prabhu’s budget has dedicated a huge ~60% of

outlay to raise safety standards coupled with an increase

in speed of train movements. According to a high-level

safety review committee report headed by Dr Anil

Kakodkar in 2012, ~15,000 people die each year on

India’s tracks. Safety includes track renewals, bridge

works, roads over bridges (ROB), roads under bridges

(RUB), signaling & telecommunications. It also focuses on

decongestion by expanding network in oversaturated

areas.

Exhibit 7: Sizeable investment needed to address

IR safety

Accidents Fatalities

FY13 FY14 FY13 FY14

Collision of Trains 8 8 27 1

Derailments of trains 95 80 5 6

Level crossing accidents 73 61 179 112

Fires in rolling stock 14 8 31 35

Other accidents 4 4 8 7

Source: White Paper of 2015, Indian Railways

Exhibit 8: Pertinent safety issues

Source: scoopwhoop.com

Safety takes no holiday

Safety with speed: capex of INR 5.0tn over FY16-20

Station development & logistics parks: INR 1.0tn spend over the next five years

Rolling stocks: capex of INR 1.02tn over FY16-20

Exhibit 5: We expect a sharp rise in all divisions of IR in the next five years

FY10 FY11 FY12 FY13 FY14 FY15RE FY16-20E

Electrification (route km) 1,117 975 1,165 1,317 1,350 1,350 10,000

Track renewals (track km) 3,841 3,465 3,300 3,296 2,885 2,200 8,100

Construction of new lines (route km) 258 709 727 501 450 300 1,700

Gauge conversion (route km) 1,516 837 856 605 404 450 3,200

Rolling stocks

a) Locos 498 527 582 678 687 647 5,000

b) Coaches 2,761 2,824 3,637 4,023 3,887 3,359 25,000

c) Wagons (in terms of vehicle units) 13,068 14,703 18,357 16,894 9,326 10,000 75,000

Source: Ministry of Railways, Elara Securities Research

Railways

Infr

ast

ructu

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Tracks & bridges

Going nowhere along congested routes

The major issue facing IR today is congestion on its main

routes (refer to Exhibit 10). It slows traffic movement,

and, hence, is leading to a steady drop in IR’s share in

freight transport, which declined from ~89% at the time

of Independence to ~30% currently. The Golden

Quadrilateral and the diagonals connecting the four

major metros (Delhi, Kolkata, Mumbai & Chennai and

along the east-west diagonal extending to Guwahati)

constitute ~15% of the total route (~10,000km), but

account for more than 50% of passenger & freight traffic

combined. These routes have been working beyond

100% capacity utilization (in railway parlance, a line

capacity utilization of 80% is considered optimum).

Exhibit 10 also shows that 189 out of 212 sections on the

high density network have already reached saturation

line capacity utilization. Further, the same route is being

used by passenger as well as freight trains, with a

preference given to the former.

Exhibit 9: Major sections of IR running on more than 100% capacity, thereby leading to congestion

Source: Bibek Debroy report on Indian Railways, 2015

Exhibit 10: 189 out of 212 sections operate at more than optimal capacity

<80% 80-100% 100-120% 120-150% >150% Total

Mumbai - Chennai 10 9 5 2

26

Howrah - Chennai 1 4 7 5

17

Delhi - Chennai via Jhansi,Nagpur-Bhallarshah 3 2 5 13 2 25

Delhi - Guwahati via Sitapur- Gorakhpur-Barauni-Katihar 2 13 5 5 8 33

Delhi - Mumbai 3 5 4 11 5 28

Mumbai - Howrah 2 7 19 13 1 42

Delhi - Howrah 2 8 9 17 5 41

Total 23 48 54 66 21 212

Source: National Transport Development Policy Committee, 2014

Railways


Exhibit 11: Sections operating at >100% capacity


Efficiency hit: track upgradation need of the hour

Network saturation restricts the flow of heavy-haul

freight trains and high speed passenger trains, which, in

turn, leads to lower transport efficiency. Hence, there is a

need to upgrade tracks, which are capable of ferrying

heavier freight trains at 25-tonne-axle load (currently:

22.5) and can achieve speeds of more than 75-100kmph

vs the current average of ~25kmph for freight trains and

~50kmph for passenger.

Bigger is better

Around 88% of total route of ~65,800km consists of

broad gauge (BG) network, and ~9% is meter gauge

(MG). IR plans to convert the entire MG network into BG

in the next seven years, barring few areas in the

mountains and of heritage importance. This conversion

would help in doubling freight-carrying capacity, as the

MG network usually carries 1,800 tonnes vs ~4,000

tonnes of freight traffic on the BG network.

Fewer crosses to bear

Track upgradation also involves doing away with level

crossings and replacing them with roads over bridges

(ROB) and roads under bridges (RUB). There are ~14,900

unmanned and ~17,800 manned level crossings on IR as

on April 1, 2011, according to IR report. These level

crossings contribute to ~30% of fatalities in mishaps and

~40% of accidents. The ministry envisages eliminating all

unmanned level crossings by 1) building subways and

diverting traffic from the unmanned level crossing gates

to existing ROB & RUB, 2) manned gates by constructing

diversion roads, 3) manning unmanned level crossing

gates, and 4) upgrading infrastructure in the next five

years. It also requires strengthening ~11,000 bridges,

which can sustain heavier loads at higher speeds. IR

targets eliminating 5,000 unmanned level crossings and

1,200 manned level crossings in the next five years. It

targets 2,600km of track renewals, 300km of

construction of new lines and 500km of gauge

conversion during FY16.

These measures, if implemented, will increase carrying

capacity of freight trains. The railway has initiated a part

of the process in the form of commissioning two

dedicated freight corridors.

Electrification & signaling

IR goes green: just under half electrified

IR has installed electric railway tractions as they are

pollution-free and energy efficient. They have helped

lower the fuel bill of IR, due to switching from diesel- to

coal-generated power as a source of energy. They also

allow the use of high-powered electric locomotives,

which help in increasing the train’s speed.

Exhibit 12: Route electrification in an upward trend

Source: Indian Railways

Thus, IR is in the process of electrifying the entire

network of railways. The total route km (RKM) of railway

track electrified until FY15 was ~26,000km, which is

~40% of total RKM. During the first three years of the

Twelfth Five-Year Plan (FY12-17), 4,042 RKM of railway

tracks have been electrified against total target of 6,500

RKM. It has plans to electrify 1,600 RKM in FY16 and

~10,000 RKM during FY16-20.

Exhibit 13: Electricity cost cheaper than diesel


0 10 20 30 40 50

Mumbai - Chennai

Howrah - Chennai

Delhi - Chennai via Jhansi,Nagpur-Bhallarshah

Delhi - Guwahati via Sitapur- Gorakhpur-Barauni-Katihar

Delhi - Mumbai

Mumbai - Howrah

Delhi - Howrah

Number of sections

<80% 80-100% 100-120% 120-150% >150%

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Exhibit 14: Around 40% of total route kilometers (26,000) electrified until FY15


Railways


Right signals: technology push save lives

Bells & whistles

Effective signaling is important for railway safety. It is used

to direct railway traffic to prevent trains from colliding. This

not only improves passenger and worker safety but also

increases speed and enhances capacity utilization of

tracks. IR aspires to implement automatic block signaling

on major routes and introduce GSM-based mobile train

control communications systems on busy routes.

Exhibit 15: Robust signaling will enhance safety

Source: Elara Securities Research

Exhibit 16: Fire in the signaling system leads to chaos

Source: Times of India

Station development & logistics parks

Capex opportunity of ~USD 16bn over FY16-20

As on FY14, IR had ~7,200 stations. The redevelopment of

identified stations is done through the Indian Stations

Development Corporation (IRSDC). Since the IRSDC can

undertake redevelopment of only a few stations at a time

and there is an urgent need to redevelop many more, it

has been proposed to redevelop stations via open bids.

Modernization can include enhanced customer amenities

& services at stations.

Makeover of 400 stations: benefits real estate firms

Recently, the cabinet approved redeveloping railway

stations on an as-is-where-is basis through open

invitation from interested parties with designs and

business ideas, including permission to commercially

develop real estate owned by Zonal Railways. About 400

stations have been identified for this. These stations are

mostly based in metros, major cities, pilgrimage centers

and important tourist destinations across the country.

The existing station at Surat in Gujarat will be the first

station to be developed as an integrated model with an

estimated cost of INR 30bn. Other stations include

Chandigarh, Delhi (Bijwasan & Anand Vihar), Habibganj,

Shivajinagar at Pune, Gandhinagar, Mangalore,

Ernakulam, Vijayawada, Nagpur, Byappanahalli and

Bhubaneswar.

Exhibit 17: Anand-Vihar, New Delhi: existing station

Source: Indian Railways Presentation

Proposed architectural views

Source: Indian Railways Presentation

There is a lot of interest across India for the proposed

modernization of railway stations; once a few come up,

the pace would increase.

Railways

Infr

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Logistics parks: a prudent business move

Along with station modernization, IR also is expected to

develop logistics parks at several locations (Navi Mumbai,

in Maharashtra, Vapi, Ahmedabad & Kutch regions in

Gujarat, Jaipur in Rajasthan and NCR of Delhi), which

provide integrated transport infrastructure facilities.

Currently, due to no last mile connectivity, consumers

prefer road transport over railways, despite the former

being expensive. It intends to provide a slew of

warehousing and value-added services, including cold

storage facilities for perishables, a container

maintenance, repair & cleaning yard, an empty container

yard and modern garage facility with a workshop for

maintenance of vehicles. These initiatives would lead to

sizeable revenue generation by attracting additional

traffic, as customers can have last-mile connectivity. IR’s

subsidiary, Container Corporation (CCRL IN, CMP: INR

1,346, Not Rated), will study the concept of logistics

parks across the world and implement them in India. A

few private sector companies, such as Navkar

Corporation (NACO IN, CMP: INR158 Not Rated), are

setting up a logistics park at Vapi at an estimated capex

of ~INR 3.0bn.

Exhibit 18: A logistics park


Rolling stocks: ferrying hopes

Capex opportunity of ~USD 17bn over FY16-20

An increased number of rolling stocks are needed to

expand the railway network in India. And, we believe it is

even more important to upgrade stocks with increased

productivity, higher speed potential for passenger trains

and axle load for freight trains. Currently, the maximum

gross load carried on IR trains is 5,400 tonnes (vs 20,000-

37,000 tonnes in China, Australia, South Africa and

Brazil). These efforts would lead to capacity

enhancement and increase productivity. However, we

believe if IR manages to decongest its network, the

existing rolling stocks can be used to double the speed as

has been done in the past few months, which would

help Coal India hike volume offtake 9% YoY in 1HFY16E.

More the merrier

IR plans to increase axle load capacity from the current

22.5 to 25.0 in the upcoming months, which will enable

freight trains to carry more cargo. After achieving an axle

load of 25.0, IR will then raise that to 32.5 in the next few

years. These will be suited for DFCs. The current and

partially completed bridges have been designed to bear

an axle load of 32.5.

In terms of wagons, we expect demand of 14-16k

wagons per year for the next few years from IR, a part of

which is replacement demand. IR may order high

capacity wagons, which may not lead to a sharp rise in

the number of wagons ordered on a yearly basis. Real

growth for wagons is likely to come after the full

commissioning of dedicated freight corridors, which may

shift a part of the traffic from roads to railways.

Exhibit 19: Consistent wagon demand from IR likely


High speed corridors

Mumbai-Ahmedabad speed train – a possibility

One mega project envisaged is the construction of a

high speed railway line between Mumbai and

Ahmedabad with speeds of more than 250kmph. This

would lead to decongestion of cities & traffic, increased

connectivity and faster intercity & intracity travel. The

initial estimated cost of the project is ~INR 650bn, which

is to be funded via the PPP route. However, recently, the

Japan International Cooperation Agency (JICA) has

done a feasibility study of the Mumbai-Ahmedabad high

speed bullet train corridor project and estimated cost of

~INR 1tn and it is willing to provide both technical &

financial assistance for this project. The corridor, if

undertaken, would cut travel time from the current

seven to two hours, besides spurring industrialization

and urbanization along the same lines.

Teething problems

We believe it will be difficult to execute this project via

the PPP route. Such projects like DFCs would have to be

built by the government, as it can take years before they

become commercially viable, and private investors may

18 17

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not be willing to invest for such a long gestation period.

Moreover, there will always be ambiguity related to

pricing of passenger fares, which may restrict this project

from making a profit.

Exhibit 20: High speed train reduces travel time


Funding conundrum: high speed game

Due to a lack of funds, preference should be given on

priority projects, such as laying tracks facilitating faster

goods movement and easing off of passenger traffic, as

this high speed train project may not be financially viable

and caters to a small section. While we do agree with

this view, such a corridor should not be viewed on a

standalone basis. This would boost real estate and

decongest the city too and put India’s rail network on

the world map and may further help in attracting FDI,

and, hence, it is essential in nation-building. Moreover,

required capex of INR 1.8-2.0bn/km for high speed train

is lower than that of INR 2.5-3.0bn/km capex required for

metro trains.

Other mega opportunities

Additional USD 13bn capex for DFC

The most critical issue facing IR is capacity constraint

rather than rolling stocks. To decongest the network, IR

through its special purpose vehicle, DFFCIL, is setting

up two dedicated freight corridors (eastern & western

DFC of ~3,300km), which would lead to decongestion

of freight and passenger traffic on main routes. This

would speed up delivery (expected to increase to

~70kmph from the current average of ~25kmph) and

generate freight carrying capacity of more than 500mn

tpa at peak. Heavy axle loads, better wagon design and

longer freight train length would reduce unit cost too.

Estimated capex of two DFCs is ~USD 13bn (~INR

810bn). These two corridors are expected to be

completed by December 2019. The pace of ordering

will increase in the short term, and a majority of it is

expected to be finalized by 1HCY16.

Metro Rail’s ~USD 30bn opportunity

Increasing urbanization and an inability to widen

roads to a large extent demands investment in an

alternative mode of transport. Metro Rail fits the bill.

With the success of the Delhi Metro, India has already

invested ~USD 17bn in metro projects across the

country and there still lies an opportunity for further

USD 30bn investment in the next five years. With debt-

financing assistance (up to 60% of project cost)

currently available from international financial

institutions at an attractive interest rate (2-5% pa) and

desired repayment tenure (25-30 years with initial

moratorium of 5-10 years), implementation of capital-

intensive and longer gestation metro rail projects is

picking up pace across progressive states.

Exhibit 21: New metro rail projects

Project Length (km) Estimated cost (INR bn) Date of completion

Mumbai Metro Line 2 40 256 2023

Mumbai Metro Line 3 33 231 2020-21


Lucknow Metro 34 125 2017

Jaipur Metro Phase-2 23 66 2021

Bangalore Metro Phase-2 72 264 2020

Chennai Metro- Phase 2 76 360 2026

Ahmedabad-Gandhinagar 38 107 2021

Bhopal Metro 39 80 2023

Indore Metro 107 150 2018-19

Nagpur Metro 38 87

Patna Metro 60 115

Vizag Metro 45 NA

Total 645 2,032

Source: Industry, Elara Securities Research

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Money maker faces crunch

Railway projects in India have usually been in the public

sector domain. Private firms are involved in allied

activities, such as track laying & maintenance,

manufacturing of coaches & wagons, construction of

bridges, stations, signaling and telecommunications

works. However, IR requires greater participation from

the private sector as internal generation will not be

adequate to fund capex plans and the government’s

budgetary support may not continue to increase.

Exhibit 22: Internal resource as a % of total capex

deteriorating


Makes just enough to survive; no room for upkeep

IR does not need funds to meet its revenue expenditure

as its operating ratio remains below 95%. In FY15, IR

generated a surplus of only INR 73bn vs capex

requirement of INR 580bn (capex of only 12% from

internal sources over FY16-20). Hence, it has to depend

on budgetary sources & loans to fund capex plans. We

do not view this only as the fallout of the efficiency of IR,

but can say it is a victim itself. The government does not

allow IR to run commercially, particularly, in the

passenger segment, by restricting fare increases as and

when needed. Hence, it has to fund IR expansion, which

may not prove to be adequate.

Exhibit 24: Higher dependence on budgetary

sources, but not enough

Source: Railway Budgets

Turns to private & institutional finance…

Over the years, a decline in internal resources has led to

increased market borrowings and financial stress in IR.

Leasing arrangement through Indian Railway Finance

Corporation (IRFC) has enabled additions to rolling

stocks; hence, the effect of lower internal resources has

been primarily felt on track renewals, bridges and other

fixed assets, which resulted in an adverse impact on train

operations. Hence, IR needs new sources of funds, which

can be in the form of PPP and institutional investment.

Recently, Life Insurance of Corporation (LIC) agreed to

provide INR 1.5tn to IR over the next five years, which

will be used primarily to decongest the railway network.

IR has already received INR20bn from LIC as financial

assistance for investment in capacity augmentation

projects.

…and also seeks help from the States and PSUs

One key issue, which negatively affects project

implementation, is land acquisition. Engaging the States

as an equity partner may help in speedier acquisition and

result in faster execution of the project. For example,

Minister Prabhu has tried to address this issue by

bringing into force a MoU for creating a SPV, which is

signed between the Ministry of Railways and Ministry of

33 31

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Show me the money

Internal generation and government support not enough

Government turns on its charm offensive on private players

Plotting the PPP route: so far unable to meet needs

Exhibit 23: Sources of funds – a PPP & institutional investment – a new initiative

(INR bn) FY10 FY11 FY12 FY13 FY14 FY15 RE FY16E

Budgetary sources 169.1 183.9 200.1 241.3 270.3 301.0 400.0

Internal resources 130.0 126.3 102.6 111.1 116.6 157.3 194.4

Market borrowing under EBR 97.6 97.8 147.9 151.4 150.9 199.7 176.6

PPP - - - - - - 57.8

Institutional investment through Railway/PSUs - - - - - - 171.4

Total 397 408 451 504 538 658 1,000

Source: Indian Railways, Feb’2015 Railway Budget

Railways


Coal & Jharkhand, which may help expedite railway

connectivity projects for coal transportation in

Jharkhand. It is forming JVs with the government, and

17 States have already agreed to participate in this

initiative, with Maharashtra setting aside capex of INR

100bn for the next four years. It also targets cash-rich

PSUs, such as Coal India, to fund its capex plans.

Exhibit 25: Source of funds: INR 8.56tn until FY20


PPP model in port connectivity is a success

So far, PPP model in port connectivity is a success for IR.

IR has created autonomy via the SPV route, which

involves both public and private investments. The port

connectivity projects under this parameter have proven

successful. Currently, four port connectivity projects are

operational and three more in progress.

FDI route can be a game-changer

Since April 2000, cumulative FDI in railways-related

components stood at USD 646mn until May 2015, which

though has increased but is not meaningful.

Exhibit 26: Increasing FDI inflows

Source: Department of Industrial Policy & Promotion

FDI to increase manifold now

The Minister is working towards greater FDI participation

in the rail sector. For example, we expect two mega

Greenfield tenders to be finalized soon. These projects

were initially conceived and announced in FY07 and

FY08 railway budgets but faced delays with successive

governments and within the ministry on the utility and

the site chosen for setting up the factories. The estimated

cost would be ~INR 34bn:

The electric locomotive factory at Madhepura in

Bihar will manufacture 800 locomotives. The

estimated capex would be ~INR13bn. Four

companies are in the running to build the factory:

Alstom, Siemens, GE and Bombardier, and

The diesel locomotive factory at Marhowra in Bihar

will manufacture 1,000 locomotives. The estimated

capex would be ~INR21bn.GE and Electro Motive

Diesel is in the fray for setting up the diesel

locomotive factory there.

Gross Budgetary

support INR 2.56tn

30%

Internal generation INR1.00tn

12%

State JVs INR1.20tn

14%

PPP INR1.30tn

15%

Debt INR2.50tn

29%

57 75 110 133

248 270

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Exhibit 27: Key beneficiaries

Source: Company, Elara Securities Research

Infrastructure

Logistics & Ports Capital Goods

Crompton

Greaves

Rolling Stocks

Railways


Coal: moving at full volume

Around 50% of total freight is bulk freight, which is

transported exclusively through rail. Although IR has lost

market share in freight traffic for distances of less than

350km, it has retained market share in freight traffic

greater than 350km. As coal is an essential commodity,

there is an urgent need for speedier evacuation, which

can be done only via Indian Railways.

Exhibit 28: Urgent need for speedier evacuation


Exhibit 29: Coal as a % of total rail freight remains

high


Reducing lead distances boosts coal offtake

During FY10-15, Coal India (COAL IN, Buy, CMP: INR 333,

TP: INR 398) reported a sales volume CAGR of 3% to

489mn tonnes. Before May 2014, it seemed highly

unlikely that Coal India could manage to grow at a sales

volume CAGR of 8% over the next few years. During

H1FY16, it grew by even higher at 9.3% YoY which

further gave a boost to confidence that it can continue

to grow at a higher pace. This growth was primarily

because of the Ministry of Coal’s approving swapping

coal from nearby mines rather than distant sites for a few

power plants, thereby reducing lead distances. This

helped in increasing average railway rake availability by

~12% YoY without IR increasing overall wagons in its

portfolio. This initiative is helping decongest traffic at a

few locations and increase the turnaround time of

wagons (for example, the Mughalsarai section in UP). We

believe a similar focus will help reduce inefficiency in IR.

Development of railways needed for coal evacuation

Coal India targets selling 1bn tonnes of coal by 2021.

During FY15, it sold 489mn tonnes. Hence, it would

need to post a volume CAGR of 13% during FY15-21 to

meet its target. Besides receiving timely regulatory

approvals, coal evacuation requires a higher number of

wagons and tracks connecting coalfields. Roads cannot

meet its requirements, and, hence, the company is

relying heavily on IR to lay additional track lines to help

in evacuation. There are currently three critical railway

lines in Chhattisgarh, Odisha and Jharkhand, which will

assist in evacuating ~175mn tonnes at completion, as

per Coal India management.

252 271 294 313

337 370

396 420

456 496 508

543 585

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Coal movement by railways

CAGR of 6.7% over FY10-16E

47

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Coal (LHS) % of total freight (RHS)

Exhibit 30: Three critical railway lines essential for transporting coal

Railway lines State Length

(km) Command

area Associated Coalfield

Projected capacity (mn tpa)

Expected date of completion

Jharsuguda-Barpali-Sardega Odisha 53 MCL Ib Valley fields 35 December 2016

Bhupdevpur-Dharamjaigarg Chhattisgarh 64 SECL Mand-Raigarh 60 June 2017

Tori-Shivpur Jharkhand 44 CCL North Karanpura 60 3 years post land acquisition

Shivpur-Kathautia Jharkhand 53 CCL North Karanpura 20 3 years post land acquisition

Total

214

175

Source: Indian Railways, Elara Securities Research

Trickle-down economics at play

Coal: direct beneficiary of reforms with a volume CAGR of 13% over FY15-21

Capital Goods: huge windfall

Ports: making the right connections

Rolling stocks: rollicking ahead

Railways

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Odisha

Jharsuguda-Barpali-Sardega railway line (53km) in the IB valley

The line passes through Jharsuguda & Sundergarh districts around 24 villages and two tehsils: Jharsuguda &

Hemgir.

Expected coal output: 35mn tpa from the Gopalpur-Manoharpur blocks in IB valley fields of Mahanadi Coalfelds

Status on land acquisition: Almost all land has been acquired except for 14 acres, which MCL has to acquire. This

is due to incomplete update on revenue land records; some plots could not be identified for acquisition initially.

Now, land is to be acquired under the New Land Acquisition Act.

Project completion date: It received Stage 2 forest clearance in June 2014 after 8 years. Contracts for bridges have

been given, and tenders for station buildings have been invited. Seven high tension transmission lines will need to

be shifted, which are en route. It is likely to be completed by December 2016.

Jharsuguda coal critical line


Railways


Chhattisgarh

Bhupdevpur- Korichapar- Dharamjaigarh (64km) at the Mand Raigarh coalfield

This project has been taken under the SPV route with equity from Chhattisgarh (10%), South Eastern Coalfields, a

subsidiary of Coal India (SECL) [64%] and Ircon International (IRCON) [26%].

Expected coal output: 60mn tpa from the Raigarh-Mand fields of SECL

Status on land acquisition: Almost all land (520 hectares) has been acquired. Stage 1 forest clearance has been

received. Compliance has been taken to file Stage 2 clearance.

Project completion: June 2017, subject to forest clearance.

Bhupdevpur-Korichapar-Dharamjaigarh at the Mand Raigarh coalfield in Chhattisgarh


Korichapar

Bhupdeopur

DharamjaigarhKorba

Railways

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Jharkhand

Tori-Shivpur (44km) railway line at North Karanpura

Expected coal output: 60mn tpa from North

Karanpura of CCL

Status on land acquisition: Total land required is

~1,120 acres; around 30% of land is yet to be acquired.

Most land is in Raiyati. Jharkhand may frame the rule

for its acquisition after passing of the New Land

Acquisition Act. The current available land is also in

small and non-continuous stretches due to which

construction cannot start in full swing.

Exhibit 31: Status of land acquisition

Type of land Required

(acres) Acquired Balance

% of land acquisition remaining

Forest 257 257 -

Govt. Jungle Jhari 128 112 15 11.9

Govt/GM (Gair Majuri) 210 188 22 10.5

Raiyati 528 206 321 60.9

Total 1,122 763 359 32.0

Note: as on June 2015; Source: Indian Railways, Elara Securities Research

Project completion date: Contract for earthwork and

minor bridges is in position for first 36km and from

40km to 44km been awarded. Due to high rates,

negotiations for 36-40km are being negotiated.

Contracts for major bridges have been awarded.

However, it will take three years from the date of

handing over all land to IR. As balance land has not

been made available, the timelines for project

completion will get shifted accordingly.

Shivpur-Kathautia (53km) railway line at North Karanpura

Expected coal output: 20mn tpa from North

Karanpura of CCL

Status on land acquisition: Total land required is

~1,300 acres. Land in the Chatra and Hazaribagh

districts has to be acquired and handed over to IR. No

land has been acquired as on yet. Process will restart

after the new LA Act is implemented.

Exhibit 32: Status of land acquisition

Type of land Required

(acres) Acquired Balance

% of land acquisition remaining

Forest 678 0 678 100

Govt. Jungle Jhari 188 0 188 100

Govt/GM(Gair Majuri) 72 0 72 100

Raiyati 367 0 367 100

Total 1,304 - 1,304 100

Note: as on June 2015; Source: Railways, Elara Securities Research

Project completion: It will take three years after

getting forest clearance and land for construction

Jharkhand coal critical line


Railways


Capital goods: huge windfall Analyst: Deepak Agrawala, Harshit Kapadia

The capital goods sector is in a sweet spot. Minister

Prabhu’s intent to improve customer satisfaction got a

boost with the announcement to increase spend on

upgradation and modernization of existing

infrastructure. PM Modi’s “Make in India” initiative also

will lead to significant pickup in areas of metros and

locomotives. Opportunities can take the form of EPC

contracts, specific-projects works and product supply

contracts across the entire spectrum of locomotives,

coaches, tracks, signaling, telecommunications,

transformers, traction motors and engines.

Order inflows pick up

Order inflows have seen an increase in momentum

compared to the past few years over

FY15-16 YTD.

Exhibit 33: Announced contracts of INR 67,450mn

Contracts Order inflows (INR mn)

FY15-16 YTD

Electrification 32,340

Track laying, signaling & communications 17,850

Rolling stocks (coaches & locomotives) 17,260

Source: BSE India, Elara Securities Research

Metro: beginning of a new era

Exhibit 34: New metro rail projects

Project Length

(km) Estimated cost

(INR bn) Date of

completion


Mumbai Metro Line 3 33 231 2020-21


Lucknow Metro 34 125 2017

Jaipur Metro Phase-2 23 66 2021

Bangalore Metro Phase-2 72 264 2020

Chennai Metro- Phase 2 76 360 2026

Ahmedabad-Gandhinagar 38 107 2021

Bhopal Metro 39 80 2023

Indore Metro 107 150 2018-19

Nagpur Metro 38 87

Patna Metro 60 115

Vizag Metro 45 NA

Total 645 2,032

Source: Industry, Elara Securities Research

Increasing urbanization, population density, strain on

existing transport infrastructure and the success of the

Delhi Metro necessitated investments in the modern

mass rapid transit system (MRTS). Metro is catching up as

an additional source of order inflows and a revenue

contributor, especially is several tier-II and tier-III cities, as

well as feeder line for the main Metro in tier-I cities

during the current and the next 3-4 years. Cities, such as

Mumbai (Line-3), Lucknow, Jaipur, Ahmedabad, Noida &

Greater Noida, Nagpur, and Bangalore (Phase 2), have

announced metro projects and are either in an advanced

stage of planning and implementation in India. Monorail

projects announced at Delhi, Kozhikode and Trivandrum

are likely to add more business opportunities to IR in the

upcoming years. However, it is unlikely the government

would go ahead with a PPP model to build a metro

network, (a model which was used in Mumbai Line 1,

Hyderabad) and instead follow the EPC route with

ownership retained by the respective States and IR.

Locomotives attract FDI

This is another area where we see two mega Greenfield

tenders likely to be finalized soon. They include:

Electric locomotive factory at Madhepura in Bihar to

manufacture 800 locomotives of 12,000 HP,

especially to meet requirements of the eastern

dedicated freight corridor. Four companies are in the

running for building the factory: Alstom, Siemens,

GE and Bombardier, and

Diesel locomotive factory at Marowhra in Bihar to

manufacture 1,000 locomotives (700 of 4,500 HP

capacity and 300 of 6,000 HP). GE and Electro

Motive Diesel are in the fray for setting up the diesel

locomotive factory there.

Apart from this, IR also has received bids to set up a

factory for electric locomotives at the Dankuni unit in

West Bengal to service the WDFC. About 200 electric

locomotives of 9,000 HP each are estimated to be

manufactured there, out of which about 40 will be

imported from Japan and the rest manufactured in India.

Among products, IR has received an encouraging

response from global as well as India entities to

manufacture 15 EMU train sets worth ~INR 25bn. The

project involves manufacture and supply of 315 rail cars

with AC sleeper as well seating facilities (40 imported

and 275 to be manufactured in India). The participating

companies include CSR Zhuhou Electric Locomotive

(China), Zhuhou CSR Times Electric (China), Siemens,

Kawasaki-Toshiba-BHEL consortium, Hitachi-AnsalDo

consortium, Bombardier-CAF consortium, BEML-Alstom

consortium and Rotem- Melco. The project is expected to

be awarded in H2FY16.

http://economictimes.indiatimes.com/topic/Toshiba

http://economictimes.indiatimes.com/topic/Bombardier

Railways

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Product profile

The exhibit below lists several capital goods companies and their product portfolio for IR. These companies would be

significant beneficiaries of a revival in rail capex.

Exhibit 35: Product profile of CG companies

Company Product profile

ABB India Rolling stocks: traction transformers, converters

& motors, auxiliary converters & battery

chargers, semiconductors, low voltage products

and surge arrestors

Infrastructure: traction substations, power &

distribution transformers, high voltage

switchgear, static frequency converters,

protection & control equipment

Services: spare parts, maintenance, upgrade and

retrofit

Robots

Traction substation

Bharat

Earth

Movers

Metro train & integral rail coaches, overhead

equipment (OHE) inspection cars, postal vans,

AC/DC electric multiple units, d-EMU, utility track

vehicles, track laying equipment, broad-gauge rail

buses, treasury vans and spoil disposal units

Utility track vehicle

Electric multiple unit (metro coach)

BHEL Traction machines and drives: insulated gate

bipolar transistor (IGBT) propulsion equipment

includes traction motors & converters, auxiliary

converter, and traction generators, transformers

& switchgear and alternators

Transportation system: urban transportation

systems, electric & diesel locomotives, EMU

coaches, OHE inspection cars, dynamic track

stabilizers, well wagons, rail-cum-road vehicles,

utility vehicles and ballast cleaning machines

AC electric locomotives

Source: Company websites

Railways


Company Product Profile

Crompton

Greaves

Propulsion equipment: traction motors &

alternators, electrical traction control, IGBT

technology-based propulsion equipment

Traction electronics: auxiliary & power converters,

control electronics and static inverters

Railway signaling: signaling relays, point machines,

data loggers, carriage fans, integrated power

supply system and inverter motors

Traction motors

Cummins

India

Industrial engines Locomotive engine

Kalpataru

Power

Civil infrastructure including earthworks, bridges,

tunnels, station buildings and facilities

New track laying & rehabilitation of existing tracks

Railway electrification and power system

Signaling and telecommunications network

Signaling

Track laying

KEC

International

Civil & track works: bridges, buildings (at stations &

yards), platforms, and workshop modernization.

Track works includes track laying & linking and

preparation of ballast bed & earthwork

information

Electrification: overhead electrification, traction

substations, and general electrical works (building

& station yard lighting)

Signaling: interlocking works, outdoor & indoor

supply and installation works

Track laying

Railway station


Railways

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Company Product profile

Larsen &

Toubro

Integrated solutions for railway construction

(monorail transit system)

EPC work in railway electrification (traction

overhead equipment, and traction & switching

stations)

Dedicated rail links and merry-go-round system

(end-to-end rail connectivity solutions for sectors,

such as power, steel, aluminium & cement)

Complete civil and track works (to construct rail

beds and permanent way works involving

embankments, bridges, associated civil works

comprising station buildings, passenger amenities

and staff quarters)

Signaling and telecommunications (automatic

train supervision, protection and operations

including electronic interlocking)

Steel & concrete bridges and tunnels

Automated track laying machine at the DFC project

Rigid overhead contact system of the Delhi Metro Rail

Corporation

Siemens

India

Rail automation: railway electrification like

signaling & control equipment, relays, audio

frequency track vacancy detection, axle counters,

safety system, auxiliary warning system, point

machines and thermo flashers

Rolling stocks: Metro bogies, components of a

propulsion system, such as traction converters &

motors, auxiliary converters, control system,

locomotives and urban transport vehicles

Electric multiple unit (EMU)


Railways


Order inflows

The following are orders bagged by CG companies in the past few quarters from IR. Data suggests inflows have picked

up in recent quarters.

Exhibit 36: Order flows pick up

Year Order Supplier Customer Order size (INR mn)

CY14 Supplying new & rehabilitation of turbochargers to Diesel Modernization Works, a

division of IR

ABB India Indian Railways, Punjab

NA

FY13 Electrification of Phase III of the Delhi Mass Rapid Transit System (MRTS) Siemens India Delhi Metro Rail Corporation

1,760

FY13 Gurgaon Metro South Extension project Siemens India IL&FS Rail 1,841

FY14 Supply of traction motors Siemens India Diesel Locomotive Works, Varanasi

743

FY14 Construction package of rail line doubling between Jhansi and Bhimsen stations in

Uttar Pradesh

GMR Consortium Rail Vikas Nigam 2,670

FY15 To supply Phase III propulsion system for diesel & electric locomotives Siemens India Indian Railways 4,500

FY15 Supply of track-side transformers Crompton Greaves Indian Railways NA

FY15 Order of a Phase-III, diesel-electric multiple unit (DEMU) propulsion system Crompton Greaves Indian Coach Factory (ICF), Chennai

NA

FY15 Orders for 38 HP D-EMU Crompton Greaves Indian Coach Factory (ICF), Chennai

NA

FY15 Supply of 72 traction motors Crompton Greaves Rail Coach Factory, Kapurthala.

NA

FY15 Supply of CNG-fuelled dual engine (using CNG as an alternative to diesel) for DEMU Cummins India Indian Railway Organization for Alternate Fuels

NA

FY15 Electrification of 914km from Rewari to Vadodara Larsen & Toubro DFCCIL (Dedicated Freight Corridor Corporation of India)

30,970

FY15 Supply of axle box housing castings required for rail coaches BEML Integral Coach Factory

NA

FY15 Manufacture and supply of 70 cars in addition to 92 standard gauge metro cars for

Phase III

BEML Delhi Metro Rail Corporation

NA

FY15 Secured order for railway electrification KEC International Central Organisation of Railway Electrification

1,370

FY15 Construction of 48km of railway lines for the transportation of coal from coal mines Larsen & Toubro NA NA

FY15 Construction of viaduct and stations for YMCA - Ballabhgarh Larsen & Toubro Delhi Metro Rail Corporation

2,280

FY15 Construction of Lucknow Metro Larsen & Toubro Lucknow Metro Rail Corporation

6,310

FY15 To supply 10 traction alternators TD Power Systems Diesel Locomotive Works

NA

FY15 Received two railways orders in JV Kalpataru Power Indian Railways 1,000

FY15 Construction of rail line doubling of multi modal transport system (MMTS) – Phase II

works on Secunderabad division of South Central Railway in Andhra Pradesh

GMR Consortium Rail Vikas Nigam 3,890

FY16 Design, manufacture, supply test and commission 74 board gauge metro cars BEML Delhi Metro Rail Corporation

6,450

FY16 Secured order for electrification, civil works, track laying, signaling and

telecommunications works in Madhya Pradesh

KEC International Rail Vikas Nigam 2,880

FY16 Construction of special steel bridges on the western DFC Larsen & Tubro and IHI Infrastrucutre System, Japan

DFCCIL 10,200

FY16 Design, construction, supply, testing and commissioning of 2X25 kV AC 50 Hz

electrification, signaling, and telecommunications and associated works of double

track rail lines under construction on a design build lump sum basis for the

Bhaupur-Khurja Section of eastern DFC

Alstom India DFCCIL 14,970

FY16 Four projects in the railway division Kalpataru Power Indian Railways 3,250

FY16 EPC for a 417-km-long eastern DFC railway project in two phases: first build a

180km stretch between Mughalsarai and Karchana (near Allahabad) and second

involving a 237km stretch between Karchana and Bhaupur (near Kanpur)

GMR Consortium DFCCIL 50,800


Railways

Infr

ast

ructu

re


Ports: right connections Analyst: Adhidev Chattopadhyay

India’s West Coast currently accounts for more than 70%

of total container volume handled at ports; to decongest

this route, Indian Railways SPV, DFFCIL, is building the

eastern and western DFCs of 3,300km dedicated to

moving freight from ports to the hinterland; this will, to a

large extent, alleviate congestion at ports. In this context,

DFC is expected to significantly benefit ports along

India’s West Coast, especially in Gujarat and

Maharashtra.

Among the West Coast ports, the ports of Mundra and

Pipavav are far away from the existing rail line. Post DFC

which is running near to existing rail tracks, Pipavav

would still be 370km from Mehsana while Mundra will

connect to DFC at Palanpur, which is 440km away.

Though DFC does not reduce distance, it provides a

dedicated freight line, which is missing currently. The

Hazira Port would be the best connected as it is just

28km from Surat on the DFC. As per Adani Ports

management, land acquisition for the Hazira rail line has

been completed, and it expects it to be commissioned

once DFC is operational.

DFC to unchoke ports

West Coast capacity to grow 1.6x over FY15-19E

Gujarat Pipapav (GPPV IN, Sell, CMP: INR 173, TP: INR

122) is currently expanding capacity to 1.35mn TEUs

from 0.85mn TEUs at Pipavav Port. Its peers like Mundra

are setting up a new container terminal in a 50:50 JV

with CMA-CGM having capacity of 1.3mn TEUs that will

be equivalent to GPPV’s capacity post expansion.

Further, work has started on Phase I (2.4mn TEUs) on the

PSA container terminal at JNPT that will become

operational in FY18. Also, the Hazira Port is set for

expansion to 1.5mn TEUs from current capacity of 0.7mn

TEUs, as land for setting up the rail line has already been

acquired. It would be operational by FY18.

Container volume to grow 1.42x over FY15-19E

We assume a 10% CAGR in West Coast container volume

over FY15-19E despite a challenging demand

environment. Overall capacity utilization is still expected

to fall to 82% in FY19E from 92% in FY15.

Challenge from Hazira if new IR line & DFC happens

While GPPV does offer superior rail evacuation, it will

face significant competition from Hazira once the railway

line is completed and the WDFC is commissioned as

Hazira is closest to the DFC (about 28km from Surat).

Pipavav would be 370km away (Palanpur) while Mundra

would be 440km away (Mehsana & Ahmedabad).

Pricing pressures to persist on capacity expansion

We believe pricing competition will persist and impact

margin, owing to new capacity coming up at major

container ports on the West Coast. Capacity is likely to

come up well ahead of demand, and, hence, ports would

be competing with one another to retain market share.

Exhibit 37: Connectivity of the key West Coast ports to DFC

Rail connectivity of Mundra and Pipavav to the western rail corridor

Source: Gujarat Infrastructure Development Board

To

De

lhi

To

Mu

mb

ai

Existing Rail Line

DFC

Pipavav

Hazira

Dahej

Surat

Bharuch

Ahmedabad

Mahesana

Palanpur

MundraKandla

Gujarat

Railways


Exhibit 38: Container volume to grow 1.42x over FY15-19E to 13.4 mn TEUs

Container Volumes Handled at Ports (mn TEUs) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E

JNPCT (Owned by JNPT trust) 1.0 0.8 0.9 1.1 1.2 1.3 1.4 1.4 1.4 1.4 1.5

% YoY growth

(20.0) 12.5 22.2 10.0 8.3 3.1 0.0 0.0 3.7 3.6

NSICT (DP World) 1.5 1.5 1.5 1.5 1.0 1.0 1.1 1.1 1.1 1.2 1.2

% YoY growth

1.3 0.7 (3.9) (29.7) (6.7) 8.2 1.0 3.8 4.5 4.3

Nhava sheva New DP World terminal (expansion) - - - - - - - - 0.2 0.4 0.4

% YoY growth

NM 100.0 0.0

GTI(APM Terminals - CONCOR) 1.7 1.8 1.9 1.9 2.0 1.9 2.0 1.9 2.0 2.1 2.2

% YoY growth

1.4 6.3 3.2 4.2 (6.0) 6.4 (3.0) 3.1 5.0 4.8

PSA Singapore Terminal - - - - - - - - - 0.5 0.8

% YoY growth

NM 50.0

Total JNPT Volumes (mn TEUs) 4.2 4.1 4.3 4.5 4.3 4.2 4.4 4.4 4.7 5.6 6.0

% YoY growth

(3.7) 5.4 4.7 (5.6) (2.1) 5.8 (1.1) 6.9 19.4 8.1

Mundra Port (CT-I and CT-II) 0.5 0.8 1.0 1.3 1.7 1.7 2.0 2.2 2.3 2.4 2.5

% YoY growth

52.0 32.9 24.8 38.1 (1.7) 17.0 10.0 4.5 4.3 4.2

Mundra(CT-III) JV with MSC - - - - - 0.7 1.1 1.4 1.5 1.5 1.5

% YoY growth

57.1 27.3 7.1 0.0 0.0

Mundra(CT-IV) JV with CMA-CGM - - - - - - - - 0.5 0.7 1.0

% YoY growth

40.0 42.9

Total Mundra Port Volumes (mn TEUs) 0.5 0.8 1.0 1.3 1.7 2.4 3.1 3.6 4.3 4.6 5.0

% YoY growth

52.0 32.9 24.8 38.1 38.5 28.6 16.1 19.4 7.0 8.7

Gujarat Pipavav 0.2 0.3 0.5 0.6 0.6 0.7 1.0 0.7 0.9 0.9 1.0

% YoY growth

60.0 45.6 30.9 (6.6) 16.1 48.4 (24.0) 15.0 10.0 10.0

Hazira - - - - - 0.1 0.3 0.5 0.6 0.8 0.8

% YoY growth

278.9 50.0 25.0 25.0 0.0

Others (Kandla, Cochin, Murmagao, New Mangalore) 0.7 0.7 0.6 0.8 0.6 0.6 0.6 0.6 0.6 0.6 0.6

% YoY growth

(1.5) (2.1) 23.8 (25.0) 0.0 0.0 0.0 0.0 0.0 0.0

Total Volumes (mn TEUs) 5.6 5.8 6.4 7.2 7.2 7.9 9.4 9.8 11.0 12.5 13.4

% YoY growth

3.8 10.3 11.6 (0.1) 10.6 18.9 4.0 12.6 13.1 7.6

Source: Company, Industry sources, Elara Securities Estimate

Exhibit 39: West Coast container operating capacity to reach 16.4mn TEUs by FY19E from 10.2mn TEUs in FY15

Operating capacity (mn TEUs) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E

JNPCT (Govt owned) 1.1 1.1 1.1 1.1 1.2 1.3 1.3 1.3 1.3 1.3 1.3

NSICT (DP World) 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2




JNPT total (MTEU) 4.1 4.1 4.1 4.1 4.2 4.4 4.4 4.5 4.9 7.7 7.7




Mundra Port Total 2.5 2.5 2.5 2.5 2.5 4.0 4.0 4.0 4.7 5.3 5.3

Gujarat Pipavav (Elara Sec estimates) 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 1.4 1.4 1.4

Others 0.5 0.5 0.5 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6

Hazira - - - - - - 0.4 0.8 1.5 1.5 1.5

Total capacity 8.0 8.0 8.0 8.0 8.1 9.8 10.2 10.7 13.0 16.4 16.4

% YoY Capacity Growth - 0.0 0.0 0.8 1.2 20.9 4.1 4.9 21.0 26.6 0.0


Exhibit 40: West Coast container capacity utilization to fall to 82% in FY19E from 92% in FY15

Capacity utilization (%) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E

JNPCT (Govt owned) 90.9 72.7 81.8 100.0 100.8 100.8 103.8 103.8 103.8 107.7 111.5

NSICT (DP World) 125.8 127.5 128.3 123.3 86.7 80.8 87.5 88.3 91.7 95.8 100.0




JNPT total 103.3 99.5 104.9 109.8 101.2 94.5 100.0 96.7 94.9 72.1 77.9




Mundra Port Total 20.0 30.4 40.4 50.4 69.6 60.3 77.5 90.0 92.5 86.8 94.3

Gujarat Pipavav 23.5 37.6 54.8 71.8 67.0 77.8 115.4 87.7 63.5 69.9 76.8

Others 128.8 126.9 124.2 137.9 103.4 103.4 103.4 103.4 103.4 103.4 103.4

Hazira - - - - - - 82.4 61.8 41.2 51.5 51.5

Total Container Utilisation (%) 70.3 73.0 80.6 89.3 88.1 80.5 92.0 91.2 84.9 75.9 81.6


Railways

Infr

ast

ructu

re


Rolling stocks: rollicking ahead

Exhibit 41: Coal as a % of total rail freight remains high


COAL target of 1.0bn tonnes to light fire

Coal India has a target to sell 1.0bn tonnes of coal per

year by 2021. During FY15, it sold 489mn tonnes. Hence,

it must grow at a CAGR of 13% during FY15-21E to

achieve the target. Besides receiving timely regulatory

approvals, coal evacuation requires transportation

facilities. Roads cannot fulfill the requirements along,

and, hence, railways have to act and lay track lines,

which will help in coal evacuation. This would help in

consistent demand of wagons for the next few years.

Wagons on a roll

IR has set an internal target to increase daily passenger

carrying capacity from 21mn to 30mn, a rise in track

length by ~20% from 114,000km to 138,000km. It can

grow annual originating freight carrying capacity from

1.0bn tonnes to 1.5bn tonnes in the next five years.

Consequently, in February 2015 budget, Minister of

Railways unveiled its five-year capex plan in which it

proposed to spend ~INR 1.02tn in rolling stocks

(locomotives, coaches & wagons production and

maintenance) in the next five years.

Exhibit 42: Wagon demand set to improve

Source: Indian Railways, Elara Securities Estimate

The current Railway budget indicates investment in

wagons would see a significant increase compared to

investment made during the earlier period. The plan

shows investment will be prioritized in the following

areas: DFC, high capacity rolling stocks, last mile rail

linkages and port connectivity. Interactions with Railways

officials reveal a requirement of 14-16k wagons per year.

Exhibit 43: Different types of wagons being used by IR

Wagons Commodities

Open top wagon coal, ore & minerals

Covered wagons fertilizer, cement & foodgrains

Flat wagons steel, container, timber

Tank wagons oil, milk, acid, caustic soda

Tank wagons (pressurized) Liquefied petroleum gas

Tank wagon (with air fluidizing system)

alumina & cement

Hopper wagon coal & ballast

Special purpose wagon (multi axle/well type)

oversized/extra heavy consignments, defense equipment


Cast in steel

Rail castings involve bogies and couplers which are parts

of wagons and CMS crossings. IR is a major consumer of

steel castings in the country. Steel castings required for

wagon manufacturing must be procured from foundries

approved by IR.

In recent years, there is an increasing export potential for

rail as well as industrial castings. Companies, such as

Texmaco Rail and Titagarh Wagons, have already started

to export a major part of its produce to manufacture

wagons. The steel foundry is labor intensive, and high

labor cost involved in the operations of a foundry

becomes a deterrent. Labor-related issues like strikes also

pose a problem.

47

.2

46

.6

45

.5

45

.1

45

.1

44

.1

43

.8

71

.1

80

.6

44

.6

45

.6

47

.0

49

.2

48

.3

49

.3

30

40

50

60

70

80

90

0

100

200

300

400

500

600

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

RE

(%)

(mn

to

nn

es)

Coal (LHS) % of total freight (RHS)

18 17

9

0

14 15

16 16 16

0

4

8

12

16

20

FY

12

FY

13

FY

14

FY

15

BE

FY

16

E

FY

17

E

FY

18

E

FY

19

E

FY

20

E

('0

00

no

of

un

its)


Railways


Appendix I

How IR lost its mojo

Stuck in a vicious circle

Although IR is considered as a commercial entity, political

parties have not allowed running it commercially,

particularly in the passenger segment. As the entity is a

monopoly with no separate policymakers and regulators,

it has failed to respond to new demands for expanded

services. The cost continues to increase due to a large

employee pool. In addition, political pricing of passenger

fares has forced IR to charge uncompetitive and high

freight tariffs. Although IR has not lost much share in

traffic beyond 350km and the bulk freight segment, it

has not managed to cater to the high-value segment

which has shifted to road transport. With revenue falling,

IR has found it difficult to adequately maintain assets or

create new capacity to serve customers, and this, in turn,

has forced more customers to turn away, leading to a

crisis-like situation.

Exhibit 44: Under investment in IR


Network improves but lags demand

IR has improved its network capacity over the past 65

years. It has added ~12,000km of new lines since

independence. It has grown passenger and freight

volume faster than growth in population or the route

kilometers. Freight carried has increased from 73mn

tonnes in FY51 to 1,052mn tonnes in FY14, according to

IR. The network is being more intensively used at many

places, and it is running beyond 100% capacity

utilization. However, these supply-side improvements

have not been commensurate with demand

requirements. Hence, it continues to lose its share to

other modes of transport despite being the most cost

effective.

Not a pure commercial organization

IR does not run fully on commercial terms. It has

continuously subsidized passenger fares which have

increased losses in this segment. During FY13, loss per

passenger km was ~30 paise.

Exhibit 45: Loss remains high in the passenger

segment

Year Cost per PKM Earnings per PKM (Earnings

/cost)

FY00 35.8 22.2 62.0

FY09 48.9 26.1 53.5

FY10 52.9 26.0 49.1

FY11 52.6 26.3 50.0

FY12 54.4 27.0 49.6

FY13 57.8 28.5 49.4

Source: White paper on IR, 2015

Highest freight rates lead to fall in traffic

In the past, IR increased freight rates to offset losses in

the passenger segment. During FY13, profit per tonne

km was ~64 paise. This makes India’s freight rates among

the highest in the world.

Exhibit 46: Freight rates across other nations

Country Freight yield

Usc/passenger km at nominal prices

Freight yield Usc/passenger km adjusted for PPP (India = 1)

India 2.11 1.00

China 1.49 0.58

Russia 2.20 0.75

US 2.28 0.51


Exhibit 47: High freight rate makes it noncompetitive

Year Cost per NTKM Earnings per NTKM (Earnings/cost)

FY00 55.9 72.3 129.3

FY09 63.7 96.9 152.0

FY10 65.8 97.4 147.9

FY11 67.6 100.4 148.5

FY12 69.6 104.2 149.6

FY13 75.3 123.3 163.7


Given higher freight rates coupled with a delay in

delivery and a lack of last-mile connectivity, its share in

total traffic has been declining. The modal mix of

transport has shifted in favor of road transport, not only

for freight but also for passenger transport with shorter

leads.

Under Investment

Inability to increase fares

Lower surplus for investment

Lower resource

generation

Poor quality services &

delays

Railways

Infr

ast

ructu

re


At the time of independence, IR used to carry 89% of

freight. Its share keeps on declining and currently it is

~30% of total originating traffic. However, it manages to

maintain its share in bulk freight and traffic beyond

350km, which may be due to no better alternative

option.

Exhibit 48: IR share in origination tonnage continues

to decline

Source: National Transport Development Policy Committee

Salaries, fare subsidy eat into profit

Higher wages, cross subsidization of passenger fares and

inefficiency have led to declining traffic, leading to lower

internal resource generation.

Low investment taking a toll

One major challenge faced by IR is that it has to meet

not only operational expenses but also generate

adequate funds for investment. Over the years, railways

expenditure as a percentage of the transport sector

expenditure has declined from 67% in the Third Five-Year

Plan (1961-66) to 30% in the Eleventh Five-Year Plan

(2007-12).

Exhibit 49: Underinvestment in IR over the years

Five-year plans IR expenses

(INR bn) As a % of the transport sector

expenses

FY51-56 2.2 50

FY56-61 7.2 66

FY61-66 13.3 67

FY69-74 9.3 37

FY74-79 21 37

FY80-85 66 47

FY85-90 165 56

FY92-97 322 49

FY97-02 457 38

FY02-07 841 36

FY07-12 1921 30


Exhibit 50: Railway expenditure as a % of total

transport declining


Poor execution chips away at investment

The real problem plaguing IR is the delay in execution of

projects, which has not only resulted in time overruns

but in cost overruns. Thus, despite continued investment,

it seems to be under-invested, which has led to its

current state. The primary reason for cost and time

overruns is inadequate funds allotted for projects, a lack

of coordination with local authorities & sub-contractors,

land acquisition issues, a delay in finalizing detailed

engineering plans and a lack of familiarity with the latest

technology.

Exhibit 51: Pending projects

Plan Number of

projects Cost to complete

FY15 (INR bn)

New lines (construction) 170 1,336

Gauge conversion 67 245

Doubling 233 396

Traffic facilities (yard re-modeling & others)

598 55

Road safety works (level crossings)

204 11

Road safety works (road over/under bridges)

1,535 425

Track renewals 2,355 152

Bridge works 286 23

Signaling and telecommunications

582 63

Electrification projects 54 67

Workshops including production units

481 174

Metropolitan transport projects 16 217

Total 6,581 3,164

Bridge works 1,287 1,750

Grand total 7,868 4,914

Source: Bibek Debroy Committee report, 2015

89

65

53

31

0

20

40

60

80

100

FY51 FY79 FY87 FY15

(%)

0

20

40

60

80

0

500

1,000

1,500

2,000

2,500

FY

51

-FY

56

FY

56

-FY

61

FY

61

-FY

66

FY

69

-FY

74

FY

74

-FY

79

FY

80

-FY

85

FY

85

-FY

90

FY

92

-FY

97

FY

97

-FY

02

FY

02

-FY

07

FY

07

-FY

12

(%) (I

NR

bn

)

Railways Exp as a % of transport sector exp (RHS)

Railways


Current state of Indian Railways

Things could be better

IR carries ~23mn passengers and ~3mn tonnes of freight

per day. There are only four countries in the world that

carry more than 1.0bn tonnes of originating freight

every year (China, Russia, the US and India).

Exhibit 52: Statistical snapshot

FY14

Number of passengers carried (mn) 8,397

Passenger kilometers (bn) 1,159

Passenger earnings as a % of gross earnings 25

Express long-distance passenger as a % of passenger earnings

80

Average suburban lead (km) 37

Average non-suburban lead (km) 258

Number of railway stations 7,172

Number of daily passenger trains 12,961

Average speed of mail & express trains on broad gauge (km/hr)

51

Average rate per passenger km (paise) 32

Revenue originating tonnes (mn) 1,052

Net tonnes km (bn) 692

Bulk freight as a % of goods earnings 89

Number of daily goods trains 8,637

Wagon turnaround time on broad gauge (days)

5

Average speed of goods trains on broad gauge (km/hour)

26

Average net load of goods trains on broad gauge (tonnes)

1,686

Average rate per NTKM (paise) 138

Working expenses as a % of gross earnings (operating ratio)

94

Number of employees (‘000s) 1,334

Wage bill as a % of working expenses 49

Rate of return on capital (%) 7

Number of locomotives 9,956

Wagons 245,267

Coaches 66,392

Land owned by IR 455,000 hectares

Source: Bibek Debroy Committee report, 2015

Segment-wise revenue for IR

Exhibit 53: Freight and passenger revenue on an

increasing trend


Exhibit 54: Freight earnings remain critical


Freight: two-thirds of revenue

Freight trains constitute ~35% of train network but yield

more than 65% of revenue. Despite this, it has lower

priority vs passenger trains in operational matters.

Higher growth but not adequate

IR performance is well below potential despite high

growth witnessed in freight traffic during the past

decade. The transport elasticity to GDP is 1.25. IR’s freight

CAGR was at 7% over FY04-14.

Exhibit 55: Rail freight traffic CAGR of ~7% over the

past 10 years


Of total freight, ~50% is bulk freight, which can be

transported primarily via rail. Hence, price elasticity with

regards to bulk freight is low. Hence, we believe IR will

continue to increase freight rate to subsidize passenger

fares.

Exhibit 56: Composition of freight traffic in FY14


0

200

400

600

800

1,000

1,200

0

100

200

300

400

500

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

(INR

bn

)

(IN

R b

n)

Passenger earnings (LHS) Freight traffic (RHS)

Passenger earnings

27%

Freight traffic 67%

Others 6%

55

7

60

2

66

7

71

6

47

4

45

8

88

8

92

2

96

9

1,0

08

1,0

52

0

200

400

600

800

1,000

1,200

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

(mn

to

nn

es)

Freight traffic

Coal 48%

Ore to Steel Plants

6%

Ore - Export

1%

Cement 11%

POL 4%

Foodgrains 5%

Fertilizers. 4%

Iron & Steel 4%

Others 17%

Railways

Infr

ast

ructu

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Remains an economical mode of travel

Even if IR were to maintain its current market share of

~30%, it would have to grow at 7-8% over next few

years. According to National Transport Development

Policy Committee (NTDPC), roads transportation is

economical for distance upto 400km only. Around 65%

of India’s freight traffic comprises bulk commodities and

is transported over a distance of more than 400km. This

can be more economically served by IR. Also, the

average lead distance travelled is 620-630km where IR

has not lost much market share.

Exhibit 57: Rail freight cheaper by >50% from road

for distance beyond 500km


IR must improve productivity and efficiency, particularly

in its freight segment. In our view, it can 1) introduce and

proliferate higher pay load to tare weight ratio wagons,

2) improve average speed of goods train by using longer

trains, and 3) decongest a few of the highly saturated

track networks.

Passenger traffic less elastic to price movement

The Economic Survey of 2014-15 provides estimates of

price elasticity of demand for different components of rail

services. It shows that passenger services are far less

price elastic than freight services. A 10% increase in fares

would reduce passenger demand by 1.4% while in case

of freights, it would fall by 5.5%. Thus, IR can increase

passenger fares more than freight rates but is unable to

do so due to political compulsions. The current loss per

passenger km is ~50 paise.

Exhibit 59: Loss remains high in the passenger

segment

Year Cost per PKM

(%) Earnings per PKM

(%) Ratio (%)

FY00 35.8 22.2 62.0

FY09 48.9 26.1 53.5

FY10 52.9 26.0 49.1

FY11 52.6 26.3 50.0

FY12 54.4 27.0 49.6

FY13 57.8 28.5 49.4


Financials

In a bad shape

IR’s operating ratio has been in the range of 85-93%;

thus, there is not much of surplus to invest, and it has to

depend on external sources to fund capex plans. In some

countries, an operating ratio of ~75% provides their

railways adequate room for further investment. There

are several public service obligations that IR bears (for

example, support for investment in national projects and

strategic lines, such as in J&K and the Northeast states).

However, IR is not at fault as it has not been allowed to

raise passenger fares in a commercial way. Hence, the

government has to continuously provide capital to fund

its capex plans.

Exhibit 60: Operating ratio hovering at ~90%


1.3 1.3 1.8 1.8 2.0 2.0

3.3 3.3 3.3 3.5

4.5

5.1

0.00

1.00

2.00

3.00

4.00

5.00

6.00

FY11 FY12 FY13 FY14 FY15 FY16E

(pe

r km

pe

r to

nn

e)

Rail freight Road freight

91.0

83.7

78.7

75.9

90.5

95.3 94.6 94.9

90.2

93.6 91.8

70

75

80

85

90

95

100

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

(%)

Exhibit 58: Railway financials can easily meet revenue expenses

(INR bn) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 RE FY16 BE

Gross traffic receipts 627 717 799 870 945 1,041 1,237 1,396 1,592 1,836

Total working expenses 490 545 718 822 895 987 1,116 1,303 1,460 1,622

Excess/shortfall 102 134 45 0 14 11 83 37 73 143

Operating ratio (%) 78.7 75.9 90.5 95.3 94.6 94.9 90.2 93.6 91.8 88.5

Source: Indian Railways, February 2015 Railway Budget

Railways


Challenges

Key challenges faced by IR are constraints of

infrastructure, primarily in line capacity on busy routes,

the absence of difference between policymakers &

regulators and deteriorating financials.

Capacity constraints on busy routes…

The high density network is the one which connects the

metros and this is overstretched. The main lines

(connecting the four metros), which comprise ~16% of

the total rail network, carry ~60% of freight and more

than 50% of passenger traffic, and, thus, is oversaturated.

Despite having a large-scale network, traffic distribution

is highly uneven.

Exhibit 61: Line capacity utilization of sections on

high density network

Source: National Transport Development Policy Committee

…leading to slower speed

Most developed countries have high speed railways

(speeds upto 300-350km per hour) and have rebuild

their old tracks for speeds upto 200km per hour. The

maximum permissible speed on IR is only 150km per

hour and average speed actually is 50-60km per hour for

passenger trains and ~25km per hour for goods trains.

The problem is not rolling stocks but stretched capacity

with mixed traffic of high speed, slow passenger trains

and goods trains. Thus, if IR were able to decongest the

track, the existing asset would run at double the speed.

Need of the hour: rescuing IR

Modernize and augment core assets

Key revenue-generating assets of IR, such as tracks &

bridges, signaling, rolling stocks and stations & terminals,

need to be modified to meet increasing demand.

Review and prioritize projects

As on 2014-15, a total of 11,709 projects that have been

approved by the Railways Board are in the process of

completion with an estimated cost to completion of INR

4.95tn. There are several projects which were started

before 2000 that have still to be completed.

Financing should not be a problem

As internal generation of IR is low, there is an urgent

need to mobilize additional funding from private

participation and FDI. IR needs to change its investment

strategy through ring-fenced investments in high-yield

projects, which can be funded through multilateral

funding agencies like insurance companies and pension

funds. These agencies can provide long-term, lower

interest rate funds. Hence, these funds should be used

for capacity generation and not for asset replacement.

For example, the upcoming DFCs.

Set up an independent regulator

It would be difficult to unlease the potential of private

sector & FDI participation unless there is a clear policy

and independent regulator. The government has started

working on these directions, and, accordingly, the

Railways Budget of 2015-16 proposes to have a

regulation mechanism independent of the service

provider. It is proposed to set up a mechanism which will

make regulations, setting up performance standards and

determine tariffs. Proper functioning may help attract

private participation in the sector.

Reduce approval process by 18 months

Earlier, the practice was to include a project in Railway

Budget and send for an ‘In Principle Approval’ to the NITI

Aayog, hold meetings of extended Board of Railways

and finally seek approval of the Cabinet. Once Cabinet

approval is available, IR used to go for final location

survey (FLS), and, subsequently, prepare a detailed

estimate. Expenditure can be incurred only after this is

sanctioned. This process used to take 2-3 years. To

reduce this time gap, Ministry Railways asked zonal

railways to carry out the FLS after inclusion of the work

in the Railway Budget. After the FLS, zonal railways were

asked to send a detailed project report (DPR) to the

Board with cost estimates. This change yielded results:

out of 77 line-doubling projects sanctioned this year, DPR

of 73 have been prepared and received.

Power delegation to GM a welcome move

An important step is the devolution of decision-making

and tendering power to GMs, making them “nodal

points” to implement and execute contracts faster. One

way this devolution is in play is that project size has been

0 10 20 30 40 50

Mumbai - Chennai

Howrah - Chennai

Delhi - Chennai via Jhansi,Nagpur-Bhallarshah

Delhi - Guwahati via Sitapur- Gorakhpur-Barauni-Katihar

Delhi - Mumbai

Mumbai - Howrah

Delhi - Howrah

Number of sections

<80% 80-100% 100-120% 120-150% >150%

Railways

Infr

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increased from INR 3bn to INR 10bn. Any project above

INR 10bn now requires cabinet approval.

DFC: a game-changer

The most critical aspect of IR is capacity constraints rather

than rolling stocks. To decongest the network, the

government is setting up DFCs (eastern & western of

~3,300km) which would lead to decongestion of freight

and passenger traffic on main routes, speed up delivery

and generate additional freight carrying capacity of >500

mn tpa at peak. Heavy axle loads, better wagon design,

longer freight train length can also to reduce unit cost.

Privatization answer: muted so far

Private sector participation in IR has been muted,

particularly compared to other sectors, such as ports,

telecom, electricity, airports and roads. Several attempts

have been made in the past to involve the private sector,

particularly in wagon procurement & leasing, freight

trains & container operations, terminals & warehousing

facilities, catering services, and other rail infrastructure

through schemes framed by the Ministry of Railways.

However, high cost and low returns, policy uncertainty, a

lack of a regulator to create a level-playing field, few

incentives for investors, and procedural & operational

issues have deterred private sector participation.

Private sector on the line

During FY06, IR decided to allow private firms to obtain

licenses for running container trains on its network.

Initially, 14 operators signed an agreement with IR to run

container trains. However it came down to two next year

as CONCOR, a subsidiary, imposed restrictions on 13

container train operators to do business with its existing

customers as a precondition for accessing its terminals.

Further, huge cost and special treatment to CONCOR

has brought down investor interest even further. The

sharp rise in haulage charges by IR has been a big

negative for these private container train operators.

SPV-based model for port connectivity is successful

IR achieves some success by adopting the SPV-based

model for port connectivity. It has created autonomy

through the SPV route, which involves both public and

private investments. Currently, four port connectivity

projects are operational and three more are in progress.

Attracting FDI

On August 27, 2014, FDI regulations were changed to

permit 100% FDI in the following activities of the railway:

Construction, operations and maintenance of the

following:

Suburban projects through PPP

High speed train projects & dedicated freight lines

Rolling stocks, including train sets, and locomotives/

coaches manufacturing and maintenance facilities

Railways electrification & signaling systems

Freight & passenger terminals

Infrastructure in industrial parking pertaining to

railway line/ sidings, including electrified railway

lines and connectivity to main railway line

Takeaways for IR

Financing should not be a problem

Private investment will take time to come due to

absence of a regulator

Freight rates will continue to increase as cross

subsidization for passenger fares remains

Key focus areas would be increasing the track

network, improving safety systems, expanding the

signaling network, removing level crossings and

redeveloping a few stations.

Rolling stock upgradation would take place, but we

do not expect any major uptick

Exhibit 62: Port-based projects through SPVs

(INR mn) Pipavav Railway

Kutch

Railway Bharuch Dahej

Railway Krishnapatnam

Railway

Route length (km) 271 301 67 113

Date of commissioning Apr-03 Phase I - Mar'06 &

Phase II - Nov'06 Mar'12 July'09

Project cost 4,060 5,000 3,850 12,030 (Including

Phase II and III)

Total equity contribution of promoters 1,960 2,000 1,550 2,700

Total debt 2,100 3,000 2,300 9,330

Investment by MoR or its PSU 980 1,000 550 810

% of cost invested by MoR/its PSUs (%) 24.1 20.0 14.3 6.7

Annual traffic FY14 (mn tonnes) 8.7 26.9 6.6 15.4

Expected annual traffic FY15 (mn tonnes) 9.83 (upto Feb'15) 29.19 11 16.4 (upto Dec'14)

SPV share in earnings FY15 2,662.5 (upto Feb'15) 5,840 1,390 450 (upto Dec'14)

IR's share in earnings FY15 12,610 44,710 14,220 14,430 (upto Dec'14)

Source: Bibek Debroy Committee report

Railways


China’s Railway Dream

According to International Union of Railways, India has

the fourth-largest railway network in the World. The US

has 224,792km, China has 120,000km, Russia has

128,000km and India has 64,460km. The maximum

gross load carried on trains in IR is 5,400 tonnes vs

~20,000 tonnes in China. In China, railways carry

~51% of domestic freight whereas in India, railways

carry ~30%.

We found that except for the US, railways are

controlled by the government in all major countries.

China: the success story

China’s rail network has witnessed a steady rise over

the past decade after a series of restructuring exercises

undertaken by the government to improve

productivity. In 2014, railways in China reported 2.4bn

passenger trips and carried 3.8bn tonnes of freight. The

railway network has expanded with the government

setting aside a budget of USD 130bn for railway

investment in 2014 alone. It has a long-term plan to

expand its network to 270,000km by 2050.

Exhibit 63: A consistently huge investment

Source: China Railway Corporation

Exhibit 64: China’s rail network km grows at a

CAGR of 4% in the past 15 years

Source: Industry

Source: Wikimedia

705

843

591 634

666

809

400

500

600

700

800

900

2009 2010 2011 2012 2013 2014

(RM

B in

bn

)

69

112

0

20

40

60

80

100

120

20

00

20

05

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

('0

00

s km

)

Railways

Infr

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Result of several years of hard work

The Chinese Academy of Railway Sciences (CARS) is a

comprehensive research institute with multi-discipline

and multi-specialty in China Railway industry, set up in

1950. After 60 years, CARS possesses the technological

innovative ability and core competitiveness in railway

transportation. It has developed high and new

technologies of rail transport with the integration of

scientific research, development, production and

consultation. It has undertaken commissioning tasks for

several high-speed lines. For example, Beijing-Tianjin,

Qingdao-Ji’nan, Wuhan-Guangzhou and Shanghai-

Nanjing.

Investment in skills and know-how bearing fruit

Our analysis shows China’s railway has achieved its

goals in quick time, following years of investment in

building skills and know-how (for example, in case of

high-speed passenger lines, specialized units were set

up years in advance to study and adapt technologies

employed internationally, such as track systems, rolling

stocks design, and signaling & communications). The

technologies selected were absorbed: in some cases

by technology transfer agreements with foreign

manufacturers, and in other cases by adapting them to

China’s needs. Several high speed projects may not be

commercially viable but have changed the landscape

of rail network in China, which indirectly boosts the

economy.

Exhibit 65: Numero Uno in high speed train network within a short span of time

Route (km) 2008 2009 2010 2011 2012 2013 2014

Total Railway length 79,687 85,500 90,600 93,000 98,382 103,968 112,395

Newly added length 1,721 5,813 5,100 2,400 5,382 5,586 8,427

High speed railway (HSR) 4,042 6,123 8,546 9,967 12,690 14,362 19,853

Newly added high speed railway 3,522 2,081 2,423 1,421 2,723 1,672 5,491

HSR as a % of total network 5.1 7.2 9.4 10.7 12.9 13.8 17.7

Source: National Bureau of Statistics of China

Faster completion of project

China’s railway entered a new phase of development

in 2004. A project that might take about 5-6 years from

government approval of project concept to system

commissioning in China would take 7-15 years other

countries. For example, the 1,068-km-long Wuhan-

Guangzhou high speed railway started construction in

2005 and was commissioned in December 2009.

Three reasons behind speedier delivery:

Proper planning and design

In China, authorities implement project in a timely

manner as there are minimal changes during

construction. This is done due to the detailed planning

and schedule for each project, freezing of the budget

and receiving all regulatory approvals at the time of the

start of the project. Designs and technical specifications

are standardized, emphasis on physical & financial

capacity on contractors and tight contract award

process are some factors that assist in faster

procurement.

Project management with accountability

There is a project management team which has been

allocated funds and has the authority to implement the

project.

The project team remains together until it is

completed; it is held fully accountable. This continuity

together with significant financial incentives built into

team earnings for timely delivery of the project acts as

a strong motivator of team performance.

Ongoing reforms, policymaking and execution

In March 2013, China decided to restructure its railway

sector by dissolving the Ministry of Railways (MoR) and

separating railway policy & regulation from

commercial operations. As a result, MoR’s railway

planning and policy-making functions have been

assigned to the Ministry of Transport (MoT) while its

administrative functions such as establishing &

monitoring technical standards, safety standards and

service quality have been assigned to a new

organization, the State Railways Administration (SRA).

The responsibility for the enterprise (commercial

operations of railways) has been assigned to the newly

formed China Railway Corporation (CRC). The CRC is

to operate the railway on commercial lines. It is

understood that in line with this policy, CRC would be

compensated financially if it is required to provide

services that are financially not viable.

Railways


Appendix II

Railway Budget of FY16

Aggressive plan; implementation is key

IR, one of the most important enablers of faster GDP

development, has been in shambles for a long time. Lots

of initiatives have been considered, but the real issue has

been implementation, due to a lack of finance and

political will. In the 2015 railway budget, Minister Suresh

Prabhu tried to address issues hampering the success of

Indian Railways and announced aggressive plans, which

will help it regain its lost glory and accelerate GDP

growth.

The following are the key takeaways:

Focus on governance & transparency

Minister Prabhu has focused on governance and

reiterated transparency in recruitment as well as

procurement. He has tried to decentralize decision-

making and making authorities accountable to fast track

implementation. The Minister has appealed to MPs, the

States and local bodies to help with land acquisition and

project implementation.

Plan outlay hiked 52% YoY in FY16: seems aggressive

The Minister chalked out an aggressive plan outlay for

FY16, which was increased by 52% YoY to INR 1,000bn.

He plans to reduce dependence on budgetary support

(down 13% YoY) and try to tap into new sources of

funds, including JV with PSUs, partnering with

multilateral & bi-lateral organizations, and the PPP route.

Indian Railways will increase market borrowings (up 47%

YoY) and try to raise internal funds for expansion plans.

We believe new sources of revenue may take time, but

will provide sustainability long term.

Cleanliness, safety, and self sustaining – top focus

Minister Prabhu focused on increasing customer

satisfaction by raising service quality and cleanliness. The

capex plan includes provisions for safety, such as

eliminating manned & unmanned crossings and a

proper signaling system. IR will also increase track length

by 20% from 114,000km to 138,000km and grow annual

freight carrying capacity from 1.0bn tonnes to 1.5bn

tonnes within the next five years. The Minister plans to

make railways financially self-sustaining by improving

operating efficiency, and proper project selection &

execution. The total capex estimate for the next five years

is at ~INR 8.56tn.

Raise freight rates, not passenger

Freight rates, which are among the highest in the world,

have been increased further by revising class rates and

distance slabs, thereby denying any benefits of lower

diesel prices. Freight traffic constitutes ~66% of total

railway revenue. Minister Prabhu has not raised

passenger fares in the budget, thereby increasing

subsidy burden. During FY13, railways loss on passenger

fare per km was 30 paise.

Exhibit 66: Sources of funds: INR 100bn (FY16)


Exhibit 67: Application of funds (FY16)


Exhibit 68: Freight and passenger traffic earnings


Budgetary sources

41%

Market borrowing under EBR

18%

Internal resources

18%

PPP6%

Institutional investment

through Railway/PS

Us17%

New Lines 13%

Doubling19%Rolling

Stock19%

Invst. In NGU's13%

Others36%

939 1,058 1,069 1,214

365 446 430

502

0

500

1,000

1,500

2,000

FY14 FY15BE FY15RE FY16BE

(IN

R b

n)

Freight Earnings Passenger traffic

Railways

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Exhibit 69: Railways revenue estimates

(INR bn) FY14 FY15BE FY15RE FY16BE YoY (%) Remarks

Freight traffic 939 1,058 1,069 1,214 13.6 Volume growth of ~8% and a price increase of 6% taking into account proposed revision of class rates, rationalization of commodity classification & distance slabs

Passenger earnings 365 446 430 502 16.7 No increase in fares; assume a 3% increase in originating passengers

Other coaching 37 42 40 46 14.5

Sundries 57 55 52 73 39.6

Gross traffic receipts 1,398 1,601 1,592 1,835 15.3

Operating ratio (%) 93.6 92.5 91.8 88.5


Exhibit 70: Source of funds

(INR bn) FY15BE FY15RE FY16BE YoY (%)

Capital 275.8 278.5 388.4 39.4

Capital fund 54.6 54.5 62.9 15.4

Depn reserve fund 70.3 73.8 75.0 1.6

Development fund 28.6 29.0 40.0 38.0

Safety fund 22.0 22.0 16.5 (25.2)

Bond 193.0 190.7 176.6 (7.4)

Institutional finance NA NA 171.4

Deposit (PPP) NA NA 57.8

Total 451.3 457.8 988.5 115.9

Metropolitan transport projects 10.2 9.5 11.6 22.9

Grand Total 654 658 1,000 52.0


Exhibit 71: Application of funds

(INR bn) FY14 FY15BE FY15RE FY16BE YoY (%)

Transfer to national investment fund 176.3 301.0 301.0 400.0 32.9

New lines (construction) 58.1 85.7 89.8 128.3 42.8

Gauge conversion 31.0 25.4 34.3 55.5 62.0

Doubling 29.8 36.7 40.5 184.2 355.2

Rolling Stock 175.0 153.2 173.8 193.5 11.3

of which

Locomotives 90.7 84.2 84.7 84.7 0.0

Carriages 52.5 48.0 49.7 43.8 (11.8)

Wagons 31.4 7.8 24.0 45.0 87.4

Leased assets - Payment of capital component 49.7 54.6 54.5 62.9 15.4

Track renewals 49.9 48.0 50.5 60.4 19.6

Workshops including production units 18.2 27.8 27.2 26.2 (3.6)

Invst. In non gov undertakings including JVs and SPVs 40.9 100.1 78.1 130.9 67.6

Others 87.4 122.9 109.3 158.2 44.7

Total 539.9 654.5 658.0 1000.1 52.0


Railways


Exhibit 72: Five-year capex plan (FY16-20)

(INR bn)

Network decongestion (including DFC, electrification, doubling including electrification and traffic facilities) 1,993

Network expansion (including electrification) 1,930

National projects (Northeast & Kashmir connectivity projects) 390

Safety (track renewal, bridge works, ROB, RUB and signaling & telecom) 1,270

Information technology and research 50

Rolling stocks (locomotives, coaches, wagons production & maintenance) 1,020

Passenger amenities 125

High speed rail & elevated corridor 650

Station redevelopment and logistic parks 1,000

Others 132

TOTAL 8,560


Exhibit 73: Major development activities

FY14 FY15 FY16

Target Achieved Target (revised/achieved) Target

Electrification (route km) 1,350 1,350 1,350 1,600

Track renewals (track km) 2,100 2,885 2,200 2,600

Construction of new lines (route km) 450 450 300 300

Gauge conversion (route km) 404 404 450 500

Rolling stock

a) Locomotives

i) Diesel 375 385 397 375

ii) Electric 300 302 250 261

b) Coaches

i) EMU/MEMO/DMUs/Metro 4,086 3,887 3,359 3,390

c) Wagons (in terms of vehicle units) 15,666 9,326 10,000 16,800


Exhibit 74: Increase in freight rates of selected commodities

Avg lead (km) Freight class Freight rate/ tonne (INR) Variation

Existing Proposed Existing Proposed (INR) Weightage (%)

Cement 551 150 140 785 806 21 2.7

Coal 535 150 145 723 769 46 6.3

Iron or steel 897 180 165 1,379 1,391 12 0.8

Grains & pulses 1,280 130 130 1,415 1,557 142 10.0

Urea 772 130 130 891 981 89 10.0

Limestone, dolomite & manganese ore 575 160 145 837 834 (3) (0.3)

Iron ore (domestic) 300 180 165 501 505 4 0.8

Scrap and pig iron 645 160 150 902 931 28 3.1

Slag 575 150 140 785 806 21 2.7

Groundnut oil 1,600 140 140 2,000 2,043 43 2.1

High speed diesel oil 723 200 180 1,291 1,278 (13) (1.0)

Bituman and coal tar 645 170 160 959 993 34 3.5

Kerosene 645 180 165 1,015 1,024 9 0.8

LPG 645 180 165 1,015 1,024 9 0.8


Railways

Infr

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Key highlights

Infrastructure

Station redevelopment: Minister Prabhu has

proposed to revamp the station redevelopment policy

and simplify processes for faster redevelopment by

inviting open bids from interested parties. He further

suggested developing 10 satellite railway terminals in

major cities this fiscal, with the twin purposes of

decongesting the city as well as providing services to

passengers residing in the suburbs

Capacity augmentation: Fast-track sanctioned work

on 7,000km of double, third and fourth lines and

commission 1,200km in FY16 at an investment of INR

86.86bn. Additionally, he sanctioned 77 projects

covering 9,400km of doubling, tripling and

quadrupling works along with electrification at a total

cost of INR 961.8bn, which is 2,700% higher in terms of

amount sanctioned in FY14. FY15 is a Plan holiday

Dedicated freight corridor: Target awards for 750km

of civil contracts and 1,300km of system contracts in

FY16 under the DFC. Durgawati-Sasaram, a 55-km

section of the Eastern DFC, is proposed to be

completed in the current year

Bullet train: The feasibility study for the Ahmedabad-

Mumbai high speed train is in the advanced stages.

Regarding the other high speed routes on the

diamond quadrilateral, studies are being commissioned

The minister also proposed to set up joint ventures with

states for focused project development, resource

mobilization, land acquisition, project implementation

and monitoring of critical rail projects

PPP & BOT: Proposal to launch projects worth INR

25bn through the BOT and annuity routes

Capital Goods

Introduction of train sets which are similar to

bullet trains in design and can run on existing

tracks without an engine to haul them

Traffic facility works like construction of longer

loops, creating smaller block sections, building

bypass lines, making crossing stations,

augmenting terminals and removing permanent

speed restrictions

Railway electrification work sanctioned for a route

of 6,608km against 462km in FY14

Indigenous manufacturing of high-horse power

and green technology locomotives, commodity-

specific wagons, such as auto carriers, signaling

systems and train protection systems and track

laying & maintenance machines

Install a train protection warning system and train

collision avoidance system on select routes

Conversion of 100 DEMUs to dual fuel – CNG and

diesel

Increase in the number of planned wagons by

68% to 16,800 from 10,000 in FY16. The budget

estimate for this work is INR 45bn

Increase track length by 20% to 138,000km from

114,000km

Build 970 ROBs and RUBs and other safety-related

works to eliminate 3,438 level crossings


Railways


Dedicated freight corridors (DFC)

IR, through its SPV, DFFCIL has been working on DFC

project to construct high capacity, high speed, and

dedicated freight corridors along the golden

quadrilateral linking the four metropolitan cities of Delhi,

Mumbai, Chennai & Kolkata and its diagonals (Delhi-

Chennai and Mumbai-Howrah). This is ~16% of IR’s route

km and carries 52% of passengers & 58% of freight. The

DFC will not only speed up freight movement but also

decongest the existing tracks on IR network.

Two main routes in first phase

In the first phase, it is working to construct DFCs on the

western and eastern routes, involving construction of

~3,300km, to carry primarily coal & steel on the eastern

corridor and containers on the western corridor. It

targets to complete both DFCs by December 2019.

Eastern DFC (1,840km)

It connects Dankuni (West Bengal) to

Ludhiana (Punjab) with the Dadri-

Khurja link. It will pass through

Jharkhand, Bihar, Uttar Pradesh and

Haryana and terminate at Ludhiana in

Punjab. It will carry primarily coal and

steel from East India to plants in North

India

Western DFC (1,502km)

It connects Jawaharlal Nehru Port

(JNPT) at Mumbai to Dadri, near Delhi

via Vadodara-Ahmedabad-Palanpur-

Phulera-Rewari. It is proposed to join

eastern corridor at Dadri. The traffic

on this route would primarily

comprise containers from JNPT &

Mumbai Port in Maharashtra and

ports of Pipavav, Mundra & Kandla in

Gujarat destined for inland container

depots (ICDs) in northern India,

especially at Tughlakabad, Dadri and

Dandharikalan. Besides containers,

other commodities moving on the

western DFC are POL, fertilizer, food

grains, salt, imported coal, iron & steel

and cement.

Source: DFFCIL

Punjab

Uttarakhand

Uttar Pradesh

Haryana

Rajasthan

Madhya

PradeshChhatisgarh

Jharkhand

Bihar

Saharanpur

MeerutzHapurKhurjaAligarhHathras

BhaupurKanpurPrempur

Allahabad

Tundla

MughalsaraiNew Ganjkhwaja

New Karwandiya

Sonnagar

West BengalDankuni

Ludhiana

Ambala

Etawah

Uttar Pradesh

Dadri

Madhya Pradesh

Maharashtra

Gujarat

Rajasthan

Rewari

Rewari

Nim Ka Thana

Ringas

PhuleraAjmer

SendraMarwar

Sirohi

Abu Rd

Palanpur

Mahesana

Sanad

Makarpura

Mahesana

Ahmadabad

Vadodara

BharuchSanjali

Surat

Valsad

SanjanDahanu

Vaitarna

PanvelJNPT

Vasai

Marwar

Phulera

Palanpur

Railways

Infr

ast

ructu

re


Speedier movement of traffic

Although the maximum speed under the existing rail

network is 75kmph, it achieves an average speed of

25kmph, due to congestion on busy routes. The

maximum speed on DFC routes can be 100kmph. The

distance between the two stations will be ~40km vs 7-

10km on the existing IR network, which will help in the

speedier movement of trains. The average speed of

freight trains can easily go up from 25kmph to 70kmph,

which will help in reducing transit time significantly.

Huge opportunity with technology upgrade

The axle loads of DFC routes will be minimum 25.0

tonnes, which can go up to 32.5 tonnes progressively vs

a maximum of 25.0 tonnes in IR’s existing system. The

length of the train can be upto 1,500m vs 700m

currently. Wagons with much better pay load to tare

ratio would also get introduced. These changes will

increase the train loading capacity from ~5,000 tonnes

to ~13,000 tonnes. Newer technology in signaling, train

communications and track maintenance & operations

would get introduced. All these will change the freight

scenario of the rail network.

DFCs to change landscape of freight traffic

Both DFCs will add ~3,300km of new railway network,

enhancing total transport capacity. It will help in faster

movement and customers can rely on timely delivery.

Although haulage charges are yet to be decided, we

believe unit cost of transportation taking into account

the time will not be higher than the current rate.

Indirectly, it releases capacity on IR’s existing network,

which can be used to augment and speed up passenger

trains. It also will help in port connectivity and decongest

major highways. However, the success of DFC depends

on how quickly industrial corridors come up.

Traffic to jump 9x from the current levels

The existing traffic on rail routes parallel to EDFC and

WDFC is ~55mn tonnes per year and ~50mn tonnes per

year, respectively. With industrial growth kicking in and

shifting of traffic from road to rail, both DFCs can carry

more than 500mn tonnes per year at peak capacity.

Exhibit 75: Proposed timelines

Section

Route (km) Timelines

EDFC

1,840

Khurja-Bhaupur EDFC-1 342 March'18

Bhaupur-Mugalsarai EDFC-2 391 Dec'18

Khurja-Ludhiana EDFC-3 400 Dec'19

Khurja-Dadri EDFC-3 50 Dec'19

Mugalsarai-Sonnagar Indian Railway funded 123 Dec'17

Sonnagar-Dankuni PPP 534

Dankuni-Gomoh PPP: Phase-1 282 Based on finalisation of PPP Contract

Gomoh-Sonnagar PPP: Phase-2 261

WDFC

1,502

Rewari-Iqbalgarh Phase-1 625 Dec'18

Iqbalgarh-Vadodara Phase-1 325 Dec'19

Vadodara-JNPT Phase-2 425 Dec'19

Rewari-Dadri Phase-2 127 Dec'19

Source: DFFCIL

Exhibit 76: DFC vs IR

Indian Railways DFC routes

EDFC WDFC

Height 4.265mt 5.1mt 7.1mt

Container stack Single Single Double

Train length 700mt 700/1,500mt

Train load 5,000 tonnes 13,000 tonnes

Axle load 22.9/25t 25t; bridges and formation designed for 32.5t

Maximum speed 75kmph 100kmph

Station spacing 7-10km 40km approx

Signaling Absolute/automatic with 1km spacing Automatic with 2km spacing

Source: DFFCIL

Railways


Exhibit 77: Projected traffic (mn tonnes)

Corridor FY22E FY27E FY32E FY37E

EDFC 153 182 214 251

WDFC 161 203 241 284

Source: DFFCIL

Capex and source of funding

The project completion cost of two DFCs is estimated at

~INR 815bn, excluding the Dankuni–Sonnagar section

(534km) of eastern DFC, which is proposed to be

implemented through a PPP. A major part of the project

is being financed through multilateral & bilateral debt.

About 45% of EDFC is financed through loans by the

World Bank (INR 136bn) and ~75% of WDFC is financed

through loan by JICA (INR 387bn). The Dankuni–

Sonnagar section of eastern DFC (INR 100bn) is to be

implemented via the PPP route. The balance would be

met through budgetary support. Both DFCs are targeted

for completion by December 2019.

Exhibit 78: Funding details

(INR bn) EDFC WDFC Total

Equity from MOR 130 80 210

Loan from JICA

387 387

Loan from World Bank 136

136

Total (without land) 267 467 734

Land (MoR) 37 44 81

Total 304 511 815

Source: DFFCIL

Of the total fund requirement of ~INR 815bn, ~INR53bn

for the interest during construction of the western DFC

needs to be paid off after the moratorium period of 10

years. Hence, ~INR 761bn will be needed during the

construction period.

Status on awarding projects

In two DFCS, DFFCIL has awarded projects worth ~INR

170bn since November 2014, a large jump from INR

104bn order awarded since inception. The status of

project implementation as on August 2015 is: 1)

compensation award of 85% of land has been

completed, 2) 65% of civil contract and 48% of system

contract have been awarded, and 3) the physical

progress of civil work is 20%. Management informs the

entire project will be awarded by 1HCY16 (to award 85%

of contracts by March 2016 and the balance by June

2016 on EDFC and the entire contract by March 2016 on

WDFC). The draft concession agreement has been

finalized for the 534km Sonnagar-Dankuni section in

EDFC to be developed along the PPP mode.

Status on land acquisition

Land for construction under DFCCIL is being acquired

under the Railway Amendment Act (RAA) 2008. Out of

total 10,548 hectares land to be acquired for the project,

85% has been acquired except in the Sonnagar-Dankuni

Section of EDFC. Due to resistance from land losers, land

acquisition has been held up in 144 patches covering a

length of 245km in EDFC and in 296 patches covering a

length of 113km in WDFC.

Proposed DFCs

Apart from EDFC & WDFC, preliminary engineering cum

traffic surveys (PETS) have been taken up for the

following DFC:

East-West corridor (Kolkata-Mumbai): It will traverse

through West Bengal, Jharkhand, Odisha, Chhattisgarh

and Maharashtra.

North-South corridor (Delhi-Chennai): It will traverse

through Haryana, Uttar Pradesh, Rajasthan, Madhya

Pradesh, Maharashtra, Andhra Pradesh and Tamil Nadu.

East Coast corridor (Kharagpur-Vijaywada): It will

traverse through West Bengal, Odisha and Andhra

Pradesh.

Southern corridor (Chennai-Goa): It will traverse through

Tamil Nadu, Andhra Pradesh, Karnataka and Goa.

Exhibit 79: Future DFCs

Corridor (km) Remarks

East – West Corridor (Kolkata–Mumbai)

2,000 Draft PETS submitted in September 2014

North-South Corridor (Delhi-Chennai)

2,173 Draft PETS submitted in June 2014. Sent to Railway Board

East Coast Corridor (Kharagpur-Vijayawada)

1,100 Traffic study & field data collection completed. Draft PETS in 2014-15

Southern Corridor (Chennai-Goa)

890 Traffic study completed. Field data upto Hubli collected. Draft PETS in CY15

Source: DFFCIL

Glo

ba

l M

ark

ets

Re

sea

rch




At the cusp of revival

Best player to benefit from Indian Railways drive

Texmaco Rail (TEXRAIL IN), the largest wagon manufacturer in India, is

best suited to take advantage of any growth opportunity coming from

Indian Railways (IR). The recent acquisition of Kalindee Rail, an EPC

contractor, helps it meet demand from other segments, such as

signaling, laying of tracks and bridges.

Demand picks up for wagons from non-IR; IR to take off from FY17

IR constitutes ~10% of the current order book of wagons of ~INR 6bn

as the company has yet to receive any orders from IR in FY16, due to

the fall in wagon prices. Wagon prices dipped following predatory

pricing by new entrants. However, orders from defense & the private

sector (order book of ~INR 5.4bn) have picked up and are expected to

support FY16 earnings. We believe the company will be able to win a

sizeable order (1500-2,000 wagons) from IR in the upcoming tender,

which is expected to be floated in H2FY16. This along with continued

traction in orders from the private sector, including defense, would aid

in revenue growth from FY17.

Earnings support from exports and diversification initiatives

Over the past few years, TEXRAIL developed its presence in steel

foundries, the hydromechanical segment, bridges and structurals due

to its focus on exports, which are expected to offset any slow orders

from IR. Around 52% of the current order book of INR 12.5bn is non-

wagon order comprising steel foundries, structurals & bridges.

Changing into total rail solutions provider with Kalindee Rail deal

Amalgamation of Kalindee Rail, an EPC player with focus on rail infra,

helps TEXRAIL to cater to a wide gamut of IR demand. The Ministry of

Railways focus on modernization of IR, which involves better signaling,

and increasing tracks & bridges, helps it in consistent order flows. It

may benefit in form of getting EPC contracts in dedicated freight

corridors (DFC) too.

Valuation We Initiate coverage of Texmaco Rail & Engineering with an

Accumulate rating and a TP of INR 141 based on a SOTP method

(valuing the merged entity at 20.0x FY18E P/E). The company is set

to post an earnings CAGR of 111% during FY15-18E on the back of

higher volume amid improved demand for wagons. We believe

growth will start coming in from FY17, with higher ordering from

IR. Meanwhile, growth from its hydromechanical segment and steel

casting, due to its focus on exports, help to offset any slow orders

from IR. At a CMP of INR 129, it is trading at 17.7x FY18E P/E.

Price performance

Source: Bloomberg

Key Financials YE

March

Revenue

(INR mn)

YoY

(%)

EBITDA

(INR mn)

EBITDA

margin (%)

Adj PAT

(INR mn)

YoY

(%)

Fully DEPS

(INR)

RoE

(%)

RoCE

(%)

P/E

(x)

EV/EBITDA

(x)

FY15 4,386 (1.7) 195 11.1 137 (29.9) 0.7 1.8 2.8 227.9 147.0

FY16E 5,227 19.2 299 53.0 225 63.8 1.1 2.5 2.9 120.5 77.9

FY17E 8,824 68.8 930 210.9 705 213.5 3.4 7.6 7.5 38.4 24.8

FY18E 11,632 31.8 1,649 77.4 1,295 83.6 6.2 12.8 12.6 20.9 13.6

Note: pricing as on 26 October 2015; Source: Company, Elara Securities Estimate

India | Infrastructure 2 November 2015

Initiating Coverage

Texmaco Rail & Engineering

Rating: Accumulate Target Price: INR 141

Upside: 9%

CMP: INR 129 (as on 26 October 2015)

Key data

Bloomberg /Reuters Code TXMRE IN/TEXA.BO

Current /Dil Shares O/S (mn) 210/210

Mkt Cap (INR bn/USD mn) 27/416

Daily Volume (3M NSE Avg) 186,355

Face Value (INR) 1

1 USD = INR 64.9

Note: *as on 26 October 2015; Source: Bloomberg

Price & Volume

Source: Bloomberg

Shareholding (%) Q2FY15 Q3FY15 Q4FY15 Q1FY16

Promoter 63.3 54.8 54.8 54.8

Institutional Investor 21.6 30.7 34.3 34.3

Other Investor 6.7 8.4 6.2 3.8

General Public 8.4 6.1 4.7 7.0

Source: BSE

Price performance (%) 3M 6M 12M

Sensex (2.7) (0.3) 1.9

Texmaco Rail 5.6 (3.4) 39.7

Titagarh Wagons (1.3) 6.9 145.6

Source: Bloomberg

60

110

160

210

Oct-14 Jan-15 Apr-15 Jul-15 Oct-15

Re

ba

sed

to

10

0

Texmaco Rail Sensex

0.0

5.0

10.0

15.0

20.0

25.0

50

80

110

140

170

200


Vol. in mn (RHS) Texmaco Rail (LHS)



Valuation trigger

Source: Bloomberg, Company, Elara Securities Estimate

Valuation

(INR mn) FY18E

Net profit 1,606

Texmaco 1,295

Kalindee 312

No. of shares (mn) 227

EPS (INR) 7.1

Target multiple (x) 20.0

TP (INR) 141

Source: Elara Securities Estimate

Valuation driver – Margin to witness a V-shaped recovery

Source: Company, Elara Securities Estimate

Investment summary

Wagon capacity utilization to improve;

volume CAGR of ~30% over FY15-18E

Diversification constitutes ~50% of

current order book

Earnings CAGR of 111% over FY15-18E

Total rail solutions provider post its

acquisition of Kalindee Rail

Valuation trigger

1. Winning orders from IR of ~5,500

wagons during FY15-18E

2. Improved demand from the private

sector and defense, leading to ~4,000

wagons during FY15-18E

Key risks

Uncertainty in timely placement of

wagon orders by IR

Competition may lead to lower margin

Delay in demand from the private

sector may hit growth

Delay in execution may lead to longer

working capital cycle

Our assumptions

Wagons volume CAGR of 31% during

FY15-18E to 4,600 wagons in FY18E

Margin improvement to 14.0% in

FY18E from 4.5% in FY15

0

20

40

60

80

100

120

140

160

180

Oct-

14

No

v-1

4

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4

Jan

-15

Fe

b-1

5

Ma

r-1

5

Ap

r-1

5

Ma

y-1

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Jun

-15

Jul-1

5

Au

g-1

5

Sep

-15

Oct-

15

No

v-1

5

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Jan

-16

Fe

b-1

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Ma

r-1

6

Ap

r-1

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Ma

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Jun

-16

Jul-1

6

Au

g-1

6

Sep

-16

Oct-

16

Improved demand from the private sector and defense,

leading to ~4,000 wagons during FY15-18E

12

Winning orders from IR of ~5,500 wagons during FY15-18E

3.9

14.2

0

2

4

6

8

10

12

14

16

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

FY13 FY14 FY15 FY16E FY17E FY18E

(%)

(IN

R m

n)

EBITDA EBITDA margin (%)


Infr

ast

ructu

re


Financials (YE March) Income Statement (INR mn) FY15 FY16E FY17E FY18E

Net Revenues 4,386 5,227 8,824 11,632

EBITDA 195 299 930 1,649

Add:- Non operating Income 237 293 293 296

OPBIDTA 432 592 1,222 1,945

Less :- Depreciation & Amortization 149 168 178 188

EBIT 283 424 1,044 1,757

Less:- Interest Expenses 121 103 79 31

PBT 162 321 966 1,726

Less :- Taxes 25 96 261 432

Add/(Less): Associates/(Minorities) - - - -

Adjusted PAT 137 225 705 1,295

Add/Less: - Extra-ordinaries - - - -

Reported PAT 137 225 705 1,295

Balance Sheet (INR mn) FY15 FY16E FY17E FY18E

Share Capital 210 210 210 210

Reserves 8,724 8,861 9,389 10,431

Borrowings 1,068 1,068 568 68

Deferred Tax (Net) 76 76 76 76

Minority Interest 0 0 0 0

Other Liabilities 81 81 81 81

Total Liabilities 10,159 10,296 10,324 10,866

Gross Block 3,459 3,659 3,859 4,109

Less:- Accumulated Depreciation 1,396 1,564 1,741 1,930

Net Block 2,064 2,095 2,118 2,179

Add:- Capital work in progress 48 48 48 48

Investments 1,440 1,440 1,440 1,440

Cash & cash equivalents 5,056 4,710 5,041 4,829

Net Working Capital 1,407 1,858 1,533 2,225

Other Assets 145 145 145 145

Total Assets 10,159 10,296 10,324 10,866

Cash Flow Statement (INR mn) FY15 FY16E FY17E FY18E

Cash profit adjusted for non cash items 263 496 961 1,514

Add/Less : Working Capital Changes 146 (451) 325 (692)

Operating Cash Flow 408 45 1,286 821

Less:- Capex (181) (200) (200) (250)

Free Cash Flow to Firm (2,596) (155) 1,086 571

Financing Cash Flow 2,820 (88) (677) (753)

Investing Cash Flow (362) (303) (279) (281)

Net change in Cash 2,867 (346) 331 (212)

Ratio Analysis FY15 FY16E FY17E FY18E

Income Statement Ratios (%) Revenue Growth (1.7) 19.2 68.8 31.8

EBITDA Growth 11.1 53.0 210.9 77.4

PAT Growth (19.1) 63.8 213.5 83.6

EBITDA Margin 4.5 5.7 10.5 14.2

Net Margin 3.0 4.1 7.7 10.9

Return & Liquidity Ratios Int/PBIT 42.7 24.2 7.5 1.7

Net Debt/Equity (x) (0.4) (0.4) (0.5) (0.4)

ROE (%) 1.8 2.5 7.6 12.8

ROCE (%) 2.8 2.9 7.5 12.6

Per Share data & Valuation Ratios Diluted EPS (INR/Share) 0.7 1.1 3.4 6.2

EPS Growth (%) (29.9) 63.8 213.5 83.6

Book Value 42.5 43.2 45.7 50.7

DPS (INR/Share) 0.3 0.4 0.7 1.0

P/E Ratio (x) 227.9 120.5 38.4 20.9

EV/EBITDA (x) 147.0 77.9 24.8 13.6

Price/Book (x) 3.5 3.0 2.8 2.5

Dividend Yield (%) 0.2 0.3 0.5 0.8


Revenue & margin growth trend


Adjusted profit growth trend


Return ratios


4.5 5.7

10.5

14.2

0

5

10

15

0

5,000

10,000

15,000

FY15 FY16E FY17E FY18E

(%)

(IN

R m

n)

Net Revenues (LHS) EBITDA Margin (RHS)

(19.1)

63.8

213.5

83.6

(50)

0

50

100

150

200

250

(300)

0

300

600

900

1,200

1,500


(%)

(IN

R m

n)

Adjusted PAT (LHS) PAT Growth (RHS)

1.8 2.5

7.6

12.8

2.8 2.9

7.5

12.6

0

2

4

6

8

10

12

14


ROE (%) ROCE (%)

Return ratios to improve on volume growth

EPS CAGR of 111% over FY15-18E



Wagons demand set to improve

Railways focus would drive wagon demand from IR…

The Central government’s thrust with the highest-ever

investment proposed in the Indian Railways bodes well

for the sector. The government has announced a five-

year capex plan of INR 8.56tn (out of which INR 1.02tn is

in rolling stocks) during FY16-20.

...however, it is at a slow pace; a pickup is expected

During FY16, IR has released a tender of ~8,500 wagons.

However, private sector wagon manufacturers have not

accepted orders from IR, due to low prices quoted by

one of the new entrants, Jindal Rail, for a price which

would lead to losses at the operating level. We expect IR

to open tender of ~14k wagons for FY17E in H2FY16,

which may provide growth to the industry. We expect

14-16k wagons demand per year from IR for the next

few years.

Demand from defense and private sector improves

The GoI’s focus on the defense sector has opened new

avenues of wagon demand. Enquiries from the private

sector too have started after being subdued over the

past few years. We believe with industrial demand start

picking up from FY17, demand from this segment will

further inflate overall demand for wagons. TEXRAIL’s

wagons order book of ~INR 6bn comprises ~90% of

non-IR wagons demand.

DFC commissioning for sustained demand of wagons

The eastern and western dedicated freight corridors

(DFC), encompassing ~3,300km, are expected to be

commissioned by December 2019. With expectations of

economic growth and faster & timely delivery of goods,

the two DFCs may help in taking market share of traffic

from roads. Hence, even if demand from IR were to

decline after the DFCs (IR has to provide ~70% of traffic

to DFCs) start their operations, additional demand would

be able to offset the dip and provide sustainable growth

of wagons demand in India. However, DFCs would need

wagons of improved quality (higher axle load). TEXRAIL

is in the process of developing high axle load wagons

upto 25 tonnes for the upcoming DFC. The current

maximum axle load on the IR track is 22.9 tonnes and

the DFC proposes to progressively move up to 32.5

tonnes. TEXRAIL is all geared to tap this demand.

Volume growth to kick in

The company has total wagon manufacturing capacity

of 10,000 wagons pa. It operated at 8% capacity

utilization in FY14 and 21% in FY15.

Wagons volume CAGR of 31% during FY15-18E…

With improvement in demand from the defense and

private sectors and expected improvement in orders

from IR, we expect utilization to improve to 34% in FY17E

(3,400 wagons) and by 46% in FY18E (4,600 wagons).

This would lead to a volume CAGR of 31% during

FY15-18E.

Exhibit 1: Wagons production CAGR of 31% over

FY15-18E


…but margin improvement to take time

With more than 25.000 wagons capacity in the industry,

there is a stiff competition, and, thus pricing is expected

to be low. In the recent tendering of IR, Jindal Rail

quoted a low price, which was not supported by the

industry. Thus, we believe it will be difficult to garner

higher margin from an IR order as every producer is

underutilizing capacity. Margin will improve only from

higher volume, absorbing fixed cost, in our view.

TEXRAIL is expected to post a ~14% margin from its

defense and private sector orders. This along with a

marginal improvement in IR order margin would help it

post an overall ~10% margin in FY17E and a higher

~14% margin in FY18E from the lows of 5% in FY15.

However, it would still be below 17-18% margin enjoyed

by the company during FY11-12.

2,674

161

1,862

550

2,000

3,000

1,202

671

200

974

1,400

1,600

0

1,000

2,000

3,000

4,000

5,000


(un

its)

IR Non-IR

Best player in the game

Wagon capacity utilization to improve; volume CAGR of 31% during FY15-18E

Diversification plays a bigger role

Earnings CAGR of 111% during FY15-18E

Total rail solutions provider with Kalindee Rail acquisition



Infr

ast

ructu

re


Exhibit 2: EBITDA margin to witness a V-shaped

recovery


Benefits of diversification to kick in

During order slowdown from IR in FY14, TEXRAIL

earnings were cushioned by steel foundry, bridges and

structurals. As on Q1FY16-end, non-IR order comprised

~52% of order book (~INR 6.5bn). It also focused on

export orders. For example, it recently constructed and

exported railway girders for the Bhairab bridge in

Bangladesh. Its steel foundry business, which reported

losses in FY15, reverted in the black in Q1FY16.

Strong order book gives two-year revenue visibility

The current order book stands at INR 12.5bn, which is

2.9x FY15 revenue, providing visibility for the next two

years. Around 48% of it is from wagons while the rest

comes from the steel foundry, bridges and structurals.

Exhibit 3: Order book position

As on Q1FY16-end (INR mn) Remarks

Total 12,500

Wagons 6,000 ~10% is IR order

Non-wagons 6,500


Acquisition of Kalindee Rail

Besides being the largest wagon manufacturer in India,

TEXRAIL’s acquisition of Kalindee Rail enhanced its

portfolio. The combined synergy will provide with a wide

range of offerings, from track laying, civil construction,

structural fabrication, signaling (including route relay),

telecommunications & auto fare collection as well as end

products, such as wagons, coaches and locomotive shells

& assemblies.

To benefit from DFC commissioning

While higher wagons demand may start to come from

the fag end of commissioning of both DFCs in 2019, the

company also should benefit by winning orders in the

form of laying tracks and installing signaling system

while DFCs are getting commissioned. This happened

with Kalindee’s acquisition.

Strong balance sheet; cash of INR 4bn

TEXRAIL has a strong balance sheet with net cash of INR

4bn as on FY15-end. The company raised ~INR 2.9bn in

FY15, which provides it the flexibility to acquire a

company or to infuse money to scale up business of

Kalindee Rail. The company does not have any plans of

further equity raising.

Exhibit 4: Net cash per share to increase 1.2x


Investment risks

Uncertainty in timely placement of IR wagon orders

IR continues to form a majority of revenue for the

company. During FY15, it made up ~45% of overall

revenue. Any delay or not releasing new orders will

adversely affect TEXRAIL operations, just as it has for the

past two years and continues into FY16.

Competitive market may lead to lower margin

TEXRAIL operates in a competitive environment with

~15 peers. The industry has capacity of ~25,000 wagons

per year. Over the past few years, due to lower demand

by IR, capacity utilization for all producers was low.

Hence, every other producer may bid aggressively to win

a share in the increasing pie. Also, new entrants may

quote a low bid to become regular vendors of IR (for

example, during FY16 tendering of IR, Jindal Rail quoted

a low price of INR 1.08mn per wagon, which was not

supported by other manufacturers, as it would be a loss-

making proposition at that price). Hence, any such

events may adversely affect margin.

15.1

3.9 4.5

5.7

10.5

14.2

2

5

8

11

14

17


(%)

10

6

19 17

21 23

0

5

10

15

20

25


(IN

R/s

ha

re)



Kalindee Rail deal may not lead to desired results

Although the Kalindee Rail acquisition will enhance

TEXRAIL portfolio (it will enter into track laying, signaling

& telecommunications), it requires huge working capital

and the company would have to do capex in this

business. This segment is also highly competitive, and

any delay in receiving orders or getting low margin

orders may adversely affect return ratios.

Stilted growth from delay in private sector demand

Demand from the private sector for special purpose

commodity-specific wagons depends on GDP growth,

which, in turn, sustains demand for specific commodities,

such as coal, steel, cement and alumina. TEXRAIL enjoys

higher margin in wagon orders from the private sector

vs that coming in from IR. Although there have been

increased inquiries from the private sector in the past six

months, there could be a possibility of order delay from

there, which may adversely affect our FY17 numbers.

Delay in execution may lengthen WC cycle

There exists a possibility that despite receiving orders and

mobilizing main raw materials, execution may be

delayed, due to a delay in finalizing design parameters

for the newly developed wagons by Integral Coach

Factory (ICF) and Rail Coach Factory (RCF), which had

been assigned the responsibility by IR. In that case, the

company has to keep higher inventory, thereby taking a

hit on higher working capital.

Background

Texmaco Rail & Engineering (TEXRAIL) was incorporated

and demerged from the Texmaco effective April 2010.

The heavy engineering and steel foundry divisions of

Texmaco are engaged in the business of designing &

manufacturing wagons; hydro-mechanical equipment

structurals & steel castings at its units at Belgharia,

Agarpara, Panihati and Sodepur in West Bengal were

demerged. During FY14, it acquired ~49% in Kalindee

Rail Nirman, which is engaged in the business of

providing EPC services to railways & metros, especially in

the field of signaling tracks, telecommunication and auto

fare collection machines. Now, it is in the process of

merging the company with itself which is expected to be

completed by December 2015.

Operational overview

TEXRAIL is the largest wagons manufacturer in India

with capacity of 10,000 wagons pa. It has received an

approval from Research Design and Standards

Organization (RDSO) to manufacture 6,800 wagons pa,

based on its past production record. It has further

deepened its roots and expanded operations from

products into project segments in areas of railway

signaling, communications and track work by acquiring

Kalindee Rail Nirman (KRNL) during FY14. Now, it is a

total rail solutions provider.

The company also has ventured into locomotive

assemblies and metro coaches by forming a JV with

leading multinationals.

Standalone business

Heavy engineering (~70% of revenue in FY16E)

This division comprises rolling stocks (wagons, coaches

and electric locomotive components & assemblies),

hydro-mechanical equipment, and bridges & heavy

structures.

Wagons

TEXRAIL produces conventional wagons along with

commodity-specific wagons. Indian Railways is its largest

customer. Recently, the company started supplying

wagons to the defense sector. It caters to other

customers, including container freight operators and

industries involved in the production of commodities. It

has manufacturing facilities at Agarpara and Sodepur in

West Bengal.

Coaches

The company has recently set up a production facility to

manufacture electrical multiple units (EMU), diesel

electric multiple units (DEMU) and mainline electric

multiple units (MEMU) coaches, passenger coaches,

locomotive shells & assemblies and sub-assemblies. Its

coach manufacturing facility is at Sodepur, West Bengal,

as a part of the traction and coaching division.


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Types of wagons

Petrol tank car

Bogie open wagon

Bottom discharge hopper car

Container flat car

Source: Company

Car for transportation of LPG

Specialized wagon for transporting alumina

EMU Coaches

250T payload car for transportation of transformers

Source: Company



Hydro-mechanical equipment

TEXRAIL is a leading manufacturer of hydro-mechanical

equipment in India. The company offers “one stop”

solution to customers from designing to commissioning

of hydro-mechanical equipment and providing after-sales

services. It manufactures components, such as radial &

vertical gates, flap gates, hoists, gantry & electric

overhead travelling (“EOT”) cranes and other heavy steel

structures, including barrage equipment. It has also

forayed into refurbishment and replacement work

opportunities in existing hydro projects and barrage

equipment after successful execution of rehabilitation

work at the Farakka Barrage and Rampur HEP of SJVN

(SJVN IN, Buy, CMP: INR 29, TP: INR 33). It is currently

executing a contract to commission and design a 456

MW hydropower project at Upper-Tamakoshi in Nepal. It

supplies products to public sector companies, such as

NHPC, NTPC, Tehri Power & SJVN as well as private

sector companies, such as Mitsubishi Heavy Industries.

Bridges & Structures

This division manufactures steel superstructure, including

girders, hull blocks and other parts of bridges & flyovers

for large bridges for railways as well as roads at its

manufacturing facilities at Panihati and Sodepur near

Kolkata. It has recently started delivering steel girders for

railway bridges in Bangladesh through IRCON

International. Its primary competitors include Larsen &

Toubro, Bridge and Roof India, Braithwaite & Company

and BBJ Construction.

Steel foundry (~30% of revenue in FY16E)

This unit has a manufacturing capacity of 30,000 tpa,

based at Belgharia in West Bengal. It is engaged in

manufacturing railway castings, such as bogies &

couplers, which are a part of wagons and CMS crossings.

It supplies steel castings to Indian Railways and other

wagon builders in India. It also exports steel castings to

the US, Australia and Southeast Asia. It has reported a

profit in Q1FY16 after incurring losses in FY15. We

expect capacity utilization to increase to 77% in FY18E

from 44% in FY15. Hence, we expect it to post a volume

CAGR of 20% to 23,000 tonnes during FY15-18E.

Collaboration with MNCs

Texmaco UGL JV, Australia

TexUGL, a 50:50 JV with Australia-based UGL Rail

Services, has set up a specialized fabrication facility to

manufacture high precession fabrications, primarily

catering to the exports market. It commenced

commercial operations in April 2013. TexUGL executed

its first order to supply bogies for Kazakhstan Railways.

However, due to a slowdown in commodities market, it

has not picked up much else since then. The deal has

been signed on 28 September 2015 where Texmaco will

buy out the entire stake of UGL Rail in a JV for a nominal

consideration of INR 1.

JV with Touax Rail, a French Group (May 2012)

The firm formed a 50:50 JV company, Touax Texmaco

Rail Car Leasing (TTRPL) with Touax Rail (a French group)

for leasing wagons. This JV can benefit if IR permits

leasing companies to own and lease wagons to the

industry on an operating lease basis.

Exhibit 5: Key competitors and customers

Segment Key competitors

Wagons Titagarh Wagons, Hindustan Engineering Industries, Modern Industries, Besco, Jessop & Company, Jupiter Wagons, Om Metals Infraprojects, PES Engineers, Bharat Wagon & Engineering and BBJ Construction EMU coaches

Loco shells, components and assemblies

Hydro–mechanical equipment Alstom (Portugal), Technoprome Export (Russia), Andritz Hydro (Austria), Om Metals Infraprojects and Precision Technofab

Bridges & structures Larsen & Toubro, Bridge and Roof India, Braithwaite & Company and BBJ Construction Segment Key customers

Wagons Indian Railways, ACC, UltraTech Cement, Bulk Cement (India), Vedanta Aluminium, Hindalco, National Aluminium, BALCO, NTPC

EMU coaches Indian Railways

Loco shells, components and assemblies Indian Railways

Hydro-mechanical equipment NHPC, NTPC, Tehri Power, SJVN, Mitsubishi Heavy

Bridges & structures IRCON, Bangladesh Railways, Sri Lanka Railways

Steel foundry Indian Railways, Sandvik Shark (Australia), Progress Rail Services (US) and Dellner Couplers (Sweden)



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JV arrangement with Wabtec International (US)

The company has formed a JV with Wabtec International

to provide Indian Railways with the latest safety and

control equipment & systems. Wabtec is a leading global

provider of products for freight rail & passenger transit

cars and locomotives, including brake equipment,

electronics, doors, couplers and bogies. Construction has

started in Q1FY16.

Technical tie-up with Kawasaki of Japan (January 2012)

The company has entered into a technical tie-up to

manufacture EMU coaches with Kawasaki of Japan,

which is expected to be extended to include metro

coaches in the near future.

Acquisition of Kalindee Rail – a step forward

During FY14, Texmaco acquired Kalindee Rail, which is in

the business of providing EPC services to IR and metros,

especially in the field of signaling, track, telecommunications

and auto fare collection machines. This is the thrust area of

Railways as emphasized in the February 2015 budget.

Moreover, the initial phase of commissioning of DFCs will

provide more orders. Thus, the company has made inroads

in the entire value chain of railways. Kalindee will be able to

bid for higher value project with financial strength coming

in after the merger (higher working capital and weak

balance sheet were chief concerns for Kalindee).

TEXRAIL acquired a 49% stake in the company after

purchasing from erstwhile promoters at ~INR 510mn.

Subsequently, it is merging the company with itself to

emerge as a “total rail solutions provider” from 1 April 2014.

Exhibit 6: Kalindee – a turnkey solutions provider


Exhibit 7: Major areas of expertise of Kalindee Rail

Railways Metro Private siding

Ballasted track Y Y Y

Ballastless track N Y Y

Signaling Y N Y

Telecommunications Y N Y

Automatic fare collection systems N Y N


Exhibit 8: Signaling


Kalindee undertakes total turnkey projects, which

include design, preparation of engineering drawings,

supply of all materials & equipment, installation, testing,

training, commissioning, documentation, maintenance

and warranty services.

Exhibit 9: Telecommunications


Kalindee provides optical fiber and radio wireless

systems, including wide & local area networking, GSM

systems and mobile train radio.

Design

Preparation of Engineering Drawings

Supply of all Materials & Equipments

Installation

Testing

Commissioning

Documentation

Training

Maintenance & Warranty Services



Exhibit 10: Railway tracks


Kalindee provides track construction on a turnkey basis

for industrial units that need their own railway facilities,

gauge conversion, rail tracks for underground tunnels

and elevated tracks.

Exhibit 11: Railway automatic fare collection at a

Metro station


Kalindee offers services that primarily include access

control systems and automatic fare collection. It also has

made offers for centralized train control, train

management, passenger information and centralized

security systems in association with major MNCs.

Some Kalindee projects are as follows:

Talwandi Sabo Power: railway siding and linkage

from the Sada Singh Wala Railway station to

Talwandi Sabo Plant, including the plant yard at

Banwala village in Mansa District of Punjab

Bangalore, Kolkata and Jaipur Metro Rail: design,

manufacture, supply installation testing and

commissioning of automatic fare collection system

Bangladesh Railways: rehabilitation of Laksman–

Chandpur section of Bangladesh Railways on a

turnkey basis

Broad Gauge Railway: siding works at a 2x500MW

super thermal power station at Chandrapur,

Maharashtra

Gauge conversion of meter gauge track between

Lucknow and Pilibhit: construction of roadbed,

bridges, electricals, signaling and

telecommunications works at Lucknow and

Izatnagar divisions of the North Eastern Railway, UP

Exhibit 12: Kalindee Rail’s technical partners

Company Country Projects

Track and Civil

TSO France Track work for Delhi Metro corridor (Phase I)

Pandrol UK Track work for Kolkata Metro Rail Corp

Signaling equipment

Siemens Germany Signaling projects for Indian Railways

Ansaldo Italy Signaling projects for Indian Railways

Railway automation

Samsung SDS

South Korea

Delhi Metro AFC Work For Phases I & II

Jaipur Metro AFC Work For Phase I

Bangalore Metro AFC Work For Phase I


Exhibit 13: P&L snapshot of Kalindee Rail

(INR mn) FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Net Sales 2,443 2,572 2,540 3,085 4,011 5,214 6,778

% growth 6.4 5.3 (1.3) 21.5 30.0 30.0 30.0

EBITDA 208 243 (30) 204 360 499 683

EBITDA margins (%)

8.5 9.5 (1.2) 6.6 9.0 9.6 10.1

Net Profit 77 82 (71) 65 70 164 312

% growth 11.7 6.8 0.0 0.0 7.7 135.6 89.6


Acquisition of Bright Power – moving deeper

During September 2015, TEXRAIL went ahead and

strengthened its positioning as a total rail solution

provider company. It is going to acquire a 76% stake in

Bright Power Projects (India), an EPC company,

specializing in over head electrification (OHE) solutions

for the Indian Railways. It also serves diverse sectors such

as power, utilities, petrochemicals, pharmaceuticals and

real estate. The enterprise value of the deal is ~INR 1bn

which is to be funded through internal accruals. Bright

Power had a net turnover of INR 782mn in FY15.


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Financial Analysis

Sales CAGR of 38% during FY15-18E

We expect a net sales CAGR of 38% during FY15-18E,

driven by its heavy engineering and steel foundry

segments. The heavy engineering segment is expected

to record a revenue CAGR of 40% during FY15-18E, led

primarily by wagons volume growth of 31% during the

similar period. The foundry segment too is expected to

record a 22% revenue CAGR during FY15-18E again, due

to volume growth, from the lows reported in FY15.

Exhibit 14: Net sales show an increasing trend


Exhibit 15: Revenue breakdown (as a % of revenue)


Exhibit 16: Wagons, realization and revenue

FY12 FY13 FY14 FY15P FY16E FY17E FY18E

Total wagons 3,471 3,876 832 2,062 1,524 3,400 4,600

Blended Realization (INR mn/wagon)

1.9 2.0 4.0 1.6 2.6 2.2 2.2

Wagons Revenue (INR mn)

6,760 7,568 3,323 3,236 3,971 7,442 10,038


EBITDA of 8x in FY18E over FY15

We expect an EBITDA CAGR of 104% during FY15-18E,

driven by volume growth. This would lead to higher

absorption of fixed cost, thereby causing margin

improvement as well. We expect an EBITDA margin of

14% in FY18E from the lows of 4.5% in FY15, although

this is still lower than the historical average of 15-17%

during FY12-13.

Exhibit 17: EBITDA margin to recover sharply


PAT to grow 9x in FY18E

We expect 9x in net profit growth in FY18E to INR 1.3bn

from the FY15 levels of INR137mn, driven by higher

operating profit.

Exhibit 18: PAT growth to be V-shaped by FY18


Strong balance sheet with net cash

TEXRAIL has a strong balance sheet with net cash of INR

4bn at FY15-end (INR 19 per share). However, this

includes INR 2.9bn cash raised during FY15 through a

QIP, which may be either used in acquiring a company

or higher capex once it merges Kalindee Rail with itself. It

currently has balance sheet strength to go for either

expansion or acquisition. We have not assumed the

merger or acquisition in our valuation; hence, net cash is

expected to increase to INR 4.7bn (INR 23 per share) in

FY18E from INR 4.0bn in FY15.

(60)

(40)

(20)

0

20

40

60

80

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000


(%) (I

NR

mn

)

Net Sales growth (%)

80%

74% 90% 71%

78%

79%

9,880

4,875 4.386

5,911

9,597

12,698

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000


(IN

R m

n)

Heavy engineering Steel foundry

0

2

4

6

8

10

12

14

16

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800


(%)

(IN

R m

n)

EBITDA EBITDA margin (%)

0

2

4

6

8

10

12

0

200

400

600

800

1,000

1,200

1,400


(%)

(IN

R m

n)

PAT PAT margin (%)



Exhibit 19: Net cash company


Equity history

During FY15, the company raised ~INR 3.0bn through a

QIP by issuing 28mn shares at INR 106 per share.

TEXRAIL is currently in the process of amalgamating

Kalindee Rail. It proposed to issue 106 shares of TEXRAIL

for every 100 shares of Kalindee Rail. Hence, additional

shares issued by TEXRAIL will be 17.5mn shares, taking

total shares outstanding to 227.5mn shares with a face

value of INR 1.

10

6

19 17

21 23

0

5

10

15

20

25


(IN

R/s

ha

re)


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Initiate with Accumulate

We initiate coverage of TEXRAIL with an Accumulate

rating. We arrive at a fair value of INR 141 after valuing it

at 20x FY18E P/E. The stock may not provide an

adequate return in the near term; however, it can be a

good investment from a three-year perspective once the

full impact of the macro recovery, led by Indian Railways,

including DFCs-related investment, starts to kick in.

“One-stop” rail solutions provider

TEXRAIL is best suited to capitalize on growth

opportunity arising from IR. With the recent acquisition

of Kalindee Rail, it may benefit in the form of getting EPC

contracts (track laying, signaling, telecommunications &

electrification) in railways, metro rails and dedicated

freight corridors. Kalindee can see a major operational

improvement after its merger, as it will be able to bid for

large value projects.

JV-related benefits not factored in

We have factored in lower-than-historical margin in both

the heavy engineering and the foundry businesses,

assuming continued competitive pressures due to

overcapacity in the industry. If the company manages to

revert to historical margin along with higher demand

from the upcoming DFCs, there could be upside risks to

our FY18 earnings. We have not factored in any benefits

which may come from its JVs (UGL, Wabtec, Touax &

Kawasaki).

Earnings boost on higher volume

The company is set to post an earnings CAGR of 111%

during FY15-18E on the back of higher volume amid

improved demand for wagons. We believe growth will

start coming in from FY17, with increased orders from IR.

Meanwhile, growth from the hydro-mechanical segment

& steel casting, due to focus on exports, helps to offset

slow or delayed orders from IR.

Exhibit 20: Valuation

(INR mn) FY18E

Net profit 1,606

Texmaco 1,295

Kalindee Rail 312

No of shares (mn) 227

EPS (INR) 7.1

Target multiple (x) 20.0

TP (INR) 141


Exhibit 21: Trading close to average (Apr11-13) one-

year forward P/E of 19.5x

Source: Company, Bloomberg, Elara Securities Estimate

0

50

100

150

200

Ap

r-1

1

Jul-1

1

Oct-

11

Jan

-12

Ap

r-1

2

Jul-1

2

Oct-

12

Jan

-13

Ap

r-1

3

Jul-1

3

Oct-

13

Jan

-14

Ap

r-1

4

Jul-1

4

Oct-

14

Jan

-15

Ap

r-1

5

Jul-1

5

Oct-

15

(x)

Rolling 1yr fwd P/E Avg

+ 1 Std dev - 1 Std dev

Valuation & Recommendation

Initiate with an Accumulate and a one-year TP of INR 141 on 20x FY18E P/E

Best suited for opportunities in the IR-related reforms and investment


Exhibit 22: Peer valuation

Company Rating

Mcap (INR mn)

CMP (INR)

TP (INR)

PAT CAGR (%)

EBITDA margin (%)

P/E (x) ROE (%) ROCE (%)







Board of Directors & Management

Saroj Kumar Poddar, Executive Chairman

Saroj Kumar Poddar has been the Chairman of the

company since September 2010. He is a gold medalist

with a bachelor’s degree in commerce (honors) from

Calcutta University. Poddar is the Chairman of Adventz

Investments and Holdings, Chambal Fertilisers and

Chemicals, Chambal Infrastructure Ventures, Gulbarga

Cement, Paradeep Phosphates, Simon India, Texmaco

Infrastructure and Holdings, Zuari Cement, Zuari

Fertilisers and Chemicals, Zuari Agro Chemicals, Zuari

Global, Adventz Finance and Hettich India.

Ramesh Maheshwari, Executive Vice Chairman

Ramesh Maheshwaris has been the Executive Vice

Chairman since September 2010. He has been associated

with the organization for more than 50 years and had

served as the president of Texmaco prior to the

demerger of the heavy engineering and steel foundry

divisions of Texmaco to the company.

Sandeep Fuller, Executive Director & CEO (heavy engineering division)

Sandeep Fuller has been a Director since February 2014.

He has experience of more than 24 years in the industry.

Prior to joining the company, he worked with Indian

Railways for 20 years with core expertise in metro

coaches, locomotives, traction operations and

maintenance and thereafter with Larsen & Toubro for

three years. He was MD of Kalindee Rail Nirman

(Engineers).

DH Kela, Executive Director & CEO (Steel Foundry)

DH Kela has been a Director since September 2010. He

graduated with a degree in metallurgical engineering in

1964 and has experience of more than 46 years in the

industry. Prior to joining the company, Kela had also held

senior positions in several engineering and metallurgical

companies.

AK Vijay, Executive Director, Finance

AK Vijay has more than 38 years of experience looking

after commercial activities at the macro level, including

procurement, marketing exports, finance, accounts, plant

coordination, project coordination, legal matters and

collaborations. He was previously employed with

Hindusthan Engineering and Industries before joining

the company in October 2001.

Company Description

Texmaco Rail & Engineering was incorporated and demerged from Texmaco, a part of Adventz Group of companies

from April 2010. It has been manufacturing wagons for the past 60 years and is the largest wagons manufacturer in

India, with capacity of 10,000 wagons per year. It has five manufacturing facilities near Kolkata, West Bengal. It is

also the largest supplier of steel casting in India, with capacity of 30,000 tpa. It recently acquired Kalindee Rail

Nirman, an EPC service provider to IR & metros in the field of signaling track, telecommunications and auto fare

collection machines, Post this acquisition, Texmaco has become a total rail solutions provider.


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Coverage History

Date Rating Target Price Closing Price

1

26-Oct-2015 Accumulate INR 141 INR 129

Guide to Research Rating

BUY Absolute Return >+20%

ACCUMULATE Absolute Return +5% to +20%

REDUCE Absolute Return -5% to +5%

SELL Absolute Return < -5%

1

70

90

110

130

150

170

190

Oct-

14

No

v-1

4

De

c-1

4

Jan

-15

Fe

b-1

5

Ma

r-1

5

Ap

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5

Ma

y-1

5

Jun

-15

Jul-1

5

Au

g-1

5

Se

p-1

5

Oct-

15

Not Covered Covered



Notes

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Back on track

Demand for wagons to improve from FY17

Demand for wagons may start improving from FY17 from Indian

Railways (expect a new tender for wagons of 14-16k in H2FY16E) and

the private sector, owing to a pickup in industrial activity. Titagarh

Wagons (TWL IN), being one of the largest wagon manufacturers, is

set to benefit, in our view.

Capacity utilization to rise, leading to volume growth

TWL has manufacturing capacity of 6,000 wagons per year. It has

been operating at 11-13% capacity utilization over FY14-15. We expect

utilization to improve to 37% in FY17E and a further 57% in FY18E

based on higher orders from IR and demand improvement from the

private sector. This would lead to a volume CAGR of 58% during FY15-

18E to 3,400 wagons in FY18E.

Likely margin expansion due to better absorption of fixed cost

We believe it will be difficult to garner higher margin from IR orders, as

the market is highly competitive and every producer is underutilizing

capacity. Overall margin may improve to ~14% in FY18E from ~8% in

FY15 based on higher absorption of fixed cost and fair business

practices among wagon manufacturers, which helps in achieving

good returns. Moreover, once demand comes in from private

customers from FY17, margin may improve further.

Focus on exports, defense to offset slow orders from IR

TWL’s 75% subsidiary, CIMMCO, with a 2,400-wagon manufacturing

capacity, is all set to focus on the defense sector. Recently, it received

an industrial license to cater to defense demand. Besides, TWL has

started to focus on exports, which would help to offset some pains on

account of the slowdown in IR orders.

Valuation We initiate coverage of Titagarh Wagons with a Buy rating and a TP

of INR 133 based on 17x FY18E P/E. The company, which is one of

the largest private sector wagon manufacturers of India, is set to

post an earnings CAGR of 104% during FY15-18E on the back of

higher capacity utilization of its underutilized wagon capacity. Its

strategy of diversifying in the exports market would aid in

generating earnings growth. The real value for the company may

start emerging from FY19, with demand coming in from two DFCs.

This may generate additional demand for wagons, due to the

partial shift of traffic from roads to railways.

Price performance

Source: Bloomberg

Key Financials YE

March

Revenue

(INR mn)

YoY

(%)

EBITDA

(INR mn)

EBITDA

margin (%)

Adj PAT

(INR mn)

YoY

(%)

Fully DEPS

(INR)

RoE

(%)

RoCE

(%)

P/E

(x)

EV/EBITDA

(x)

FY15 3,761 44.0 295 NM 99 162.2 1.0 1.6 3.8 117.2 36.6

FY16E 4,427 17.7 379 28.3 287 152.7 2.5 4.0 4.3 44.7 30.4

FY17E 6,072 37.2 702 85.2 487 69.8 4.2 6.0 6.2 26.3 16.0

FY18E 8,516 40.2 1,173 67.3 838 72.3 7.3 9.7 9.9 15.3 9.8


India | Railways 2 November 2015

Initiating Coverage

Titagarh Wagons

Rating: Buy Target Price: INR 133

Upside: 20%

CMP: INR 111 (as on 26 October 2015)

Key data

Bloomberg /Reuters Code TWL IN/TITW.BO

Current /Dil. Shares O/S (mn) 100/100

Mkt Cap (INR bn/USD mn) 13/197

Daily Vol. (3M NSE Avg.) 697,974

Face Value (INR) 2

1 USD = INR 64.9

Note: * as on 26 October 2015; Source: Bloomberg

Price & Volume

Source: Bloomberg

Share holding (%) Q3FY15 Q4FY15 Q1FY16 Q2FY16

Promoter 53.1 53.1 53.1 53.1

Institutional Investors 7.6 11.1 13.3 16.8

Other Investors 22.5 18.2 22.0 15.7

General Public 16.8 17.6 11.7 14.5

Source: BSE

Price performance (%) 3M 6M 12M

Sensex (2.7) (0.3) 1.9

Titagarh Wagons (1.3) 6.9 145.6

Texmaco Rail 5.6 (3.4) 39.7

Source: Bloomberg

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Vol. in mn (RHS) Titagarh Wagons (LHS)

Titagarh Wagons


Valuation trigger


Valuation overview

FY18E

TWL’s standalone EPS (INR) 7

Multiple (x) 17

TP (INR) 124

CIMMCO

EPS (INR) 4.4

Multiple (x) 17

TP (INR) 74

No of shares (mn) 20.1

Derived market cap (INR mn) 1493

TWL's share (%) 75.7

TWL's share (market cap) INR mn 1,131

No of shares of TWL (mn) 115.4

Per share of TWL (INR) 10

Total arrived TP (INR) 133


Valuation driver - Margin to recover close to historic average


Investment summary

Wagons volume to jump 4x in FY18E

to 3,400 from FY15

Three-pronged strategy: focus on

railways, defense and exports

Margin expansion to 14% in FY18E

from 8% in FY15, leading to an EPS

jump of 9x in FY18E

Valuation trigger

1. Winning orders from IR of ~4,200 over

FY16-18E

2. Improved demand from the private

and defense sectors, with wagons

order of ~2,500 over FY16-18E

Key risks

Uncertainty in timely placement of

wagon orders by IR

Competitive market may lead to lower

margin

Delay in increased demand from the

private sector may hit margin

Our assumptions

Wagons volume CAGR of 58% during

FY15-18E to 3,400 wagons

Realization to remain subdued

Margin improvement to 13.8% in

FY18E from 7.8% in FY15

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Improved demand from the private and defense

sectors, with wagons order of ~2,500 over FY16-18E

Winning orders from IR of ~4,200

over FY16-18E

15.7

(2.4)

13.8

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EBITDA EBITDA margins (%)

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Financials (YE March) Income Statement (INR mn) FY15 FY16E FY17E FY18E

Net Revenues 3,761 4,427 6,072 8,516

EBITDA 295 379 702 1,173

Add:- Non operating Income 180 180 144 112

OPBIDTA 475 559 846 1,285

Less :- Depreciation & Amortization 91 93 112 131

EBIT 385 466 734 1,154

Less:- Interest Expenses 63 36 36 36

PBT 150 430 698 1,118

Less :- Taxes 52 143 211 279

Add/(Less): Associates/(Minorities) - - - -

Adjusted PAT 99 287 487 838

Add/Less: - Extra-ordinaries - - - -

Reported PAT 99 287 487 838

Balance Sheet (INR mn) FY15 FY16E FY17E FY18E

Share Capital 201 231 231 231

Reserves 6,100 7,721 8,073 8,709

Borrowings 146 146 146 146

Deferred Tax (Net) 8 8 8 8

Minority Interest 0 0 0 0

Other Liabilities 37 37 37 37

Total Liabilities 6,491 8,143 8,495 9,131

Gross Block 1,995 2,445 2,895 3,345

Less:- Accumulated Depreciation 848 940 1,052 1,183

Net Block 1,148 1,505 1,843 2,162

Add:- Capital work in progress 8 308 608 908

Investments 2,157 2,157 2,157 2,157

Cash & cash equivalents 1,049 1,830 1,566 1,229

Net Working Capital 1,800 2,013 1,991 2,345

Other Assets 329 329 329 329

Total Assets 6,491 8,143 8,495 9,131

Cash Flow Statement (INR mn) FY15 FY16E FY17E FY18E

Cash profit adjusted for non cash items 161 416 635 1,006

Add/Less : Working Capital Changes 748 (213) 23 (354)

Operating Cash Flow 909 202 658 652

Less:- Capex (92) (750) (750) (750)

Free Cash Flow to Firm 713 (548) (92) (98)

Financing Cash Flow (633) 1,329 (171) (239)

Investing Cash Flow (15) (1,721) 295 (677)

Net change in Cash 261 (190) 781 (264)

Ratio Analysis FY15 FY16E FY17E FY18E

Income Statement Ratios (%) Revenue Growth 44.0 17.7 37.2 40.2

EBITDA Growth NM 28.3 85.2 67.3

PAT Growth 162.2 152.7 69.8 72.3

EBITDA Margin 7.8 8.6 11.6 13.8

Net Margin 2.5 6.2 7.8 9.7

Return & Liquidity Ratios Int/PBIT 16.4 7.8 5.0 3.2

Net Debt/Equity (x) (0.1) (0.2) (0.2) (0.1)

ROE (%) 1.6 4.0 6.0 9.7

ROCE (%) 3.8 4.3 6.2 9.9

Per Share data & Valuation Ratios Diluted EPS (INR/Share) 1.0 2.5 4.2 7.3

EPS Growth (%) 162.2 152.7 69.8 72.3

Book Value 62.8 68.9 72.0 77.5

DPS (INR/Share) 0.8 1.0 1.0 1.5

P/E Ratio (x) 117.2 44.7 26.3 15.3

EV/EBITDA (x) 36.6 30.4 16.0 9.8

Price/Book (x) 1.8 1.6 1.5 1.4

Dividend Yield (%) 0.7 0.9 0.9 1.4


Revenue & margin growth trend


Adjusted profit growth trend


Return ratios


7.8 8.6

11.6

13.8

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Net Revenues (LHS) EBITDA Margin (RHS)

162.2 152.7

69.8 72.3

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ROE (%) ROCE (%)

Return rations to improve on volume growth

Earnings CAGR of 104% over FY15-18E

Titagarh Wagons


Wagons demand set to improve

Growth opportunities on the back of rail push

The government has recognized the urgency to

accelerate the reforms process in IIR; hence, it

announced aggressive plans in the 2015-16 Union

Budget, which will help accelerate GDP growth. It

announced a five-year capex plan of INR 8.56tn (out of

which INR 1.02tn is in rolling stocks) during FY16-20.

Exhibit 1: Wagon orders from IR remain muted in the

past two years


Macro recovery to push non-IR demand for wagons

Although demand for wagons from the private sector

has been sluggish over the past few years, inquiries have

started again. With industrial demand starting to pick up

from FY17, demand from this segment would further

inflate overall demand for wagons.

Focus on railways, defense and export

TWL, which is one of the largest private sector wagon

manufacturers of India, is set to post earnings CAGR of

104% during FY15-18E on the back of higher capacity

utilization of its underutilized wagon capacity. It is well

established in India and has been manufacturing

wagons for more than 17 years and is set to cater to

increasing demand of railways and defense —

incidentally the two focus areas of the government.

Well placed to meet growing demand of wagons

The company has a total wagons manufacturing

capacity of 6,000 pa. Besides, its 75% subsidiary,

CIMMCO, has wagon manufacturing capacity of 2,400

pa. TWL operated at a 11% capacity utilization in FY14

and 13% in FY15. Although FY16 will remain a sluggish,

with the possibility of higher orders from IR and demand

improvement from private customers, we expect

utilization to improve to 37% in FY17E and 57% in

FY18E. This would lead to a volume CAGR of 58% during

FY15-18E.

Exhibit 2: Wagons production CAGR of 58% over

FY15-18E


Positioned CIMMCO to cater to defense demand

TWL is well placed to cater to increasing demand from

the defense sector. CIMMCO (capacity of 2,400 wagons

pa) recently qualified and got a license to supply

equipment, such as special wagons, shelters, bailey

bridges and other engineering components to defense.

CIMMCO has large infrastructure with 200 acres of land

at Bharatpur, Rajasthan, which is near Mathura and

Bharatpur tank depots. The company is exploring

collaborations with global technology providers to

partner with them to bidding on India defense projects.

Stage set to manufacture Metro coaches

Demand for Metro Rail has increased significantly in

India, especially after the success of the Delhi Metro. TWL

currently has a small order to refurbish Kolkata Metro. As

it will be difficult for it to qualify independently to

manufacture metro coaches, it has been trying to tap this

opportunity and looking for viable options of having JV

with global producers. During July 2015, TWL acquired

Italy-based Firema Trasporti S.p.A. and became the only

company in India to possess the technology to

manufacture metro coaches and high speed trains. The

company is in the process of upgrading its facilities at

Hindmotor in West Bengal to manufacture metro

coaches with capacity of up to 20 metro coaches per

month. It has an existing capital expenditure plan for this

0

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Riding on the rail wave

Wagons demand set to improve; volume to jump 4x in FY18E to 3,400 from 850 in FY15

TWL’s three-pronged strategy: focus on railways, defense and exports

Margin to improve to 14% in FY18E from 8% in FY15; EPS to jump 9x in FY18E

[Type Text]

[Type Text]

Titagarh Wagons

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purpose. The company intends to tap into the metro

coach market once it commences production at its new

facility for metro coaches at Hindmotor, which is

expected by FY17.

Focus on increasing exports, targeting new markets

TWL tries to diversify its business amid slowdown of

orders from IR. It focused on exports and started

targeting new markets, such as Bangladesh, Myanmar

and several Middle East countries. The company thus

bought Arbel Fauvet Rail (AFR), a railway rollings stock

manufacturer based in Douai, France in 2010. It has a

manufacturing capacity of 5,000 wagons pa. Although

this has yet to contribute meaningfully to consolidated

profit, it helps in catering to demand from different

geographies. Management can leverage on the wagon

design capabilities of its French subsidiary, AFR, coupled

with the low-cost Indian manufacturing facilities, and be

able to supply cost-effective wagons with advanced

designs to the Africa markets. Its recent acquisition of

Firema Trasporti not only helps TWL to acquire

technology to manufacture metro coaches but also open

the world market. This acquisition adds EUR 220mn to its

order book.

Play on operating leverage

Exhibit 3: Higher volume leads to high margin


Margin to improve to 14% in FY18E

Margin expansion on the back of volume growth

Historically, TWL has posted an 18-19% margin, which

has currently fallen to 8% in FY15. We believe margin is

set to improve from this level in the next three years on

the back of volume growth. However, due to

overcapacity in the system, there is possibility of

increased competition and it may not reach to the

historical level of 18-19%. We expect margin of 11.6% in

FY17E and 13.8% in FY18E.

Better product mix from FY17 may improve margin

Although wagons demand from IR continues to help in

volume growth, incremental demand from the private

and defense sectors would aid in improving margin.

Moreover, higher demand for electric multiple unit

(EMU) in which TWL has a 50% market share will help in

margin expansion too.

Other opportunities

The company plans to start wagons repairing at Cimmco,

whenever it is open to the private sector. During the last

budget, the ministry says it may open it to the private

sector. CIMMCO has large infrastructure with 200 acres

of land at Bharatpur in Rajasthan, which can be fully

utilized for this purpose.

Cash rich, with strong balance sheet

TWL has a strong balance sheet with net cash of INR

903mn at FY15-end. Recently, the company raised INR

1.5bn through a QIP of INR 99.4 per share to fund capex

for upgrading India’s coach manufacturing facilities.

Exhibit 4: Remains a net cash company


Capex to strengthen position in Metro and defense

TWL plans to spend ~INR 3bn in the next two years to

strengthen its position to meet increasing demand in the

Metro and defense segments.

Order book position

Order book, as on April 30, 2015, stands at INR 9,443mn.

The recent acquisition of Firema Trasporti added EUR

220mn to its order book.

(15)

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Volumes Gross margin EBITDA margin

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Net cash/share

Titagarh Wagons


Investment risks

Uncertainty in timely placement of wagon orders

IR continues to generate the most revenue for the

company. Any delay or not releasing new orders by IR

would adversely affect TWL’s operations. A decline in

revenue in FY15 was due to IR not releasing any new

orders for wagons. Currently, the company benefits from

the wagon procurement policies where ~75% of total

orders for wagons are based on past performance and

track record of the bidder. Hence, new entrants may not

eat away a major portion of the pie by even bidding low.

However, any change in IR’s procurement policy may

further increase competition, implying less orders or

lower margin.

Competitive market may lead to lower margin

IR has a policy to award orders at L1 price. TWL operates

in a competitive environment with ~15 companies. In

the past few years, capacity utilization for all producers

was low. Hence, every other producer may bid

aggressively to take a share in the increasing pie. Hence,

it may adversely affect margin (for example, in the recent

tender, one of the wagon manufacturers bid at a low

price at which it would make losses, and, hence, none of

the other manufacturers went ahead to get an order at

that price).

Delay in demand from private sector may hit margin

Demand from the private sector for special purpose

commodity-specific wagons depends on GDP growth,

which sustains demand for specific commodities, such as

coal, steel, cement & alumina. TWL enjoys a higher

margin in wagon orders coming in from the private

sector than from IR. Although inquiries have increased

from the private sector in the past six months, there is a

possibility of delay in orders from there, which may

adversely affect our FY17 numbers.

Inability to pass on cost of raw materials

The primary inputs used in manufacturing wagons,

bailey bridges & heavy engineering equipment are steel-

based raw materials. The cost of steel plates and beams is

highly dependent on steel prices prevalent in the global

markets, which are highly volatile and cyclical in nature.

Although the company does back-to-back agreement

and books a major portion of raw materials, there is a

possibility of not passing on the entire cost escalation,

thereby negatively affecting margin.

Execution delay may mean longer WC cycle

There exists a possibility that despite receiving orders and

mobilizing main raw materials, execution may be

delayed due to a delay in finalizing design parameters for

the newly developed wagons by ICF and RCF, which

had been assigned the responsibility by Indian Railways.

In that case, the company has to maintain higher

inventory, thereby leading to a higher working capital.

Operations may be affected due to labor issues

As on March 31, 2015 TWL had ~1,750 employees on its

rolls, more than 50% represented by trade unions. In the

past, the company dealt with disputes with some

workers and trade unions with regards to the dismissal

of a few workers at its facility which resulted in a lockout

of two months at this facility. A lengthy strike or other

work stoppage in the future at any of its facilities could

have an adverse effect on the business.

Operational overview

TWL has combined capacity of 8,400 wagons per year. It

manufactures wagons in West Bengal and Rajasthan. Its

business is primarily divided into two verticals: the

railways and the defense division. The railways division

primarily comprises wagon & coach manufacturing and

steel casting operations. The defense division develops &

supplies bailey bridges, nuclear shelters, canisters, rail

wagons and other engineering equipment to cater to

India’s defense forces.

Exhibit 5: Organizational structure


Standalone business

TWL’s primary business consists of manufacturing

wagons and it caters to IR and the private sector. It is

backward integrated and produces steel foundry. The

company also produces heavy earth-moving and mining

equipment. It has a manufacturing facility at Titagarh

and Uttarpara in West Bengal.

Titagarh Wagons

CIMMCO Titagarh

Wagons AFR, France

Titagarh Firema Adler,

Italy

75% 100% 90%

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Business segments

Wagons

Exhibit 6: Wagons ferrying coal


TWL has capacity to produce 6,000 wagons per year at

its facilities at Titagarh and Hindmotor in West Bengal. It

also produces special purpose wagons to suit varying

needs of customers. The wagons segment accounted for

~97% and ~100% of total revenue & operating profit

respectively, in FY15.

Rail coaches (EMUs)

Exhibit 7: Coaches for exports


Demand for Metro Rail and intracity railway passenger

vehicles, such as EMUs, is increasing. It produces coaches

for Indian Railways. The company set up an EMU

manufacturing facility at its Uttarpara unit at total capital

outlay of about INR 187mn in FY09. It has capacity to

manufacture 36 rakes every year of EMU, MEMU &

DEMU and 500 coaches per year.

Cast in steel

The company has two steel foundries: Titagarh and at

Hindmotor, West Bengal. It has manufacturing capacity

of 30,000 tpa. Around 75% of production, primarily

consisting of bogies & couplers, is consumed internally to

manufacture wagons. Demand for castings is correlated

with demand for wagons.

Heavy earth moving machinery (HEMM)

Exhibit 8: Crawler cranes


This division manufactures crawler cranes and

excavators. TWL produced 13 HEMM machines in FY12.

However, with declining demand in infrastructure, it

produced just three in FY14. With fresh impetus on

infrastructure, there exists a possibility of revamping this

segment.

CIMMCO to cater to defense demand

TWL currently holds a ~75% stake in CIMMCO through a

100% subsidiary, CIMMCO Equity (CEHPL). It currently

has wagons manufacturing capacity of 2,400 wagons

per year at Bharatpur in Rajasthan. It recently received an

industrial license to manufacture defense equipment.

The firm has ~200 acres of land, a major part of which

may be dedicated to the defense division’s operations as

it has an existing industrial license to manufacture ML6

ground vehicle and components, including armored

vehicles.

CIMMCO earlier was a SK Birla company and was set up

in 1957. It was one of the premier wagons

manufacturing companies until 2000 when its Bharatpur

plant in Rajasthan locked out due to labor unrest, and,

eventually, was declared sick in FY02. TWL and sponsor

group of Cimmco set up a JV with a 50% stake each in

FY08. TWL acquired CIMMCO in FY10 and infused INR

485mn to revive it successfully. During FY15, TWL

acquired the remaining 50% stake in CEHPL at INR

645mn; thus, it became a 100% subsidiary. CEHPL holds

a 75% stake in CIMMCO.

Exhibit 9: Financials of CIMMCO

(INR mn) FY14 FY15 FY16E FY17E FY18E

Wagons (no.) 652 141 400 500 800

Revenue 1,281 321 643 778 1,224

Realization (INR mn/wagons)

1.6 1.7 1.4 1.4 1.5

EBITDA 129 (70) 88 106 178

PBT 45 (147) 19 36 108

Adjusted PAT 1 (151) 15 30 88


Titagarh Wagons


AFR, France, a100% subsidiary

Arbel Fauvet Rail (AFR) is a railway rolling stocks

manufacturer based at Douai, France. During the

Eurozone crisis, it went into receivership in FY10. TWL

seized the opportunity and bought it at EUR 1.92mn

(INR 111.4mn) and has invested another EUR 13mn

since then towards working capital and capex. Total

investment stood at INR 286.4mn until FY14-end. It has

manufacturing capacity of 2,000 special & conventional

types of wagons per year at its facilities spread over 17

hectares of land. Although it does not contribute

meaningfully to consolidated profit as on yet, it will help

in catering demand from different geographies.

Titagarh Firema Adler (a 90% stake)

During July 2015, TWL has done its second overseas

acquisition and acquired the business of Firema Trasporti

in Italy. The business has been acquired through a SPV

Titagarh Firema Adler S.p.A., Italy, in which TWL holds a

90% stake and the rest by Adler Plastics S.p.A. Total cost

of acquisition is EUR 20-25mn. This adds EUR 220mn to

TWL’s order book. This acquisition makes TWL the first

company in India to possess this technology to

manufacture of all three types of rolling stocks: carbon

steel, stainless steel and aluminium.

Firema manufactures metro coaches, semi & high speed

trains, propulsion systems for trains, such as traction

motors & convertors in Italy. During its peak in 2007, it

achieved sales of EUR 195mn and an EBITDA of EUR

28mn. It has manufactured rolling stocks for Italian state

railways and Metro Campania, Milan’s underground

railway system. However, due to global economic

slowdown, the company was under pressure.

Financial analysis

Net sales CAGR of 31% over FY15-18E

We expect a net sales CAGR of 31% during FY15-18E,

driven by wagons volume growth CAGR of 58%, partly

offset by subdued pricing.

Exhibit 10: Wagons volume to drive revenue


Exhibit 11: Wagons, realization and revenue trend

FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Wagons (no.) 2,855 2,362 743 854 1,075 2,200 3,400

Realization (INR mn/wagon)

1.9 1.9 2.7 2.4 1.7 1.7 1.9

Revenue (INR mn)

5,553 4,124 1,603 3,185 2,850 4,823 7,593


Exhibit 12: Revenue breakdown

(INR mn) FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Wagons & coaches

5,553 4,124 1,603 3,185 2,850 4,823 7,593

Others 1,124 1,076 1,201 608 1,860 1,637 1,466

Total 6,677 5,201 2,804 3,793 4,709 6,460 9,059


EBITDA CAGR of 58% during FY15-18E

We expect an EBITDA CAGR of 58% during FY15-18E,

driven by volume growth, which will lead to higher

absorption of fixed cost and margin improvement too.

We expect EBITDA margins to expand, from the lows of

7.8% in FY15 to 13.8% in FY18E, which is still lower than

the historical average of 15-17% during FY11-12.

Exhibit 13: EBITDA margin to improve from the lows


PAT to be 9x in FY18E

We expect net profit to be 9x in FY18E to INR 838mn

from the FY15 level of INR 99mn, driven by higher

operating profit.

Exhibit 14: PAT to be 9x in the next three years


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Net revenues growth (%)

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EBITDA EBITDA margins (%)

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APAT growth (%)

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Strong balance sheet with net cash

TWL has a strong balance sheet with net cash of INR

900mn at FY15-end. Post that, it has raised INR 1.5bn in

FY16 by issuing 15.1mn shares at INR 99.41 per share.

We expect net cash of INR 1.7bn by FY16E-end, which

will be used to expand its CIMMCO plant and overseas

subsidiaries.

Equity history

During FY12, share capital increased by ~6.5% to INR

201mn (with a face value of INR 10) as it raised ~INR

500mn from promoters by issuing 1.25mn in warrants

into shares. During FY16, the company raised ~INR

1.5bn through a QIP by issuing 15.1mn shares at INR

99.4 per share.

Exhibit 16: A net cash company


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E

FY

18

E

(IN

R/s

ha

re)

Net cash/share

Exhibit 15: Equity history: dilution of 41% in the past seven years

Date Share cap

(post dilution) No of shares issued (mn)

Issue price (INR/share)

Dilution (%)

Reason

Feb'08 163.7 1.67 524 10 Conversion of preference shares into equity

Apr'08 184.4 2.06 540 11 Allotment through IPO

Jan'10 188.1 0.36

2 Allotted to shareholders of erstwhile Titagarh Steels pursuant to the scheme of amalgamation

Mar'12 200.6 1.25 387 6 Conversion of warrants

Apr'15 200.6 NA

NA Sub-division of face value from INR 10 to INR 2

July'15 230.8 15.08 99.4 13 Issued to QIBs


Titagarh Wagons


Initiate Buy with a TP of INR 133

We initiate coverage of TWL with a Buy rating. We arrive

at a fair value of INR 133 on 17x FY18E P/E. We have

assigned a 15% lower multiple than the industry leader

due to lower growth and absence in areas of signaling,

telecommunications and track laying, which were the

primary focus of IR in the initial years. The stock may not

provide good returns in the near term; however, it can

be a good investment for a three-year period once the

full impact of the recovery led by railways, including DFC-

related investment, starts to kick in.

Recent France deal not factored in

TWL’s acquisition of firms in Europe will provide an edge

to peers, particularly in the Metro segment, demand of

which is increasing significantly. We have not factored in

any benefits that may accrue from its recent acquisition

in France, which provides technical knowhow for metro

coaches.

Earnings boost on higher volume

We have factored in lower-than-historical margin in

wagons, assuming continued competitive pressures, due

to overcapacity in the industry. If the company manages

to restore its historical margin along with higher demand

from the upcoming DFCs, there could be upside risks to

our FY18 earnings. TWL is set to post an earnings CAGR

of 104% during FY15-18E on the back of higher volume

amid improved demand of wagons. We believe growth

will start coming in from FY17 with higher orders from IR.

Exhibit 17: Valuation

FY18E

TWL’s standalone EPS (INR) 7

Multiple (x) 17

TP (INR) 124

CIMMCO

EPS (INR) 4.4

Multiple (x) 17

TP (INR) 74

No of shares (mn) 20.1

Derived market cap (INR mn) 1493

TWL's share (%) 75.7

TWL's share (market cap) INR mn 1,131

No of shares of TWL (mn) 115.4

Per share of TWL (INR) 10

Total arrived TP (INR) 133


Exhibit 18: Trading above average (Apr10-12) one-

year forward P/E of 14.2x


0

20

40

60

80

100

Ap

r09

Oct0

9

Ap

r10

Oct1

0

Ap

r11

Oct1

1

Ap

r12

Oct1

2

Ap

r13

Oct1

3

Ap

r14

Oct1

4

Ap

r15

Oct'

15

(x)

Rolling 1yr fwd P/E Avg

+ 1 Std dev - 1 Std dev

Valuation & Recommendation

Initiate with a Buy rating and a TP of INR 133 on 17x FY18E P/E

Focus on exports, defense sector to aid in lifting operating performance


Exhibit 19: Peer valuation

Company Rating

Mcap (INR mn)

CMP (INR)

TP (INR)

PAT CAGR (%)

EBITDA margin (%)

P/E (x) ROE (%) ROCE (%)





Titagarh Wagons

Ra

ilw

ay

s


Board of Directors & Management

JP Chowdhary, Promoter, Executive Chairman

JP Chowdhary has 52 years of experience in the

manufacturing sector. He joined the company in 2005 as

Chairman, and, subsequently, he was appointed as the

Executive Chairman in 2008. He jointly oversees

operations with Umesh Chowdhary.

Umesh Chowdhary, Promoter, VC and MD

Umesh Chowdhary has 24 years of experience in the

manufacturing sector. He is son of JP Chowdhary. He

has been on the company board since incorporation and

was appointed as MD in 2002. He is actively involved in

the day-to-day operations and management.

Sudipta Mukherjee, Director (Wagons Operations)

Sudipta Mukherjee joined the company in 1998 as a

Management Trainee. He has a post graduate from

Calcutta University in industrial law and gained

experience in wagons operations. He was appointed as

additional director and designated as Director (Wagons

Operations) in May 2014. He has been overseeing the

production facilities at all three plants.

Anil Kumar Agarwal, CFO

Anil Agarwal is a qualified CA and CWA. He has around

16 years of experience and joined the company in

September 2006.

Company Description

Titagarh Wagons (TWL IN) set up in 1997 is one of the largest private sector wagons manufacturers in India with its

manufacturing facilities in West Bengal and Rajasthan. It manufactures wagons through its ~75% subsidiary,

CIMMCO too, which it acquired in 2010. The total (TWL+ CIMMCO) wagon manufacturing capacity currently stands

at 8,400 wagons. It also manufactures Bailey bridges, heavy earth moving & mining equipment and steel castings.

Around 88% of revenue and 100% of operating profit was from the wagons & coaches division in FY14. TWL caters

to wagons demand from Indian Railways & the private sector and it recently started exporting. It plans to enter into

manufacturing Metro coaches soon.

Titagarh Wagons


Coverage History

Date Rating Target Price Closing Price

1

26-Oct-2015 Buy INR 133 INR 111

Guide to Research Rating

BUY Absolute Return >+20%

ACCUMULATE Absolute Return +5% to +20%

REDUCE Absolute Return -5% to +5%

SELL Absolute Return < -5%

1

0

20

40

60

80

100

120

140

160

180

Oct-

14

No

v-1

4

De

c-1

4

Jan

-15

Fe

b-1

5

Ma

r-1

5

Ap

r-1

5

Ma

y-1

5

Jun

-15

Jul-1

5

Au

g-1

5

Se

p-1

5

Oct-

15

Not Covered Covered


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Disclosures & Confidentiality for non U.S. Investors

The Note is based on our estimates and is being provided to you (herein referred to as the “Recipient”) only for information

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70

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The information contained in this note is of a general nature and is not intended to address the circumstances of any

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guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.

No one should act on such information without appropriate professional advice after a thorough examination of the

particular situation.


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Disclosures for U.S. Investors

The research analyst did not receive compensation from Texmaco Rail & Engineering Limited and Titagarh Wagons Limited.

Elara Capital Inc.’s affiliate did not manage an offering for Texmaco Rail & Engineering Limited and Titagarh Wagons Limited.

Elara Capital Inc.’s affiliate did not receive compensation from Texmaco Rail & Engineering Limited and Titagarh Wagons

Limited in the last 12 months.

Elara Capital Inc.’s affiliate does not expect to receive compensation from Texmaco Rail & Engineering Limited and Titagarh

Wagons Limited in the next 3 months.

Disclaimer for U.S. Investors

This material is based upon information that we consider to be reliable, but Elara Capital Inc. does not warrant its

completeness, accuracy or adequacy and it should not be relied upon as such.

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“forward-looking statements” and financial information.


72

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