Rane (Madras) is in the auto ancillary industry and manufactures Steering and Suspension linkages. The company also setup a Die Casting division in 2006 and acquired US-based Precision Die Casting Inc in 2016. As a result, the company has organized operations as three divisions - Steering & Linkage Division, Die Cast Division and Rane Precision Die Casting.
Overall, the standalone revenue of the company over the last ten years is as follows
09
10
11
12
13
14
15
16
17
18
Sales
349.19
415.50
578.89
663.15
633.06
718.80
770.02
847.05
989.27
1,211.89
SalesGrowth
18.99%
39.32%
14.56%
-4.54%
13.54%
7.13%
10.00%
16.79%
22.50%
ProfitGrowth
78.87%
33.88%
36.04%
-6.75%
4.38%
11.08%
15.43%
27.33%
39.38%
Rane Precision Die Cast was acquired and turnaround plan is in progress.
Financial Overview
Trends
10 years
7 Years
5 Years
3 Years
Recent
Sales Growth
14.83%
11.13%
13.87%
16.32%
22.50%
OPM
8.95%
9.36%
9.47%
10.02%
10.89%
P/E
22.21
17.41
21.48
21.31
9.38
Sales growth dipped in between and is now accelerating. OPM has been steady and improving. P/E of Sona Koyo is 45.17 and Z F Steering is 14.29.
Valuation compared to peers
Comparing to Sona Koyo and Z F Steering
Rane
Sona Koyo
Z F
ROE
19.03%
10.49%
13.13%
ROCE
17.81%
12.83%
15.33%
ROA
8.13%
5.86%
11.10%
Debt to Equity
1.02
0.72
0.17
Positives
After a dip in revenue growth between 2012~2015, the company is now growing faster than it’s peers.
As the Passenger and Commercial vehicle segments grow, the management expects the growth to continue/accelerate.
Profit growth is slightly more than sales growth, indicating improved efficiency. This is also validated by the improvement in ROCE.
Concerns
Turnaround of Rane Precision Die Cast is going on.
I think Rane Holdings has increased it’s ownership by using Warrants. This has happened for the first time in recent years.
P/E has reduced drastically from >25 at beginning of the year to ~10
The volumes are low.
New to investing and looking for inputs from experts
Do you have any views on how the company plans to manage its debt? Debt to Equity of >1 is not too bad but this is also an area of concern for me. For such small companies, any disruption in market may cause it to be not able to manage its debt and consequently lose control over finances.
Probably thats the reason why the PE has come down to ~10 along with the market correction for Small Mid Cap indices.
Looking at the Debt to Equity ratio over the last 5 years, it has been coming down (after increasing in 2016, due to loans secured for the acquisition)
14
15
16
17
18
Standalone
1.13
1.36
1.74
1.72
1.04
Consolidated
2.07
2.30
1.59
The company has increased the repayment of borrowings over the last 3 years. I am guessing the Debt to Equity ratio would reduce over the next couple of years…
Frankly, I am trying to figure that out. The management team is professional and the board is well qualified. There are no pledged shares or other red flags in the financial statements. Factors with could affect recovering growth are (1) the slowdown in the automobile sector and (2) turnaround of Precision Die Casting. But these do not justify such a drop in valuations.
One aspect to consider is the sudden drop in volumes. The only reasoning I have is that low volumes indicate that the stock is not priced correctly.
Update from the last two quarters (ending March and June) and the Annual results
Standalone sales saw a drop of 3% and 11% in the last two quarters. It’s down 4% and 13% compared to the same quarter last year.
Standalone OPM too dropped from 11% to 10% and 8% and in the last two quarters
Consolidated sales saw a drop of 3% and 8.5% in the last two quarters.
Consolidated OPM too dropped from 7.5% to 5.9% and 4.4% in the last two quarters
Management has attributed these to the domestic auto slowdown and the turnaround pains of the subsidiary (Rane Precision Die Cast). The company’s products are intrinsic to the auto industry and are not susceptible to disruptions due to the EV shift.
Looking forward, both these factors would be mitigated - the auto sector will eventually rebound and the turnaround is estimated to be complete by 2020. Till that time, I think this script might be range bound with low volumes.
Personally, I have faith in the business and the management. My (amateurish) intrinsic valuation using conservative growth expectations and aggressive discount rates still shows the company to be undervalued quite a bit.
rane madras has a subsidary in usa called rane die castings which is making huge losses from the time they have taken over the company and thats why rane madras is not able to post profits ,hence avoid buying the stock
as said the stock again crashed badly from 420 to 350 ,there has been a constant selling in zones of 400 to 500 ,if there is selling at such lower levels ,there are chances of stock going back to 300 levels
A lot has happened in last 6-8 months which makes Rane Madras an interesting play.
Company has divested its loss making US casting business.
Has setup an unit in Mexico to export to US players. North American Free trade agreements give preference to local presence. So manufacturing happens in India and and assembly/machining in Mexico.
This should add 250cr to topline to start with.
Biggest is merger of Rane Brake and Rane Engine valves with Rane Madras. This will help in number of ways- Larger entity with 3500 cr sales and 2300 cr mcap at current prices, lower D/E ratio, cross-selling and synergies in manufacturing and manpower.
Apart from topline growth opportunities there seems to be lot of operating leverage built in which is apparent from low Mcap/sales ratio.
Export from quality perspectives should not be an issue as Rane Madras has been at forefront winning Deming award
This also shows that management’s focus is back on their crown jewel as they intend to capitalize on export opportunities which opens up due to China + 1. Rane Holdings parent has two other JV with NSK and ZF where they hold 49% each. These businesses are focused on India and controlled by JV partners. They seems to have stabilized. Last concall all discussion was around merger.
That is where merger will help. Rane Brakes is generating lot of cash and is not able to invest as brake lining does not need investment. Where as Rane Madras has debt and lots of opportunities for investments as it enhances product portfolio and explores export market.
Also, recent performance has been impacted by loss making US subsidiary which they have divested. So starting on clean slate.
Note: There is 4% arbitrage when buying Rane Brakes based on merger ratio. Also, Rane Brakes div yield is 3% if they payout this year(management may choose otherwise pending merger). So total arbitrage can be 7%.
So CRISIL puts a +ve watch on credit rating (meaning will be upgraded) as result of merger with high cash generating Rane Brakes e26be96f-e7d8-454d-9f46-ee40178bbe15.pdf (420.7 KB)
