Upcoming Mergers And Capacity Expansion Will Streamline Operations And Meet Rising Demand

Key Takeaways

• Mergers and strategic realignment initiatives aim to enhance operational efficiency and drive revenue growth through better business structure and focused segment growth.
  
• Capacity expansion and improved supply chain logistics underscore efforts to meet growing demand, enhancing production capabilities and potentially boosting revenue and margins.
  
• Geopolitical challenges and supply chain constraints pose risks to revenue and margins, while strategic reorganizations could impact financial outcomes and growth stability.

Catalysts

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

• The acquisition and merger of Texmaco West with Texmaco Rail & Engineering Limited, anticipated to conclude in 6 to 8 months, is expected to enhance operational efficiency and streamline the business structure, potentially leading to increased revenue and better net margins.
  
• The strategic transfer of the Infra-Rail and Green Energy segments into a 100% subsidiary within 12 to 15 months aims to focus on future growth in the EPC business, which could drive revenue and improve earnings.
  
• Texmaco Rail's plan to enhance capacity with a new foundry in Odisha by mid-next year, increasing total capacity to 80,000 metric tonnes, could meet both domestic and international demand more effectively, potentially boosting revenue.
  
• With India's government focus on logistics shifts, Texmaco anticipates steady demand for rail freight cars. Expansion in the private sector for specific rail freight solutions could provide meaningful revenue growth.
  
• The introduction of imported wheelsets by April 2026 is expected to resolve supply chain issues, which should allow for uninterrupted production and delivery of orders, positively impacting revenue and potentially improving net margins.

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 March 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 54.7x on those 2028 earnings, up from 22.0x today. This future PE is greater than the current PE for the IN Machinery industry at 28.4x.
• 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 14.62%, as per the Simply Wall St company report.

Texmaco Rail & Engineering Future Earnings Per Share Growth

Risks

• The shortage of wheelsets from Indian Railways impacted production in Q3 FY '25, which reflects supply chain risks that could affect revenue and earnings if persistent.
  
• The absence of an increase in the railway stock budget for the year suggests limited expansion in the TAM (Total Addressable Market) for freight wagons, which could potentially stagnate future revenue growth.
  
• Dependency on imports for wheelsets, mainly from China, and geopolitical factors like tariffs or supply disruptions could increase costs and impact net margins.
  
• Although there's an endeavor to improve, fluctuating financial expenses from interest rates have shown inconsistencies that could continue to affect net margins and earnings stability.
  
• The reorganization processes like the merger with Texmaco West Rail Limited and the transfer of the Infra-Rail and Green Energy business could bring about regulatory or execution risks, possibly affecting financial forecasts and margins.

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 54.7x, assuming you use a discount rate of 14.6%.
• Given the current share price of ₹140.14, the analyst price target of ₹269.5 is 48.0% 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.