Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of Rane Engine Valve Limited (REVL) at ‘CRISIL BBB/Negative/CRISIL A3+’.

 

REVL’s revenues have declined by over 15% in fiscal 2021 due to weak performance in the first quarter of fiscal 2021, following the pandemic induced lockdown. Operating profitability was negative in the fiscal 2021 due to lower revenues, and not withstanding cost reduction initiatives by the company. However, profit of Rs.23 crore on sale of a land parcel, limited losses at net level in fiscal 2021. Debt metrics continue to remain modest due to weak operating profitability. Gearing, though, was adequate at around 1.1 time at March 31, 2021, supported by proceeds from land sale, but is expected to moderate in fiscal 2022, due to continued net losses. With first quarter of fiscal 2022 again likely to get impacted due to shutdowns by original equipment manufacturers on account of lockdowns and aftermarket also likely getting impacted, full recovery is likely to be delayed by a year and company is now expected to break even at net level in fiscal 2023 only. CRISIL Ratings expects REVL to post double digit growth in revenues over the medium term, driven by continued recovery in the domestic auto sector, and healthy export orders. Operating margins are expected to improve to over 5.5% over the medium term due to higher revenues and cost improvement measures taken by the company. Debt metrics though will recover only gradually, while return on capital employed will remain modest.

 

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

Analytical Approach

For arriving at its ratings, CRISIL 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/FAAA/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 over 25% 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 25% of revenues from non-auto product components. This diversity helps in arresting overall decline due to a slowdown in any particular segment.

 

• 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. 4,500 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.

 

Weaknesses:

• Weak operating efficiencies

REVL’s profitability has been constrained in the past 6-7 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 starting to yield benefits as seen in recent quarters. Cost of production is also expected to reduce due to reduction in internal rejections. Company is also slowly modernizing its equipment at plants, all of which is expected to drive improvement in operating efficiency, although improvement is expected to happen only gradually and net losses are expected to continue in near term. Earlier inefficiencies had resulted in volatile margins; profitability ranged between 1.8% and 8.6% in the last 5 years ending fiscal 2020; a small loss of Rs.3 crore was registered in fiscal 2021. Despite high internal rejections, the company has continuously maintained negligible rejections at customers’ side owing to the stringent quality control measures enforced.  Going forward, higher business levels along with cost reduction and productivity improvement measures, will help operating profitability gradually recover to over 5%.

 

• Moderate financial risk profile:

Financial risk profile remains moderate due to low operating margin, weak business cash flows and average debt protection metrics; gearing though was comfortable at 1.1 time estimated as on March 31, 2021. Since fiscal 2013, REVL has been continuously reporting losses before accounting for any extraordinary income from profit on asset sales. As a result, debt protection metrics such net cash accruals to total debt (NCATD) have remained average estimated at 0.15 time, in fiscal 2021.

 

However, the company’s measures to monetise assets as part of its restructuring exercise 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. The company has planned a capital expenditure of about Rs 18 crore in fiscal 2022 to be partly funded from asset sale proceeds of FY21. Part debt funding of capex and continuing net losses, will lead to moderation in gearing levels in the near term. Break-even at net level in fiscal 2023, will be critical for material improvement in financial risk profile.

 

• 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. On a standalone basis, REVL has stretched liquidity due to modest cash flows. Liquidity has benefitted from receipt of asset sale proceeds of ~Rs 23 crore. Cash accruals for fiscal 2022 are expected to be lower compared to the long-term debt repayments of Rs 12 crore; in turn leading to part dependence on refinancing, payment out of unutilised bank lines or by lowering working capital needs. Considering REVL’s strong franchise with lenders, availing funds for refinancing is not expected to be a challenge. Fund-based working capital limits have been utilised at 64% over the past 12 months ending March, 2021. Furthermore, REVL has sizeable land bank, which can be monetised in case of exigencies, as demonstrated in the past.

Outlook: Negative

CRISIL Ratings believes REVL’s business risk profile will gradually recover over the medium term due to better domestic and export demand, resulting in better operating profitability. Net losses are likely to continue over the near term, though on a declining trend, and limit material improvement in the company’s financial risk profile. The Rane group is expected to provide distress support in a timely manner, if required.

Rating Sensitivity factors

Upward factors

• Improvement in credit quality of Rane Group
• Healthy double digit revenue growth and improvement in operating profitability (sustains over 6-7%), 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 higher net losses and impacting cash generation
• Deterioration in key debt metrics; for instance gearing above 1.7-1.9 times, due to higher losses or increase in debt to fund capex /elongation of working capital cycle.

About the Company

REVL incorporated in 1954 is second oldest entity in the Rane group, with group holding company, Rane Holdings Ltd (RHL) having 55% stake (none of the shares are pledged). Other group companies include Rane (Madras) Ltd, Rane Brake Lining Ltd, Rane TRW Steering Systems Pvt 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)

 

 The company reported a net loss of Rs 6 crore for the fiscal 2021 (Rs 16 crore loss for corresponding period of previous fiscal) on revenue of Rs 302 crore (Rs 359 crore).

Key Financial Indicators

Particulars	Unit	2020	2019
Revenue	Rs crore	359	426
Profit after tax (PAT)	Rs crore	-16	-14
PAT margin	%	-4.6	-3.2
Adjusted debt/Adjusted net worth	Times	1.09	1.04
Interest coverage	Times	1.05	1.84

 

Any other information: Not applicable

Annexure - Details of Instrument(s)