Merger With West Rail Limited Will Streamline Operations And Improve Efficiency

Key Takeaways

• Merger and restructuring efforts are expected to enhance operational efficiency and boost revenue by aligning with core business and improving net margins.
  
• Strong financial performance and order book, alongside strategic initiatives, position the company for potential sustainable revenue growth and improved earnings.
  
• Texmaco Rail faces supply chain vulnerabilities, reliance on government orders, competitive challenges, strategic execution risks, and financial pressure from rising costs.

Catalysts

Manufactures, sells, and provides services for rail and rail related products in India and internationally.

• Texmaco Rail & Engineering is expecting to complete a merger with Texmaco West Rail Limited within the next 6 to 8 months, which is anticipated to enhance operational efficiency and streamline the business structure, potentially boosting revenue and net margins.
  
• The transfer of the Infra-Rail and Green Energy business into a 100% subsidiary is expected to be completed within 12 to 15 months, aligning with long-term strategies to focus on core businesses, increasing operational efficiency, and potentially impacting earnings positively.
  
• The company's financials were strengthened by an upgrade in its long-term and short-term bank facilities to CARE A and CARE A1, respectively, reflecting stable financial performance and strong fundamentals likely to support better borrowing terms, which can improve net margins.
  
• The shortage of wheelsets from Indian Railways is being addressed by using imported wheelsets, which resolves a key operational bottleneck and could lead to increased production and revenue in the coming quarters.
  
• Texmaco Rail & Engineering has a strong order book, robust order inflow expectations, and sees significant opportunities in private sector investments and export markets, which can contribute to sustainable revenue growth and improved earnings.

Texmaco Rail & Engineering Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Texmaco Rail & Engineering's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.2% today to 5.7% in 3 years time.
• Analysts expect earnings to reach ₹3.0 billion (and earnings per share of ₹7.19) by about February 2028, up from ₹2.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 54.6x on those 2028 earnings, up from 22.5x today. This future PE is greater than the current PE for the IN Machinery industry at 30.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.58%, as per the Simply Wall St company report.

Texmaco Rail & Engineering Future Earnings Per Share Growth

Risks

• The company's Q3 FY '25 performance was slightly lower than Q2 FY '25 due in part to a shortage of wheelsets from Indian Railways, which affected production capabilities. This supply chain vulnerability could continue to impact revenue and operations if not addressed.
  
• There is a reliance on orders and budget allocations from the Indian government and railways. With current rail budgets remaining flat and uncertainties around future allocations, there is a risk that revenue growth could be impacted by limited order inflows.
  
• The company faces a challenge with respect to competition and geopolitical factors, particularly related to its casting exports to countries like the U.S. Changes in trade policies or international relations could impact revenue from these segments.
  
• The company's plan to expand via mergers and structural changes, such as the transfer of businesses to subsidiaries, involves regulatory processes and significant execution time, which could temporarily affect operational efficiency and financial stability, impacting net margins.
  
• Increasing costs or fluctuating financial expenses, as noted in the interest and other expenses discussions, could put pressure on earnings if not properly managed, especially under current stable or flat revenue conditions.

Valuation

• The analysts have a consensus price target of ₹269.5 for Texmaco Rail & Engineering based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹325.0, and the most bearish reporting a price target of just ₹214.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹52.3 billion, earnings will come to ₹3.0 billion, and it would be trading on a PE ratio of 54.6x, assuming you use a discount rate of 14.6%.
  
• Given the current share price of ₹143.65, the analyst price target of ₹269.5 is 46.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.