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Company Background Texmaco Rail & Engineering (Texmaco), a part of Adventz Group of Mr. Saroj Poddar, is amongst India’s largest railway wagon manufacturers (located near Kolkata, West Bengal) with market share of 25-30%. It also manufactures structural equipment and steel castings, hydro mechanical equipment (HME), constructs bridges and offers EPC services (through Kalindee Rail and Bright Power) to Indian Railways (IR) and Metros. It has JVs with Wabtec, USA, Touax Rail, France and a recent JV with NYMWAG CS, Europe’s second largest wagon manufacturer. With an objective to streamline its business operations, the management has reclassified its business operations into Heavy Engineering Division (HED - freight cars & its components etc.), Steel Foundry Division, Infra – Electrical Division (Bright Power) and Infra - Rail & Green Energy Division comprising of Kalindee Rail and HME & bridges business. Investment Rationale Record production in Q3FY24 with continuous improvement in margins

* During Q3FY24, Texmaco net sales improved by a whopping ~43.5% y-o-y to Rs 8,964.4 mn led by best ever execution of orders for IR and private players. Major revenue contributions came from heavy engineering (wagons) and steel foundry division, representing ~61% and ~19% of total sales respectively. Wagon production increased by ~300% with a marginal increment in investment. During the quarter, Texmaco produced 1,756 wagons (vs. 1,650 wagons in Q2FY24) split between IR:private in ratio 77:28 and as of 9MFY24 total wagon production stood at 4,737. The management expects to produce ~2,300 wagons in Q4FY24.

* EBITDA during Q3FY24, increased by ~47.3% y-o-y to Rs 824.9 mn with 24 bps improvement in EBITDA margin to ~9.2% on account of higher wagon production leading to operational efficiencies and cost optimization measures.

* Texmaco foundry is operating at 85%-90% CU and is undergoing an expansion from 42,000 MTPA to 48,000 MTPA by March 2024. Further, management plans to increase capacity to 55,000-60,000 MTPA by FY26 at a cumulative capex of Rs 1 bn. In Q3FY24 and 9MFY24 steel foundry production stood at ~10,500 MT and ~30,600 MT respectively. Healthy wagon order book and capex provides revenue visibility

* GoI’s ambitious plan of increasing the share of rail in overall freight movement and reducing industry’s logistic cost has opened long-term opportunities for wagon manufacturers. Texmaco bagged its single largest wagon order for 20,067 wagons valued at ~Rs 64.5 bn out of historic order to supply 72,358 wagons in FY23 by IR, to be supplied in 6 tranches over 39 months. Subsequently, with the company deciding not to deliver the 2nd tranche (resulting in a one-time provision of Rs 380 mn in Q1FY24 based on a Recovery Notice from IR) the order was revised to 16,722 wagons valued at ~Rs 53.9 bn.

* In December 2024, IR allotted another 11,000 wagons specifically to run on DFC (25 tn axle load and speed capacity of ~45 kmph when loaded), out of which Texmaco received 3,400 BOXNS (open wagon type) worth Rs 13.74 bn (including GST) to be executed in 3 equal tranches of 1,133 wagons starting July 2024.

* GoI’s focus on modernization of railway infrastructure and announcement of three major economic railway corridor programs with a strategic focus on increasing freight movement and connectivity on rail will increase the demand for wagons providing long-term growth visibility. IR reported the highest-ever capex utilization in 9MFY24 highlighting the substantial boost in investment in railway projects.

* Going forward, IR is expected to come out with another ~20,000 - 30,000 wagons order in a few months including new generation wagons and aluminium wagons. In order to capitalize on this opportunity with an increasing focus on private and export space, Texmaco is increasing its wagon production in phases from 700-750 wagons per month currently to ~1,000 wagons per month by H1FY25E.

* Texmaco through a JV (NYMWAG CS) is having a wagon manufacturing facility in Czech Republic, Europe to cater to vast export demand. It also plans to enter into passenger mobility.

* Total order book as of December 2023 stood at ~Rs 85 bn - ~Rs 57.6 bn from HED (private order of ~Rs 11 bn) constituting ~17,000 wagons including ~2,500 private wagons; ~11 bn from Infra - Rail & Green Division; ~9 bn from Infra - Electrical Division; ~3.25 bn from Steel Foundry; and ~4.25 bn from its JV & other subsidiaries. Turnaround in financials and fund raising augurs well

* In October 2023, the promoter entity - Adventz Finance Pvt Ltd and Mr Saroj Kumar Poddar invested Rs 500 mn in the equity capital of the company at a price of Rs 145/share. Texmaco also raised Rs 7.5 bn in November 2023 through QIP for various purposes - ~Rs 2.5 bn for repayment of high cost borrowings (~Rs 2 bn already paid), ~Rs 2.5 bn for supporting working capital needs, ~Rs 1 bn for capex in wagon & steel foundry segment, and ~Rs 1.5 bn for general corporate purposes such as investment in JVs. Restructuring of EPC business - A move in the right direction!

* In its quest to become an integrated rail solutions provider, the company acquired Kalindee and Bright Power. Over time, Rail EPC (Kalindee and Bright Power combined) completed 500+ projects and represented 30%-50% of Texmaco’s topline between FY18-23. However, Kalindee faced challenges resulting in higher debt levels and interest outgo. But, Bright Power has done relatively better since its acquisition.

* To insulate the core manufacturing business from vagaries and substantial working capital requirements of EPC business, the company is undergoing a demerger of its M/s. Belgharia Engineering Udyog Pvt. Ltd. (BEUPL) representing Infra - Rail & Green Energy Division, expected to be completed by middle of FY25 (w.e.f. 1 st April 2024). BEUPL shares will be allotted to shareholders in the ratio of 1:3, record date is yet to be announced. This restructuring is a good move enabling debt reduction by another ~Rs 2 bn providing better business clarity with relevant financial strategies for respective growth.

Outlook & Valuation

GoI’s strong impetus towards improving the modal share of rail in freight has opened a multi-year opportunity for wagon manufacturers in general and Texmaco in particular. The company is well placed to capitalize on the emerging opportunities with its diverse range of offerings, longstanding track record, state-of-the-art infrastructure, technical collaborations with global players. Further, balance sheet improvement with recent fund raise and demerger of its debt ridden business augurs well. We have valued the stock at 25xFY26E EPS of Rs 10 from an earlier 20x lead by strong earning visibility and recommend a ‘BUY’ rating on the stock with a target price of Rs 250/share (upside potential ~23%) in 18 months

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