Detailed Rationale

Crisil Ratings has reaffirmed its ‘Crisil AA-/Stable/Crisil A1+’ ratings on the bank facilities of Titagarh Rail Systems Ltd (TRSL).

 

The ratings continue to factor in the company’s healthy operating efficiency as reflected in its stable profitability, healthy execution in the freight wagon segment and diversified order book providing medium term revenue visibility.

 

In fiscal 2024, the topline increased 39% on-year to Rs  3,853 crore (Rs 2,781 crore in fiscal 2023 and Rs 1,482 crore in fiscal 2022) because of healthy execution of large order of Rs 7,800 crore for manufacture of 24,177 wagons, received from Indian Railways in May 2022. Furthermore, earnings before interest, taxes, depreciation, and amortisation (Ebitda) increased 73% on-year to Rs 452 crore in fiscal 2024 (Rs 262 crore in fiscal 2023 and Rs 163 crore fiscal 2022) and Ebitda margin rose to 11.7% (9.4% in fiscal 2023 and 11.0% in fiscal 2022).

 

In the first half of fiscal 2025, the topline increased by ~6% on-year to Rs 1,960 crore (Rs 1,846.21 crore in the first half of fiscal 2024). Unavailability of labour affected the order execution in the wagons segment in the first quarter of fiscal 2025. However, the execution ramped up in the second quarter of fiscal 2025, with production of ~2,700 wagons. Furthermore, Ebitda stood at Rs 222.74 crore in the first half of fiscal 2025 ( compared with Rs 221.85 crore in the first half of fiscal 2024) and Ebitda margin remained healthy at 11.36% (12.01% in the first half of fiscal 2024).

 

The present order book of Rs 25,751 crore (including Rs. 13,320 crore share from Ramkrishna Titagarh Rail Wheels Ltd, joint venture [JV] with Ramakrishna Forgings Ltd [RFL], for wheelset and Bharat Heavy Electricals Ltd [BHEL] for Vande Bharat) as on September 30, 2024, provides medium- to long-term revenue visibility based on execution timelines. TRSL has received projects including Vande Bharat order share (Rs 4,942 crore), Surat Metro order (Rs 866 crore), Ahmedabad Metro order (Rs 350 crore) and Wheelset manufacturing (TRSL share of Rs 6,300 crore, to be executed as Joint Venture [JV] with Ramakrishna Forgings Ltd, [RFL]}. This is on top of the large existing wagon order from the India Railways to be completed over fiscals 2025- 2027.

 

The financial risk profile is supported by healthy net cash accrual of Rs 324 crore in fiscal 2024 (Rs 126 crore in fiscal 2023). This, with substantial reduction in debt, improved the net cash accrual to adjusted debt ratio to 4.89 times as on March 31, 2024 (from 0.50 time in fiscal 2023 and 0.82 time in fiscal 2022). Healthy cash accrual, with fund raise done in fiscal 2024, led to an increase in adjusted networth to Rs 2,226 crore as on March 31, 2024, from Rs 961 crore as on March 31, 2023. As a result, the gearing decreased to 0.03 time as on March 31, 2024 from 0.26 time as on March 31, 2023. The company’s debt to Ebitda ratio declined to 0.13 time as on March 31, 2024 from 0.95 time as on March 31, 2023 (0.65 time as on March 31, 2022) on account of improved profitability.

 

With orders coming in from the passenger rolling stock segment, the order book composition has also diversified to freight: passenger ratio of 44:56 (as on September 30, 2024) from 89:11 (as on March 31, 2022). However, the timelines of passenger rolling stock segment orders have been delayed on account of different reasons and hence, any meaningful contribution to revenue and operating profitability will come from fiscal 2026 onwards. The execution of Bangalore metro was delayed due to visa issues for engineers from CRRC, while for the Vande Bharat order, train configuration was changed to 24 coaches from 16 coaches, leading to higher time required for building the prototype. The successful buildup of prototypes under the development stage and execution as per contract timelines, with expected margin, would remain monitorable.

 

While Crisil Ratings expects a moderate increase in debt over the medium term likely due to increase in the working capital with expected rise in revenue, the credit metrics are projected to remain healthy on account of expected above-average profitability, resulting in moderate cash accrual. Furthermore, the equity raised through qualified institutional placement (QIP) last year resulted in net cash position at the end of fiscal 2024, which was still maintained at the end of September 2024. Internal accrual is likely to meet the capital expenditure (capex) requirement over the next 2-3 years. Moreover, the management maintains its stance of not providing any financial support to international associates, including TFA Italy, directly or indirectly from TRSL’s balance sheet.

 

Any weakening in the operating performance due to delays in order execution or raw material supply constraints and delay in clearances will remain monitorable. Any further stretch in liquidity due to long working capital cycle, higher-than-expected debt-funded capex or incremental support towards the group companies or overseas subsidiaries will also be monitorable.

 

The ratings continue to reflect TRSL’s established market position in the wagon manufacturing industry and benefits derived from diversification into passenger rolling stock segment (Vande Bharat and various metro orders), along with an improved financial risk profile and liquidity. These strengths are partially offset by large working capital requirement, significant dependence on Indian Railways for orders and exposure to volatility in raw material prices.

Analytical Approach

Crisil Ratings has considered the standalone business and financial risk profiles of TRSL.

 

Titagarh Bridges & International Pvt Ltd was amalgamated with TRSL in fiscal 2023. TFA Italy (erstwhile subsidiary and now a JV) continues to be not consolidated as the corporate guarantee towards TFA Italy has ceased to exist. Additionally, there are covenants laid down by the working capital lenders restricting financial support to the group entities without prior approval.

 

Crisil Ratings has not combined the business and financial risk profiles of the recently set up JV, Ramkrishna Titagarh Rail Wheels Ltd, for executing the wheelset order from the Indian Railways. As per articulation received from management, any debt availed by the JV will not be backed by corporate guarantee from TRSL.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position in the core wagon manufacturing business: TRSL is one of India’s largest wagon manufacturers, with an annual capacity of 12,000 wagons. TRSL has maintained its leadership position in the segment and accounted for 32% (24,177 wagons) of the orders awarded by Indian Railways in May 2022. Additionally, TRSL received an order for 4,463 wagons from Indian Railways in fiscal 2024. With these orders from Indian Railways, and outstanding private wagon orders, the current capacity of TRSL is largely tied up till fiscal 2026. Access to technical capability through foreign collaborations also enhances the business risk profile.

 

• Diversified revenue profile of domestic operations: The passenger segment contributed to 11% of the topline in fiscal 2024 (19% in fiscal 2023, 13% in fiscal 2022, 5% in fiscal 2021). This is expected to remain muted in fiscal 2025 due to current projects being in the design phase. It will likely ramp-up from fiscal 2026 onwards with delivery of Bangalore metro, Surat metro, Ahmedabad metro and Vande Bharat coaches. The order book composition has changed with wagon: passenger ratio improving to 44:56 as on September 30, 2024, from 89:11 in fiscal 2022.

 

TRSL received its first metro project order from Maharashtra Metro Rail Corporation Ltd in August 2019 for the Pune metro project, in consortium with TFA Italy, with delivery of the last train done in the third quarter of fiscal 2025. Furthermore, TRSL is now bidding for more metro orders on its own and has won Surat and Ahmedabad metro orders (both Gujarat) in the recent past.

 

TRSL has also received an order for forged wheelset manufacturing in collaboration with RFL, with guaranteed offtake of 15.4 lakh wheelsets from Indian Railways for the next 20 years. The consortium of TRSL and RFL has started setting up the manufacturing facility with an annual capacity of 228,000 wheelsets wherein the remaining capacity will be utilised for captive consumption by TRSL, and sales in domestic and overseas markets. The capex required for this will be funded by a mix of equity infusion by the JV partners as well as debt. However, there will be no corporate guarantee or collateral by TRSL, and the debt will be backed by the immovable assets of the JV.

 

• Healthy financial risk profile and liquidity: The gearing improved to 0.03 time as on March 31, 2024, from 0.26 time a year earlier, due to fund raise of Rs 988 crore in fiscal 2024 and higher cash accrual. The gearing is expected to remain stable over fiscals 2025-2027. Steady increase in the operating margin over the years has led to enhanced debt protection metrics with adjusted interest coverage ratio at 6.28 times in fiscal 2024 as compared with 7.99 times in fiscal 2023. The liquidity remains healthy with cash and equivalents of ~Rs 570 crore as on September 30, 2024, and fund-based limits of Rs 750 crore moderately utilised in the past six months.

 

Cash accrual over fiscals 2025-2027 is expected to be sufficient to fund the incremental capex of around Rs 600 crore. Some increase in overall borrowing is expected due to rising working capital requirement in line with the increase in turnover and with total investments of around Rs 320 crore to be made in a JV set up for manufacturing wheelsets (Rs. 156.8 crore done). Overall, the financial risk profile is expected to remain healthy, backed by steady operating performance, limited capex to be financed via cash accrual, funds from PE and appropriately-sized term debt to be availed over fiscals 2025-2027. However, any major, debt-funded capex or any debt-led investment along with stretch in working capital cycle will remain a key monitorable.

 

Weaknesses:

• Working capital-intensive operations: The operations are working capital intensive, as reflected in the large gross current assets and sizeable inventory requirement (60 days as on March 31, 2024, and 64 days as on March 31, 2023). The working capital cycle may remain stretched, driven by current execution of the large railway and metro orders. Increase in working capital limits, back-to-back contracts with suppliers and healthy cash accrual should help meet the incremental working capital requirement.

 

• Exposure to volatility in raw material prices and competition: The key inputs include steel and related products. The orders from Indian Railways generally have a long execution period and are covered by a price-variation clause to a large extent. The private sector orders (15-20% of the freight wagon order book) have a shorter turnaround and are fixed-price in nature, but these come with better pricing and margins. Hence, to an extent, TRSL is susceptible to volatility in steel prices during the order execution period. On the other hand, pricing power is restricted as the orders from Indian Railways (main customer) are spread across suppliers and are decided based on bids submitted by wagon manufacturers. The recently won large orders—Vande Bharat, Surat Metro and Ahmedabad Metro, and the wheelsets order come with a price variation clause, thus protecting the operating margin.

Liquidity: Strong

TRSL had cash and equivalent of ~Rs 570 crore as on September 30, 2024, and the fund-based working capital utilisation was moderate in the six months through September 2024. The company has increased its non-fund-based working capital limit, in line with expected increase in the scale of operations. TRSL has scheduled debt obligation of around Rs 12.5 crore in fiscal 2025, which should be met comfortably by internal cash accrual. Expected cash accrual, increase in working capital limit, order-backed contracts with suppliers and sizeable cash balance will help fund the capex and incremental working capital requirement.

Outlook: Stable

TRSL’s operating performance will continue to benefit over the medium term from its strong order book and sustenance of healthy financial risk profile.

Rating sensitivity factors

Upward Factors

• Timely execution of orders in hand in both freight and passenger rolling stock, with ability to maintain overall operating margin above 12% on a sustained basis
• Prudent working capital management at high scale of operations with net debt to Ebitda ratio below 0.5 time on a sustained basis

 

Downward Factors

• Delay in order execution or weakening of operating performance leading to interest coverage ratio dropping below 4 times
• Any large, debt funded capex weakening the debt protection metrics
• Weakening of liquidity on account of either stretch in working capital cycle or incremental infusion in JVs

About the Company

TRSL (erstwhile Titagarh Wagons Ltd) was established in July 1997 by Mr Jagdish Prasad Chowdhary. It is a leading comprehensive mobility solution provider with presence in India and Italy. The company specialises in manufacturing semi high-speed trains, urban metros, passenger coaches, propulsion equipment, and a wide array of wagons, including specialised ones. The operations are managed by Mr Umesh Chowdhary. The company has four manufacturing facilities in India - two in Titagarh and one in Uttarpara in West Bengal, and one in Bharatpur, Rajasthan. It has capacity to manufacture 12,000 wagons, 300 coaches, and process around 30,000 tonne of casting steel per annum.

Any other information: Not Applicable