Detailed Rationale

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

 

The ratings were recently placed on watch following the announcement by REVL at the stock exchanges on February 9, 2024, that its Board of Directors have approved a scheme of arrangement wherein the two listed entities of Rane group, REVL and Rane Brake Linings Limited (RBLL) will be merged with Rane (Madras) Limited ( RML, rated CRISIL A/Watch Positive/A1) on a share swap basis, subject to National Company Law Tribunal (NCLT) approval. 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 Rane group operating companies will create a larger entity which will have sizeable scale, better revenue and product diversity and operating margins of 8-10%, while the balance sheet will also strengthen due to modest debt at REVL and no debt at RBLL. The combined entity is expected to have a net worth of more than Rs.600 crores compared to Rs.105 crores estimated for fiscal 2024 for REVL while the consolidated debt is expected at Rs. 800 crores, resulting in gearing of 1-1.2 times compared to 2.5 times estimated in fiscal 2024.

 

The companies have obtained the NOC from all the lenders and subsequently filed the scheme with stock exchanges and SEBI and is awaiting no objection certificate (NOC). Post the receipt of NOC,  the scheme will be filed with NCLT, and the final approval for the scheme is expected by end of fiscal 2025. The reorganization has been done to unlock synergies and optimize support functions to improve efficiency in the Rane group.

 

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 RML’s management. CRISIL Ratings believes that upon resolution of the watch, the rating may  improve by at least by a notch, should the companies sustain the improvement in business performance.

 

In the first nine months of fiscal 2024, REVL’s revenues have registered an on-year growth of 12% driven by healthy offtake for automobile components from domestic and international customers. Aided by a healthy business risk profile and steady demand scenario, REVL’s revenues are expected to register 5-7% growth per annum over the medium term. Operating margins have improved to 7.3% in the first nine months of fiscal 2024 supported by benefits of efficiency improvement measures taken and favourable product mix. Operating profitability is expected to remain above 7-7.5% over the medium term.

 

The company’s financial risk profile, while being moderate, is also improving due to steady improvement in revenues and operating profits, benefitting accruals. Sale of assets in the recent past has enabled the company fund past losses and shore up its net worth. This and prudent capex spend, in turn has ensured debt levels remain under control, which along with improved profitability has led to better debt metrics. For instance, interest cover is estimated at ~4 times in fiscal 2024, compared with 3.4 times in fiscal 2023.

 

The ratings continue to reflect REVL’s healthy market position in India's automotive (auto) engine valves segment, diversified revenue profile, moderate though improving financial risk profile and benefits derived from being part of the Rane group. These strengths are partially offset by modest operating efficiencies, exposure to demand cyclicality and pricing pressure on account of large exposure to automobile OEMs.

Analytical Approach

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

 

Earlier, group support for Rane group was provided while assessing the consolidated credit profile of RML. To arrive at the group rating, CRISIL Ratings had consolidated the operating entities of the Rane group and proportionately consolidated 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 engine valves segment: 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/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. 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 around 58% of revenue, exports account for around 35% 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. Besides, REVL also derives around 30% of revenues from non-auto product components. The diversity will help in mitigating exposure to concentration and EV transition risks and support revenue visibility over the medium term.

 

With the merger, the combined entity will have presence in steering linkage products, engine valves, light metal castings and friction material which will further augment the diversity. Besides as RBLL 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 PAT level between fiscals 2018 and 2022, with the company registering nil profit in fiscal 2023. However, the company’s measures to monetise assets as part of its restructuring exercise, and an improvement in operating performance, have significantly benefited capital structure. REVL realised more than Rs 180 crore as profit from asset sale between fiscals 2015 and 2021 and this in turn enabled debt reduction, despite continuing losses at PAT level until fiscal 2022. The company has already reported PAT of almost Rs.7 crore in the first 9 months of fiscal 2024.

 

Gearing is estimated to be comfortable at 1.3 times estimated as on March 31, 2024, while interest cover is estimated to improve above 4 times compared to 3.4 times in fiscal 2023, due to better operating performance, also supporting net profits. The company has also been funding its capital expenditure plans through part debt resulting in limited debt reduction despite progressive debt repayment.

 

Upon merger, the consolidated entity’s net worth is expected to increase above Rs.600 crores which along with gradually lower debt levels, despite annual capex of Rs.100-120 crore and modest investments in RACM, will lead to reduction in gearing below 1.5 times by March 31, 2025. Besides, the interest cover and ratio of debt/EBITDA are expected to improve to 5.1 times and below 2.5 times in fiscal 2025 respectively.

 

• 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. 4,800 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 has extended financial support in case of exigencies. For instance, about Rs.15 crores of equity was infused into REVL between fiscals 2022 and fiscal 2024. Going forward, post merger, the consolidated entity will be financially much stronger, and may not require support from the group.

 

Weaknesses:

• Modest operating profitability: EVL’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, however some improvement in operating efficiency has started to accrue in the recent past . While certain measures such as plant automation/modernisation and quality control initiatives over the past few years have started yielding results, covid induced demand slowdown and cost inflations over-shadowed the benefits in fiscals 2021 and 2022.

 

With normalisation of operations and healthy demand from OEMs, benefits of these measures have accrued  from fiscal 2023 onwards leading to improvement in operating profitability (6.9% from 4.7% in fiscal 2022). Operating profitability has further improved to 7.3% in the first nine months of fiscal 2024 and is expected to sustain at above 7-7.5% in 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 OEM 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 and driven largely by expected timely funding support from the group in case of exigencies. REVL’s liquidity situation improved in fiscal 2024 due to better cash generation and is expected to record cash accruals of above Rs.30 crores in fiscal 2024, and improve steadily; these will be adequate to fund debt obligations of Rs. 16 crore and Rs.15 crore in fiscals 2024 and 2025, respectively. Furthermore, REVL has sizeable land bank, which can be monetised in case of exigencies, as demonstrated in the past.

 

Upon merger, liquidity position is expected to improve further with estimated cash accruals of over Rs.200 crores per annum, and surplus cash of Rs.30 crores at RBLL.

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.

 

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, RML and RBBL

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

 

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)

 

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).

 

RML started manufacturing operations in 1960 and today is a leading tier 1 automotive component supplier. It is engaged in the manufacturing of manual steering gears, hydrostatic steering systems, and steering and suspension linkages which together account for about 80% of overall revenues. The balance comes from its high-pressure aluminum die casting division.

 

RML has manufacturing units at Kanchipuram, Mysore, Puducherry, Pantnagar and Hyderabad (2 units). 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 RML’s first overseas acquisition and marked its foray into the manufacturing in 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 ~50.03% stake at present in RBLL.

Any other information: Not Applicable