Titagarh Wagons Ltd., a General Electric Co.-backed supplier to the Indian Railways, is seeking railroad orders in Africa to reduce dependence on its home market amid slowing sales.
The wagon maker, which acquired a company in France in 2010, will use that unit to bid for projects on the continent, Managing Director Umesh Chowdhary said in an interview in Kolkata. Titagarh has also filed for patents for wagons it has designed to carry automobiles, he said.
The Indian unit of Standard & Poor’s cut Titagarh’s rating outlook this month and said the view may be revised if the company improves operating margins and diversifies to reduce dependence on Indian Railways. The wagon maker is turning to Africa, where the economy is forecast by McKinsey & Co. to rise to $2.6 trillion by 2020 from $1.6 trillion in 2008.
“Africa is going to be a future market and we are looking for potential in freight markets,” Chowdhary said on Dec. 13. “It is also a risk mitigation process because over the past few years we have seen a bit of an inconsistent wagon purchasing policy by the Indian Railways.”
Profit, excluding at units, fell 79 percent in the six months ended Sept. 30 and sales declined 49 percent after fire at one of its factories disrupted output and inadequate supply of raw materials from the Indian Railways, the company said last month. Net income, excluding units, dropped 5.9 percent in the year ended March 31, the first decline in at least nine years.
Crisil Ltd. cut its rating outlook on the long-term bank facilities to stable from positive, it said Dec. 11.
Shares of Titagarh, which is 12.7 percent owned by GE Capital International (Mauritius), have declined 3.1 percent this year, compared with a 25 percent gain in the key Sensitive Index. Titagarh fell 1.4 percent to close at 369.50 rupees in Mumbai trading.
There are concerns about the benefits for Titagarh from an overseas push.
“Exports are difficult due to high transportation costs, competition with other countries, and because of different gauge requirements,” said Tejas Sarvaiya, an analyst with Trust Financial Consultancy Services Ltd. in Mumbai. “So I doubt whether it will move the needle for the company in the short to medium term.”
Arbel Fauvet Rail, located at Douai in northern France, was acquired by Titagarh two years back and will be leveraged to expand presence in Africa, Chowdhary said. The unit is now called Titagarh Wagons AFR.
“A lot of the West African countries have been French colonies, so that gives us a natural advantage to enter these markets in a resistance-free manner vis-a-vis competition,” said Chowdhary. “We will have a low-cost manufacturing base in India wherein we can do the assembling and have the French company to back us in terms of design and marketing.”
The strategy to expand in Africa could help the company grow, according to Chetan Kapoor, an analyst with IDBI Capital Market Services Ltd. in Mumbai.
“It will be profitable to do business in Africa because it’s not as developed a market,” said Kapoor. “So manufacturing in India and sending it there is a more reasonable option rather than setting up a whole factory there.”
The French company is expected to double its revenue in the current fiscal year ending March 31 from about 20 million euros ($26 million) in the previous 12 months, Chowdhary said.
It has 70 million euros of orders and is negotiating for another 40 million euros of contracts over the next two to three months, he said.
In contrast, the wagon orders on offer from Indian Railways in the current fiscal year shrunk to 16,000 units from 18,000 units budgeted in the previous 12 months.
That’s prompted Titagarh to look at other customers and restructure some businesses to accelerate growth.
Titagarh, set up in 1997, has developed wagons for carrying vehicles and won orders from Maruti Suzuki India Ltd., the nation’s biggest carmaker. The company is talking to more customers for supply of specialized wagons, Chowdhary said.
This segment has a “huge potential” because a small fraction of automobiles produced in India move by rail, compared with about 70 percent in the U.S. and 60 percent in Europe, Chowdhary said.
Last month Titagarh’s board approved separating its rail coaches division into an existing subsidiary of the company and its heavy earth moving and mining equipments division demerged into another unit.
“As of now, these two divisions are really not contributing to the topline or bottomline of Titagarh,” said Chowdhary. “So separating them and putting the thrust to grow would be more logical.”
These changes will help increase the contribution of business from private companies to about 40 percent of total revenue over the next two to three years from about 15 percent, Chowdhary said.