Multibagger railway stock jumps 8% as Morgan Stanley initiates coverage with an ‘overweight’ call

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Shares of train part maker Titagarh Rail Systems Ltd. are trading with gains of more than 8% after global brokerage firm Morgan Stanley initiated coverage on the stock with an ‘overweight’ rating. Its price target of ₹1,285 per share implies a potential upside of 24% from the stock’s closing levels on Monday.

Morgan Stanley has now become the ninth brokerage that has a ‘buy’ or equivalent rating on Titagarh Rail Systems, out of the 10 analysts that have coverage on the stock. Morgan Stanley’s price target is also the third highest on the Street after Ashika Stock Broking’s ₹1,350 and Nuvama’s ₹1,309 per share.

Morgan Stanley in its latest note to clients said the freight business has been a cash cow for Titagarh (the market leader), and it should see stronger wagon demand as rail freight share increases in the modal mix.

The brokerage views the passenger coach business as Titagarh’s new growth engine, but it said the market is not yet factoring in its earnings potential. “We expect this growth to be driven by new products (Vande Bharat, Amrit Bharat, and bullet trains) and rising metro demand,” it said.

The foreign brokerage sees strong evidence of a revival in India’s railways and believes Titagarh will be a large beneficiary.

Explaining why Titagarh will be a big beneficiary of the rail theme, Morgan Stanley said, “Titagarh specialises in the design, manufacture, supply, commissioning and servicing of various types of rolling stock and metro coaches. Titagarh’s earnings visibility has been improving, driven by policy initiatives such as ‘AtmaNirbhar Bharat’ and ‘Make in India’.”

The brokerage expects a strong 28% earnings CAGR over FY24-FY27, driven by the execution of order backlog across the freight and passenger businesses. This will be further supported by backward integration, viz: production of the propulsion system (under license from ABB) and manufacture of forged wheel sets (JV with Ramkrishna Forgings), it said.

In the last one year, the Titagarh rail stock has traded at an average of 32 times the one-year forward consensus P/E (price-earnings) peak of 38 times.

Key downside risks to the brokerage’s outlook include slower execution of freight and passenger order book; and lack of new orders leading to lower absorption of fixed costs.

At 9:50 am, the scrip was trading 7.11% higher at ₹1,107.65 on the NSE. The stock also delivered multibagger returns to investors, as it has surged nearly 140 % over the last 12 months.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow