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Tuesday, August 5, 2008

Texmaco Limited - Investment report

Report Date: August 4, 2008
Company Name: Texmaco Limited
Recommendation: BUY
CMP – Rs. 1276
Target Price – Rs. 1800/-
Mkt. Cap. Rs.14213 crore


Investment Rationale
Ø Texmaco, diversified engineering company of K.K. Birla Group, has reported fabulous performance for Q1 FY 2009. Net sales shot up @ 37.6% to Rs.196.83 crore led by 39.8% growth in heavy engineering division’s (76.6% of Net Sales) turnover of Rs. 196.23 crore. Foundry division reported 73.8% jump in sales of Rs. 56.95 crore. OPM% improved considerably to 17.9% as a result of decline in all heads of expenses. PBIT% of Heavy Engineering division improved to 12.4% (8.1%). However, PBIT% of Foundry division was subdued at 13.2% (18.2%). Higher Sales coupled with improved margins led to 95.2% spurt in PBT (before extraordinary items) to Rs.32.39 crore and doubling of PAT to Rs.22.82 crore (Rs.11.37 crore). The current order book position is over Rs.2000 crore.

Ø Texmaco has 3 distinct divisions – heavy engineering (comprising of rolling stock), steel foundry and others (incl. hydro mechanical equipment & structural and process equipments, agro machinery, mini hydel power, etc.).

Ø Rolling stock division, which provides wagons to Indian Railways, has immediate potential for further significant growth as major orders placed by Railway Board for 2007-08 will be operational shortly following resolution of certain design issues by RDSO relating to high capacity wagons ordered by Indian Railways for the first time. The Indian railways wagon tender for 15348 wagons for 2008-09 has already been opened and is expected to be finalised shortly. Texmaco is well placed to receive substantial order. Company is progressively switching over from conventional to Special Purpose Wagon manufacture, i.e. Stainless Steel wagons, Container Freight Rakes as also wagons for bulk transportation of Alumina, Food Grains, Caustic Soda, etc.


Ø The JV proposed with United Group (UGL), Australia, in the field of freight cars and coaches is progressing well, and it is expected in due course to target exports to markets in Africa, Asia and Australia, besides meeting new design wagon demand of Indian railways. Company has also participated in a RFQ for setting up an Electric Loco factory at Madhepura in JV with Kawasaki, Toshiba, Mitsubishi Corporation and Mitsubishi Electric Corporation.

Ø The company expects to play a pivotal role in Indian Railways’ aggressive growth plans involving an investment of Rs. 75,000 crore over next 7 years on dedicated freight corridors linking Delhi, Mumbai, Chennai and Kolkata. IR has also come out with Wagon Leasing Policy and Liberalized Wagon Investment Scheme to attract investment in special purpose high capacity wagons and company is moving in this direction thru suitable tie-ups with leading multinationals.

Ø It has maintained its leadership in supplies of steel castings for manufacture of Rolling Stock. Working of new Foundry equipped with Kunkel Wagner Plant from Germany has fully stabilized. It has booked some export orders for high tech castings and already exported two pilot batches to USA and Australia. It has also undertaken modernization-cum-expansion of old foundry, which is expected to be completed by middle of CY 2009, raising capacity to 40000 tpa (22,000 tpa in FY 2007).

Ø Hydro-mechanical equipment division is also likely to witness significant growth on account of growth expected in hydel power. NHPC is planning to add 5000 MW by end of 11th Plan and company is ideally placed to participate in this high growth sector.

Ø As company plans to leap into new growth trajectory and reap its full potential, Texmaco plans to transfer the core engineering business to a subsidiary to focus on accelerated growth and diversification, enhance shareholders’ value and raise financial resources to take advantage of emerging business opportunities in infrastructure sector.

Ø Apart from these operational drivers, another trigger is Texmaco has huge surplus land at Delhi and Kolkatta. At Delhi, company has 32 acres of land. A decision of Supreme court on legal issues relating to this land is still pending. Company has entered into 50 : 50 JV with LMJ International for setting up food park in SEZ. Texmaco will be utilising its 144 acres of land at Howrah, Kolkatta for this purpose.

Valuation
Ø At CMP, share is trading at 13.6 times FY 2009 expected actual EPS of Rs. 94 and 10.9 times FY 2009 expected EPS of Rs. 117/-. In view of bright prospects ahead, we recommend to “BUY” the share at CMP.

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