Rating Rationale
March 06, 2023 | Mumbai
Titagarh Wagons Limited
Ratings upgraded to 'CRISIL A/Stable/CRISIL A1'; Removed from 'Watch Developing'
 
Rating Action
Total Bank Loan Facilities RatedRs.1841.52 Crore
Long Term RatingCRISIL A/Stable (Upgraded from 'CRISIL A-'; Removed from ‘Rating Watch with Developing Implications’)
Short Term RatingCRISIL A1 (Upgraded from 'CRISIL A2+'; Removed from ‘Rating Watch with Developing Implications’)
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of Titagarh Wagons Limited (TWL) to ‘CRISIL A/CRISIL A1’ from ‘CRISIL A-/CRISIL A2+’ and removed the ratings from ‘Rating Watch with Developing Implications and assigned a Stable outlook to the long-term rating. 

 

The rating watch resolution factors in the disposition of the Corporate Insolvency Resolution Process proceedings by the National Company Law Appellate Tribunal (NCLAT) through an order dated February 3, 2023, following settlement between TWL and the operational creditor.

 

The rating upgrade factors in the improvement in the business and financial risk profiles of TWL with healthy year-on-year revenue growth of 71% and healthy operating margin of ~10% in the first nine months of fiscal 2023 driven by improved order execution. The company executed a large order from the Indian Railways (IR) in the freight wagon segment in May 2022 and Pune Metro in line with expectation.

 

During the first nine months of fiscal 2023, operating profit before depreciation, interest and tax (OPBDIT) rose to Rs 169 crore from Rs 116 crore in the corresponding period of the previous fiscal. The operating margin dropped to 9.4% from 11%, in line with expectation, on account of a larger proportion of low-margin orders in the freight segment. The interest coverage ratio (adjusted for notional interest) remained at 4.5 times (4.6 times in fiscal 2022 and 2.8 times in fiscal 2021). CRISIL Ratings expects the operating margin to sustain over the medium term on account of price variation clauses in orders from IR, which will mitigate any volatility in commodity prices, and execution of private sector order book where margins are generally higher.

 

The IR order received in May 2022 provides healthy revenue visibility till fiscal 2026. TWL saw healthy order inflow in the first nine months of fiscal 2023, as indicated by order book of Rs 10,130 crore as of December 2022 compared with Rs 10,675 crore in fiscal 2022. TWL private sector order book saw healthy inflow increasing the private sector orders to over Rs 1,000 crore as on 31 December 31, 2022. TWL is putting up capacity for manufacturing stainless steel coaches for jobwork for Bangalore Metro coaches under an order from CRRC Corporation Ltd. TWL has also emerged as the L2 bidder for supply of Vande Bharat trains in consortium with BHEL, which enhances revenue visibility in the passenger train segment, and has participated in bids for supplying metro trains in other cities. The execution of the order book while maintaining profitability and working capital cycle will remain a key monitorable. TWL has to match the L1 price bid for receipt of letter of approval for the Vande Bharat order. Historically,  this segment has low profitability and ability to improve the margin is a monitorable.

 

Gearing has increased with debt rising to Rs 279 crore as on December 31, 2022, from Rs 119 crore as on March 31, 2022, on account of increased working capital requirement because of the new IR order and Pune Metro order. Large unbilled revenue because of the percentage completion method for the Pune Metro order has led to higher working capital requirement. However, the Pune Metro order will be completed in the first half of fiscal 2024, which may reduce the working capital intensity. CRISIL Ratings expects debt protection metrics to remain healthy as the scale of operations increases.

 

During September 2022, TWL entered into a restructuring agreement for its stepdown subsidiary Titagarh Firema S.p.A. (TFA), Italy, under which the Government of Italy and PE Fund invested EUR 14.5 million, reducing the shareholding of TWL to 49.7% from 99.24% in fiscal 2022. Also, as part of restructuring, TWL infused EUR 1.5 million. The management maintains its stance of not providing any financial support to international subsidiaries directly or indirectly from TWL’s standalone balance sheet. 

 

The ratings continue to factor in the established market position of TWL in the wagon manufacturing industry, and benefits derived from diversification into metro, shipbuilding, bridge building and defence segments, along with 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 for private sector orders.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of TWL. The subsidiary, Titagarh Bridges & International Pvt Ltd (TBIPL), was amalgamated with TWL in fiscal 2023.

 

TFA (erstwhile subsidiary and now a joint venture) continues to be not consolidated as the corporate guarantee towards TFA has ceased to exist and the TWL management has articulated that no further financial support will 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.

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 has maintained its leadership position in the segment and accounted for 32% (24,177 wagons) of the orders awarded by IR in May 2022. Access to technical capability through foreign collaborations enhances the business risk profile. TWL is scaling up operations in the passenger train segment with its emergence as L2 bidder in Vande Bharat Trains order by IR.

 

Diversified revenue profile of domestic operations

TWL received its first metro project order from Maharashtra Metro Rail Corporation Ltd for the Pune Metro project in consortium with TFA in August 2019. Furthermore, with access to the latest technology from TFA, TWL is well positioned to bid for large orders for other metro projects. In the freight wagon segment, too, TWL has improved its order book from the private sector to reduce dependence on IR. The company also has presence in the shipbuilding and defence segments. It has successfully launched four ships for the Indian Navy and National Institute of Ocean Technology. During the first nine months of fiscal 2023, segments other than freight wagons contributed around 23% to revenue, compared with 6% in fiscal 2021.

 

Healthy financial risk profile and liquidity

Gearing is likely to increase to ~0.25 time as on March 31, 2023, from 0.12 time as on March 31, 2022, on account of increased working capital requirement. However, steady operating margin has kept debt protection metrics stable with adjusted interest cover (adjusted for notional interest) at 4.5 times in the first nine months of fiscal 2023 compared with 4.6 times in fiscal 2022 (2.8 times in fiscal 2021). Liquidity remains healthy with significant untilised fund-based limits. The financial risk profile is expected to remain healthy backed by steady operating performance, limited capital expenditure (capex) of Rs 80-100 crore in fiscal 2024 and likely moderation in working capital requirement. However, any major debt-funded capex or any debt-led investment will remain a key monitorable.

 

Weaknesses:

Working capital-intensive operations

The large working capital requirement is due to sizeable inventory requirement (86 days as on March 31, 2022). The working capital requirement increased during the first nine months of fiscal 2023, driven by increased execution due to large orders from IR and Pune Metro. Increase in working capital limits, back to back contracts with suppliers, and healthy accrual should help meet the incremental working capital requirement.

 

Dependence on IR to continue

A large portion of revenue is currently derived from wagon orders received from IR. Although lack of steady orders has constrained the topline and operating performance of wagon manufacturers historically, the new order of 24,177 wagons and Vande Bharat order has enhanced revenue visibility for the next 3-4 years. Though TWL has diversified its order book with increased orders from the private sector in the freight segment, Pune Metro and Indian Navy orders, dependence on IR for orders will continue given the sizeable contribution of the client in the business.

 
Exposure to risks relating to fluctuation in raw material prices and competition

The key inputs include steel and related products. While the IR projects generally have a long execution period and are covered by a price-variation clause to a large extent, private sector orders are generally fixed in nature. Hence, to an extent, TWL is susceptible to fluctuations in steel prices during the project execution period. On the other hand, pricing power is restricted as the orders from IR (main customer) are spread across suppliers and are decided based on bids submitted by wagon manufacturers. Although the quantity is allocated as per the supplier's past performance, TWL has to match the prices of the lowest bidder to receive the final order.

Liquidity: Strong

TWL had cash and equivalent of Rs 102 crore as on December 31, 2022, including unencumbered cash of Rs 12.4 crore. Fund-based working capital utilisation averaged 50-60% in the six months through January 2023. The company has increased its overall working capital limits, which are likely to be available from March 2023. The company has scheduled debt obligation of around Rs 33 crore in fiscal 2024 and is likely to generate accrual of more than Rs 100 crore. Expected cash accrual, increase in working capital limits, order-backed contracts with suppliers, and sizeable cash balance will help fund capex and incremental working capital requirement.

Outlook: Stable

CRISIL Ratings believes that TWL’s operating performance will benefit over the medium term from existing healthy order book and sustenance of healthy financial risk profile.

Rating Sensitivity Factors

Upward Factors

  • Timely execution of orders and healthy operating margin leading to interest coverage ratio sustaining above 4.5 times.
  • Strengthening liquidity on account of improvement in the working capital cycle

 

Downward Factors

  • Delay in order execution or weakening operating performance leading to reduction in interest coverage ratio below 3.5 times
  • Weakening liquidity 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 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 equipment. 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 Ratings-adjusted numbers)

As on/for the period ended

9MFY23

March 2022

March 2021

Operating income

Rs crore

1,806

1,482

1,026

Profit after tax (PAT)

Rs crore

50.4

79

50

PAT margin

%

2.79

5.4

4.9

Adjusted debt/adjusted networth

Times

NA

0.12

0.12

Adjusted interest coverage*

Times

4.75

4.63

2.94

*Adjusted for notional interest

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN

Name of instrument

Date of allotment

Coupon rate (%)

Maturity date

Issue size (Rs.Crore)

Complexity level

Rating assigned with outlook

NA

Long Term Loan

NA

NA

Dec-2023

49.52

NA

CRISIL A/Stable

NA

Cash Credit

NA

NA

NA

315

NA

CRISIL A/Stable

NA

Letter of credit & Bank Guarantee

NA

NA

NA

1477

NA

CRISIL A1

Annexure - Rating History for last 3 Years
  Current 2023 (History) 2022  2021  2020  Start of 2020
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 364.52 CRISIL A/Stable   -- 07-12-22 CRISIL A-/Watch Developing 09-08-21 CRISIL A-/Stable 01-04-20 CRISIL BBB/Positive CRISIL BBB/Negative
      --   -- 11-11-22 CRISIL A-/Watch Developing 20-07-21 CRISIL A-/Stable   -- --
      --   -- 02-08-22 CRISIL A-/Positive   --   -- --
Non-Fund Based Facilities ST 1477.0 CRISIL A1   -- 07-12-22 CRISIL A2+/Watch Developing 09-08-21 CRISIL A2+ 01-04-20 CRISIL A3+ CRISIL A3+
      --   -- 11-11-22 CRISIL A2+/Watch Developing 20-07-21 CRISIL A2+   -- --
      --   -- 02-08-22 CRISIL A2+   --   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Cash Credit 20 IDBI Bank Limited CRISIL A/Stable
Cash Credit 10 Bank of India CRISIL A/Stable
Cash Credit 50 Bandhan Bank Limited CRISIL A/Stable
Cash Credit 25 IndusInd Bank Limited CRISIL A/Stable
Cash Credit 25 Union Bank of India CRISIL A/Stable
Cash Credit 55 ICICI Bank Limited CRISIL A/Stable
Cash Credit 50 State Bank of India CRISIL A/Stable
Cash Credit 20 Axis Bank Limited CRISIL A/Stable
Cash Credit 30 Canara Bank CRISIL A/Stable
Cash Credit 30 YES Bank Limited CRISIL A/Stable
Letter of credit & Bank Guarantee 300 IndusInd Bank Limited CRISIL A1
Letter of credit & Bank Guarantee 175 Union Bank of India CRISIL A1
Letter of credit & Bank Guarantee 79.15 YES Bank Limited CRISIL A1
Letter of credit & Bank Guarantee 100 Bandhan Bank Limited CRISIL A1
Letter of credit & Bank Guarantee 155 ICICI Bank Limited CRISIL A1
Letter of credit & Bank Guarantee 80 IDBI Bank Limited CRISIL A1
Letter of credit & Bank Guarantee 111 Syndicate Bank CRISIL A1
Letter of credit & Bank Guarantee 101.5 Bank of India CRISIL A1
Letter of credit & Bank Guarantee 153 State Bank of India CRISIL A1
Letter of credit & Bank Guarantee 171.5 Axis Bank Limited CRISIL A1
Letter of credit & Bank Guarantee 50.85 YES Bank Limited CRISIL A1
Long Term Loan 49.52 IndusInd Bank Limited CRISIL A/Stable

This Annexure has been updated on 06-Mar-23 in line with the lender-wise facility details as on 17-Aug-21 received from the rated entity. 

Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Engineering Sector
CRISILs Criteria for Consolidation

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