Texmaco iciciS 130709

Please refer to important disclosures at the end of this report

Market Cap Rs10.1bn/US$208.7mn Year to March FY09 FY10E FY11E FY12EReuters/Bloomberg TEXM.BO/TXM IN Revenue (Rs mn) 9,845 11,282 12,992 15,482Shares Outstanding (mn) 111 Net Income (Rs mn) 758 880 1,041 1,26952-week Range (Rs) 137/34 EPS (Rs) 6.8 7.9 9.4 11.5Free Float (%) 45.4 % Chg YoY 8.7 16.4 18.2 21.7FII (%) 1.9 P/E (x) 13.4 11.5 9.7 8.0Daily Volume (US$'000) 690 CEPS (Rs) 7.9 9.0 10.6 12.9Absolute Return 3m (%) 58.8 EV/E (x) 8.4 7.0 5.6 4.5Absolute Return 12m (%) (16.9) Dividend Yield 0.8 0.8 0.8 0.8Sensex Return 3m (%) 23.1 RoCE (%) 23.6 21.9 21.1 20.7Sensex Return 12m (%) 0.3 RoE (%) 27.7 25.4 24.0 23.5

Texmaco BUY Favoured by firm foundations Rs92Reason for report: Initiating coverage

Equity Research July 13, 2009 BSE Sensex: 13504

Infrastructure

Shareholding pattern

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Promoters 54.0 54.5 54.6 Institutional investors 21.9 22.6 21.9 MFs and UTI 14.7 15.6 15.1 Banks, FIs & Insurance 4.9 4.9 4.9 FIIs 2.3 2.1 1.9 Others 24.1 22.8 23.5

Source: BSE

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Gaurav Pathak [email protected] +91 22 6637 7339 Ashish Gupta ashish.gupta@icicisecurities .com +91 22 6637 7314

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 fromnecessities and logistics advantage. Demand for wagons continues to grow asIndian 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 fromthe expanding railways landscape. We value the company at Rs146/share andinitiate coverage with BUY recommendation. Further, positive developments on JVs with global partners, the foundry division and real estate would provideupside 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 fiveyears; 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 istechnologically 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 andKolkata 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 orRs7/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 avalue play on growing demand of rail freight and Mass Rapid Transport System (MRTS) across Indian cities.

INDIA

Texmaco, July 13, 2009 ICICI Securities

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TABLE OF CONTENT Railway freight traffic – In fast lane ...............................................................................3

Expansion, the only way to go ........................................................................................3 Rails offer significant logistics advantage .......................................................................5 Dedicated Freight Corridor..............................................................................................6 Increasing port traffic.......................................................................................................7 Rise in containerisation ...................................................................................................7 Demand for wagons set to grow over next 15 years ......................................................9

In sweet spot to meet burgeoning opportunity ..........................................................12 Foundry, JVs and real estate to provide upside.........................................................14 Attractively valued .........................................................................................................16 Risk factors.....................................................................................................................19 Company overview ........................................................................................................20

Rolling stock division.....................................................................................................22 Steel foundry division ....................................................................................................22 Hydro mechanical equipment .......................................................................................23 Process equipment and agro machinery division .........................................................25 Real estate ....................................................................................................................25

Annexure 1: Financials..................................................................................................26 Annexure 2: Index of Tables and Charts .....................................................................30


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Railway freight traffic – In fast lane

Expansion, the only way to go

Rail freight in India offers logistics advantage and is critical to economic growth. Based on this, India requires significant expansion of rail capacity, given that other means of transport – road, air and waterways – are comparatively cost inefficient, unviable for large-scale transportation and intermittent.

Chart 1: Rail freight traffic in line with GDP growth

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Source: Planning Commission, I-Sec Research Freight traffic has seen 7% CAGR over the past ten years and 8% CAGR in the past five. We expect freight traffic to grow 9% over the next three years, thereby reaching 1,070mnte in FY12E versus 832mnte in FY09.

Chart 2: Growth in freight traffic Chart 3: Rise in railway traffic

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Transport intensive sectors such as Power, Coal, Steel and Cement have witnessed some of the fastest growth rates in the past five years and are set to grow even further. Bulk commodities form over 85% of the railway-freight traffic. Coal would continue to be the mainstay of rail traffic, accounting for ~45% of total traffic.

Demand for coal is set to increase, given ramp-up in coal-based power plants. There is also rise in demand from steel and cement plants. As per the eleventh five year plan (XI FYP), steel production could increase by 40mnte. Each tonne of steel produced is likely to add 5-6mnte of raw material and finished product to rail traffic.

Chart 4: Sector-specific freight traffic to grow Chart 5: Increasing demand for coal

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Table 1: Coal – Significant contribution to railway freight traffic Year Coal Total % FY51 20 73 28 FY61 31 120 26 FY71 48 168 29 FY81 64 196 33 FY91 135 318 42 FY01 224 474 47 FY04 252 557 45 FY05 271 603 45 FY06 294 667 44 FY07 313 728 43 FY08 337 794 42 FY09 370 833 44 FY12E 487 1,070 45

Source: XI FYP, I-Sec Research


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Rails offer significant logistics advantage

Railways are the preferred method of freight transportation in developed countries as they offers benefits of cost. However, in India, Roads is the preferred medium as railways lack last-mile connectivity; in contrast, roads offer greater flexibility. Due to this, and despite cost advantage, railways has been losing market share to roads.

Table 2: Railways – Cost effective vis-à-vis Roads Port Distance from Haulage cost (Rs/TEU) Haulage cost (Rs/TEU/km) Delhi (km) Rail Road Rail Road JNPT-Mumbai 1,388 19,500 27,400 14.0 19.7 Mundra 1,295 17,800 23,400 12.8 16.9 Pipavav 1,333 18,200 24,000 13.1 17.3 Vishakapatnam 1,700 24,000 52,000 17.3 37.5 Chennai 2,100 29,200 52,000 21.0 37.5

Source: CRISIL, I-Sec Research

Chart 6: Increase in road traffic

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Source: Planning Commission, I-Sec Research We believe that market share of Railways is likely to increase as infrastructure bottlenecks clear and cost advantage starts to play a more meaningful role.

Table 3: Railways – Increasing market share (%)

FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12ERoad traffic (btkm*) 61.1 61.5 61.7 61.5 60.5 60.4 60.4 60.1 Railway traffic (btkm) 38.9 38.5 38.3 38.5 39.5 39.6 39.6 39.9

* billion tonne kilometre Source: I-Sec Research


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Dedicated Freight Corridor

To cater to the rise in demand in freight traffic going forward (freight load of 1,070mnte by FY12), the government has started construction activities on a Dedicated Freight Corridor (DFC) on the eastern and western routes. DFC’s development will drive demand for wagons.

A special purpose vehicle (SPV) – Dedicated Freight Corridor Corporation of India (DFCCIL) – has been set up for implementation of DFC projects. The project would cover a total length of over 2,762km. At present, DFCCIL has acquired 70% of required land on the eastern route. The high-speed route will involve a cost of over US$5.78-7.64bn; it will connect Sonnagar with Ludhiana on the eastern route and Mumbai with NCR-Dadri on the western route coupled with the interlinking of these two corridors at Khurja (western Uttar Pradesh-UP). Total area required for the project for both corridors stands at 12,500ha. The World Bank, Asian Development Bank (ADB) and Japan Bank for International Cooperation (JBIC) have evinced interest in investing in the venture along with the IR, which will bear part of the projected cost via gross budgetary support, debts and internal accruals. The corridors are expected to commence operations by FY16-17.

Chart 7: Eastern corridor Chart 8: Western corridor

Source: DFCCIL Source: DFCCIL

Table 4: Benefits of DFC vis-à-vis existing facilities Particulars Existing On DFC Train length 700 metres 1,500 metres Train load 4,000te 15,000te Container stack Single Double Axle load 22.9te/25te 32.5te/25te Maximum speed 75km/hr 100km/hr

Source DFCCIL


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Increasing port traffic

International trade, too, has been in expansion mode, implying higher volumes for transport from ports to the hinterland. Traffic at Indian ports is likely to see CAGR of 8% over FY17E, a growth to 1,320mnte from 723mnte in FY09.

Chart 9: Increasing traffic at ports

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Source: I-Sec Research To meet this colossal growth, railways is committed to providing single/double-line rail connectivity to ports and is implementing most of the port-connectivity projects via public private partnership (PPP) by forming project-specific SPVs. Total fund requirement for completing the identified works stands at Rs38.24bn. Also, 41 ports across Gujarat and Maharashtra will be linked via the DFC.

Rise in containerisation

There has been a shift of focus from transportation of bulk commodities to containerised cargo, which is seeing increased focus. Lately, CONCOR was the only entity transporting container cargo. However, the sector has now been opened to private players and as many as 14 players have obtained licence to operate container trains. Share of containers has, therefore, been steadily increasing over the past few years and we expect this trend to continue going forward.

Non-bulk commodities form 35-40% of the total primary freight movement. Containerisation, as a mode of packing and transporting goods, is attaining greater significance on account of the buoyant export-import (EXIM) trade scenario over the past few years, increasing acceptance of containerisation in port logistics and the huge potential of containers in domestic haulage through railways.


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Chart 10: Containerised traffic at ports on the upswing

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Source: I-Sec Research Containerisation is seeing growth on the back of swift handling of cargo, safeguard against material damage or pilferage, reduction in transit time due to faster cargo movement (thereby trimming inventory costs), savings in packaging costs (as the goods can be packed in cartons instead of cases), standardisation of containers (which has promoted mechanised form of cargo handling) and ease of handling cargo in the container form has shifted focus from disparate transport activities to a well-linked transportation chain.

Container traffic increased to ~6.7mn TEU (twenty-foot equivalent units) or 92.3mnte in FY08 from 3.4mn TEU or 44mnte as at end FY03, witnessing CAGR of ~15%.

About 17% of the container traffic moves through rail; in FY09, rail-based container traffic grew 36% to 28.8mnte.

The company enjoy 56% market share in the container wagon segment.

Chart 11: CONCOR container freight handling (mn TEU)

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Demand for wagons set to grow over next 15 years

According to the railway budget ’09-10, there has been no increase in freight rates; orders for 18,000 wagons for FY10 (highest ever) have been announced, which is a considerable rise compared with 11,000 wagons in FY09. Wagons contribute 70% to Texmaco’s topline and 59% to its EBITDA.

Demand for EMUs/metro coaches will see growth, given ongoing Metro rail projects that are in the initial stage of development in Mumbai, Bangalore, Chennai & Hyderabad, and are under evaluation for Pune, Lucknow, Kochi, Ludhiana, Jaipur, Cochin and Kanpur. Demand for EMUs will grow with expansion of railway network in urban areas. The XI FYP projects an addition of 22,689 coaches/EMUs. The railway budget announced setting up of an EMU/coach factory via the JV/PPP modal; the factory will have annual production capacity of 500 coaches.

IR plans increasing production of both diesel & electric locomotives to 200 each annually from 150; XI FYP estimates requirement of electric & diesel locomotives to be 1,800 each, or 360 locos per year.

Non-IR Demand Private players were allowed to carry freight on the IR network from FY08, with players investing in their own wagons. Besides CONCOR, 14 players have been issued licences, with 6-7 having already commenced operations.

Wagon Investment Scheme. Implemented by the IR April 1, ’05 onward, the wagon investment scheme aims to secure investment in procurement of wagons via stakeholders in private and public sectors for meeting the anticipated incremental freight traffic going forward.

According to the scheme, the customer is provided guaranteed supply of rakes loading every month and a rebate of 10% on normal freight charges.

Wagon Leasing Scheme. On April 15, ’08, the IR introduced the concept of leasing wagons that allows third parties to invest in wagons and lease them to interested parties.

IR executes 100% procurement of wagons through open tender. A distribution system of tendered quantity amongst all established wagon manufacturers, both private and public, is followed, based on past performance, for broad based distribution. Wagon builders are required to supply orders at the lowest rate, determined by an open tender. The bidder who quotes the lowest price is given 25% of the quantity of wagon requirement, with the remaining 75% distributed in the 60:40 ratio to the public and private sectors respectively.


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Chart 12: Dispatches by wagon manufacturers

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Table 5: New entrants in container rail haulage – Train rollout plans Operator Total trains planned Adani Logistics 20 Box Trans (JM Baxi Shipping) 20 CWC 12 Delhi-Assam Roadways 8 Dinesh ETA 0 Gateway Distriparks 30 Hind Terminals 22 Innovative B2B Logistics (Bothra Shipping) 15 IndiaLinx (APL) NA MICT (DP World) 8 MSC 8 Pipavav Railway Corp. 14 Reliance Infrastructure NA SICAL Logistics 25 Total 182

Source: I-Sec Research

Chart 13: Texmaco – Leader in non-IR segment

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Private players use wagons to transport commodities such as alumina, caustic soda, cement, iron, food grains, iron ore and coal which require special wagons. CONCOR plans to add ~2,000 wagons by FY11, translating into 1,000 wagons a year, creating additional demand.

With increase in bulk commodities’ transportation, supply of commodities to companies (such as NTPC and cement companies) in the core sector will rise, creating additional demand for wagons. Refurbishment of wagons provides a new avenue. Of the wagons held by IR, 5,000 were slotted for refurbishment in FY09.


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In sweet spot to meet burgeoning opportunity Texmaco has over 50 years of experience in manufacturing freight cars and is the largest & oldest wagon builder in the private sector. It has a credible track of lowest default, timely delivery and highest standard of quality products. As a result, it receives the highest number of orders from the IR every year.

Texmaco’s unique low-cost infrastructure provides key business advantage, with all products manufactured under one roof. The one-stop-shop facility is spread over 155 acres with 2mn sqft of factory sheds. The facility has a rail network of ~10km inside the factory for wagon-rake handling that can be used to move and store wagons. The company can simultaneously manufacture eight types of wagons; competitors do not have the scale and low-cost advantage of Texmaco’s infrastructure. The company has depreciated assets and has capability to ramp up capacity, given its current utilisation at 54%. Texmaco has the most modern and state-of-the-art steel foundry with capacity of 30,000mtpa, which gives it significant cost advantage over competitors.

Texmaco’s skill set is unparalleled in the industry, with dedicated in-house engineering and design capabilities including commodity-specific & special-design wagons. The company has the widest portfolio of wagons in India. The company has also pioneered the manufacture of hydro mechanical equipment in India. Capability to fabricate high-pressure vessels and hydro mechanical equipment augments Texmaco’s wagon-manufacturing capability. The hydro mechanical division produces hydro mechanical items such as radial gates, vertical gates, hoists, gantry/EOT cranes, trash cleaning machines, penstock and heavy steel. Texaco has an outstanding record in execution of prestigious mega projects financed by national and international Institutions such as the World Bank and the ADB.

Texmaco is the largest supplier of wagons to both the IR (market share of 25%) and private sector (market share of ~50%). It is also the largest supplier of steel castings to the IR. It has a long-standing relationship and excellent track of timely deliveries with the IR, NTPC, National Hydroelectric Power Corporation (NHPC) etc. Notably, timeliness is crucial as it serves as pre-qualification criteria in the bidding process. Texmaco is also the only company qualified by the NHPC to participate in international bids.

Texmaco has near monopoly in the high margin & high growth specialised wagons such as BCCW (covered car for transportation of bulk cement and fly ash; contribution 3-4x higher than a common wagon) and BCN HL (covered bogie wagons with higher axle load and stainless steel body). It has significant share of BLC wagons, used to transport container flat trains, and BOBRN HS (rapid pneumatic bottom discharge hopper car, with high speed bogies).


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Chart 14: Texmaco leads in high-contribution products

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Source: Company data, I-Sec Research While PSUs have been operating inefficiently and largely defaulting on deliveries, Texmaco is being regularly awarded additional orders by IR, which diverts orders from the non-performing units to the company.

IR removed couplers and bogies from free supply items. Going forward, more items such as steel may be removed from the free supply list. Texmaco stands to gain due to in-house manufacturing capability of such items. IR has also allowed manufacturers to submit their own design for wagons for manufacturing.

Experienced management Texmaco management has over 50 years of experience in manufacture of wagons and the rail industry. The management has been judiciously using capital, adding to its high-end infrastructure capabilities via internal accruals. The company is part of the well-diversified Dr KK Birla Group, which has presence in a wide range of industries such as Chemicals, Fertilisers, Sugar, Media, Textile and Engineering. The company is widely acclaimed for its ethical standards and holds the record for industrial harmony over the past five decades.

The Management values human assets and has committed substantial resources to harness these assets. The company has entered into collaboration with the renowned Birla Institute of Technology & Science (BITS), Pilani to promote industry-centric knowledge and skills upgradation. It has set up BITS-Texmaco Centre of Excellence at its premises that offers work-integrated-learning modules. The company has also initiated various other programmes to upgrade technical skills of the workmen and communication skills of staff at all levels. Texmaco’s efforts to create a social infrastructure and ecosystem for development of workers and the staff has had effect – not a single man-day has been lost at the company for the past 40 years.

The company follows the highest standards of internal quality controls, resulting in no delay in deliveries.


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Foundry, JVs and real estate to provide upside Texmaco has one of the most modern and state-of-the-art steel foundries in India, with cumulative capacity of 30,000mtpa. In-house casting division gives Texmaco significant cost advantage over competitors as well as opportunities to tap the global and domestic markets. Its steel foundry division achieved the highest-ever production of 18,150MT during FY09 and is currently running at 60% capacity. EBITDA for the division has seen 39% CAGR over the past three years. In FY08, Texmaco installed a new state-of-the-art foundry with 15,000mtpa capacity, equipped with a high-pressure moulding line imported from world renowned Kunkel Wagner, Germany; for Rs530mn; the foundry operates at ~100% utilisation capacity.

Stringent pollution norms and high labour & capital costs have led to exports from the steel foundry. Texmaco has booked export orders for high-tech castings from the USA and Australia, and has exported two pilot batches. The high-tech new foundry unit is capable of high precision castings for catering to the export market. Texmaco has been approved by the Association of American Railroads to manufacture and supply bolsters, side frames and centre plates to the US market. It targets the US for side frames and bolsters as well as CMS crossings for railways and Australia for industrial castings for mining equipment makers.

Texmaco has been forming JVs to bag emerging opportunities in the railway segment. These include entry into EMUs, metro coaches, special wagons and locomotives.

Texmaco has a 50:50 JV with the United Group, one of Asia’s leading end-to-end rail technology solutions providers, and plans to foray into the production of special wagons, locomotive underframes & bogies and EMUs & metro coaches.

The company is in the process of forming another JV with Kawasaki, Toshiba, Mitsubishi Corporation and Mitsubishi Electric Corporation for the proposed electro-locomotives project. The project would have capacity of 120 locomotives and is likely to be located at Madhepura, Bihar; Texmaco has filed technical bids for the same. The winning consortium will form a JV with the IR (24%), thereby assuring volume & price realisation for the Rs14-bn project.

The government is focused on ramping up hydro power capacity. The location of Texmaco’s factories, close to the NorthEast, provides an edge over others’ in the hydro mechanical equipment segment. Total addressable market size for hydro mechanical equipment is 147bn in the next 10 years and, we believe, that Texmaco will be able to encash on this opportunity owing to its proximity to the market.


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Chart 15: Planned hydel capacity addition (MW)

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Source: Central Electricity Authority Within real estate, Texmaco owns 34 acres at a prime location in Delhi (legal issue pending with Supreme Court), the developable area of which would depend on the outcome of the case, between 1.3mn sqft and 2mn sqft – We have ascribed Rs20bn or Rs18/share as the minimum option value to the property. The company also owns 144 acres in Sankrail, Kolkata (also under litigation), which it intends to develop as a food park; we ascribe Rs2bn or Rs2.6/share as the option value to the property. Further, Texmaco owns 0.06mn sqft office property in Gurgaon, which is rented to MNCs and yields Rs90mn as annual rental.


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Attractively valued We have valued Texmaco at Rs16.1bn or Rs146/share. This is based on SOTP valuations of Rs15.4bn or Rs139/share for Texmaco’s core business and Rs750mn or Rs7/share attributable to its leased property in Gurgaon (NCR). Further, we believe that real estate and investments could provide healthy upside to our valuations – we have ascribed Rs2.9bn or Rs26/share as the worst-case option value, if there is value unlocking through these assets.

Table 6: Valuations Segments Rs mn Rs/share Texmaco core business 15,390 139 Gillette Tower 750 7 Total Valuation 16,140 146 Option Value Delhi Land 2,001 18 Sankril Kolkata 288 3 Investments (at BV) 588 5 Total 2,877 26

Source: I-Sec Research We estimate Texmaco’s core business based on average of DCF- and P/E-based methodologies at Rs15.4bn or Rs139/share. For our FCFF-based valuations, we have assumed WACC of 11.7% and terminal growth rate of 3%. We have ascribed FY10E P/E of 17x based on FY10E PAT of Rs882mn. Given the attractive growth opportunities, high earnings visibility, healthy RoE (27-24%) and astute management, we believe Texmaco could trade at a premium P/E. We expect earnings for the company to post 19% CAGR over the next three years.

Table 7: Valuations of core business (Rs mn)

DCF - FCFF FY10E FY11E FY12E FY13E FY14E TY PAT 880 1,041 1,269 1,586 1,983 2,042 Add: Depreciation 116 134 156 195 243 251 Misc expenses written-off 2 2 - - - - Interest 97 108 140 174 218 225 Less: Increase in working cap 287 67 797 477 596 89 Capital expenditure 300 400 430 200 200 100 Tax on interest 33 37 47 59 74 76 FCFF 476 781 289 1,219 1,574 2,252 PV 426 626 208 783 905 13,332 Total PV 16,280 Less: Net Debt 496 Value of Equity 15,784 Relative valuations FY10E PAT 882.2 P/E (x) 17.0 P/E based value 14,997



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Table 8: Relative valuations Price EPS (Rs) P/E (x) Company (Rs) FY09E FY10E FY11E FY09E FY10E FY11E Titagarh Wagons 341 35.9 34.5 41.0 8.9 9.3 7.7 BHEL 1,950 NA 111.2 136.4 NA 17.5 14.2 Suzlon Energy 80 7.6 6.1 9.2 13.2 8.7 10.3 ABB India 681 24.4 28.2 32.4 27.9 24.1 21.0 Alstom Projects 453 18.7 20.3 25.7 23.7 22.5 17.8 BEML 973 53.0 43.5 41.4 18.5 22.3 23.4 Elecon Engineering 68 7.4 7.8 10.0 9.0 8.6 6.7 Action Construction 25 2.5 2.4 3.3 10.2 10.7 7.7 Average 15.9 15.5 13.6 Texmaco 92 6.8 8.0 9.4 13.4 11.5 9.7

Source: I-Sec Research We expect Texmaco to post earnings CAGR of 19% over FY09-12E. However, we have not included any upside from real estate, expansion in foundry division and earnings from new JVs in our estimates.

Chart 16: Growth in earnings

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Chart 17: FY09 revenue break-up Chart 18: FY09 EBITDA break-up

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Hyrdro Mech7%

EBITDA

Hyrdro Mech9%

Foundry30%

Process Equipment

2%

Wagon 59%

Source: I-Sec Research Source: I-Sec Research


18

Table 9: Growth capex plans (Rs mn)

Capex details FY10 FY11 Remarks JV with UGL 500 Short term requirement ,to be put in JV Foundry Expansion and Modernization 500 Expanding capacity by 10,000mnte JV with Kawasaki 400 400 Phased investment in JV for Locomotives Agarpara facility 600 Modernisation and expansion Total capex 2,000 400



19

Risk factors

Dependent on IR for orders – Customer concentration The IR is the largest customer for wagons in the country, of which Texmaco has bagged ~25% market share. Demand from IR constitutes ~70% of revenues for Texmaco; thus, earnings are largely correlated with wagon procurement by IR. The company also enjoys benefit of a favourable tendering system by the IR. A delay in order placement by IR or decrease in selling price of wagons may adversely impact revenues and Texmaco’s bottomline.

Slow progress on infrastructure projects may affect growth Key projects such as the DFC and introduction/expansion of the Metro in various cities is an important growth driver for Texmaco as such programmes would create additional demand for wagons. Delay in execution of these projects will affect Texmaco’s topline going forward.

Macroeconomic factors Slowdown in global trade activity might lead to slowdown in demand, leading to deceleration in exports. Further, the industry depends on the liquidity position of private & public developers. Liquidity constraints with large infrastructure developers could delay projects, making Texmaco’s order book lumpy; this leads to risk of cancellation.

Private sector demand depends on government policy/incentives Schemes such as Wagon Investment Scheme and Wagon Leasing Scheme have helped create demand for wagons in the private sector. Texmaco caters to half the demand of the private sector; thus, withdrawal, reversal or substantial change in the schemes may impact the company’s revenues and profitability.

Shortage of wheel sets Wheel sets are in short-supply and currently being imported from various countries. They are a key ingredient of a complete rake and unavailability of the wheel sets presents major risk. The Rail Wheel Factory (subsidiary of IR) has recently increased production capacity; also, Texmaco has tied up with certain Chinese manufacturers for assured supply. Moreover, Texmaco is mulling its own wheel & axle manufacturing facility that will reduce dependence on imports and other external sources. Further, supply of wheel sets to Texmaco has seen fewer delays.

Volatility in raw material cost to affect margins The main raw material in the manufacturing of wagons and heavy engineering Division products is steel; volatility in steel prices could affect margins of Texmaco’s non-IR order book.


20

Company overview Texmaco was incorporated in 1939 by Dr KK Birla, son of the legendary Indian Businessman, Late GD Birla. It was started as a textile machinery manufacturing company and later diversified into other engineering fields. It manufactures a varied and diversified range of precision & heavy engineering capital goods & equipments, including railway wagons, steel foundry for railway equipment & other precision castings, hydraulic steel structure & hoisting equipment, pressure vessels & heat exchangers, turnkey sugar mill plants, agro machinery etc.

Its main operating divisions are Rolling Stock Division, Hydro Mechanical Equipment, Steel Foundry and Process Equipment & Agro Machinery at present. Also, it has real estate assets and four factories on the outskirts of Kolkata in Agarpara, Belgharia, Sodepur and Panihati.

Chart 19: Timeline

Source: Company data, I-Sec Research

1939

1954-1960

’06

’00

’07-08

’13

Established by young KK Birla as a Textile machinery manufacturing company

Started manufacturing railway freight cars and steel castings Sugar mill machinery in collaboration with Stork-Workspoor Water tube boilers in collaboration with CE, USA Hydro mechanical equipment in collaboration with Voest, Austria

Established a most modern, state-of-the-art steel foundry with capacity of 15,000mtpa, equipped with high-pressure moulding line imported from world renowned Kunkel Wagner, Germany for Rs530mn

Order book crosses Rs20bn 50:50 Food Park JV with international food processing player Agreement with Australia-based United Group, the leader in freight car

manufacturing in Asia-Pacific, for manufacture of modern design freight cars, loco underframes, loco bogies and EMU coaches

Agreement with Kawasaki-Mitsubishi for manufacturing of high-capacity locomotives

Maintain high growth rate and leadership position across wagons, steel castings and hydro mechanical equipment To establish itself in the new fields of locomotives, EMUs, real estate etc

Listed on the Bombay Stock Exchange

’04 Listed on the National Stock Exchange


21

Chart 20: Manufacturing facilities

Facility

Belgharia Works

Panihati Works

Sodepur Works

Agarpara Works

Steel Castings:

Old Plant: 13,000mtpa

New Plant: 15,000mtpa

- Total capacity to be

increased to 39,000mtpa

-Wagons:

-7,500 vehicle units

Structurals:

20,400mtpa

Water Tube Boilers:36 units

Pressure Vessel, Heat Exchangers:

1,500mtpa

- Steel foundry division manufacturing castings

- Implemented a Rs530-mn capex for state-of-

the-art, highly automated operations

- Also manufactures agro equipment

-Facility available for future expansion of JV

with United Group

- Assembly unit for steel foundry

-Structural/mechanical work

- Manufactures wagons and hydro mechanical

equipment

- Manufactures wagons, hydro mechanical

equipment, process equipment

Belgharia Works

Panihati Works

Sodepur Works

Agarpara Works

Steel Castings:

Old Plant: 13,000mtpa

New Plant: 15,000mtpa

- Total capacity to be

increased to 39,000mtpa

-Wagons:

-7,500 vehicle units

Structurals:

20,400mtpa

Water Tube Boilers:36 units

Pressure Vessel, Heat Exchangers:

1,500mtpa

- Steel foundry division manufacturing castings

- Implemented a Rs530-mn capex for state-of-

the-art, highly automated operations

- Also manufactures agro equipment

-Facility available for future expansion of JV

with United Group

- Assembly unit for steel foundry

-Structural/mechanical work

- Manufactures wagons and hydro mechanical

equipment

- Manufactures wagons, hydro mechanical

equipment, process equipment

Description Capacity


Chart 21: Business divisions

TexmacoTexmaco

Rolling stockRolling stockHydro

mechanicalequipment

Hydro mechanicalequipment

Steel foundrySteel foundryProcess

equipment&

Agro machinery

Process equipment

&Agro machinery

New ventures &

other assets

New ventures &

other assets

Manufactures

general purpose as

well as commodity

specific wagons for

both Indian

Railways and

private sector

players

Fabricator of

equipments for

projects in Power

Generation,

Irrigation and Flood

Control. Also

manufactures

heavy steel

structure for

industries

Manufactures

railways steel

castings such as

bogies and couplers

for captive and

market use as well

as industrial

castings mainly for

mining industry. Has

started exports to

North America &

Australia

Products include

steam boilers,

chemical plant

machinery, sugar

plant machinery,

pressure vessels &

cryogenic vessels.

Manufactures

power tiller under

brand name

Texmaco Dhanwan

JV with the United

Group to

manufacture new

design wagons,

loco components

and EMUs

JV with Mitsubishi-

Kawasaki-Indian

Railways to

manufacture

electric locomotives

Real Estate

TexmacoTexmaco

Rolling stockRolling stockHydro

mechanicalequipment

Hydro mechanicalequipment

Steel foundrySteel foundryProcess

equipment&

Agro machinery

Process equipment

&Agro machinery

New ventures &

other assets

New ventures &

other assets

Manufactures

general purpose as

well as commodity

specific wagons for

both Indian

Railways and

private sector

players

Fabricator of

equipments for

projects in Power

Generation,

Irrigation and Flood

Control. Also

manufactures

heavy steel

structure for

industries

Manufactures

railways steel

castings such as

bogies and couplers

for captive and

market use as well

as industrial

castings mainly for

mining industry. Has

started exports to

North America &

Australia

Products include

steam boilers,

chemical plant

machinery, sugar

plant machinery,

pressure vessels &

cryogenic vessels.

Manufactures

power tiller under

brand name

Texmaco Dhanwan

JV with the United

Group to

manufacture new

design wagons,

loco components

and EMUs

JV with Mitsubishi-

Kawasaki-Indian

Railways to

manufacture

electric locomotives

Real Estate



22

Rolling stock division

The rolling stock division provides wagons to IR as well as the private sector. Texmaco has five decades of experience in wagon manufacturing and the segment is the main growth driver for the company; it contributed 70% of gross income in FY09. The workforce of the division includes 684 workers, 116 engineers & technicians and administrative staff.

The division has the largest line of wagon products; along with BOX wagons for IR, it manufactures special wagons such as container wagons, coal Hooper wagons, covered wagons for transport of bulk commodities such as alumina, caustic soda, food grains, cement, iron ore and coal, and tank cars for chemicals.

Texmaco’s current order book is 5,861 wagons, with capacity utilisation of 54.3%. Wagon delivery for FY09 stood at 4,071 wagons.

Some key demand drivers for the segment include demand for metro coaches/EMUs, growth in container traffic, development of the DFC and increase in port traffic.

Chart 22: Wagon segment growth

0

2,000

4,000

6,000

8,000

10,000

12,000


(Rs

mn)

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

(No.

of w

agon

s)

Net Sales Wagons Delivered (RHS)


Steel foundry division

The steel foundry division manufactures steel castings such as bogies, couplers, draft gears and other industrial castings (such as yokes, flanges and tooth points), and has a workforce of 335 workers and 115 technical staff.

Current production capacity of the division stands at 30,000MT.

Major share (>90%) of the production is utilised in-house. The company is the largest supplier of steel casting to IR. It has manufacturing facilities at Belgharia near Kolkata and carried out Rs530-mn expansion in ’06 to implement automated operations sourced from Kunkel Wagner, Germany. The facility consists of controlled high-pressure moulding line and automated sand plant.

Texmaco plans to increase focus on exports, which have higher margins. The division has booked export orders for hi-tech castings and exported two pilot batches of castings – one to the US and the other to Australia. It targets US for side frames,


23

bolsters, CMS crossings for railways and Australia for industrial castings for mining equipment makers.

We expect the division to post EBITDA CAGR of 26% over the next three years, with production reaching 25,000mnte by FY12E. Further, management expects increasing capacity of the division to 40,000mnte in FY10/11E.

Chart 23: Leading supplier of castings to IR

24.58 29.63 34.4624.01 27.6

13.7216.91

17.7420.94 20.2

21.7618.17 13.62

14.3918.4

8.539.53

5.39

11.95.484.61 4.73

9.54

3.625.94 19.36 19.93 25.74 18.2

11.32

0%10%20%30%40%50%60%70%80%90%

100%

FY04 FY05 FY06 FY07 FY08

TEXM ACO TSL BESCO HEI Simplex CastingJ it A ll O i t St l B d All BWT/A B St d d/H hOthers


Chart 24: Steel foundry – Growth in production and capacity

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000


(mnt

e)

Capacity Production


Hydro mechanical equipment

The hydro mechanical division produces hydro mechanical items such as radial gates, vertical gates, hoists, gantry/EOT cranes, trash cleaning machines, penstock and heavy steel structures, and has workforce of 315 workers and 136 technical staff.

It holds the record in execution of mega projects financed for design, erection and commissioning of hydraulic steel gates, hoists, penstocks, heavy steel structures etc. Texmaco has exported to various projects globally, including Wadi Ghan Dam, Libya, N’Kula Falls ‘B’ HE Project, Africa, Tenom Pangi Power Project, Malaysia, Tuanku Ja’Far Power Station, Malaysia, and Kaligandaki HE project, Nepal


24

Recently, Texmaco was awarded the largest order for hydro mechanical equipment in India for the 2,000-MW hydro electric project of NHPC in Subansiri, Arunachal Pradesh (under execution)

Other customers include NHPC, NTPC, North Eastern Electric Power Corporation (NEEPCO) etc in the public sector, and Mitsubishi Heavy Industries, Jaiprakash Industries etc in the private sector.

The total hydro power potential in India is 150,000MW, of which the exploitable hydro power resource, as per the XI & XII FYPs, is 46,500MW. NorthEast accounts for 66% of total capacity, which translates into 30,690MW. An investment of Rs60mn is required to generate 1MW of hydro power, which translates into market size of Rs1,840bn, of which hydro mechanical equipment accounts for 8%. This, in turn, implies market size of Rs147bn in the next 10 years, which would be Texmaco’s addressable market. The company’s factories in Kolkata provide it substantial location advantage to make it a key player in the segment.

Table 10: Completed/under execution projects Capacity (MW) Projects (Completed) Chamera Stage-II 300 Tala 1,020 Purulia Pumped Storage 900 Teesta Stage-V 510 Projects (Under execution) Vishnuprayag 400 Parbati Stage-II 800 Teesta Low Dam III 132 Sewa Stage-II 120 Subansiri Lower 2,000 Loharinag Pala 600


Chart 25: Order book position at beginning fiscal

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

FY07 FY08 FY09 FY10E FY11E

(Rs

mn)



25

Process equipment and agro machinery division

The process equipment & agro machinery division makes steam boilers, chemical plant & machinery, sugar machinery and agro machinery (power tiller).

It has a workforce of 215 workers and 90 engineers & technical staff.

Steam boilers. Texmaco manufactures industrial waste heat recovery boilers and multi-fuel boilers of up to 150te/hr capacity and 75kg/sqcm (g) pressure, which is suitable for oil, coal, bagasse, paddy-husk etc, and fitted with different firing systems.

Chemical plant & machinery. Pressure vessels manufactured include LPG bullets and mounded tanks, Horton spheres, double-walled cryogenic vessels, gas receivers and buffer vessels, heat exchangers etc.

Sugar machinery. Texmaco commenced manufacturing of turnkey sugar plants of 1,250tcd capacity, as one of its earlier product lines, in technical collaboration with M/s. Stork Werkspoor Sugar B.V. of Holland and subsequently with M/s. Walkers Limited of Australia. Current facilities have capacity of up to 16,000tpd of crushing capacity. The equipment ranges from self-cutting constant ratio mills to pressure feeders and heavy-duty shredders developed in collaboration with Walkers, Australia.

Majority of the boilers are supplied to sugar mills of group companies such as Upper Ganges and Oudh Sugar. Other customers include Balrampur Chini and Dwarikesh Sugar.

Competitors in process engineering include Thermax, Walchand Industries and Triveni; in agro machinery, the company faces competition from Chinese power tiller companies.

Real estate

Texmaco owns 145 acres in Sankrail, Kolkata, where it plans to develop a food park, and has formed a JV with LMJ International for the same. The property is in dispute in the High Court regarding ownership with the West Bengal Government. Texmaco also owns 34 acres at a prime location in Delhi (Legal issue pending with THE Supreme Court); potential development area of the land could be 1.3-2mn sqft, depending on the outcome of the Supreme Court decision. Texmaco also owns an office property in Gurgaon, comprising 65,000sqft, which it rents to multinationals and other companies with a lock-in period. It yields annual rental income of Rs90mn.


26

Annexure 1: Financials Table 11: Earning statement (Rs mn, year ending March 31)

FY08 FY09 FY10E FY11E FY12E Wagon 5,681 7,001 7,885 8,905 10,566 Foundry 1,490 1,984 2,295 2,777 3,289 Hydro mechanical 584 647 850 1,000 1,250 Process equipment 391 99 176 231 297 Others 54 114 76 78 81 Gross sales 8,199 9,845 11,282 12,992 15,482 Less: Excise duty 0 0 0 0 0 Net sales 8,199 9,845 11,282 12,992 15,482 Net internal sales 1,335 1,744 1,951 2,361 2,787 Scrap sale 114 215 147 143 135 Total operating income 6,978 8,316 9,478 10,774 12,829 Less: Operating costs 5,310 6,470 7,395 8,388 10,025 Selling expense 13 21 29 31 34 Freight expense (9) (3) 5 5 5 Personnel expenses 318 334 358 387 410 Miscellaneous expenses 111 136 123 127 134 Packing & Forwarding cost for exports - - - - - Repairs & Maintenance 98 85 89 94 98 Total operating expenses 5,841 7,043 8,000 9,033 10,706 EBITDA 1,137 1,273 1,479 1,741 2,123 Depreciation & Amortisation 89 118 116 134 156 Other income 49 63 69 79 95 EBIT 1,098 1,218 1,432 1,686 2,062 Less: Gross interest 91 109 97 108 140 Recurring pre-tax income 1007 1,109 1,335 1,579 1,922 Add: Extraordinary income Less: Extraordinary expenses - - 2 2 - Less: Taxation 310 351 453 536 653 --Current tax 310 351 453 536 653 --Deferred tax - - - - - Less: Minority expense & associate profit - - - - - Net income (Reported) 697 758 880 1,041 1,269 Recurring net Income 697 758 882 1,043 1,269



27

Table 12: Balance sheet (Rs mn, year ending March 31)

FY08 FY09 FY10E FY11E FY12E ASSETS Current assets, loans & advances Cash & Bank balance 43 247 683 1,332 1,911 Inventory 1,094 2,285 2,382 2,452 2,928 Sundry debtors 1,380 1,801 2,029 2,313 2,765 Loans & Advances 789 763 1,135 1,286 1,537 Operational 789 763 1,135 1,286 1,537 Others Other current assets 11 14 16 19 23 Total current assets 3,318 5,112 6,245 7,401 9,164 Current Liabilities & Provisions Current Liabilities 3,154 3,950 4,389 4,836 5,228 Sundry creditors 1,428 2,849 2,360 2,234 2,118 Other current liabilities 1,727 1,101 2,029 2,602 3,110 Provisions 170 158 131 124 117 Total Current Liabilities & Provisions 3,324 4,108 4,520 4,959 5,345 Net current assets (7) 1,004 1,726 2,442 3,819 Investments Strategic & Group Investments 937 588 588 588 588 Other Marketable Investments Equity Debt Total investments 937 588 588 588 588 Fixed assets Gross block 3,212 3,311 3,614 4,014 4,444 Less: Accumulated depreciation 970 1,029 1,145 1,279 1,435 Net Block 2,242 2,282 2,469 2,734 3,009 Add: Capital Work in Progress 0 3 0 0 0 Less: Revaluation Reserve Total Fixed Assets 2,242 2,285 2,469 2,734 3,009 of which intangibles 0 0 0 0 0 Total Assets 3,172 3,876 4,782 5,764 7,415 LIABILITIES AND SHAREHOLDERS' EQUITY Borrowings Short Term Debt Secured Loans 661 670 793 831 1,312 Unsecured Loans 64 73 73 73 73 Total Borrowings 725 743 866 904 1,386 Deferred Tax Liability 23 23 23 23 23 Share Capital Paid up Equity Share Capital 111 111 111 111 111 No. of Shares outstanding (mn) 111 110.8 111 111 111 No. of Warrants outstanding (mn) Face Value per share (Rs) 1 1 1 1 1 Preference Share Capital (convertible) 27 27 27 27 27 Reserves & Surplus Share Premium 232 232 232 232 232 General & Other Reserve 2,065 2,744 3,525 4,467 5,637 Less: Misc. Exp. not written off 12 4 2 0 0 Less: Revaluation Reserve Net Worth 2,424 3,110 3,893 4,837 6,007 Minority Interest Total Liabilities & Shareholders' Equity 3,172 3,876 4,782 5,764 7,415



28

Table 13: Cashflow statement (Rs mn, year ending March 31)

FY08 FY09 FY10E FY11E FY12E Cashflow from operating activities Reported Net Income 697 758 880 1,041 1,269 Add: Depreciation & Amortisation 127 59 116 134 156 Provisions 90 (12) (27) (7) (6) Deferred Taxes 0 0 0 0 0 Less: Other Income 49 63 69 79 95 Net Extra-ordinary income 0 0 (2) (2) 0 Operating Cashflow before Working Capital change (a) 865 742 902 1,091 1,324 Changes in Working Capital (Increase) / Decrease in Inventories (174) (1192) (97) (70) (476) (Increase) / Decrease in Sundry Debtors (158) (421) (227) (284) (452) (Increase) / Decrease in Operational Loans & Adv. (101) 26 (372) (150) (252) (Increase) / Decrease in Other Current Assets (2) (3) (2) (3) (4) Increase / (Decrease) in current liabilities 328 1421 (489) (127) (116) Increase / (Decrease) in Other Current Liabilities 443 (625) 927 574 508 Working Capital Inflow / (Outflow) (b) 336 (794) (259) (60) (791) Net Cashflow from Operating Activities (a) + (b) 1202 (53) 643 1031 533 as a % of Operating Cash Flow Cashflow from Capital commitments Purchase of Fixed Assets (1,178) (102) (300) (400) (430) Purchase of Investments (405) 349 0 0 0 Consideration paid for acquisition of undertaking Cash Inflow/(outflow) from capital commitments (c) (1,584) 247 (300) (400) (430) Free Cashflow after capital commitments (382) 195 343 631 103 (a) + (b) + (c) Cashflow from Investing Activities Purchase of Marketable Investments 0 0 0 0 0 (Increase) / Decrease in Other Loans & Advances 0.00 0.00 0.00 0.00 0.00 Sale of Fixed Assets Sale of Investments Consideration received for sale of undertaking/division Other Income 49 63 69 79 95 Net Cashflow from Investing Activities (d) 49 63 69 79 95 Cashflow from Financing Activities Issue of Share Capital during the year 8 0 0 0 0 Proceeds from fresh borrowings 192 18 123 38 481 Repayment of Borrowings Buyback of Shares 0 0 0 0 0 Dividend paid including tax (96) (99) (99) (99) (99) Others 202 27 2 2 0 Net Cashflow from Financing Activities (e) 305 (54) 26 (59) 382 Net Extraordinary Income (f) 0 0 (2) (2) 0 Total Increase / (Decrease) in Cash (28) 204 436 649 579 (a) + (b) + (c) + (d)+ (e) + (f) Opening Cash and Bank balance 71 43 247 683 1,332 Closing Cash and Bank balance 43 247 683 1,332 1,911 Increase/(Decrease) in Cash and Bank balance (28) 204 436 649 579



29

Table 14: Key ratios (Rs mn, year ending March 31)

FY08 FY09 FY10E FY11E FY12E Per-share data (Rs) Diluted Recurring Earning per share (DEPS) 6.3 6.8 8.0 9.4 11.5 Diluted Earnings per share 6.3 6.8 7.9 9.4 11.5 Recurring Cash Earnings per share (CEPS) 7.1 7.9 9.0 10.6 12.9 Free Cashflow per share (FCPS-post capex) (3.4) 1.8 3.1 5.7 0.9 Reported Book Value (BV) 21.6 27.8 34.9 43.4 54.0 Adjusted Book Value (ABV) 21.6 27.8 34.9 43.4 54.0 Dividend per share 0.7 0.8 0.8 0.8 0.8

Valuation ratios (x) Diluted Price Earning Ratio 14.5 13.4 11.5 9.7 8.0 Price to Recurring Cash Earnings per share 12.9 11.6 10.2 8.6 7.1 Price to Book Value 4.2 3.3 2.6 2.1 1.7 Price to Adjusted Book Value 4.2 3.3 2.6 2.1 1.7 Price to Sales Ratio 1.2 1.0 0.9 0.8 0.7 EV / EBITDA 9.5 8.4 7.0 5.6 4.5 EV / Total Operating Income 1.6 1.3 1.1 0.9 0.8 EV / Operating Free Cash Flow (Pre-Capex) 9.0 (202.8) 16.1 9.4 18.1 EV / Net Operating Free Cash Flow (Post-Capex) (28.4) 54.8 30.2 15.4 94.0 Dividend Yield (%) 0.8 0.8 0.8 0.8 0.8 Growth ratios (% YoY) Diluted Recurring EPS Growth 122.4 8.7 16.4 18.2 21.7 Diluted Recurring CEPS Growth 112.6 11.5 13.9 17.9 21.0 Total Operating Income Growth 86.7 19.2 14.0 13.7 19.1 EBITDA Growth 135.0 11.9 16.2 17.7 21.9 Recurring Net Income Growth 138.6 8.7 16.4 18.2 21.7 Operating ratios (%) EBITDA Margins 16.3 15.3 15.6 16.2 16.5 EBIT Margins 15.7 14.6 15.1 15.7 16.1 Recurring Pre-tax Income Margins 14.3 13.2 14.0 14.5 14.9 Recurring Net Income Margins 9.9 9.0 9.2 9.6 9.8 Raw Material Consumed / Sales 64.8 65.7 65.5 64.6 64.8 SGA Expenses / Sales 1.4 1.4 1.1 1.0 0.9 Other Income / Pre-tax Income 4.9 5.7 5.2 5.0 4.9 Other Operating Income / EBITDA 10.0 16.9 10.0 8.2 6.3 Effective Tax Rate 30.8 31.6 33.9 33.9 34.0 Return/Profitability ratios (%) Return on Capital Employed (RoCE)-Overall 28.5 23.6 21.9 21.1 20.7 Return on Invested Capital (RoIC) 43.5 37.7 38.3 40.8 42.7 Return on Net Worth (RoNW) 34.8 27.7 25.4 24.0 23.5 Dividend Payout Ratio 11.8 11.2 9.6 8.1 6.7 Solvency ratios/ Liquidity ratios (%) Debt Equity Ratio (D/E) 30.9 24.6 22.8 19.2 23.4 Long Term Debt / Total Debt 11.6 12.5 10.8 10.4 6.8 Net Working Capital / Total Assets (1.6) 19.5 21.8 19.3 25.7 Interest Coverage Ratio-based on EBIT 1,211.9 1,120.4 1,478.6 1,568.5 1,477.3 Debt Servicing Capacity Ratio (DSCR) 1,278.9 1,197.6 1,564.7 1,659.3 1,554.9 Current Ratio 76.1 105.8 113.1 123.3 142.7 Cash and cash equivalents / Total Assets 1.4 6.4 14.3 23.1 25.8 Turnover ratios Inventory Turnover Ratio (x) 5.4 3.9 3.2 3.5 3.8 Assets Turnover Ratio (x) 2.6 2.4 2.2 2.1 2.0 Working Capital Cycle (days) (27.1) (12.2) 16.0 29.6 48.9 Average Collection Period (days) 57.9 59.0 62.0 61.0 59.9 Average Payment Period (days) 79.0 110.8 118.9 92.8 74.2



30

Annexure 2: Index of Tables and Charts

Tables Table 1: Coal – Significant contribution to railway freight traffic ........................................... 4 Table 2: Railways – Cost effective vis-à-vis Roads .............................................................. 5 Table 3: Railways – Increasing market share....................................................................... 5 Table 4: Benefits of DFC vis-à-vis existing facilities ............................................................. 6 Table 5: New entrants in container rail haulage – Train rollout plans................................. 10 Table 6: Valuations ............................................................................................................. 16 Table 7: Valuations of core business.................................................................................. 16 Table 8: Relative valuations................................................................................................ 17 Table 9: Growth capex plans .............................................................................................. 18 Table 10: Completed/under execution projects .................................................................. 24 Table 11: Earning statement............................................................................................... 26 Table 12: Balance sheet ..................................................................................................... 27 Table 13: Cashflow statement ............................................................................................ 28 Table 14: Key ratios ............................................................................................................ 29

Charts Chart 1: Rail freight traffic in line with GDP growth .............................................................. 3 Chart 2: Growth in freight traffic ............................................................................................ 3 Chart 3: Rise in railway traffic ............................................................................................... 3 Chart 4: Sector-specific freight traffic to grow....................................................................... 4 Chart 5: Increasing demand for coal..................................................................................... 4 Chart 6: Increase in road traffic............................................................................................. 5 Chart 7: Eastern corridor....................................................................................................... 6 Chart 8: Western corridor...................................................................................................... 6 Chart 9: Increasing traffic at ports......................................................................................... 7 Chart 10: Containerised traffic at ports on the upswing........................................................ 8 Chart 11: CONCOR container freight handling (mn TEU).................................................... 8 Chart 12: Dispatches by wagon manufacturers.................................................................. 10 Chart 13: Texmaco – Leader in non-IR segment................................................................ 10 Chart 14: Texmaco leads in high-contribution products ..................................................... 13 Chart 15: Planned hydel capacity addition (MW)................................................................ 15 Chart 16: Growth in earnings .............................................................................................. 17 Chart 17: FY09 revenue break-up ...................................................................................... 17 Chart 18: FY09 EBITDA break-up ...................................................................................... 17 Chart 19: Timeline............................................................................................................... 20 Chart 20: Manufacturing facilities ....................................................................................... 21 Chart 21: Business divisions............................................................................................... 21 Chart 22: Wagon segment growth ...................................................................................... 22 Chart 23: Leading supplier of castings to IR....................................................................... 23 Chart 24: Steel foundry – Growth in production and capacity ............................................ 23 Chart 25: Order book position at beginning fiscal............................................................... 24


31

ICICI Securities Limited has been mandated by Texmaco for fund raising activity. This report is prepared on publicly available information.

I-Sec investment ratings (all ratings relative to Sensex over next 12 months) BUY: +10% outperformance; HOLD: -10% to +10% relative performance; SELL: +10% underperformance

ANALYST CERTIFICATION We /I, Gaurav Pathak, PGDM, BTech and Ashish Gupta, PGDBM, B.E.; research analysts and the authors of this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

Disclosures: ICICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated investment banking, investment management and brokerage and financing group. We along with affiliates are leading underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover.

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities, its subsidiaries and associated companies, their directors and employees (“ICICI Securities and affiliates”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or in certain other circumstances.

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgement by any recipient. The recipient should independently evaluate the investment risks. The value and return of investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities and affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice.

ICICI Securities and its affiliates might have managed or co-managed a public offering for the subject company in the preceding twelve months. ICICI Securities and affiliates might have received compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific transaction. ICICI Securities and affiliates expect to receive compensation from the companies mentioned in the report within a period of three months following the date of publication of the research report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific transaction. It is confirmed that Gaurav Pathak, PGDM, BTech and Ashish Gupta, PGDBM, B.E.; research analysts and the authors of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Our research professionals are paid in part based on the profitability of ICICI Securities, which include earnings from Investment Banking and other business.

ICICI Securities or its affiliates collectively do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report.

It is confirmed that Gaurav Pathak, PGDM, BTech and Ashish Gupta, PGDBM, B.E.; research analysts and the authors of this report or any of their family members does not serve as an officer, director or advisory board member of the companies mentioned in the report.

ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. ICICI Securities and affiliates may act upon or make use of information contained in the report prior to the publication thereof.

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

This report has not been prepared by ICICI Securities, Inc. However, ICICI Securities, Inc. has reviewed the report and, in so far as it includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed.


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EQUITIES A Murugappan Executive Director +91 22 6637 7101 [email protected] T S Baskaran Head Cash Equities +91 22 6637 7275 [email protected]

Equity Research – Telephone : +91 22 2288 2460/70 Fax: +91 22 2288 2448 ANALYST SECTOR ALLOCATION DIRECT NOS. E-MAIL Anantha Narayan Head of Research +91 22 6637 7311 [email protected] Amit Mishra Oil & Gas, Petrochemicals +91 22 6637 7274 [email protected] Gaurav Pathak Real Estate, Infrastructure +91 22 6637 7339 [email protected] Krupal Maniar, CFA Technology +91 22 6637 7254 [email protected] Prakash Gaurav Goel Agriculture, Utilities +91 22 6637 7373 [email protected] Rajesh Vora Pharmaceuticals +91 22 6637 7508 [email protected] Sandeep Shah Technology +91 22 6637 7114 [email protected] Sanjay Singh FMCG +91 22 6637 7386 [email protected] Siddharth Teli Banking +91 22 6637 7298 [email protected] Vikash Mantri, CFA Media, Telecom +91 22 6637 7161 [email protected] Gagan Dixit Sr. Associate (Oil&Gas, Petrochemicals) +91 22 6637 7480 [email protected] Suchitra WL Sr. Associate (Media, Telecom) +91 22 6637 7510 [email protected] Sunil Teluja Sr. Associate (FMCG) +91 22 6637 7312 [email protected] Abhijit Mitra Associate (Metals) +91 22 6637 7289 [email protected] Abhishek Murarka Associate (Banking) +91 22 6637 7351 [email protected] Ashish Gupta Associate (Real Estate, Infrastructure) +91 22 6637 7314 [email protected] Hemant Joshi Associate (Automobiles) +91 22 6637 7380 [email protected] Sanket Maheshwari Associate (Utilities) +91 22 6637 7159 [email protected] Prakriti Singh Editor +91 11 2439 0154 [email protected] Simmu Kahlon Editor +91 22 6637 7202 [email protected] Hemant Jathar Production +91 22 6637 7135 [email protected] Ruben Fernandes Production +91 22 6637 7442 [email protected]

Equity Sales – Asia-Pacific – Telephone : +91 22 2288 2460/70 Fax: +91 22 2288 2341 Rishikesh Joshi +91 22 6637 7229 [email protected] Akshay Kothari +91 22 6637 7504 [email protected] Balaji Jayaraman +91 22 6637 7230 [email protected] Hitesh Danak +91 22 6637 7131 [email protected] Kim Collaco Rath +91 22 6637 7367 [email protected] Rishi Agrawal +65 6823 1557 [email protected] Vinay Patel +65 6823 1557 [email protected]

Equity Dealing – Telephone : +91 22 2281 4570 Fax: +91 22 2288 2341 Pinakin Mistry +91 22 6637 7279 [email protected] Ravi Chhugani +91 22 6637 7316 [email protected]

Equity Derivatives – Telephone : +91 22 2288 2460/70 Fax: +91 22 2288 2341 Dr. C. K. Narayan +91 22 6637 7365 [email protected] Vignesh Eswar +91 22 6637 7124 [email protected] Ankur Jhaveri +91 22 6637 7118 [email protected] Deepika Asthana +91 22 6637 7473 [email protected] Manish Raval +91 22 6637 7489 [email protected] Manoj Shenoy +91 22 6637 7281 [email protected] Mayank Mehta +91 22 6637 7358 [email protected] Rohit Dhundele +91 22 6637 7288 [email protected] Sohil Shah +91 22 6637 7196 [email protected] Siddhali Desai +91 22 6637 7271 [email protected] Sriram Jagdish +91 22 6637 7455 [email protected]

ICICI Securities Limited ICICI Centre, H T Parekh Marg, Churchgate, Mumbai 400 020, Telephone: +91 22 2288 2460/70 Fax: +91 22 2288 2448

ICICI Securities Inc. Level 57, Republic Plaza, 9, Raffles Place, Singapore 048 619 Telephone: +65 6823 1556/57 Fax: +65 6823 1425

ICICI Securities Inc. 1 Liverpool Street, London EC2M 7QD, United Kingdom. Tel (Board): +44 20 79562051, Tel (Direct): +44 20 79562554 / 2555 Fax: +44 20 79562211

ICICI Securities Inc. 461, 5th Avenue, 16th Floor, New York, NY 10017, USA. Telephone: +1 212-921-2344 / +1 212 453 6704 Fax: +1 212-453-6710

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