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.
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