This report is written by Khubaib Abdullah for FinMedium Research Desk.
Rane Madras Share Limited (RML) is a leading automotive (auto) steering components segment producer in India. It has a 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).
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Rane Madras Share Limited (RML) is involved in the manufacturing and marketing of auto components for the transportation industry such as steering and suspension systems, linkage products, steering gear products, and aluminum alloy based high-pressure die-casting products.
Rane Madras Limited (RML) has two subsidiaries.
The name of Rane Precision Die Casting Inc. has been changed to Rane Light Metal Castings Inc. America (LMCA). The LMCA is engaged in the business of manufacturing high-pressure aluminum die casting for automotive applications like steering and compressor related devices.
Other wholly-owned subsidiaries include Rane (Madras) International Holdings B.V, The Netherlands, a (‘RMIH’ / ‘WOS’) and Step Down Subsidiary (SDS) – Rane Light Metal Castings Inc. USA.
Rane Madras Limited (RML) itself is a subsidiary of the privately held Rane Holding Company which is a conglomerate of a wide range of businesses founded by T. R. Ganapathy Iyer in 1929.
Rane Madras Share Limited (RML) experienced an adverse impact of the pandemic induced lockdown.
This was exacerbated by six quarters of decline in the automotive market which created an even more challenging business environment.
The Indian GDP growth dipped to 4.2% in FY20 significantly slower than 6.8% in FY19.
The manufacturing sector remained flat in FY20. The Indian automobile industry faced major headwinds caused by global factors and rapid policy changes which made the transition very difficult.
Limited time was given for transitioning to BS6, the new engine norms for India.
The industry faced more problems as the demand continued to stay subdued as the purchasing power of the population fell and unemployment rose.
Added to this were severe challenges in terms of credit availability owing to a liquidity crisis in the NBFC sector, the rising cost of vehicle ownership, BS-VI norms induced confusion in the insurance industry, and stiff competition from the growing organized pre-owned vehicle market.
Finally, the millennial idea of not owning a vehicle and the rise of shared vehicles and ride-hailing apps such as Uber and Ola only added to the pains.
The Passenger Vehicle (PV) segment experienced a decline of 15% while the Consumer Vehicle volumes declined by 33%.
The reasons were different here. The lack of demand and the COVID-induced lockdown led to very little truck demand.
The farm tractor segment experienced a decline of 14% owing to the low yield of rabi crops in 2019, erratic monsoon resulting in delayed sowing, and lower demand from non-farm and export markets.
While none of these may affect Rane Madras Limited (RML) directly, but the RML is a direct supplier to large vehicle producers. What affects them, affects Rane Madras Limited (RML).
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Business Performace of Rane Madras Share Limited
Rane Madras Ltd (RML) sales witnessed a 21% decline in the domestic market. The performance of the Steering and Linkage Division was impacted by the overall slowdown in the Indian Economy and the automotive sector.
The Light Metal Casting business was impacted due to a platform-specific decline in the served market. This was offset by the winning of a new customer base.
A breakdown of the products wise sales figures is given below.
The revenue from exports declined by 17% in FY20. This was caused by a drop-in linkage business due to the end of life in some programs and lower off-take in the served models.
The Steering Gear business consolidated its position in the share of the All-Terrain Vehicle (ATV) segment in North America.
The Steering Gear order for Passenger Car application will commence next year which will enhance the revenue from Exports.
A breakup of export sales product-wise is given below.
Industry Outlook of Rane Madras Share Limited (RML)
The spread of the Coronavirus pandemic is likely to result in job losses, a weak demand environment, and stress in financial markets.
The auto sector has been going through its worst slowdown with a slump in demand amid and an uncertain regulatory environment.
This is likely to face further headwinds during the first half of fiscal 2021 owing to the adverse economic impact of Covid-19 and cost-push from new emission norms.
Exports could be impacted owing to challenges being faced by the global auto industry in terms of slowing demand. In the medium term, the Indian auto component manufacturers have the opportunity to establish themselves as preferred manufacturing suppliers to the global auto industry.
The long term business prospects seem to be a little under doubts due to the push for electric vehicles, but Rane Madras Limited (RML) seems to be well protected.
Its product range is something that is used even in electric vehicles.
Risks faced by Rane Madras Limited (RML)
The main threats to which Rane Madras Share Limited (RML) is exposed are:
- Economic slowdown leading to a contraction in demand remains one of the major threats which could lead to decreased volumes and capacity utilization.
- Continuing cost reduction demand from OEMs from whom the major portion of the future growth is expected to come
- Increasing commodity prices and volatile forex movements.
Financial Analysis of Rane Madras Limited (RML)
Rane Madras Share’s strong position is 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). It benefits from being a part of the RML group of businesses.
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, name 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 the group’s holding company infusing equity of Rs 65 crore in fiscal 2018 and Rs 15 crore in fiscal 2019 to reduce debt levels and improve credit metrics in RML.
Supplies of components along with those of other group companies to common customers, also helps RML rationalize freight costs.
The total standalone turnover of Rane Madras Share was 1,100.52 crores, which is a decline of 20% over the previous year.
The revenue from Steering and Linkage Division (SLD) products was 930.44 crores, a decline of 19 % over the previous year.
The revenue from Light Metal Castings India (LMCI) (formerly known as Die Casting Division (DCD)) products was 79.79 crores, which is a 34% decline over the previous year.
The auto parts division of the Company registered a turnover of 45.36 crores as against a turnover of 52.29 crores recorded during the previous year.
Rane Madras Share Limited (RML) netted a Profit After Tax (PAT) of (24.43) crores, which is (2)% of the turnover. This resulted in an Earnings Per Share (EPS) of (20.37) for FY 2019-20 as against 40.38 in the previous year.
Rane Madras Limited (RML) has carried forward a loss of 13.78 crores after transferring 25.83 crores to the General Reserves.
It is due to the losses this year that the management has decided not to declare any dividend, for the year under review. The losses have also led to the parent company infusing close to INR 100 cr of fresh equity in the business, by the mode of convertible warrants.
Rane Madras Share’s financial management and its ability to service financial obligations in a timely manner, has been reaffirmed by CRISIL by its ratings.
Rane Madras Share Limited (RML) ended with Sales of 1,055.59 crores, a decline of 20% over last year, mainly because of the overall slowdown in the Indian Automotive sector.
The significant cost reduction in both variable and fixed costs helped to partially mitigate the impact of the drop in volume.
Revenue from the sale of products decreased to 1,055.59 crores in FY20 from 1,327.32 crores in FY19. EBITDA (before exceptional items) decreased to
98.50 crore in FY20 from 151.74 crores in FY19. Net Loss of (`24.43) crore in FY20 as against a PAT of 47.24 crores in FY19.
The significant change in respect of Interest Coverage ratio and operating profit margin is primarily due to a drop in volumes.
In addition to the aforementioned, an impairment loss of Rs. 37.58 crores on investment in wholly-owned step-down subsidiary further impacted the net profit margin despite various aggressive fixed cost reduction measures put in place.
The return on net worth declined to (8%) for FY 20 as against 16.4% for FY 19 due to the aforementioned reasons and also due to the general slowdown.
The R&D facilities were recently upgraded both in Chennai and at Puducherry to support the new product development.
During FY 2019-20, RLMCA, the Light Metal Casting subsidiary, continued to face challenges of lower than anticipated volumes on new programs. However,
RLMCA was able to make progress on new business and secured business from one of existing key customers and secured another business from a new nonautomotive customer during this year.
This required additional investments towards capacity enhancement which was funded by equity and debt.
The performance of the US subsidiary continues to remain a challenge, despite taking several measures to revive the business and operations.
As seen in the above graph, Rane Madras Share Limited (RML)’s cash inflow has been very erratic.
Even before the COVID crisis or the slowdown, the company’s cash flows swung wildly.
Similar is the case with the PE ratio. The shapes of the graphs are strikingly similar. Rane Madras Share shows all the effects of being a cyclical company.
The PAT and the Operating Cash Flow of a healthy firm must be in line with each other.
It is one of the easiest ways to catch any financial and accounting chicanery well in advance.
Rane Madras Limited (RML)’s chart in this regard is not the prettiest thing you would lay your eyes on.
The gap between the two lines fr 2020 is jarring. This is compensated by the fact that the profits that we see here also include the provisions of Rane Madras Share Limited (RML) for its subsidiaries.
It is hard to claim anything concrete at this stage. But the future trends need to be kept an eye on.
The only issue with the above graph is that the sales that Rane Madras Limited (RML) seems to claim they have made are not really translated into cash.
The interest coverage ratio of Rane Madras Share is decent. The credit rating agencies find Rane Madras Limited (RML) to be a darling. The ratings are really good.
I however differ a little.
They seem a little too overrated to me.
Rane Madras Limited (RML) does not seem to be doing that great after all. The DE of Rane Madras Limited (RML) is really high.
Of course, a lot of it is offset by the argument that Rane Madras Limited (RML) has been facing a very hostile business environment and that this is merely a one-time event.
The inventory turnover is high. This is a good sign. The products of Rane Madras Limited (RML) seem to be well in demand. The debtor days are also in line with the rest of the industry.
The ROE and the ROC figures paint a grim picture. The numbers are deep in the negative territory. Of course, this can be attributed to the one tie events, but it does call for some caution.
The PE and the EPS of Rane Madras Limited (RML) are also disappointing. Rane Madras Limited (RML) has delivered net losses this year, although they have made some provisions for future losses.
The future numbers of Rane Madras Share need to be watched carefully.
Rane Madras Limited (RML) is one of the many that are facing the direct brunt of the COVID 19, worsened by the changed regulatory norms.
Only the most strongly positioned will be able to make it to the other side. With close to 90 years of business experience, Rane Madras Limited (RML) seems to be a worthy candidate, albeit the question remains: will the glory of a more than 90 years old institution be the same.
This report is written by Khubaib Abdullah for the Equity Research Desk of FinMedium.
Cover Image: Business Insider