Await listing of Titagarh Wagons: Keynote

Keynote Capitals has come out with report on Titagarh Wagons' IPO. It has recommended investors to await listing.

It has opened for subscription with its initial public offering (IPO) of 2.383 million Equity Shares of face value Rs 10 each. The issue will close on March 27, 2008. The price band has been fixed at Rs 540 to Rs 610 per equity share.

Keynote Capitals' report on Titagarh Wagons IPO

• Titagarh Wagons (TWL) is predominantly a railway wagon manufacturer (80% of FY07 sales) catering to the needs of Indian Railways (IRs) and non-Indian Railways customers (NIRs).
• In order to de-risk its business model, TWL is diversifying into earth moving and mining equipment. Further, it has acquired a steel foundry and is in the process of setting up a wheelset assembly and axle machining shop, leading to backward integration.
• In order to develop aluminium wagons which are lighter and more efficient than the steel wagons, TWL has signed a JV with FreightCar America, a leading manufacturer of wagons.
• The healthy order book of Rs 753 crore will get reflected in the financials in the next two years. Also the strong balance sheet with low post-issue gearing of 0.09x would help in exploring new opportunities including acquisitions.However,the industry’s pricing power may be under pressure going forward, which may cap margin expansion.
• The revenue and net earnings saw aggressive growth during FY04-07, at CAGR of 69.6% and 90% respectively. Due to the higher base, expect growth trajectory to taper off (CAGR of 39.5% and 34.9%) over FY07-10.
• Concerns include poor track record of the promoter group in shareholder wealth creation (no dividends from group companies Continental Valves Ltd. and Titagarh Steels Ltd.) and also poor corporate governance track record (delisting of Continental Valves Ltd. from the BSE during 1999-2003).

Valuation:

The IPO pricing, at 18.5x FY09 and 15.7x FY10 earnings, is expensive vis-à-vis domestic peer Texmaco (16.5x FY09 and 12.5x FY10) and larger global peers FreightCar America (14.8x FY09 and 12.7x FY10) and American Rail Industries (9.5x FY09 and 8.7x FY10). Given the robust growth prospects of the industry and strong company fundamentals, we recommend investors to await listing.

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