Detailed Rationale

CRISIL Ratings ratings on the bank facilities of Rane (Madras) Limited (RML) continue to reflect RML’s leading position in India's automotive steering components segment, diversified revenue profile, and benefits derived from being part of the Rane group. These rating strengths are partially offset by sizeable investments in domestic and overseas die casting business and slower than expected commensurate returns and moderate financial risk profile. RML also remains exposed to demand cyclicality and pricing pressure on account of large exposure to automobile original equipment manufacturers (OEMs).

 

RML’s performance in fiscal 2021 has been impacted on account of subdued performance in first quarter of fiscal 2021, and continuing sub-par performance of its overseas subsidiary, Rane Precision Die Casting Inc, USA (RPDC), due to weak orders. Though RML’s revenues registered healthy growth during the second half of fiscal 2021, as demand from the automotive sector revived, a 67% decline in revenues in the first quarter over corresponding period of fiscal 2020, resulted in overall revenues for the year registering a modest decline. Operating profitability remained modest at ~4%, due to continuing losses at RPDC.

 

While the second covid wave may impact part of the recovery in revenues expected in fiscal 2022, RML remains well positioned to benefit from better demand from OEMs, as reflected in strong order inflows for existing and new products especially in the Die Casting Division. Diversity with respect to segments within the automotive sector and presence in aftermarket segment also augur well for the business performance.

 

However, despite equity infusion of ~Rs. 55 crore in fiscals 2021 from parent and group holding company– Rane Holdings Ltd (RHL), RML’s gearing is expected to remain higher than earlier estimated, at over 2 times at March 31, 2021, while key debt metrics have also moderated due to debt funded capex in RPDC and weak operating performance. Gearing is expected to remain elevated due to capex being planned in RML’s India operations to cater to new orders won recently

Analytical Approach

For arriving at its ratings, CRISIL Ratings has fully consolidated the business and financial risk profiles of RML and its subsidiaries, RPDC and Rane (Madras) International Holdings B V, Netherlands (RMIH), as these entities have operational linkages. CRISIL has also factored in support from the Rane group, since RML is the flagship entity and is an integral part of the group and also derives synergies from group.

 

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

Key Rating Drivers & Detailed Description

Strengths

Leading position in India’s auto steering market

RML is a leading player in the domestic steering market with strong presence in mechanical steering gears and hydrostatic gear systems. Further, RML has long standing relationship with marque clients across vehicle segments, namely Maruti Suzuki India Ltd (MSIL; rated CRISIL AAA/Stable/CRISIL A1+), Tata Motors Ltd (TML; rated CRISIL AA-/Stable/CRISIL A1+), Tractors and Farm Equipment Limited (TAFE; rated CRISIL AA+/Stable/CRISIL A1+), Mahindra & Mahindra Ltd (M&M; rated CRISIL AAA/Stable/CRISIL A1+) etc. Supported by its established presence, RML has managed to make significant in-roads in terms of share of business with its customers by bagging new significant orders. Besides, in-house capabilities have enabled the company to make product improvements in line with the requirement of its key customers and sustain its healthy market position despite competition from established peers like Z.F. Steering Gear (India) Ltd and JTEKT India Ltd.

 

Diversified revenue profile

RML has healthy revenue diversity, marked by presence across all segments of the automotive component sector— domestic OEM, aftermarket and exports, with domestic OEMs accounting for ~60-65% of revenues. Within OEMs, RML caters to the passenger vehicles, commercial vehicle (CV), and tractor segments. Besides, the company also derives about 15-20% of revenues from die-casting components sold to domestic and export customers. RML’s revenues have registered a healthy compound annual growth rate of 20% between fiscals 2016 and fiscals 2019 to ~Rs.1555 crore, supported by healthy demand from end-customer segments and acquisition of RPDC.  While revenues have been subdued in fiscals 2020 and 2021 in line with double digit revenue decline registered by automotive OEMs, CRISIL expects RML to post healthy double digit revenue growth over the medium term, supported by better demand from OEM’s and new orders won.

 

Benefits derived from being part of the Rane group

RML is the flagship entity of the Chennai based Rane group of companies. The Rane group has a consolidated turnover of ~Rs. 4,500 Cr and is into diverse product segments within the automotive component industry, namely steering components, engine valves, brake components etc. 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.

 

RML also benefits from the business synergies it derives from other group entities, which augment the product offerings to OEMs. Being part of the Rane group, RML leverages on the ‘Rane’ brand name. Financial assistance has also been demonstrated with RHL infusing equity of Rs 65 crore in fiscal 2018, Rs 15 crore in fiscal 2019, Rs 55 crore in fiscals 2021 and another Rs 30 crore expected in fiscal 2022 to support operations at RML, including part funding capex. Supplies of components along with those of other group companies to common customers, also helps RML rationalise on freight costs.

 

Weaknesses

Sizeable investments in domestic and overseas die casting business and slower than expected commensurate returns

RML had made sizeable investments towards expansion in its domestic die casting division in fiscals 2016 and 2017. However, ramping up of facilities has been slower than expected due to volatile end-user demand resulting in the division making net losses over the last 2 years. While the company is taking measures to tie-up businesses to enhance utilisation levels, improvement is likely to be only gradual.

 

Besides the strategic acquisition of continually loss-making, RPDC, in fiscal 2016, also exerted some pressure on returns. The subsidiary was envisaged to have a turnaround time of 4-5 years. Between fiscals 2017-2021, RPDC registered net losses of over Rs. 175 crores. While initial losses were due to restructuring iniatives taken by RML’s management, weak off-take from a leading customer, have resulted in low revenue levels at RPDC in the past two years, resulting in continuing losses. The company is expected to break-even only in fiscal 2023, if revenues recover.

 

RML’s return on capital employed (RoCE) declined to less than 8-10% between fiscals 2015 and 2017 as compared to over 17% prior to fiscal 2013; owing to the expansion in domestic die casting division and RPDC acquisition. CRISIL expects RoCE to remain subdued at less than 5% over the medium term, due to losses in RPDC and part-debt funded capex in RML.

 

Moderate financial risk profile

RML’s financial risk profile remains moderate marked by gearing of over 2 times estimated as of March 31, 2021. Equity infusion from the group’s holding company (Rs 65 crore in fiscal 2018, Rs 15 crore in fiscal 2019 and Rs 55 crore in fiscal 2021) and prudent working capital management had led to steep improvement in gearing from a peak of 2.5 times on March 31, 2016. However, going forward, with capex expected to be higher at ~Rs 130-140 crore in fiscal 2022, which will be mostly debt-funded and expected modest annual cash generation, gearing is expected to remain elevated over 2 times over the medium term. Debt protection metrics such as net cash accruals to total debt (NCATD) and interest coverage ratios will continue to remain subdued in fiscal 2022 also.  

 

Exposure to demand cyclicality and pricing pressures from OEMs in automobile industry    
RML’s high dependence on the OEM segment, renders its performance partly vulnerable to the inherent cyclicality in the automobile industry and any prolonged slowdown, particularly in the CV segment. However, revenue from aftermarket and exports provide some respite; besides presence across OEM sub segments is also expected to lend certain level of stability to business.

 

Raw material costs account for a substantial portion of revenue, while about two-thirds of revenue is derived from auto OEMs. Operating profitability is moderate at less than 10% due to limited pricing power and losses from die-casting business. Operating profitability is expected to remain range bound at similar levels over the medium term, due to high competitive intensity, which will largely offset gains from higher business levels in the die-casting division and expected turnaround in operations in RPDC.

Liquidity – Adequate

RML’s liquidity is adequate and driven largely by expected timely funding support from RHL in case of exigencies. The company had opted for moratorium from lenders as allowed by RBI to conserve liquidity. On a standalone basis, RML’s liquidity is moderately stretched as cash accruals of Rs. 70-80 crore in fiscal 2022 will be tightly matched with repayments of around Rs 62 crore; this in turn will lead to part dependence on debt for funding proposed capex. That said, considering RML’s strong franchise with lenders, availing funds for the capex is not expected to be a challenge. CRISIL also derives comfort from the past instance of equity infusion from the group to reduce leverage, thereby demonstrating support.

Outlook Negative

CRISIL Ratings believes RML’s business performance will improve over the medium term, supported by better demand from OEMs, but continue to be constrained by the moderate financial risk profile to due to continued losses in RPDC and debt funded capex in RML. 

Rating Sensitivity factors

Upward factors

• Higher than expected revenue growth (at over 10%) and improvement in consolidated margins to 7-9%, leading to better cash generation
• Faster than expected correction in capital structure including due to equity infusion or better cash generation; with gearing correcting to less than 1.5 time

 

Downward factors

• Weak continuing operating profitability of 4-5% due to delays in off-take from new orders or higher losses at RPDC,  impacting cash generation
• Higher than expected debt funded capex or elongation of working capital cycle leading to further deterioration in debt metrics; gearing increasing to over 2.5 times
• Delayed distress support from RHL or further deterioration in credit profile of Rane group

About the Company

RML is the flagship company of the Rane group, with group holding company, RHL having 68.47% stake (none of the shares are pledged). Other group companies include Rane Engine Valve 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.

 

RML started manufacturing operations in 1960 and today is a leading tier 1 automotive component supplier. It is engaged in the manufacturing of manual steering gears, hydrostatic steering systems, and steering and suspension linkages which together account for about 80% of overall revenues. The balance comes from its high-pressure aluminum die casting division.

 

RML has manufacturing units at Kanchipuram, Mysore, Puducherry, Pantnagar and Hyderabad (2 units). In February 2016, RML, through its wholly owned subsidiary RMIH, acquired 100% stake in US based Precision Die Casting Inc, subsequently renamed as RPDC. This is RML’s first overseas acquisition and marked its foray into the manufacturing in overseas markets.

 

The company reported a consolidated net loss of Rs 61 crore for the fiscal 2021 on consolidated revenues of Rs 1267 crore compared to a net loss of Rs. 47 crores for corresponding period of previous fiscal on consolidated revenues of Rs. 1277 crores .

Key Financial Indicators

Particulars	Unit	2020	2019
Revenue	Rs crore	1277	1555
Profit after tax (PAT)	Rs crore	-47	1
PAT margins	%	NA	NA
Adjusted debt/Adjusted net worth	Times	2.62	1.88
Interest coverage	Times	1.52	3.56

 

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	Rating Assigned with Outlook
NA	Term Loan	NA	NA	Mar-2024	123.2	NA	CRISIL A-/Negative
NA	Proposed Term Loan	NA	NA	NA	40.0	NA	CRISIL A-/Negative
NA	Short Term Bank Facility	NA	NA	NA	310.0	NA	CRISIL A2+
NA	Proposed Working Capital Facility	NA	NA	NA	24.8	NA	CRISIL A-/Negative

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Rane (Madras) International Holdings B V, Netherlands	Full	Step down subsidiary; business linkages
Rane Precision Die Casting Inc, USA	Full	Step down subsidiary; business linkages