>TEXMACO LIMITED (ASIT C MEHTA)

Poised to pick up speed…

Texmaco is the leader in the wagon segment with a 25% market share. It has sustained its leadership in the past and has an established performance track record. The company has an order backlog of ~5,500 wagons and we believe that Texmaco will continue to maintain its leadership. Moreover, increasing investments in hydel capacity augur well for the hydromechanical division. However, the hydel power generation industry typically suffers from significant delays in orders and execution.

Texmaco has formed a JV with United Group (Australia) for manufacturing metro and EMU coaches, which is expected to commence operations in the next 10-12 months. We initiate coverage on Texmaco with a BUY recommendation and a price target of INR124.

Recommendation rationale

■ Wagon orders adequate: The company has an order backlog of 5,500 wagons, which should be adequately sustain FY10 performance. IR releases tenders for wagons annually. A tender for 5,862 wagons was recently floated in July 2009 and the balance is expected during Q3FY10. Thus, bulk of the benefit from new orders being awarded will be reflected in FY11, in our view and gives us comfort over revenue visibility. However, over the past two years, there has been considerable
delay in award of orders and quantity tendered lower-than-planned. IR targeted procurement of 20,000 wagons annually in FY08 and FY09; against this, actual procurement was ~50%.

■ MRTS coaches will take time: The metro and EMU coaches will take another 10-12 months to commence operations. The Texmaco-United-Kawasaki JV will face competition from established global players such as Bombardier and domestic manufacturers such as BEML. Further, with orders that may flow to the JVs, Texmaco will capture 50% or lower share of profit.

■ Hydromechanical orders will take time: Hydel projects are subject to long gestation and execution periods. Even with a renewed target of tapping 50,000MW, many projects are suffering due to hurdles in relocating the affected population. Hence, even with an increase in order flows, execution will take 2-3 years. Equity issue to dilute equity: Texmaco has raised INR1.7 billion through a QIP at a price of INR104/share. This will lead to a 14.8% increase in equity to INR127.1 million. Further, IR has steadily lowered the free-issue components and the same will have to be procured by the company. This will imply increasing inventory levels and can impact ROCE & RONW.

Valuation and Recommendation
At CMP of INR109, the stock trades at a P/E of 15.1x FY10E EPS of INR7.2 and 12.3x FY11E EPS of INR8.9. The announcement of a 61% increase in procurement in the Railway Budget for FY10 points to increasing focus on easing infrastructure bottlenecks for the industry. We initiate coverage on Texmaco with a BUY recommendation and a price target of INR124 at a target P/E of 14x FY11E. We have not factored in any value from its Delhi land as it has been under litigation for
the last many years without result.

To see full report: TEXMACO LTD