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Here are some interesting details from the Annual Report 2020 of Rajratan Global Wire Ltd:

  • Background – The name of the company was changed to Rajratan Wires Ltd. following the IPO of equity shares in 1995 when the company commenced the production of bead wire.
  • Rajratan entered into a technical collaboration and joint venture with Gustav Wolf Group of Germany following which the name of the company was changed to Rajratan Gustav Wolf Ltd. in 1998. Following the joint venture for five years, the Indian promoters bought back equity held by Gustav Wolf after which the name of the company was changed to Rajratan Global Wire Ltd in 2004
  • The company extended to the launch of operations in Thailand In 2006, resulting in the commissioning of Rajratan Thai Wire Co. Ltd. The Thailand operations of the company commenced commercial production in 2008
  • Thailand enjoys attractive raw material availability for the manufacture of tyres. Following the imposition of anti-dumping duties by some countries on Chinese tyre exports, large Chinese tyre manufacturers have commissioned capacities in Thailand
  • Rajratan is the second largest bead wire manufacturer in Asia (excluding China), the largest manufacturer in India and the only manufacturer in Thailand with a 20% market share
  • Rajratan enjoys a tax hedge for eight years on its Thai operations for all production in excess of 22,000 TPA, which is expected to expire by 2025.
  • Tyre Bead wire –  Used in all kinds of automobile tyres, tyres of earth moving equipment and aircraft. Its function is to hold the tyre on the rim and resist the action of the inflated pressure, which constantly tries to force it off.
  • Bead wire is the crucial link through which the vehicle load is transferred from rim to tyre, preventing vibration during driving. The product enhances tyre safety, strength and durability.
  • The bead wire segment is marked by a low 1:1 asset-turnover ratio; this ratio is generally achieved only by fifth year following capacity commissioning (the intervening period spent in getting customer approvals), making it imperative to sustain interest outflow
  • The bead wire business is marked by a high cost of raw material, putting a premium on operating efficiency (which Rajratan Possesses)
  • Rajratan is largely focused on the manufacture of bead wire (87% of total capacity and 90% of revenues, 2019- 20)
  • Manufacturing –  The company’s manufacturing operations are located in India and Thailand.  The company possessed an installed aggregate manufacturing capacity of 106,800 TPA across both products in its Indian and Thailand facilities. The company is among the largest bead wire manufacturers in India and the only such manufacturing facility in Thailand.
  • In India – 36,000 TPA in 2018-19 to 72,000 TPA in 2019-20 (60,000 TPA of bead wire and 12,000 TPA of black wire), 81 crore expansion cost in India; In Thailand – 26,000 TPA in 2018-19 to 34,800 TPA in 2019-20
  • Capacity expansion decision –  From one perspective, the decision to expand our capacity was taken well before the slowdown but implemented at a time when the slowdown deepened. 
  • We believed that the decision to expand our capacity at the time we did – from an aggregate 70,800 TPA in 2018-19 to 1,06,800 TPA in 2019-20 across India and Thailand – was in line with our desire to build a global bead wire company.
  • We believed that for a specialized company like ours singularly focused on bead wire, the expansion would strengthen our brand as a dependable anytime provider of bead wire; besides, we believed that the increase in scale would strengthen our economies of scale (procurement and manufacturing) that would only reinforce our any-market competitiveness.
  • The result is that we doubled our manufacturing capacity across our India operations at one of the lowest capital costs per tonne without diluting our equity structure
  • At Rajratan, we had selected to grow our capacities through a cautious approach wherein we ensured that nearly 80% of the debt we had mobilized for expansions in the past would have been repaid by the time we embarked on a fresh expansion round. The result is that even during this recent expansion, we possessed a right-sized Balance Sheet with a post-expansion debt-equity ratio of 0.86
  • The Company’s capacity doubling was carried out at 50% of the cost of commissioning a greenfield bead wire unit
  • General comments –  we do not believe that bead wire imports will remain viable following the weakening of the Indian currency; besides, the number of players has further reduced, strengthening our competitiveness
  • of the remaining players, we are the only player with a singular focus on bead wire, making us a specialized player with superior quality, service and competitiveness
  • we have developed long-term partnerships with prominent Indian and global tyre brands; besides, our products account for a high quality criticality within the downstream product while remaining a negligible cost of the tyre
  • we possess a complement of one of the highest bead wire standards in the world and one of the most competitive cost structures (capital cost per tonne) anywhere. We believe that this makes it possible for the company to succeed across market cycles, making us the last person standing in challenging markets and among the first to be off the blocks following sectoral recovery
  • we have graduated to becoming a value-added player focused on the manufacture of quality-intensive bead wire addressing the needs of select customers willing to pay a premium
  • If the demand outlook remains muted, we believe we will be able to carve away the market share of existing players on account of larger bead wire capacity, strong order book (especially in Thailand), enduring customer relationships and a portfolio of high-end bead wire addressing the needs of some of the most demanding customers
  • The Company has not lost a single major customer in the last 5 years and derived 85% of its revenues from customers associated with the Company for five years or more
  • Covid 19 impact on Thailand operations –  The impact of Covid-19 was negligible on the company’s operations in March and April, when sales volumes were at their highest. As global customer destocked, there was a decline in our sales in May 2020; the company selected to shut operations for a month. During this period, we continued to engage with customers in Thailand: we impressed upon them that we were located on their soil, we could provide small volumes, we would bill only when the material had been delivered and encouraged our  customers to nurse low inventories. This promise was demonstrated in May 2020 when one of our largest customers sent out a request for material when our manufacturing facility was closed. We resumed operations for two days to service their urgent need;
  • Thailand Outlook for FY 21 –  At worst, we expect to match our tonnage sales of 2019-20 in 2020- 21. This outlook is based on a few assumptions and realities: even though the tyre demand is projected to contract due to the economic slowdown, we now possess a BIS license so this should translate into additional volumes; we expect to capitalize on approvals provided by customers through the full length of 2020-21 (which we only received during the second half of 2019-20); we are further trying to broad-base our customer mix by marketing our products to the flexible duct industry.
  • We believe that even in the worst of markets where the sales outlook in most sectors was uncertain, our sales did not decline more than 50%.  From a larger perspective, Thailand has emerged as the tyre hub of Asia. Some of the largest Chinese tyre brands have commissioned larger and more sophisticated manufacturing facilities in Thailand than in their own country. This reality resulted in Thailand’s tyre sector growing at 8-10% per year across the last few years, the global slowdown notwithstanding. In a number of cases, our multiyear approval process by customers is nearing completion and should translate into sizable orders across the foreseeable future
  • Exports –  In addition to marketing products within India and Thailand where its manufacturing facilities are based, Rajratan also services customers in Italy, USA, The Czech Republic, Malaysia, Indonesia, Philippines, Vietnam, Sri Lanka, UAE, Bangladesh and other countries
  • Rajratan strategically shifted the demanding needs arising out of major export contracts to the Thailand plant. Exports from Thailand accounted for around 41% of revenues from that country
  • Performance – The Indian automotive production de-grew 14.73% in 2019-20. Rajratan posted a record profit after tax in 2019-20
  • The Company reported relatively flat revenues after losing nearly 34 days of productive working to the expansion and Covid-19 impact.  Aggregate sales decreased by 2.57% or Rs. 12.68 crore in FY 20, the result of a decline in steel prices, which accounted for a major part of the company’s selling price (cost decline passed on to customers) even as the company’s volumes increased 2.4%.
  • Total Quantum of tonnage produced 66,478MT;  Quantum of tonnage sold 66,357MT (consolidated)
  • Rajratan Thai Wire Co. Limited recorded an increase of 10.5 % in sales volume to reach 27829 MT compared to 25186 MT in the previous year. Net revenues increased by 5.62 % to reach Rs. 194.41 crore as compared to Rs.184.06 crore in the previous year. Profit after tax stood at Rs. 9.94 crore compared to Rs. 9.91 crore in the previous year
  • Cost of debt – The company’s debt cost declined from a peak 12% in FY16 to 9% in FY18 and around 8% in FY20.
  • EBITDA expansion –  This increase transpired on account of three reasons: one, the company engaged in a number of productivity-enhancing programmes that helped moderate the overall cost of production; two, the company capitalized on a decline in steel prices through the first three quarters of the year under review; three, the company entered into a responsible dialogue that their stable supply interests would be best ensured if they left reasonable value on the table for long-term players like Rajratan (at a time when a supplier closed down due to unviable realizations, threatening supplies).
  • Balance sheet – The amount of borrowing cost capitalized during the year ended March 31, 2020 was Rs.1.81 crore (for the year March 31, 2019: Rs. 1.72 crore) on account of capacity expansion of plant
  • The amount of expenditures recognized in the carrying amount of property, plant and equipment in the course of its construction is Rs. 2.53 crore (Previous Year Rs. 2.17 crore)
  • 10 crore loan to subsidiary
  • Traded goods – 5.38 crore (FY 20) vs 21.13 crore (FY 19)
  • Penalty – The Adjudicating Officer of SEBI has levied penalty on the promoters of the Company for alleged violation of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 in the previous years, against which the promoters have preferred an appeal before hon’ble  Securities Appellate Tribunal. The Hon’ble Securities Appellate Tribunal vide its order dated 28th May 2018 has allowed the appeal. 
  • The Company had paid penalty of Rs. 5.31 Lakhs (inluding GST) to BSE Limited as the composition of Board was not as per Regulation 17 SEBI (LODR) Regulation, 2015

 

Disclosure: This is neither a research report or a recommendation on the stock. I don’t have any investment in the stock.

 

Best Regards,

Ekansh Mittal
Research Analyst
http://www.katalystwealth.com
Ph.: +91-727-5050062, Mob: +91-9818866676
Email: info@katalystwealth.com

 

Research Analyst Details

Name: Ekansh Mittal     Email Id: ekansh@katalystwealth.com    Ph: +91 727 5050062

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