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Disappointed with unchanged budget for wagons by the Indian Railways (IR),
investors sold TWL shares last week. We think a 20% sell off is unwarranted
as unchanged budget of 18k wagons is big enough to increase TWL’s backlog
by 40% and secure our FY12/13F earnings. Note that IR is yet to release
orders for 6k wagons from last year's budget. TWL is now trading at low PER
of 6.2x FY12F ‐ very cheap given FY12 earnings growth of 35% and strong B/S.
Current backlog of Rs5bn secures Q4 revenue growth of 70% Y/Y
In M9, TWL recorded 60% of our FY11F sales volume of 3,000 wagons. Since
then, TWL’s order book has doubled as it secured new orders from IR in last 3
months providing confidence that it will meet our FY11 revenue of Rs7.1bn
(+30%).
40% rise in budgeted spending assures new orders won’t be delayed
Last week, IR increased FY12 budgeted spending by 40% to Rs576bn – to be
funded 40% by gov’t receipts and balance from internal CF/debt. With more
funds at its disposal, IR would issue wagon orders for FY12 (18k) and carried
forward from previous year (6k). Wagons are key drivers for freight revenue
which IR targets to rise by 7% to 990m tones in FY12.
New order of 2,200 wagons in H1FY12F
Based on TWL’s past market share of 12%, we forecast new orders of 2,200
wagons if IR uses its full FY12 budget allocation. This is key to our FY12F sales
volume of 3,680 wagons (+25%). IR accounts for 80% of revenue, balance
comes from private sector. TWL has current backlog of 2,500 wagons –
including FY11 IR orders of 2,200.
High‐margin IR orders helping GM rise 300bp to 24%
IR work offers GM of 25% vs 15% from the private sector. Increased
proportion of work from IR raised GM to 23% in 9M (FY10 GM was 20.8%).
We expect GM to rise to 25% in Q4 (100% sales from IR).
FY11F EPS +23%, FY12F +35%
There is 10% potential upside to our FY12F EPS from possible larger
contribution from subsidiary, Cimco Birla. It will sell 1,700 wagons to IR in
FY12. Our share TP of Rs733 is based on PER of 14x FY12F – its currently trading
at low PER of 6.2x FY12F.
Sensitivity analysis
Sensitivity matrix (FY12F) Change in EPS (%)
Sales (base case ‐ Rs10.2bn)
Impact of 5% price change 11
Impact of additional 400 wagons (base case ‐
3,680 wagons) 8
Gross margin (base case ‐ 23.9%)
Impact of 100bp change 7
Source: Company data
Rising steel/aluminum costs will not hurt TWL’s GM as its work has pass
through clause. According to our sensitivity analysis, a 5% change in
selling price affects EPS by 11%.
If TWL secures more‐than‐expected IR orders, there will be earnings
upgrades from analysts. We estimate that sale of additional 400 wagons
has a +ve impact of 8% on TWL’s EPS.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Disappointed with unchanged budget for wagons by the Indian Railways (IR),
investors sold TWL shares last week. We think a 20% sell off is unwarranted
as unchanged budget of 18k wagons is big enough to increase TWL’s backlog
by 40% and secure our FY12/13F earnings. Note that IR is yet to release
orders for 6k wagons from last year's budget. TWL is now trading at low PER
of 6.2x FY12F ‐ very cheap given FY12 earnings growth of 35% and strong B/S.
Current backlog of Rs5bn secures Q4 revenue growth of 70% Y/Y
In M9, TWL recorded 60% of our FY11F sales volume of 3,000 wagons. Since
then, TWL’s order book has doubled as it secured new orders from IR in last 3
months providing confidence that it will meet our FY11 revenue of Rs7.1bn
(+30%).
40% rise in budgeted spending assures new orders won’t be delayed
Last week, IR increased FY12 budgeted spending by 40% to Rs576bn – to be
funded 40% by gov’t receipts and balance from internal CF/debt. With more
funds at its disposal, IR would issue wagon orders for FY12 (18k) and carried
forward from previous year (6k). Wagons are key drivers for freight revenue
which IR targets to rise by 7% to 990m tones in FY12.
New order of 2,200 wagons in H1FY12F
Based on TWL’s past market share of 12%, we forecast new orders of 2,200
wagons if IR uses its full FY12 budget allocation. This is key to our FY12F sales
volume of 3,680 wagons (+25%). IR accounts for 80% of revenue, balance
comes from private sector. TWL has current backlog of 2,500 wagons –
including FY11 IR orders of 2,200.
High‐margin IR orders helping GM rise 300bp to 24%
IR work offers GM of 25% vs 15% from the private sector. Increased
proportion of work from IR raised GM to 23% in 9M (FY10 GM was 20.8%).
We expect GM to rise to 25% in Q4 (100% sales from IR).
FY11F EPS +23%, FY12F +35%
There is 10% potential upside to our FY12F EPS from possible larger
contribution from subsidiary, Cimco Birla. It will sell 1,700 wagons to IR in
FY12. Our share TP of Rs733 is based on PER of 14x FY12F – its currently trading
at low PER of 6.2x FY12F.
Sensitivity analysis
Sensitivity matrix (FY12F) Change in EPS (%)
Sales (base case ‐ Rs10.2bn)
Impact of 5% price change 11
Impact of additional 400 wagons (base case ‐
3,680 wagons) 8
Gross margin (base case ‐ 23.9%)
Impact of 100bp change 7
Source: Company data
Rising steel/aluminum costs will not hurt TWL’s GM as its work has pass
through clause. According to our sensitivity analysis, a 5% change in
selling price affects EPS by 11%.
If TWL secures more‐than‐expected IR orders, there will be earnings
upgrades from analysts. We estimate that sale of additional 400 wagons
has a +ve impact of 8% on TWL’s EPS.
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