| Rane (Madras) Limited | ||||||
| Ratings downgraded to 'CRISIL A-/Negative/CRISIL A2+' | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has downgraded its ratings on the bank facilities and commercial paper of Rane (Madras) Limited (RML) to 'CRISIL A-/Negative/CRISIL A2+' from' CRISIL A/Stable/CRISIL A1'. |
| Analytical Approach |
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For arriving at its ratings, CRISIL has fully consolidated the business and financial risk profiles of RML and its subsidiaries, RPDC and Rane (Madras) International Holdings B V, Netherlands (RMIH), as these entities have operational linkages. CRISIL has also factored in support from the Rane group, since RML is the flagship entity and is an integral part of the group and also derives synergies from group. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Leading position in India's auto steering market RML is a leading player in the domestic steering market with strong presence in mechanical steering gears and hydrostatic gear systems. Further, RML has long standing relationship with marque clients across vehicle segments, namely Maruti Suzuki India Ltd (MSIL; rated CRISIL AAA/Stable/CRISIL A1+), Tata Motors Ltd (TML; rated CRISIL AA-/Negative/CRISIL A1+), Tractors and Farm Equipment Limited (TAFE; rated CRISIL AA+/Stable/CRISIL A1+), Mahindra and Mahindra Ltd (M&M; rated CRISIL AAA/Stable/CRISIL A1+) etc. Supported by its established presence, RML has managed to make significant in-roads in terms of share of business with its customers by bagging new significant orders. Besides, in-house capabilities have enabled the company to make product improvements in line with the requirement of its key customers and sustain its healthy market position despite competition from established peers like Z.F. Steering Gear (India) Ltd and JTEKT India Ltd. * Diversified revenue profile RML has healthy revenue diversity, marked by presence across all segments of the automotive component sector- domestic OEM, aftermarket and exports, with domestic OEMs accounting for ~65-70% of revenues. Within OEMs, RML caters to the passenger vehicles, commercial vehicle (CV), and tractor segments. Besides, the company also derives about 20-25% of revenues from die-casting components sold to domestic and export customers. RML's revenues have registered a healthy compound annual growth rate of 20% between fiscals 2016 and fiscals 2019 to ~Rs.1555 crore, supported by healthy demand from end-customer segments and acquisition of RPDC. However, considering the recent slowdown in the domestic automotive industry across all vehicle categories, CRISIL expects RML's revenues to have fallen by at least 20% in fiscal 2020. The Covid-19 outbreak and continuing sluggish automotive demand, will further pressurise RML's revenues in fiscal 2021, while a modest growth is expected thereafter, as demand rebounds. * Benefits derived from being part of the Rane group 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, namely 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, Rs 15 crore in fiscal 2019 and Rs 50 crore in fiscals 2020-21 to reduce debt levels in RML. Supplies of components along with those of other group companies to common customers, also helps RML rationalise on freight costs. Weaknesses: * Sizeable investments in domestic and overseas die casting business and slower than expected commensurate returns RML had made sizeable investments towards expansion in its domestic die casting division in fiscals 2016 and 2017. However, ramping up of facilities has been slower than expected due to volatile end-user demand resulting in the division making net losses over the last 2 years. While the company is taking measures to tie-up businesses to enhance utilisation levels, improvement is likely to be only gradual. Besides the strategic acquisition of continually loss-making, RPDC, in fiscal 2016, also exerted some pressure on returns. The subsidiary was envisaged to have a turnaround time of 4-5 years. RML's return on capital employed (RoCE) declined to less than 8-10% between fiscals 2015 and 2017 as compared to over 17% prior to fiscal 2013; owing to the expansion in domestic die casting division and RPDC acquisition. CRISIL expects RoCE to remain subdued at less than 10% over the medium term, due to increased losses and part-debt funded capex in RPDC and lower cash flows from the steering business. * Moderate financial risk profile RML's financial risk profile remains moderate marked by gearing of over 1.8 times estimated as of March 31, 2020. Equity infusion from the group's holding company (Rs 65 crore in fiscal 2018, Rs 15 crore in fiscal 2019 and Rs 50 crore in fiscal 2020) and prudent working capital management had led to steep improvement in gearing from a peak of 2.5 times in March 2016. However, going forward, with capex expected to be higher at around Rs 80-100 crore over the next two fiscals, which will be partly debt-funded and expected moderation in annual cash generation, gearing should increase to ~2 times over the medium term. Debt protection metrics such as net cash accruals to total debt (NCATD) and interest coverage ratios will also remain subdued in fiscal 2021, compared to 0.05 times and 1.5 times respectively, estimated for fiscal 2020. * Exposure to demand cyclicality and pricing pressures from OEMs in automobile industry RML's high dependence on the OEM segment, renders its performance partly vulnerable to the inherent cyclicality in the automobile industry and any prolonged slowdown, particularly in the CV segment. However, revenue from aftermarket and exports provide some respite; besides presence across OEM sub segments is also expected to lend certain level of stability to business. Raw material costs account for a substantial portion of revenue, while about two-thirds of revenue is derived from auto OEMs. Operating profitability is moderate at less than 10% due to limited pricing power and losses from die-casting business. Operating profitability is expected to remain range bound at similar levels over the medium term, due to high competitive intensity, which will largely offset gains from higher business levels in the die-casting division and expected turnaround in operations in RPDC. |
| Liquidity Adequate |
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RML's liquidity is adequate and driven largely by expected timely funding support from the group in case of exigencies. On a standalone basis, RML's liquidity is stretched as cash accruals of Rs 20-30 crore in fiscal 2021 will be lower compared with debt obligations of around Rs 40 crore; this in turn will lead to part dependence on refinancing or freeing funds by reducing the working capital cycle. Also, the company has planned a capex of Rs 50-60 crore in fiscal 2021 which will be part funded through debt. Considering RML's strong franchise with lenders, availing funds for the capex is not expected to be a challenge. CRISIL also derives comfort from the past instance of equity infusion from the group to reduce leverage, thereby demonstrating support. |
| Outlook: Negative |
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CRISIL believes RML's business performance will continue to face headwinds due to weak demand in both domestic and export markets. Financial risk profile to remain moderate due to lower cash generation and part-debt funded capex in RPDC, constraining credit metrics. |
| Rating Sensitivity factors |
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Upward factors * Improvement in credit quality of Rane Group * Sustained improvement in business levels and operating margins * Faster than expected correction in gearing to below 1.5 times, including due to equity infusion Downward factors * Further decline in revenues or operating profitability remaining less than 5-6% leading to lower than expected cash profits * Further deterioration in gearing (over 2.5 times) and other credit metrics (for instance interest cover of less than 1.5 times). * Deterioration in credit quality of Rane group or change in support philosophy towards RML |
| About the Company |
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RML is the flagship company of the Rane group, with group holding company, RHL having 60.4% stake (none of the shares are pledged). Other group companies include Rane Engine Valve 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. |
| Key Financial Indicators | ||||||||||||||||||||||||
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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) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - List of entities consolidated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||
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