>TEXMACO (ICICI SECURITIES)

Favoured by firm foundations

Texmaco, the largest wagon manufacturer in India, is in a sweet spot to capitalise on diverse & large-scale opportunities in the Indian railways sector emerging from necessities and logistics advantage. Demand for wagons continues to grow as Indian Railways (IR) and private players strive to meet the burgeoning rail-freight traffic. On the back of its leadership, long-standing experience, low-cost infrastructure and capabilities (skill & capacity), Texmaco is set to benefit from the expanding railways landscape. We value the company at Rs146/share and initiate coverage with BUY recommendation. Further, positive developments on JVs with global partners, the foundry division and real estate would provide upside to our valuations.

■ Railway freight traffic – In fast lane. Rail freight offers logistics advantage and is critical to economic growth. Freight traffic has seen 8.4% CAGR over the past five years; burgeoning demand of bulk commodities, particularly coal & containerisation, would accelerate growth. Demand for wagons is set to grow as IR, Container Corporation of India (CONCOR), and private players increase procurements. Texmaco is the leader in the high-growth, high-margin specialised wagons category.

■ Advantage Texmaco. Texmaco is the largest wagons supplier for IR (~25% market share) and the private sector (~50% market share). It has superior design & manufacturing capabilities, thereby switching rollout to the high-growth, commodity specific & special-design wagons. Texmaco’s infrastructure is low-cost and has the advantage of parallel processing and a hi-tech foundry. Management has ~50 years of experience, renowned for ethical standards & industrial harmony over 5 decades.

■ Potential upside from Foundry, JVs & real estate. Texmaco’s foundry division is technologically advanced, gaining traction in the export market – Foundry’s EBITDA saw 39% CAGR over FY06-09. Texmaco plans JVs with global peers to manufacture electrical multiple units (EMUs), metro coaches, special wagons, locomotives & their underframes, and bogies. Its 178-acre land bank at Delhi and Kolkata could provide minimum upside of Rs2.9bn or Rs26/share.

■ Valuations. Our SOTP-based valuations for Texmaco stand at Rs16.1bn or Rs146/share, including Rs15.4bn or Rs139/share for core business and Rs750mn or Rs7/share for leased property in Gurgaon (NCR). Based on FY10E & FY11E EPS of Rs8 & Rs9.4, the stock trades at P/E of 11.5x & 9.7x respectively. Texmaco is a value play on growing demand of rail freight and Mass Rapid Transport System (MRTS) across Indian cities.

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