Capital Market : Texmaco Limited

After hiving off heavy engineering and foundry operations into Texmaco Rail & Engineering Limited, the erstwhile Texmaco Limited’s business activities mainly include development of real estate, besides a mini Hydel Project.

Company has following major assets: -

•           Birla Textile Mill land at Kamla Nagar in heart of Delhi: Texmaco may be able to generate a few thousand crores of Rupees from development of this land alone.

–Company has got 11-acres out of total 31 acres land of the closed Birla Mill as apportioned by Supreme Court after prolonged litigation between Delhi Development Authority (DDA) and company. Supreme Court has allowed 50% extra floor area ratio (FAR) for development in the portion allotted to company. Thus, on these 11 acres of land, Texmaco will have approx. 10 lakh sq. ft. worth built up area for commercial exploitation. 

–Company will be developing this land for shopping mall, residential society, commercial complex, etc., over the next 2 years. Company has enough financial resources for land development.

–Of the remaining 2/3rd part of the land (approx. 20 acres) allotted to DDA, the Supreme Court has ordered that if DDA develops that piece of land, it will have to share 50% of the land value with Texmaco. That will add to substantial amount of land for development adding further value to the company.

144 acres land in Sankrail, Howrah, Kolkata, where company along with Government of India will establish a mega logistics hub.

66,500 sq. ft. office space “Gillette Towers” in Gurgaon has good prospects for long-term capital appreciation as it is in the heart of commercial locality and is presently yielding annual rental income of Rs 9-10 crore.

Moreover, company also owns 30.04% stake in the de-merged business of TREL (Texmaco Rail & Engineering) and 8.67% stake in Zuari Industries.

Being a debt-free company, its existing enterprise value (EV) is less than market capitalization of Rs 403 crore, while value of surplus assets is substantially higher (Rs.1975 crore) than EV..

Texmaco Rail & Engineering Limited (TREL)         

•    TREL now houses core engineering business of the erstwhile Texmaco Limited, viz., Heavy Engineering and Steel Foundry. Company is strategically well placed to take advantage of high growth taking place in the user segments of these businesses.

•    Company’s Rolling Stock division (81% of sales in 9 months FY 2011) manufactures general purpose & commodity specific special wagons catering to Indian Railways (IR) and other private players like CONCOR, NTPC, etc, and thus serves core sectors such as cement, coal, alumina, steel, oil, chemicals, fertilizers, container freight cars, etc.

–   As per Railway Budget for FY 2011-12, IR intends to buy 18,000 wagons during FY 2011-12 (14,500 in FY 2010-11), a jump of 24%.

–   In fact, IR’s “Vision 2020” entails average investment of Rs 140,000 crore per annum over the next 10 years to radically expand rail infrastructure such as setting up dedicated freight corridors, introduction of high speed: high-capacity wagons, running double stack containers, etc. TREL, with its market leadership, low-cost operations, massive infrastructure, and engineering skills and delivery capabilities, is set to immensely benefit from these investments.

– Apart from growing demand from IR, wagon demand from private parties is also growing. To cater to this huge demand, company is expanding manufacturing facilities of Heavy Engineering to double wagon manufacturing capacity @ capex of Rs. 100 crore over the next 2 years. Steel Foundry division is also undergoing expansion and this is expected to be over in March 2011.

•    Simultaneously, TREL has embarked on horizontal diversification in hi-tech, high-growth products for railways in joint ventures with global leaders:

–   JV with UGL – Australia, complete rail services provider, for designing, manufacturing & supplying locomotive bogies, bogie components, frames & platforms, modern design freight cars, wagons and wagon components for Australian and Indian domestic & export markets. In addition to this, both companies will be exploring related rolling stock, maintenance and refurbishment opportunities.  While currently, TREL has allotted some space at its existing plant for this JV, going ahead, a new plant may be set up, with increase in demand.

–   Recently, Indian Railways has eased conditions making Wagon Leasing Scheme more attractive for private sector by reducing net worth criteria and elongating validity of license. To grab maximum business opportunities from such favourable changes in the regulations, TREL is in advanced stage of forming a 50:50 JV with a French company (as per press reports – Touax group). Under the agreement, TREL will manufacture wagons, while the French company will market the same.

– To overcome shortage of Electric Locomotives and to reduce their imports, IR is likely to finalise all public: private projects (PPPs) by April 2011. TREL has a tie-up with Bombardier for participating in tender for setting

up locomotive factory at Madhepura and for manufacturing electric loco components at Dankuni. According to the company, Siemens is the only other major MNC contender in this activity. A JV will be formed if Bombardier is awarded the tender. These projects would involve total capex of around Rs 1,700 crore and could add ~ Rs 5,000 crore worth sales every year in foreseeable future.

–   Company hopes to finalize a deal with a Japanese consortium for EMU & Metro Coaches. It will be setting up a green field plant @ capex of Rs 250 crore for this purpose. 

•    Company also intends to pursue inorganic growth opportunities, both in India and overseas, to get into similar or allied lines of businesses, including backward integrated manufacturing facilities by acquiring companies engaged in manufacture of critical components.

•    Hydro Mechanical division manufactures equipment for mega Hydro Power, Irrigation & Flood Control projects. TREL is the only company supplying Hydro Mechanical gates for Hydel plants with capacity above 500 MW. India plans to add 30,920 MW hydel power in 12^th Five Year plan (FY 2012-2017), with investment of over Rs 180,000 crore (@ Rs 6 crore per MW). Of this, 7% i.e. Rs 12,600 crore would be addressable business for TREL.

•    Its 30,000 TPA Steel Foundry has Quality Assurance Certificate (M-1003) from Association of American Railroads, making it the only foundry in India qualified to export railway castings to North America. At present 70-75% of foundry output is used internally for wagon division. Upon completion of on-going modernization, this sales proportion is going to change, as overseas markets would improve by then and company would be able to cater to requirements for sophisticated components fetching a much higher price. Thus, its margin is expected to expand going ahead. 

•    Agro Machinery division proposing to add new Agricultural Machines, Tractors and Reapers; will benefit from on-going boom in India’s farm sector.

•    In collaboration with Nu Phalt U.K., company has taken up assembly and marketing of State-of the-Art Infrared Recycling Pothole Repairing Machine for roads. First machine has been delivered to Delhi Municipal Corporation and company expects to receive substantial orders in FY 2012.

•    In the 9 months ended December, 2010, company has posted decent results with PBT growing @ 28.5% to Rs 115 crore despite a 6% de-growth in Gross Sales to Rs 750 crore due to delayed release of order for wagons by IR. FY 2012 is expected to have much better performance from sales growth and profitability perspective.

Earnings per share (EPS) for FY11 are expected at Rs.6.80 and Rs.9.10 for FY12.  TREL is an “Excellent Buy” at CMP (Rs.65 -70 range) from a 2-3 years’ time horizon, given strong probability for accelerated earnings growth and the fact that TREL is a cash-rich company with surplus cash & equivalent worth Rs 192 crore (Rs 10.59 per share) as of September 30, 2010.