Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of Rane Engine Valve Limited (REVL) to ‘CRISIL BBB+/Stable/CRISIL A2’ from ‘CRISIL BBB/Stable/CRISIL A3+’.

 

The rating action reflects CRISIL Ratings expectation that REVL sustain double digit revenue growth driven by better offtake from Passenger Vehicles (PV) and Commercial Vehicles (CV) makers. Operating profitability to sustain at 5-6% over the medium term with improved capacity utilisation and continued cost rationalisation measures, benefitting cash generation, and keeping debt metrics at stable levels.

 

In fiscal 2023, REVL’s revenues posted a healthy growth of 29% aided by higher offtake from automobile original equipment manufacturers (OEMs) and steady exports.  Operating profitability improved to 6.9% in fiscal 2023 from 4.7% in fiscal 2022 driven by better capacity utilisation and benefits of various cost rationalisation measures taken by the management. There has been a one off write back in provisions which has improved the operating margins to ~11% in the fourth quarter of fiscal 2023.  The company’s debt metrics, especially Debt/EBITDA and interest cover also improved to 3.99 and 3.58 times in fiscal 2023, from 8.95 times and 1.78 times in fiscal 2022, benefitting from better operating performance. Debt levels also remained under control at ~Rs. 135 crores.

 

The rating also continues to benefit from the improving credit quality of the Rane group, supported by strong performance of its key operating companies, due to strong demand from the automobile sector, and new client additions.

 

Rane Holdings Ltd (RHL), the holding company of Rane group has infused Rs.11.75 crores (Rs.3.75 in fiscal 2022) in order to pursue its capital expenditure (capex) program, employee voluntary retirement scheme and for meeting debt obligations. Further infusion of Rs.3.75 crores is expected before September 2023.  The equity infusion along with improvement in performance, resulting in better cash generation will ensure steady debt protection metrics, despite modest debt funded capex.

 

The ratings continue to reflect REVL’s healthy market position in India's automotive (auto) engine valves segment, diversified revenue profile, moderate though improving financial risk profile and benefits derived from being part of the Rane group. These strengths are partially offset by modest operating efficiencies, exposure to demand cyclicality and pricing pressure on account of large exposure to automobile OEMs.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has considered the standalone business and financial risk profiles of REVL. CRISIL has also factored in support from the Rane group, since REVL is an integral part of the group and holds sizeable portion of the group’s land bank. The group is also expected to extend financial support in case of exigencies.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy market position

REVL is among the oldest and leading players in the domestic auto engine valves market and has around 35% market share. Further, the company has long-standing relationship with leading auto OEMs, namely Hero MotoCorp Ltd (CRISIL AAA/Stable/CRISIL A1+), Hyundai Motor India Ltd (CRISIL AAA/Stable/CRISIL A1+), TVS Motor Co Ltd, Mahindra & Mahindra Ltd (M&M; rated CRISIL AAA/Stable/CRISIL A1+), Cummins India Ltd and BMW India Pvt Ltd. REVL’s healthy market position is also reflected in the high share of business enjoyed with each of its customers.

 

• Diversified revenue profile

REVL also has a diversified revenue profile with presence across market segments, namely domestic OEMs, aftermarket and exports. While domestic OEMs account for ~ 60-65% of revenue, exports account for around 30% and balance is from domestic aftermarket. Even within the OEMs, REVL exhibits further diversity and caters to passenger vehicles (PV), commercial vehicle (CV), and two-wheeler (2W) segments. Besides, REVL also derives around 29% of revenues from non-auto product components. The diversity will help in mitigating exposure to concentration and EV transition risks and support revenue visibility over the medium term.

 

• Moderate financial risk profile

Financial risk profile is moderate due to losses at PAT level since fiscal 2018. However, the company’s measures to monetise assets as part of its restructuring exercise, and a slight improvement in operating performance, have significantly benefited capital structure. REVL realised in excess of Rs 180 crore as profit from asset sale between fiscals 2015 and 2021 and this in turn enabled debt reduction, despite continuing losses at PAT level. Gearing was comfortable at 1.3 time estimated as on March 31, 2023, while interest cover also improved in fiscal 2023, due to better operating performance. The company has also been funding its capital expenditure plans through part debt resulting in sustenance of debt levels despite the progressive repayments.

 

The Rane group has also infused equity of Rs.11.75 crores in fiscals 2022 and 2023 and is expected to infuse another Rs.3.75 crore by September 2023; these infusions have supported net worth.

 

The company has planned a capital expenditure of about Rs 30 crore in fiscal 2024 to be partly debt-funded. Besides, its VRS programme is expected to continue until fiscal 2025 which will constrain the accretion to reserves limiting improvement in networth. Hence, gearing is likely to remain over 1 time in the near to medium term also.

 

• Benefits derived from being part of the Rane group

REVL is part of the Chennai-based Rane group of companies, which has a consolidated turnover of ~Rs. 4,800 crore and is into diverse product segments within the automotive component industry, such as steering components, engine valves and brake components. Further, the group also has a vintage of more than 80 years as a result of which it has forged strong ties with leading OEMs in India and abroad. Being part of the Rane group, REVL leverages on the ‘Rane’ brand name and also holds a significant portion of the land bank of the group. The group is also expected to extend financial support in case of exigencies. About Rs.15 crores of equity is being infused into REVL between fiscals 2022 and fiscal 2024; Rs.3 crore is pending to be infused before September 2023.

 

Weaknesses:

• Modest operating profitability

REVL’s profitability has been constrained in the past 5-6 years due to sub-optimal utilisation, high employee costs and weak production efficiencies. The company operates across 5 plants and operations are labour-intensive. Restructuring measures in the recent years to consolidate plant operations and change work-force mix to reduce wages are yet to accrue any significant benefits. While certain measures such as plant automation/modernisation and quality control initiatives over the past few years have started yielding results, covid induced demand slowdown and cost inflations over-shadowed the benefits in fiscals 2021 and 2022. With normalisation of operations and healthy demand from OEMs, benefits of these measures have accrued  from fiscal 2023 onwards leading to improvement in operating profitability (6.9% from 4.7% in fiscal 2022). CRISIL Ratings expects REVL’s operating profitability to stabilise at 5.5-6% over the near to medium term.

 

• Exposure to demand cyclicality and pricing pressures from OEMs in automobile industry  

REVL’s high dependence on the OEM segment, renders its performance partly vulnerable to the inherent cyclicality in the automobile industry and to any prolonged slowdown therein. However, revenue from aftermarket and exports provide some respite; besides presence across OEM sub segments is also expected to lend stability to business. Besides, REVL’s margins are also susceptible to pricing pressure from its OEM counterparts. While the company has recently negotiated price escalation in contracts with OEMs, which will aid in margin improvement, any substantial increase will be constrained given the limited pricing flexibility and competition.

Liquidity: Adequate

Liquidity is adequate and driven largely by expected timely funding support from the group in case of exigencies.  REVL’s liquidity situation improved in fiscal 2023 due to better cash generation and equity infusion from RHL. Cash accruals are expected to be adequate compared to debt obligations of Rs. 16cr and Rs.15 Cr  in fiscals 2024 and 2025, supported by expectation of steady performance.

 

Considering REVL’s strong franchise with lenders, availing funds for refinancing is not expected to be a challenge. Further, fund-based working capital limits have been utilised at 60% over the past 12 months ending March 2023. Furthermore, REVL has sizeable land bank, which can be monetised in case of exigencies, as demonstrated in the past.

Outlook: Stable

CRISIL Ratings believes REVL’s business risk profile will benefit over the near term due to steady demand for components, and focus on enhancing operating efficiencies, but continuing VRS programme will constrain the PAT.  The financial risk profile is likely to remain at moderate levels.

Rating Sensitivity factors

Upward factors

• Improvement in credit quality of Rane Group
• Sustained revenue growth and improvement in operating profitability to over 8-9%, aiding faster break-even at net profit level
• Improvement in key debt metrics, including due to equity infusions, better working capital management, or utilization of sale proceeds of non-core assets to reduce debt.

 

Downward factors

• Deterioration in credit quality of Rane Group or change in support philosophy towards REVL
• Weaker than expected business performance, leading to operating profitability below 4%, impacting cash generation
• Deterioration in key debt metrics; due to higher losses, debt funded capex or elongation of working capital cycle leading to gearing above 1.6-1.8x times

About the Company

REVL incorporated in 1954 is second oldest entity in the Rane group, with group holding company, Rane Holdings Ltd (RHL) having 57.28% stake (none of the shares are pledged). Other group companies include Rane (Madras) Ltd, Rane Brake Lining Ltd, ZF Rane Automotive India Private Ltd (joint venture), Rane NSK Steering Systems Ltd (joint venture) and Rane t4u Pvt Ltd.

 

REVL is into manufacturing of engine valves, predominantly used in the automotive industry. The company has diverse presence in both domestic and export markets and has established tie-ups with leading OEMs. REVL has five manufacturing units based in South India at Ponneri and Tiruchirapalli (Tamil Nadu), Tumkur (Karnataka), and Aziz Nagar and Medchal (Telangana)

Key Financial Indicators

Particulars	Unit	2023	2022
Revenue	Rs crore	500	385
Profit after tax (PAT)	Rs crore	0	-12
PAT margin	%	0.0	-3.1
Adjusted debt/Adjusted networth	Times	1.31	1.32
Interest coverage	Times	3.58	2.08

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs. Cr)	Complexity level	Rating Assigned with Outlook
NA	Term Loan	NA	NA	22-Jan-25	11.30	NA	CRISIL BBB+/Stable
NA	Term Loan	NA	NA	26-Jan-26	11.86	NA	CRISIL BBB+/Stable
NA	Term Loan	NA	NA	30-Mar-26	10.54	NA	CRISIL BBB+/Stable
NA	Term Loan	NA	NA	31-Aug-26	6.00	NA	CRISIL BBB+/Stable
NA	Term Loan	NA	NA	14-Feb-24	19.00	NA	CRISIL BBB+/Stable
NA	Term Loan	NA	NA	29-Mar-29	11.25	NA	CRISIL BBB+/Stable
NA	Term Loan	NA	NA	30-Jun-27	15.00	NA	CRISIL BBB+/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	21.00	NA	CRISIL BBB+/Stable
NA	Fund & Non Fund Based Limits	NA	NA	NA	112.50	NA	CRISIL BBB+/Stable
NA	Proposed Short Term Bank Loan Facility	NA	NA	NA	1.55	NA	CRISIL A2