Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of Titagarh Rail Systems Ltd (TRSL) to ‘CRISIL AA-/Stable/CRISIL A1+’ from ‘CRISIL A+/Stable/CRISIL A1’.

 

The ratings upgrade factor in the improved business and financial risk profiles. The business risk profile improvement takes into account better operating efficiency as reflected in higher profitability, healthy execution in the freight wagon segment during fiscal 2024 and presence of diversified order book providing medium term revenue visibility. In fiscal 2024, topline increased 39% year-on-year to Rs  3,853 crore (fiscal 2023: Rs 2,781 crore, fiscal 2022 Rs 1,482 crore) because of healthy execution of large wagons order of Rs 7,800 crore for manufacture of 24,177 wagons received from Indian Railways in May 2022. Further, earnings before interest, tax, depreciation, and amortisation (Ebitda) increased ~73% year-on-year to Rs 452 crore in fiscal 2024 (fiscal 2023: Rs 262 crore, fiscal 2022: Rs 163 crore) and Ebitda margin improved to 11.7% (fiscal 2023: 9.4%, fiscal 2022: 11.0%).

 

The order book of Rs 28,076 crore as on March 31, 2024, provides medium-to-long term revenue visibility based on execution timelines. In year-to-date, TRSL has received projects including Vande Bharat order share (Rs 7,026 crore), Surat Metro order (Rs 858 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 along with substantial reduction in debt resulted in net cash accrual to adjusted debt ratio improving 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 along with fund raise done in fiscal 2024 resulted in adjusted networth increasing from Rs 961 crore as on March 31, 2023 to Rs 2,226 crore as on March 31, 2024. As a result gearing decreased from 0.26 times to 0.03 times for the same period. The company’s debt/Ebitda ratio declined to 0.13 time in fiscal 2024 compared to 0.95 time in fiscal 2023 (0.65 time in fiscal 2022) on account of improved profitability.

 

With orders coming in from the passenger rolling stock segment, the order book composition has also diversified from Freight: Passenger ratio of 89:11 (as on March 31, 2022) to 54:46 (as on March 31, 2024). However, the timelines of passenger rolling stock segment orders vary at around 18 months from receipt of Letter of Acceptance (LOA)) and hence any meaningful contribution to revenue and profitability will come at the end of fiscal 2025. The successful buildup of prototypes under the development stage and execution as per contract timelines along with expected margins would remain a key monitorable.

 

In December 2023, TRSL successfully completed Qualified Institutional Placement (QIP) of Rs 700 crore in addition to the fund raise of Rs 288 crore from PE Fund in July 2023. The total borrowings were reduced to Rs 66 crore as on March 31, 2024 compared to Rs 249 crore a year earlier. The company has cash and cash equivalents of Rs 661 crore as on 31st March 2024 and unutilized fund-based working capital limit of Rs 520 crore adding to the financial flexibility.

 

TRSL has also entered into a JV with Sidwal Refrigeration Industries Pvt Ltd (Sidwal) both of which have infused Rs 100 crore each in special purpose vehicle (SPV)-Shivaliks Mercantile Pvt Ltd (Shivaliks), which has invested Rs 180 crore in Titagarh Firema SpA, Italy (Firema). The SPV Shivaliks is planned to setup a new facility in India to manufacture critical railway components & subsystems used in manufacturing of passenger rolling stock. This investment by TRSL is expected to benefit the company in the form regular supply of HVAC and other components from Sidwal along with export orders from Firema. However, any large infusion in JVs weakening the liquidity profile of TRSL will remain monitorable.

 

While CRISIL Ratings expects a moderate increase in debt over the medium term owing to likely increase in working capital with expected rise in revenue, the credit metrics are projected to remain healthy on account of likely above average profitability resulting in moderate cash accrual. Further, the recent equity raised through QIP resulted in net cash position at end of fiscal 2024. Internal accruals are likely to meet the capital expenditure (capex) requirement over the next 2-3 years.  Further, 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 deterioration in operating performance due to delays in order execution or raw material (RM) supply constraints and delay in clearances will remain monitorable. Further any stretch in liquidity due to a longer working capital cycle, higher-than-expected debt-funded capex or incremental support towards group companies or overseas subsidiaries will also be monitorable.

 

The ratings continue to factor in the 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. These strengths are partially offset by large working capital requirement, significant dependence on the Indian Railways for orders and exposure to volatility in RM 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 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 consolidated 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 a capacity of 12,000 wagons per annum. TRSL has maintained its leadership position in the segment and accounted for 32% (24,177 wagons) of the orders awarded by the Indian Railways in May 2022. Additionally, TRSL received an order for 4,463 wagons awarded by Indian Railways in fiscal 2024. With these orders from the Indian Railways along with outstanding private wagon orders, the current capacity of TRSL is largely tied up for the next two fiscals. Access to technical capability through foreign collaborations also enhances the business risk profile.

 

• Diversified revenue profile of domestic operations: The passenger segment contributed 11% to the topline in fiscal 2024 (19% in fiscal 2023, 13% in fiscal 2022, 5% in fiscal 2021). This is expected to ramp up in fiscal 2025 and 2026 with delivery of Vande Bharat, Bangalore metro, Surat metro and Ahmedabad metro coaches. The current order book composition has changed with Wagon: Passenger ratio improving from 89:11 in fiscal 2022 to 54:46 in fiscal 2024.

 

TRSL 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. TRSL is now bidding for further 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 JV with RFL with guaranteed offtake of 15.4 lakh wheelsets from the Indian Railways for the next 20 years. The JV plans to set up manufacturing capacity of 220,000 wheelsets per annum wherein the remaining capacity will be utilized for captive consumption by TRSL, sale in domestic market as well as exports. 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 and liquidity risk profile: Gearing improved to 0.03 times as on March 31, 2024 from ~0.26 time a year earlier, due to fund raise of Rs 988 crore in fiscal 2024 as well as higher cash accrual. Gearing is expected to remain largely stable over fiscals 2025-2027. Steady improvement in 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. Liquidity remains healthy with fund-based limits of Rs 520 crore largely unutilized 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 along with investments of around Rs 200 crore to be made in a JV set up for manufacturing wheelsets. 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: Operations are working capital intensive, as reflected in high gross current assets and sizeable inventory requirement (60 days as on March 31, 2024; 64 days as on March 31, 2023).  The working capital cycle may remain stretched, driven by current execution of the large railway and metro order. 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 Indian Railways’ orders 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 fluctuations 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 and Ahmedabad Metro as well as the wheelsets order come with a price variation clause, thus protecting margins.

Liquidity: Strong

TRSL had cash and equivalent of Rs 661 crore as on March 31, 2024 and fund-based working capital utilization was minimal in the six months through June 2024. The company is in talks with the lender to increase its non-fund based working capital in line with expected increase in scale of operations. TRSL has scheduled debt obligation of around Rs 12.5 crore in fiscal 2025, which should comfortably be met by internal cash accrual. Expected cash accrual, increase in working capital limit, order-backed contracts with suppliers and sizeable cash balance will help fund capex and incremental working capital requirement.

Outlook: Stable

TRSL’s operating performance will continue to benefit over the medium term from its existing healthy 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 along with ability to maintain overall operating margin above 12% on a sustained basis.
• Prudent working capital management at higher scale of operations with net debt/EBITDA 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 resulting in weakening of 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 Limited) was set up in July 1997 by Mr Jagdish Prasad Chowdhary. It is a leading comprehensive mobility solution provider with presence in India and Italy. The company specializes in manufacturing semi high-speed trains, urban metros, passenger coaches, propulsion equipment, and a wide array of wagons, including specialized ones. 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 tonnes of casting steel, per annum.

Any other information: Not applicable