Detailed Rationale

CRISIL Ratings’ ratings on the bank facilities of Rane Engine Valve Ltd (REVL) continues on 'Rating Watch with Positive Implications’.

 

The ratings were placed on watch, following the announcement by REVL at the stock exchanges on February 9, 2024, that its Board of Directors has approved a scheme of arrangement wherein two listed entities of the Rane group, REVL and Rane Brake Linings Ltd (RBLL) will be merged with Rane (Madras) Ltd (RML, rated ‘CRISIL A/Watch Positive/CRISIL A1’) on a share-swap basis, subject to approval from the National Company Law Tribunal (NCLT). 21 shares of RML will be issued for every 20 shares of RBLL to its shareholders while 9 shares of RML will be issued for every 20 shares of REVL for its shareholders

 

The merger of the listed operating companies of the Rane group will provide synergistic benefits in the form of common raw material procurement and logistics, better negotiations leading to single procurement strategy, besides streamlining of administration and other cost including insurance premiums for its product warranties. The merger will also create a larger entity, with better revenue and product diversity, and healthy operating margin of 8-10%. Operating margin will also benefit from sale of the erstwhile loss-making subsidiary of RML i.e. Rane Light Metal Castings, USA Inc (RLMC).

 

The balance sheet is also likely to strengthen due to modest debt at REVL, zero debt at RBLL and no further requirement to support RLMC. The combined entity is expected to have a networth of more than Rs 650 crore, compared to Rs 250 crore estimated (at RML) as on March 31, 2024. Consolidated debt is projected to be Rs 822 crore, resulting in gearing of 1.26 times, compared to 2.8  times estimated (at RML) as on March 31, 2024.

 

CRISIL Ratings will resolve the watch post receipt of necessary approvals and completion of necessary documentation for the merger, and receipt of necessary information from the management of RML. CRISIL Ratings believes that upon resolution of the watch, the rating on the bank facilities of REVL are expected to improve, should all companies sustain the improvement in business performance.

 

REVL’s revenue  grew by 13% year-on-year to Rs. 559 crore in fiscal 2024, driven by healthy offtake for automobile components from domestic and international customers. Revenue is expected to grow by 5-7% growth per annum, backed by steady demand over the medium term. Operating margin improved to 8.3% in fiscal 2024 from 6.9% in fiscal 2023, supported by efficiency improvement measures and favourable product mix. The operating margin are expected to remain above 7-8% over the medium term.

 

Financial risk profile is also improving due to higher cash accrual. Sale of assets in the recent past has enabled the company fund losses and shore up  net worth (Rs.120 crore at March 31, 2024). This along with prudent capex spend, in turn has ensured debt levels remain under control, which along with improved profitability has led to better debt metrics. Gearing improved to 1 time at the end of fiscal 2024 on account of reduction in debt levels to Rs.122 crore from Rs.136 crore at the end of fiscal 2023. Further, interest cover improved to 4.7 times in fiscal 2024, compared with 3.4 times in fiscal 2023.

 

The ratings continue to reflect the healthy market position of REVL in the domestic automotive (auto) engine valves segment, the diversified revenue profile and benefits from being part of the Rane group. These strengths are partially offset by modest operating efficiency, exposure to cyclicality in demand and pricing pressure arising from large exposure to original equipment manufacturers (OEMs) in the automobile industry.

Analytical Approach

CRISIL Ratings will consolidate the business and financial risk profiles of REVL, and RBLL with RML and its subsidiaries, Rane (Madras) International Holdings B V, Netherlands (RMIH) and Rane Auto Components, Mexico (RACM). REVL and RBBL are proposed to get merged into RML from fiscal 2025.

 

Prior to the announcement of the merger,  support from Rane group was factored in while assessing the consolidated credit profile of REVL. To arrive at the group rating, CRISIL Ratings had consolidated the operating entities of the Rane group and proportionately consolidated the operating joint ventures.

 

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:

• Healthy market position in the engine valves segment: REVL is among the oldest and leading players in the domestic auto engine valves market with nearly 35% market share. Further, the company has longstanding relationships with leading auto OEMs, namely Hero MotoCorp Ltd (CRISIL AAA/Stable/CRISIL A1+), Hyundai Motor India Ltd (CRISIL AAA/Stable/CRISIL A1+), TVS Motor Co Ltd, Mahindra & Mahindra Ltd (M&M; rated CRISIL AAA/Stable/CRISIL A1+), Cummins India Ltd and BMW India Pvt Ltd. Healthy market position is also reflected in the high share of business enjoyed with each customer.

 

• Diversified revenue profile: REVL has a diversified revenue profile with presence across market segments, namely domestic OEMs, aftermarket and exports. Domestic OEMs contribute around 58% of revenue, followed by exports (around 35%) and the balance from the aftermarket. Even within OEMs, REVL caters to passenger vehicle (PV), commercial vehicle (CV), and two-wheeler (2W) segments. The company also derives around ~30% of revenue from non-auto product components. The diversity will help in mitigating exposure to risk posed by concentration and transition to electrical vehicles and offer revenue visibility over the medium term.

 

Post merger, the combined entity will manufacture steering linkage products, engine valves, light metal castings and friction material. RBLL also has a material presence in the aftermarket, which will provide further revenue diversity.

 

• Moderate but improving financial risk profile: Financial risk profile is moderate due to losses at profit after tax level between fiscals 2018 and 2022, with the company registering nil profit in fiscal 2023. However, measures taken to monetise assets as part of restructuring, and improvement in operating performance, have strengthened the capital structure. REVL realised over Rs 180 crore as profit from asset sale between fiscals 2015 and 2021, which has enabled debt reduction, despite continuing losses at PAT level until fiscal 2022. Healthy profitability has helped PAT reach Rs 11 crore at the end of fiscal 2024.

 

Gearing remains comfortable at one time as on March 31, 2024, while interest cover improved to 4.7 times in fiscal 2024, compared to 3.4 times in fiscal 2023, as better operating performance resulted in better net profit. The company has also been funding its capital expenditure (capex) plans partly via debt, which limits debt reduction despite progressive debt repayment.

 

Networth of the consolidated entity is likely to exceed Rs 650 crore. This, along with gradually lower debt will help gearing improve to less than 1.5 times by March 31, 2025, despite annual capex of Rs 100-120 crore and modest investments in RACM. Besides, interest cover and ratio of debt/EBITDA are expected to improve to 5.1 times and less than 2.5 times, respectively, in fiscal 2025.

 

• 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 around Rs 4,800 crore and manufactures a diverse range of automotive components, such as steering components, engine valves and brake components. Backed by vintage of more than 80 years, the group has forged strong ties with leading OEMs in India and abroad. Being part of the Rane group, REVL leverages on the Rane brand and holds a significant portion of the land bank of the group. The group has extended financial support in case of exigencies. It has infused about Rs 15 crore as equity into REVL between fiscals 2022 and 2024. The consolidated entity will be financially stronger, and hence, not require much support from the group.

 

Weaknesses:

• Modest operating profitability: Profitability was constrained in the past 5-6 years until fiscal 2022 due to sub-optimal capacity utilisation, high employee cost and weak production efficiency. The company operates across five plants and operations are labour-intensive. Restructuring measures undertaken to consolidate plant operations and alter the work-force mix to reduce wages, along with measures such as plant automation/modernisation and quality control have started yielding results,post Covid. . With normalisation of operations and healthy demand from OEMs, benefits of these measures have become visible from fiscal 2023 onwards. As a result, operating margin has improved to 8.3% in fiscal 2024 (from 6.9% in fiscal 2023 and 4.7% in fiscal 2022).

 

• Exposure to cyclicality in demand and pricing pressure from OEMs in the automobile industry: High dependence on OEMs renders performance of REVL partly vulnerable to the inherent cyclicality in the automobile industry and any prolonged slowdown therein. However, revenue from aftermarket and exports provides respite, besides presence across sub-segments. Operating margin is also susceptible to pricing pressure from OEM counterparts. While the company has recently negotiated for price escalation in contracts with OEMs, which will support the margin, any substantial increase will be constrained amidst limited pricing flexibility and competition.

Liquidity: Adequate

Liquidity will be largely aided by timely funding support from the group in case of exigencies. Cash accrual of Rs 30 crore aided liquidity during fiscal 2024. Liquidity should improve steadily over the medium term and suffice to cover the debt obligation of Rs 14 crore and Rs 23 crore in fiscals 2025 and 2026, respectively. REVL also has a sizeable land bank, which can be monetised in case of exigencies, as demonstrated in the past. Upon the merger, liquidity is expected to improve further, with cash accrual of over Rs 200 crore expected per annum.

Rating Sensitivity factors

Upward factors:

• Sustained revenue growth and improvement in operating profitability to over 8-9%, aiding faster break-even at net profit level
• Improvement in key debt metrics, including due to equity infusions, better working capital management, or utilization of sale proceeds of non-core assets to reduce debt.
• Successful completion of merger with RML and RBBL

 

Downward factors:

• Weaker than expected business performance, leading to  operating profitability below 4%, impacting cash generation
• Deterioration in key debt metrics due to debt funded capex or elongation of working capital cycle leading to gearing increasing above 1.6-1.8 times.

About the Company

REVL, incorporated in 1954, is the second oldest entity in the Rane group, with group holding company, Rane Holdings Ltd (RHL) holding 58.29% stake (none of the shares are pledged). Other group companies include RML, RBLL, ZF Rane Automotive India Pvt Ltd (joint venture) and Rane NSK Steering Systems Ltd (joint venture).

 

REVL manufactures engine valves, predominantly used in the automotive industry. The company has diverse presence in domestic and export markets and has established tie-ups with leading OEMs. REVL has five manufacturing units in South India, at Ponneri and Tiruchirapalli (Tamil Nadu), Tumkur (Karnataka), and Aziz Nagar and Medchal (Telangana)

 

RML is the flagship company of the Rane group, with the group holding company, RHL having 71.77% stake (none of the shares are pledged).

 

Having commenced manufacturing operations in 1960, RML is a leading tier 1 automotive component supplier. Manual steering gears, hydrostatic steering systems and steering and suspension linkages account for about 80% of overall revenue. The balance comes from the high-pressure aluminum die casting division.

 

RML has manufacturing units at Kanchipuram (Tamil Nadu), Mysuru, Puducherry, Pant Nagar (Uttarakhand) and 2 units in Hyderabad. In February 2016, RML, through its wholly owned subsidiary RMIH, acquired 100% stake in US-based Light Metal Casting Inc, subsequently renamed as RLMC. This is the first overseas acquisition, which marked its foray into overseas markets. This has been divested in fiscal 2024. RML has incorporated a new subsidiary, Rane Auto Components Mexico (RACM) in September 2023.

 

RBLL manufactures friction material products such as brake linings, disc pads, clutch facings, clutch buttons, brake shoes and brake blocks. RHL holds around 50.03% stake in RBLL.

Key financial indicators

Particulars	Unit	2024	2023
Revenue	Rs crore	567	500
Profit after tax (PAT)	Rs crore	11	0
PAT margin	%	2.0	0.0
Adjusted debt/Adjusted networth	Times	1.01	1.31
Interest coverage	Times	4.69	3.58

Note: REVL reported operating income of Rs 137 crore in the first quarter of fiscal 2025 (Rs. 138 Crore in the first quarter of fiscal 2024) and  operating margin at 8% (7.7% during first quarter of fiscal 2024) respectively.

Any other information: Not Applicable