Rating Rationale
September 24, 2019 | Mumbai
Rane Engine Valve Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.200 Crore
Long Term Rating CRISIL BBB+/Stable (Reaffirmed)
Short Term Rating CRISIL A2 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL BBB+/Stable/CRISIL A2' ratings to the bank facilities of Rane Engine Valve Limited (REVL).
 
REVL's operating performance is expected to remain subdued over the medium term owing to the slowdown in domestic automobile industry. However, this should be partly offset by increasing share of exports (expected at ~30-35% over fiscals 2020-2021 compared to ~24% of in fiscal 2019) driven by new orders from overseas customers. Besides, REVL also derives about 25% of revenues from non-auto applications. As a result, albeit the subdued performance, losses are expected to be marginally lower than fiscal 2019. Furthermore, the profitability is also expected to gradually improve from fiscal 2021 with increasing contribution from higher margin exports and accruing benefits from various cost improvement measures. Gearing is expected to remain over 1 time in the near term and improve thereafter as losses reduce and debt is repaid progressively. Any higher than expected losses and/or steep moderation in credit metrics due to prolonged slowdown in the automobile industry will remain a rating sensitivity factor. 
 
The ratings continue to reflect REVL's healthy market position in India's automotive (auto) 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 A1+), TVS Motor Co Ltd, Mahindra & Mahindra Ltd (M&M; rated CRISIL AAA/Stable/CRISIL A1+), Cummins India Ltd and BMW. 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 ~ 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. Revenue is likely to decline by 7-9% in fiscal 2020 given the slowdown in domestic OEM demand. Nevertheless, the diversity should help arrest the extent of decline and support revenue visibility over the medium term.
 
* 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 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. In fact post these changes, cost of production increased due to high internal rejections and stabilisation challenges encountered. All of this resulted in volatile margins; profitability ranged between 1.8% and 8.6%% in the last 5 years ending fiscal 2019. Albeit the high internal rejections, the company has continuously maintained negligible rejections at customers' side owing to the stringent quality control measures enforced by the company. While REVL is taking initiatives to enhance internal quality and output, improvement will be only gradual; net losses are expected to continue in the near term and company is likely to achieve break-even at net profit level in fiscal 2021.
 
* 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 1.04 time as on March 31, 2019. 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 as interest cover and net cash accruals to total debt (NCATD) have remained average at 1.84 times and 0.13 time, respectively, in fiscal 2019.
 
However, the company's measures to monetise assets as part of its restructuring exercise have significantly benefited capital structure. REVL has realised in excess of Rs 160 crore as profit from asset sale between fiscals 2015 and 2017 and this in turn has supported operations during weak business cash flows and was also used to retire debt. The company has planned a capital expenditure of about Rs 15 crore in fiscal 2020 to be partly debt-funded. As a result, gearing is likely to remain over 1 time in the near term and improve thereafter as losses reduce and debt is repaid progressively. Besides, with profitability expected to improve only gradually from fiscal 2021, debt protection metrics will also improve only gradually over the 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 OE 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 driven by expected forthcoming funding support from the group in case of exigencies.  On a standalone basis, REVL has stretched liquidity due to modest (though improving) cash flows. Expected cash accrual of over Rs 15-20 crore in fiscal 2020 will be tightly matched against long-term debt repayments of Rs 16 crore. However, with expected improvement in profitability and cash generation, cushion to service maturing debt will gradually improve over the medium term. Besides, fund-based working capital limits have been utilised at 70% over the past 9 months ending August 2019. Further, REVL has sizeable land bank, which can be monetised in case of exigencies, as demonstrated in the past.
Outlook: Stable

CRISIL believes REVL's credit risk profile will continue to benefit from association with Rane group even as business performance will remain subdued over the medium term and credit metrics will improve only gradually as losses are expected to continue in fiscal 2020.
 
Rating sensitivity factor
Upward factor
* Improvement in credit quality of Rane Group driven by strengthening of operating performance and financial risk profile
* Revenue growth of over 10% on a sustained basis while operating profitability improves to 13-14% leading higher PAT.
* Improvement in gearing and debt protection metrics
 
Downward factor
* Deterioration in credit quality of Rane Group or change in support philosophy towards REVL
* Decline in revenues or margins leading to higher than expected losses of over Rs 20 crore
* Deterioration in gearing and debt protection metrics

About the Company

REVL incorporated in 1954 is second oldest entity in the Rane group, with group holding company, Rane Holdings Ltd (RHL) having 51% 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 4 crore for the first three months of fiscal 2020 (Rs 4 crore loss for corresponding period of previous fiscal) on revenue of Rs 103 crore (Rs 103 crore).

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs crore 426 379
Profit after tax (PAT) Rs crore -14 -17
PAT margin % -3.2 -4.5
Adjusted debt/Adjusted networth Times 1.04 0.77
Interest coverage Times 1.84 1.98

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs. Cr) Rating Assigned with Outlook
NA Term Loan NA NA May-2021 50.96 CRISIL BBB+/Stable
NA Proposed Long Term Bank Loan Facility NA NA NA 42.24 CRISIL BBB+/Stable
NA Fund & Non Fund Based Limits NA NA NA 101.8 CRISIL BBB+/Stable
NA Non-Fund Based Limit NA NA NA 5.0 CRISIL A2
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  93.20  CRISIL BBB+/Stable      26-12-18  CRISIL BBB+/Stable    --    --  -- 
            24-12-18  CRISIL BBB+/Stable           
Non Fund-based Bank Facilities  LT/ST  106.80  CRISIL BBB+/Stable/ CRISIL A2      26-12-18  CRISIL BBB+/Stable/ CRISIL A2    --    --  -- 
            24-12-18  CRISIL BBB+/Stable/ CRISIL A2           
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Fund & Non Fund Based Limits 101.8 CRISIL BBB+/Stable Fund & Non Fund Based Limits 101.8 CRISIL BBB+/Stable
Non-Fund Based Limit 5 CRISIL A2 Non-Fund Based Limit 5 CRISIL A2
Proposed Long Term Bank Loan Facility 42.24 CRISIL BBB+/Stable Proposed Long Term Bank Loan Facility 42.24 CRISIL BBB+/Stable
Term Loan 50.96 CRISIL BBB+/Stable Term Loan 50.96 CRISIL BBB+/Stable
Total 200 -- Total 200 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Auto Component Suppliers
CRISILs Bank Loan Ratings
Criteria for Notching up Stand Alone Ratings of Companies based on Group Support
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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