Detailed Rationale

CRISIL Ratings has assigned its 'CRISIL A+/Stable/CRISIL A1' ratings to the bank facilities of Rajratan Global Wire Ltd (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 promoter and reputed and diverse clientele. The rating also factors 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 Rajratan group is a leading TBW manufacturer with facilities in key markets of India (60,000 tonne per annum [TPA]) and Thailand (40,000 TPA, likely to increase by 50% in fiscal 2022). The group benefits from its long track record in the TBW industry and established association with, and approvals from, key tyre manufacturers in domestic and overseas markets. It derives around 80% revenue from the domestic business while the remaining comes from export. It also benefits from limited large players amid high entry barriers. The group registered revenue growth of over 17% in compounded terms in the four fiscals through 2021, while operating margin remained at 11-17%. Furthermore, it has ramped up operations in Thailand in the past four years, supported by increasing product approvals and diversifying clientele. The group is likely to benefit from strong end-user industry demand over the medium term amid recovery in the automobile (auto) industry and economy, healthy demand for tyres and planned capacity enhancements by tyre manufacturers. The TBW capacities of the group are almost optimally utilised currently; it reported steady operating performance in the first quarter of fiscal 2022 despite challenges on account of the second wave of Covid-19.

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), together referred to as the Rajratan group, as the companies are in the same business and have financial fungibility.

 

Please refer Annexure - Details of Consolidation, 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 market share of about 50%, and is the sole large 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 Kern SRO. 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 export to Sri Lanka, Vietnam, Finland, Sweden and Indonesia. Diversity in geographic reach and clientele should continue to support the business.

 

Furthermore, high 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 improving operating performance. Networth was healthy at Rs 221.88 crore, and gearing and total outside liabilities to adjusted networth ratio were comfortable at 0.64 time and 0.96 time, respectively, as on March 31, 2021. The capital structure has improved in the past three fiscals owing to build up in networth and steady debt. The debt to Ebitda (earnings before interest, tax, depreciation and amortisation) ratio was moderate at 1.52 times as on March 31, 2021. Debt protection metrics were strong, reflected in interest coverage and net cash accrual to total debt ratios of 7 times and 0.42 time, respectively, in fiscal 2021.

 

The group is expected to incur capex of over Rs 100 crore per annum over the medium term. In the current fiscal, it is enhancing the capacity of the Thailand facility to 60,000 TPA from 40,000 TPA at a cost of Rs 60 crore. Further, the group also plans to incur Rs 250-275 crore capex for a greenfield capacity of 60,000 MTPA in Chennai. The project is likely to be commissioned over the next 3-4 years in a phased manner. Nonetheless, the financial risk profile should remain healthy, supported by healthy cash accrual, low gearing and phase-wise commissioning of the project. Gearing is expected to remain comfortable at 0.8 time while the debt to Ebitda ratio is expected below 1.75 times despite the capex.

 

Efficient working capital management: Gross current assets (GCAs) were 119-89 days over the three fiscals ended March 31, 2021, driven by moderate inventory and receivables. Credit available on procurement aids the group to effectively manage its working capital cycle.

 

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 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 of operating margin to volatility in raw material prices: Prices of steel, copper and zinc are volatile. As raw material cost comprises 60% of operating income or cost of manufacturing, the 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 3 months.  

     

Exposure to project risks: The group plans to set up a large unit in Chennai for Rs 250-300 crore. Though the project will be commissioned in a phased manner, completion and stabilisation risks persist.

Liquidity: Adequate

Liquidity will remain adequate over the medium term driven by expected healthy cash accrual against debt obligation and moderately utilized bank lines. Bank limit utilization was moderate at around 57% for the 12 months through July 2021. Expected cash accrual of Rs 85-110 crore per annum will sufficiently cover yearly term debt obligation of Rs 12-16 crore over the medium term. Cash flows remained positive in the past four fiscals. Current ratio was adequate at 1.28 times as on March 31, 2021. Nonetheless, the group will undertake sizeable capex over the next 3-4 years and maintaining steady liquidity will be critical.

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 1,000 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 12,000 TPA of carbon steel wire capacity. The company is listed on 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.

Key financial indicators (consolidated)

As on / for the period ended March 31		2021	2020
Operating income	Rs crore	547.38	481.34
Reported profit after tax (PAT)	Rs crore	53.13	33.04
PAT margin	%	9.71	6.86
Adjusted debt / adjusted networth	Times	0.64	0.86
Interest coverage	Times	6.98	5.12

 

For the quarter ended June 30		Q1-2022	Q1-2021
Operating income	Rs crore	182.29	64.65
Reported PAT	Rs crore	21.92	1.65
PAT margin	%	12.02	2.55
Adjusted debt / adjusted networth	Times	--	--
Interest coverage	Times	--	--

 

Any other information: Not applicable