Texmaco, Titagarh: On the fast track

Rally expected to continue, as they stand to gain the most from recent orders announced by railways

Stocks of two of India’s largest railway-wagon makers, Texmaco Rail & Engineering and Titagarh Wagons, gained nine per cent and 16 per cent, respectively, in the past week, outperforming the BSE Sensex’s one per cent uptick. The rally was fuelled by approval of rail projects worth Rs 9,598 crore by the Cabinet Committee on Economic Affairs last Wednesday.  

Other rail-related stocks such as BEML, Hind Rectifiers, Nelco, and Kernex Microsystems rose, too. However, analysts believe Texmaco and Titagarh’s fortunes are more closely linked to Indian Railways (IR) and, hence, stand to gain more.

While the railways made up a fourth of Titagarh’s FY15 revenue, it forms a tenth of the company’s current wagon order book of Rs 600 crore. With the higher capital expenditure in plans, IR’s share in these companies’ order books/revenue could rise further, estimate analysts. Historically, these two stocks have given handsome returns between November and February (when the annual railway budget is announced).

The one-year performance of these stocks has been robust this time (versus the broader markets), as the government announced its highest-ever capital expenditure (capex) plan for the railways in FY16. Commissioning of the east-west Dedicated Freight Corridors by December 2019 will aid these companies’ growth in the medium term. The debt-free balance sheets of both are a key positive.

Texmaco, with the recent acquisition of Kalindee Rail, could garner a bigger pie of the railway capex. Importantly, the company now has a diversified presence in railways in wagons, signalling, and laying tracks and bridges. Analysts believe the merger with Kalindee will also enable Texmaco to bid for larger projects. Analysts have a target price of Rs 150 for the stock, implying an eight per cent rise from current levels.

Titagarh, however, operated at dismal capacity usage of 11 to 13 per cent over FY14-15. This was due to lack of wagon orders, but this is set to change for the better. Analysts expect this metric to improve to 37 per cent in FY17 and 57 per cent in FY18, due to higher wagon demand from both IR and private companies.  

Higher utilisations will have a bigger impact on profits. Analysts at Elara Capital believe the company can clock a compound annual growth in earnings of 104 per cent over FY15-18, with improving volume growth. Analysts indicate an upside of 17 per cent for the stock.