Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA/Stable/CRISIL A1+’ ratings to the bank loan facilities of Ramkrishna Forgings Ltd (RKFL; part of the RKFL group).

 

The ratings reflect the strong market position of the RKFL group in the auto components industry, established relationships with major customers, healthy operating profitability and strengthening financial risk profile. These strengths are partially offset by its exposure to revenue concentration risks, susceptibility to cyclicality in automotive industry and government regulation, and working capital intensive operations.

Analytical Approach

To arrive at the ratings, CRISIL Ratings has combined the business and financial risk profiles of RKFL and its subsidiaries, i.e., Globe All India Services Limited (GAISL), Ramkrishna Forgings LLC (RKFLLC), JMT Auto Limited (JMT, rated CRISIL A/Stable/CRISIL A1), ACIL Limited (ACIL), Multitech Auto Private Limited (MAPL, rated CRISIL A/Stable/CRISIL A1), its step-down subsidiary, i.e., Mal Metalliks Private Limited (MMPL, rated CRISIL A/Stable/CRISIL A1), and its joint venture, i.e., Ramkrishna Titagarh Rail Wheels Limited (RTRWL), collectively referred to as the RKFL 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:

• Strong market position in the auto components industry and established relationships with major customers: RKFL has been engaged in the forged and machining components business for more than four decades and is a key supplier to several leading original equipment manufacturers (OEMs) in the automotive industry. Longstanding presence has enabled the promoters to gain deep understanding of market dynamics and maintain healthy relationships with reputed customers

 

The group has maintained its strong market position, as reflected in its healthy scale of operations. Revenue from sales of products alone is estimated over Rs 3890 crore for fiscal 2024, positioning 37% growth year-on-year and a three-year compounded annual growth rate of 49%. Inorganic growth emanating from the recent acquisitions should also aid growth, and result in double-digit revenue growth per annum over the medium term. Sustained improvement in manufacturing capabilities further strengthening market position with higher contribution from non-automotive segments and a fall in customer concentration remain monitorable.

 

• Healthy operating profitability: The group is one of the largest manufacturers of forged automotive components in India. Revenue growth has been healthy in the past few years, driven by steady offtake and sustained focus on exports. The group has entered non-automotive segments such as energy – oil & gas, power, off-road applications – earthmoving, mining, construction, railways and farm equipment, and has strategically acquired entities to augment its capacities in these segments and foray into passenger vehicles and tractor segments. Operating margin has been healthy at 22-23%, over the three fiscals through March 31, 2024.

 

The recent acquisition of casting and machining units of MAPL and MMPL, and manufacturing of precision and critical components for medium and heavy commercial vehicles (MHCVs) have led to increased revenue of more than Rs 335 crore during fiscal 2024. However, due to increased expenses during this period, acquisition of ACIL and JMT, operating margin stood at 21% in the second half of fiscal 2024, as against 22% in second half of fiscal 2023.

 

Going forward, with incremental revenues and profits from the recently acquired entities and sufficient cost passthrough, the overall operating margin for the group should remain at over 21%. Revenue and profitability will be driven by benefits from economies of scale, higher productivity and leadership position of the group enabling passage of any hike in key raw material cost to customers.

 

• Strengthening financial risk profile: RKFLs capital structure has seen a sharp improvement in fiscal 2024 with infusion of equity share capital of Rs 975 crore (net) in November 2023 and healthy accretion to reserves leading to prepayment of a significant portion of term debt and curtailed debt exposure arising from acquisitions. Adjusted networth also improved to Rs 2557 crore on March 31, 2024, reducing gearing and low total outside liabilities to adj tangible networth (TOL/ANW) to 0.4 time and 1.0 time, respectively from 1.0 time and 1.8 times, respectively a year earlier. Furthermore, RKFLs debt protection metrices have been at moderate level with interest coverage and net cash accruals to adjusted debt ratios of 5.7 times and 0.5 time, respectively on March 31, 2024. In the absence of large, debt funded capital expenditure (capex) and healthy internal accruals sufficiently covering incremental working capital requirement, the financial risk profile is expected to strengthen over the medium term.

 

Weaknesses:

• Exposure to revenue concentration risk, cyclicality in the automotive industry and change in government regulations: RKFL derives 50-55% of revenue from its top five customers, and hence faces high customer concentration risk. Growth in revenue and profitability becomes dependent on the growth plans of these customers.

 

Moreover, the company earns over 40% revenue from exports predominantly to Europe and North America, which exposes it to risks associated with inherent cyclicality in the automotive industry, whose performance is linked to the overall macroeconomic trends. It is further susceptible to change in government policies regarding automobiles such as pollution norms, electric vehicles etc. Thus, the strategies deployed by the management to increase revenue contribution of non-automotive segments and widen geographical footprint are crucial for the group to successfully navigate downturns in the industry and in its key overseas markets.

 

• Working capital intensive operations: Operations are working capital intensive as reflected in its gross current assets (GCA) days. While stringent internal controls have brought receivables down to 80 days on March 31, 2024, inventory has been sizeable at 131-147 days for the three fiscals through March 31, 2024, due to significant exports and large number of SKUs adding to raw material and finished goods inventories. This has also constrained return on capital employed (RoCE) to 14-19% in three fiscal years through March 31, 2024, against over 20-25% reported by peers. Going forward, prudent working capital management, lowering external liabilities, and steady profitability ratio are key rating sensitivity factors.

Liquidity: Strong

Utilisation of the fund-based bank limit averaged around 38% for the 12 months ended January 31, 2024. Expected cash accrual of over Rs 650 crore should suffice to cover the term debt obligation of Rs 170-200 crore per annum over the medium term. The current ratio was adequate at 1.5 times on March 31, 2024. Free cash bank balance and liquid investments in mutual funds were around Rs 177 crore and Rs 52 crore, respectively on March 31, 2024. The group shall diligently deploy these funds in meeting the working capital requirement and debt obligations. Low gearing and strong networth provide financial flexibility in case of any adverse conditions or downturn in the business.

Outlook: Stable

CRISIL Ratings believes RKFL, along with its subsidiaries, will continue to benefit from the extensive experience of its promoter, and its established market position in the auto components industry.

Rating Sensitivity factors

Upward factors:

• Strengthening of market position, improved production capabilities and diversification in end-user industry and customer base driving substantial rise in scale of operations.
• Prudent working capital management and lower exposure to external debt leading to sustenance of RoCE over 20%.
• Better efficiency through timely ramp up of commercial operations in subsidiaries, also improving interest coverage.

 

Downward factors:

• Any downturn in the auto industry or drop in market share weakens operating efficiency and financial flexibility.
• Sizeable debt-funded capex or acquisition, or huge dividend pay-out, or large investments in joint ventures, leading to net debt to earnings before interest, depreciation, taxes, and amortization (EBITDA) ratio of over 2 times.

About the Group

Incorporated in 1981, RKFL is engaged in the manufacture and sale of forged components of automobiles, railway wagons and coaches, and engineering parts. It has manufacturing facilities at Gamaria, Adityapur Industrial Area, Baliguma, Dugni at Saraikela, Jamshedpur in Jharkhand and at Liluah in West Bengal. Shares are listed on National Stock Exchange of India (NSE) and Bombay Stock Exchange (BSE).

 

About the subsidiaries

GAISL was initially formed as a partnership firm named Globe Travels in 1981, and reconstituted as a closely held public company, Globe Forex & Travels Ltd in March 1994. It was acquired by RKFL in 2013 and then became its wholly owned subsidiary. The company is engaged in hospitality management, and offers various travel related services such as MICE (meetings, incentives, conferences and exhibitions) leisure and inbound, car rental, event management, etc. Headquartered in Kolkata, West Bengal, the company has branches in more than 10 states.

 

RKFLLC is engaged in the import and sale of forged components for automobiles, railway wagons and coaches and engineering parts. It imports and procures all traded goods from RKFL.

 

MAPL was incorporated in 1995 and acquired by RKFL in August 2023. The company manufactures automotive components such as precision and critical parts of engines, gearboxes, suspensions, and axle assemblies for commercial vehicles. The company has two manufacturing facilities at Jamshedpur, Jharkhand.

 

MMPL was incorporated in 2005, as a backward integration unit for MAPL. MMPL is a wholly owned subsidiary of MAPL and was acquired by RKFL in August 2023. It manufactures castings for MHCVs at its unit in Jamshedpur.

 

JMT (formerly, Jamshedpur Metal Treat Pvt Ltd) was initially incorporated as a private limited company on 30th April 1987 to commence the business as a Metal Treat Company, as an ancillary of Tata Motors Ltd, for manufacturing auto components. The company was acquired by RKFL in August 2023 through National Company Law Tribunal (NCLT). It has the capabilities to manufacture a range of components used in light commercial vehicles (LCVs), MHCVs and tractors. JMT has six plants in Jamshedpur.

 

ACIL, incorporated in 1997, has been acquired by RKFL through NCLT vide the order dated December 22, 2023. ACIL is engaged in machining of high precision engineering automotive components. It manufactures crankshafts for tractors, HCV, LCV as well as two wheelers. Besides, the company also manufactures connecting rods, steering knuckles and hubs. ACIL has a manufacturing plant at IMT Manesar, Gurugram, Haryana.

 

About the joint venture

RTRWL was incorporated in fiscal 2024. RKFL holds 51% stake and is the lead partner in this railway contract and has signed the contract, for manufacture and supply of forged wheels under Aatma-Nirbhar Bharat by the Ministry of Railways, Government of India, in consortium with Titagarh Rail Systems Ltd. It will establish a manufacturing plant in India for production of 228,000 forged wheels per annum. Land has been acquired at Chennai and commercial operations are scheduled to begin by end of fiscal 2026.

Key Financial Indicators (Combined)

As on / for the period ended March 31	Unit	2024*	2023
Operating income	Rs crore	3923	3135
Reported profit after tax	Rs crore	341	248
PAT margins	%	8.70	7.92
Adjusted Debt/Adjusted Net worth	Times	0.44	1.00
Interest coverage	Times	5.73	5.71

*Provisional

Please note that the financials discussed in this document are CRISIL Ratings adjusted.

Any other information: Not Applicable