Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Titagarh Wagons Limited (TWL) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL A-’. The short-term rating is reaffirmed at ‘CRISIL A2+’.

 

The revision in outlook reflects CRISIL Ratings’ expectation that the credit risk profile of TWL may improve in the near term on account of higher revenue visibility from new orders and increased execution of existing orders while keeping the working capital (WC) intensity under check resulting in strengthening of operating and financial ratios. Further, the management continues to maintain its stance of not providing any financial support to international subsidiaries directly or indirectly from TWL’s standalone balance sheet. Any deviation from the stated philosophy of ‘no financial support’ towards overseas subsidiaries from TWL would be a key rating sensitivity factor.

 

TWL recently received a large order worth ~Rs 7,900 crore for wagons from Indian Railways (IR) providing revenue visibility of 3-4 years. The company has to deliver 24,177 wagons over 39 months starting July 1, 2022 with completion expected in the first half of fiscal 2026. This order doesn’t entail customer advances and thus will result in higher WC requirement which the company intends to meet largely by getting into back-to-back contracts with its suppliers. However, its ability to keep the WC intensity under check is to be seen.

 

For the Pune metro project (won in August 2019), the company had earlier received extension to deliver the first trainset (out of overall 34 trainsets) by June 2021 and the balance in a phased manner by September 2022. However, this has been delayed due to the second wave of the pandemic. As per current progress, all three trainsets from Italy have been delivered and delivery from Indian facility also started from March 2022. The management expects to deliver the entire order within current fiscal. Timely delivery of this order is critical given that this is the first order in the transit segment and would have consequence on future bids planned for metro projects.

 

During fiscal 2022, the operating profit before depreciation, interest and tax (OPBDIT) margin remained healthy at 11.1%. The sustenance was driven by increase in scale of operations and execution of high-margin orders. The operating margins are expected to moderate in fiscal 2023 owing to lower margin Pune metro order being executed during the fiscal. The interest coverage ratio (adjusted for notional interest) has improved to 4.2 times in fiscal 2022 from 2.8 times in fiscal 2021 supported by higher operating profit. While debt is likely to increase due to increase in working capital requirement for the company with execution of the new Indian Railways order, debt protection metrics are expected to remain healthy supported by corresponding growth in scale of operations.

 

The ratings continue to factor in the TWL’s established market position in the wagon manufacturing industry, and benefits derived from diversification into metro, shipbuilding, bridge building and defence segments, along with an improved financial risk profile. These strengths are partially offset by working capital-intensive operations, significant dependence on IR for orders and exposure to volatility in raw material prices.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profile of TWL and its subsidiary Titagarh Bridges & International Pvt Ltd (TBIPL) since the subsidiary is in the process of getting amalgamated with TWL during fiscal 2023.

 

The international subsidiaries, including Titagarh Firema S.p.A. (TFA), Italy, and Titagarh Singapore Pvt Ltd (TSPL) continue to be not consolidated as the corporate guarantee towards TFA, Italy had ceased to exist and management has articulated that no further financial support would be provided (directly or indirectly) to the international subsidiaries. Additionally, there are covenants laid down by the working capital lenders restricting financial support to the international entities.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Established market position: TWL is one of India’s largest wagon manufacturers, with a capacity of 8,400 wagons per annum. TWL continues to maintain its leadership position in the segment and accounted for 32% (24,177 wagons) of the orders awarded by the Indian Railways in May 2022. Access to high technical ability through foreign collaborations further supports the business risk profile. However, exposure to intense competitive pressure persists.

 

Diversified revenue profile of domestic operations: The company had received its first metro project order from Maharashtra Metro Rail Corporation Ltd for the Pune Metro project in consortium with TFA, Italy in August 2019. Further, with access to the latest technology from TFA, Italy; TWL is well positioned to bid for large orders for other metro projects. The company also has a presence in the shipbuilding and defence segments. It has successfully launched four ships for the Indian Navy and National Institute of Ocean Technology. During fiscal 2022 sales from segments other than wagons and coaches contributed around 18% of the total revenue compared to 6% in fiscal 2021.

 

Healthy financial risk profile and liquidity: Gearing remains healthy at 0.12 times and Debt to EBITDA continues to remain below 1 time as of March 31, 2022 (similar to fiscal 2021) in absence to any debt funded capex and timely repayment of the long-term debt. Debt protection metrics have witnessed improvement with interest cover (adjusted for notional interest) improving to 4.2 times in fiscal 2022 from 2.8 times in fiscal 2021. Liquidity remains healthy with cash and equivalent balance of Rs 73 crore. Financial risk profile is expected to remain healthy basis sustenance of operating performance with no major debt funded expansion plans over the medium term.

 

Weaknesses:

Working capital-intensive operations: The nature of operations has large working capital requirement, as reflected in high gross current assets (GCAs). This is due to high inventory requirement (86 days as on March 31, 2022). Working capital requirement is likely to remain high, driven by change in IR's raw material policy a few years ago coupled with current execution of the large railway and metro order. Increase in working capital limits, back-to-back nature of contracts with suppliers, and healthy accruals are expected to meet the incremental working capital requirement.

 

Dependence on IR for wagon orders: A large portion of revenue is currently derived from wagon orders received from IR. Although lack of steady orders had constrained the topline and operating performance of wagon manufacturers historically, the new order of 24177 wagons has provided revenue visibility for the next 3-4 years. Though TWL has fairly diversified its order book post the Pune Metro and Indian Navy orders, dependence on IR orders would continue given its sizeable contribution in the overall business.

 
Exposure to risks relating to fluctuation in raw material prices, and low pricing power in soft industry conditions: The key inputs include steel and related products. The projects have a long execution period, extending to over a year, and not all orders are entirely covered by a price-variation clause. Hence, to an extent, the company is exposed to fluctuations in steel prices during the project execution period. On the other hand, pricing power is restricted because of bid-based orders by IR (main customer). IR's orders are spread across suppliers and are decided based on the bids submitted by wagon manufacturers. Although the quantity is allocated as per the supplier's past performance, the company has to match the prices of the lowest bidder to receive the final order.

Liquidity: Strong

Cash and equivalents stood at Rs 73 crore as on March 31, 2022. Fund-based working capital utilisation was at 50-60% in the six months through May 2022. The working capital requirements are expected to increase for execution of the large IR order, however, TWL is underway to enhance its working capital limits which would help cater the incremental working capital requirements. The company has scheduled debt repayment obligation of around Rs 30 crore each in fiscal 2023 and 2024 against which annual accruals of more than Rs 100 crore are expected, thus providing the cushion. Expected cash accruals, increase in working capital limits, back-to-back nature of contracts with suppliers, and the cash balance are expected to be adequate for meeting capital expenditure and incremental working capital requirement.

Outlook: Positive

The credit risk profile of TWL may improve in the near term on account of higher revenue visibility from new orders and increased execution of existing orders while keeping the WC intensity under check resulting in strengthening of operating and financial ratios.

Rating Sensitivity factors

Upward factors

• Timely execution of orders in hand specifically Pune Metro along with healthy operating margins leading to interest coverage ratio sustaining above 4.5 times.
• Strengthening of liquidity on account of improvement in the working capital cycle

 

Downward factors

• Delay in order execution, deteriorating the operating performance and thus leading to sustained reduction in interest coverage ratio below 3 times.
• Liquidity deteriorates on account of stretch in working capital cycle or incremental support towards group companies or overseas subsidiaries

About the Company

TWL was set up in July 1997 by Mr Jagdish Prasad Chowdhary. It manufactures freight wagons, bailey bridges, heavy earth-moving and mining equipment, steel and spheroidal graphite iron castings, and other products. Operations are managed by Mr Umesh Chowdhary. The company has four manufacturing facilities: two in Titagarh and one in Uttarpara, both in West Bengal, and one in Bharatpur, Rajasthan. It has capacity to manufacture 8,400 wagons, 200 Metro coaches and 36 electric multiple unit coaches, and process around 30,000 tonne of casting steel, per annum. It also has capacity to manufacture bridges, shelters, propulsion equipments. Furthermore, it has a shipbuilding division, which delivered its first ship, a 1,000-tonne fuel tanker, to the Indian Navy in May 2018.

Key Financial Indicators Standalone (CRISIL adjusted numbers)

As on/for the period ended Mar 31		2022	2021
Operating Income	Rs crore	1,482	1,026
Profit after tax (PAT)	Rs crore	79	50
PAT margin	%	5.4	4.9
Adjusted debt/adjusted networth	Times	0.12	0.12
Adjusted interest coverage*	Times	4.15	2.78

*Adjusted for notional interest

Any other information: Not applicable