Detailed rationale

CRISIL Ratings has reaffirmed its 'CRISIL A+/Stable/CRISIL A1' ratings on the bank facilities of Rajratan Global Wire Limited (Rajratan India; part of the Rajratan group).

 

The rating reflects the group's strong market position in the tyre bead wire (TBW) industry backed by established presence in India and Thailand, experienced promoters and reputed and diverse clientele. The ratings also factor in a healthy financial risk profile supported by comfortable capital structure and strong debt protection metrics. These strengths are partially offset by exposure to cyclicality in demand from end-user industry, susceptibility of operating margin to volatility in raw material prices and exposure to project risks.

 

The group recorded overall operating income and operating profitability margin of Rs 894 crore and 20.45% in fiscal 2022 as against Rs 547 crore and 17.07%, respectively, the previous fiscal. The revenue growth of around 63% in fiscal 2022 was driven by strong demand from tyre original equipment manufacturers (OEMs) across markets, while profitability was supported by increasing realisations and better absorption of fixed costs. In fiscal 2023, group has started witnessing demand pressure from Q2-2023 on account of dip in demand in export markets mainly Europe and USA. Demand pressure is more evident for the Thailand unit as it is more dependant on exports.

 

Financial risk profile continues to be healthy, driven by limited reliance on external debt owing to strong cash flow from operations. Though the company has been regularly incurring capital expenditure (capex), reliance on debt has been minimal. Furthermore, working capital cycle is managed efficiently, reflected in negligible debtors and moderate inventory.

 

The group is setting up a 60000 MT TBW capacity at Chennai at a total cost of Rs 300 crore for which debt of almost Rs 100 crore would be availed. The project is expected to be completed fully before March 2025. The first phase of the project with 30000 MT bead wire capacity is expected to be operational in the second half of fiscal 2024. The project is being funded in debt to equity of 1:2 and because of limited debt, it is not expected to impact key financial metrics. Nonetheless, project related risks exist.

Analytical approach

CRISIL Ratings has combined the financial and business risk profiles of Rajratan India and its wholly owned subsidiary, Rajratan Thai Wire Company Ltd (Rajratan Thailand), collectively referred to as the Rajratan group, as the companies are in the same business and have financial fungibility.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key rating drivers and detailed description

Strengths:

Strong market position in the TBW business backed by experienced promoter: The group is a leading manufacturer of TBW in India with a sizeable market share and is the sole TBW manufacturer in Thailand. Aided by its large capacity and long track record, the group has been increasing its wallet share with key customers, leading to rise in market share. The group has established strong relationships with key customers, such as MRF Ltd, Apollo Tyres, CEAT Ltd and Bridgestone Tyres in India, and also has reputed clientele in Thailand, such as Sumitomo Rubber (Thailand) Co Ltd and Yokohama Tire. The capacity in Thailand meets local demand from the tyre hub of Thailand and exports to nearby countries. The group derives 17-20% of its revenue from exports to Sri Lanka, Vietnam, Finland, Sweden, and Indonesia. Diversity in geographical reach and clientele along with enhanced capacities should continue to support the business.

 

Furthermore, significant entry barriers in the industry owing to a long product approval phase, given the criticality of TBW in safety, and large capital cost in setting up new capacity mean that established market players such as the Rajratan group shall benefit from the rising demand.

 

The group also benefits from the extensive experience of the promoter. The key promoter, Mr Sunil Chordia, Managing Director, has over two decades of experience in the TBW industry. His experience was instrumental in ramping-up operations in Thailand and increasing capacities.

 

Healthy financial risk profile: The financial risk profile has improved over the years despite capital expenditure (capex), supported by enhanced operating performance. Networth was healthy at Rs 336 crore and gearing and total outside liabilities to adjusted networth ratios comfortable at 0.41 and 0.82 time, respectively, as on March 31, 2022. The capital structure has improved in the past three fiscals owing to build-up in networth and steady debt level. Debt protection metrics were strong, reflected in interest coverage and net cash accrual to total debt ratios of 12 times and 0.96 time, respectively, in fiscal 2022, supported by strong operating profitability.

 

In the current fiscal, it is enhancing the capacity of the Thailand facility to 60,000 tonne per annum (TPA) from 40,000 TPA, which will soon be operational. Further, the group is incurring a large project capex for a greenfield capacity of 60,000 MTPA in Chennai. The total cost envisaged at about Rs 300 crore will be debt-funded to the tune of Rs 100 crore and the project will be completed before March 2025. Given the limited reliance on debt for the capex, financial risk profile is expected to remain healthy over the medium term.

 

Efficient working capital management: Gross current assets (GCAs) were 89-119 days over the three fiscals ended March 31, 2022, driven by moderate inventory and receivables. Credit available on procurement supports prudent working capital management.

 

Weaknesses:

Exposure to cyclical end-user industry demand: Performance is linked to demand for tyres. Generally, 70% of the tyre demand comes from the replacement market, while the remaining comes from new vehicles. The demand for tyres is linked to the performance of the auto industry and overall economy. As the auto industry is cyclical, exposure to this industry will continue to constrain the business risk profile. Strong and sustained revenue growth and maintenance of steady operating margin remain critical in various business cycles. Further, the business is also dependent on tariffs and trade restrictions. Any unfavourable change in tariff or trade restriction may impact the group's income and earnings.                

                      

Susceptibility to volatility in raw material prices: Prices of steel, copper and zinc the primary raw materials are volatile. As raw material cost comprises 60% of operating income or cost of manufacturing, operating margin is susceptible to sharp adverse movement in input prices. However, the group can pass on price increases to customers with a lag of about three months.  

     

Exposure to project risks: The group is executing a large capex of Chennai project in a phased manner. Completion and stabilisation risks relating to the project persist.

Liquidity: Adequate

Liquidity will remain adequate over the medium term driven by expected healthy cash accrual against debt obligation and moderately utilised bank lines. Expected cash accrual of Rs 110-125 crore should comfortably cover term debt obligation of Rs 25-30 crore and support liquidity. Bank limit utilisation was moderate for the 12 months through October 2022. Current ratio remained adequate at 1.34 times on March 31, 2022.Cash flow from operations remained positive. Low gearing and healthy networth support financial flexibility.

Outlook: Stable

CRISIL Ratings believes Rajratan India will continue to benefit from the extensive experience of the promoter and established relationships with clients.

Rating sensitivity factors

Upward factors

• Steady increase in revenue to Rs 1000 crore and above and stable operating margin, leading to higher cash accrual
• Maintenance of healthy financial risk profile and liquidity

Downward factors

• Debt to Ebitda ratio over 1.75 times consistently
• Decline in operating income or operating margin, leading to lower-than-expected cash accrual
• Larger-than-anticipated capex, or stretch in the working capital cycle

About the group

Rajratan India was incorporated in 1988 as Rajratan Wires Pvt Ltd by Mr Sunil Chordia and commenced commercial production in 1991. The company got its current name in 2004. It manufactures TBWs and supplies to tyre manufacturers in India. The manufacturing unit is located in Pithampur, Madhya Pradesh, and has TBW capacity of 60,000 TPA and carbon steel wire capacity of 12,000 TPA. The company is listed on the Bombay Stock Exchange.

 

Rajratan Thailand, based in Thailand, was incorporated in 2006. It also manufactures tyre beads. It was set up to serve Thailand-based clients and emerging markets. Thailand is the largest producer of rubber, and hence, it is the hub of all major tyre manufacturers. Rajratan Thailand operates one plant in Ratchaburi with capacity of 40,000 MTPA.

Any other information: Not applicable

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity  levels	Rating assigned with outlook
NA	Cash credit	NA	NA	NA	90.25	NA	CRISIL A+/Stable
NA	Standby line of credit	NA	NA	NA	15	NA	CRISIL A1
NA	Term loan	NA	NA	Mar-29	146.28	NA	CRISIL A+/Stable
NA	Proposed Letter of Credit	NA	NA	NA	1.47	NA	CRISIL A1
NA	Letter of credit	NA	NA	NA	70	NA	CRISIL A1