Titagarh Rail: The stock gained 367% in 2023; is there more upside ahead?

Investors exhibit optimism towards the railway sector due to its earnings visibility and huge capex plans from Indian Railways. Against this backdrop, stocks related to the railway sector witnessed significant returns in CY23, and Titagarh Rail Systems, being the largest wagon manufacturer, was one of the beneficiaries.

In CY23 alone, the shares recorded a massive return of 367%. Looking back, in CY22, CY21, and CY20, the stock posted positive returns of 140.27%, 60%, and 19%, respectively.

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Systematix Institutional Equities, a domestic brokerage firm, foresees the continuation of this positive momentum into CY24. The brokerage points to the company's robust position in light of significant capital expenditure (capex) in the railway sector.

Titagarh Rail Systems has a prominent presence in passenger and freight rolling stock, it offers mobility solutions and makes railway wagons, components, passenger coaches, and metro coaches. It is the largest private-sector manufacturer of wagons and an established player in passenger coaches.

Major beneficiary of huge capex in the rail sector

Under the National Rail Plan (NRP), Indian Railways (IR) plans to spend $750 billion over FY22–FY30 to double its freight-loading volumes to 3 billion tonnes by 2027 vs. 2022. Also, IR is keen to increase its logistics share from 27% in FY22 to 45% by FY30.

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To achieve this, IR is looking to add over 30,000 wagons per annum over the next five years at a capex of ₹700 billion. According to the brokerage, Titagarh Rail is expected to be a significant beneficiary of this initiative.

Further, with strong orders from the private players, the brokerage said that the company enjoys an order book of ₹143 billion in the freight rolling stock (FRS) segment with a 4-year visibility on annualised H1FY24 revenue.

Huge opportunities in Vande Bharat and metro cars

The company has been manufacturing trains for IR since 2007 from its advanced facility in Kolkata. Over the last two years, the company has been showcasing tremendous efforts to bag orders in the passenger rolling stock business. It has signed a contract with GMRC for Surat Metro to deliver 72 coaches and a Vande Bharat order, thereby establishing itself in Passenger Rolling Stock (PRS).

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It is the only company in India that holds the technology and capability to produce both stainless steel and aluminium metro coaches, the brokerage highlighted. 

Strong order book from IR to keep utilisation at peak for the next 5 years

The company's order for 420 metro cars and 1,280 VB coaches (80 trains) implies strong 5- to 6-year revenue visibility. Nearly 49% of the company’s total order book of ₹282 billion falls under the passenger rolling stock (PRS) business; repairing and maintenance contracts make it even more attractive in the long run, the brokerage said. 

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Over the years, the company has been gaining market share from IR in the wagon procurement business. In FY18, it bagged 11% of total wagon orders from IR, and in FY23, the order tendering stood at 28%.

To fulfil the current order book and to tap the future opportunities, the company is looking to more than triple its passenger coach capacity from 20 cars currently to 70 cars per month by FY27. The brokerage expects the PRS segment to contribute 38% of total revenue in FY26E, up from 10% in FY24E.

Financial growth outlook

The company's strong order flow and effective execution in the FRS and PRS sectors offer a clear trajectory for long-term growth. This suggests a threefold increase in EBITDA and a fivefold jump in PAT (Profit After Tax) over the period of FY23 - FY26E, as per the brokerage estimates.

It forecasts revenue, EBITDA, and APAT to grow at CAG of 35%, 43%, and 54% during FY23 to FY26E, respectively.

While the EBITDA margin is projected to remain around 11%, the higher execution in PRS might keep the margins subdued. However, the Return on Equity (RoE) and Return on Capital Employed (RoCE) are anticipated to see improvement, reaching 25% each by FY26E, up from the current levels of 22-23%, it added.

Initiates 'Buy'

In light of the company's robust earnings growth and promising long-term prospects, the brokerage has initiated coverage on the stock. It has set a target price of ₹1,202 per share, indicating an upside of 19.36% from its previous closing price of ₹1,007 apiece.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.