Rane Holdings Limited (505800) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Rane Group Q4 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Binay Sarda from Ernst & Young. Thank you, and over to you, sir.

Thank you, Muskan. Welcome to the investor call of the Rane Group to discuss [indiscernible] and answer your questions today, we have the management team from Rane Group, represented by Mr. Harish Lakshman, [ Vice Chairman & Joint MD ] of Rane Group; Mr. P.A. Padmanabhan, President, Finance and Group CFO; Mr. Siva Chandrasekaran, Senior Executive Vice President of Secretarial and Legal Services; and Mr. M.A.P. Sridhar Kumar, Executive Vice President, Finance and CFO of Rane Holdings Limited. Please note that we have sent you the press release, and also, we have sent to the presentation link of the deck. In case if you have not received the presentation, you could look at it on our website or on the BSE site of Rane or you could write to us, and we'll be happy to send the detailed earnings presentation over to you. Before we start, I would like to say that everything that is said on this call that reflects any outlook for the future or which can be construed as a forward-looking statement must be viewed in conjunction with risks and uncertainties that we face. These uncertainties and risks are included, but not limited to what we mentioned in the prospectus and subsequently filed in annual report, which you can find also in our website. With that said, now I'll hand over the call to Mr. Harish Lakshman. Over to you, sir.

Thank you, Binay. Good afternoon, ladies and gentlemen. Thank you for dialing in. I'd like to welcome you all for this teleconference. It's a pleasure to connect with you on this platform as the Chairman of the group for the first time. You would have seen the Q4 FY '24 performance highlights of the group companies, which we posted on our website. I'd like to start off by providing a few comments on the industry. The automotive industry had a mixed performance in the final quarter of the financial year '24. The PV Segment, while experiencing record high sales was propelled by improved vehicle availability and significant contributions from the SUV segment. However, there was a drop in the M&HCV segment and the pre-buy in the Q4 financial year '23 compared to what we did not see in FY '24 resulted in muted performance on the CV segment. There was a drop in the sales of farm tractors compared to the previous quarter due to the weak weather conditions, which adversely affected agricultural output and its costs. The 2-wheeler segment had robust growth, helped by improved demand in key overseas markets. Coming to our group performance. The Rane Group had an aggregate sales of about INR 7,200 crores with 8% growth over the previous year. I'm happy to share that this is our highest ever group aggregate sales for any financial year. The revenue from the domestic OE customers grew by 9% and revenue from international customers increased [ 4%, ] and the slower growth was also on account of the divestment of our U.S. subsidiary, LMCA. On organic basis, the exports have actually grown by 15%. The EBITDA margin of RHL consolidated decreased by 38 basis points in FY '24. I'd like to now talk a little bit about each of our businesses. On Rane Madras, the demand for the steering and linkage business was impacted mainly due to the drop in passenger cars, particularly the entry-level models, and also the farm tractor segment. Export sales grew by 10% despite a drop in the off-take of the off-road vehicle segment in the U.S. The light metal castings India witnessed a growth in exports of about 18% with ramp-up of volumes in some new businesses. We also won new business worth more than INR 500 crores across products and customers during this year. Unfortunately, the EBITDA margin declined due to the lower absorption of fixed costs and due to sales drop as well as certain one-off provisions. In REVL, I'm happy to announce that we achieved the highest sales level for the company driven by robust sales growth and enhanced operational performance. We grew the business by 14% in FY '24 with strong growth across all market segments, domestic aftermarket as well as exports. The turnaround and [indiscernible] plan started a couple of years back in yielding results in operational efficiency, capacity realization, export growth and better cost management. For the year, the EBITDA margin improved by 157 basis points. The company has devised strategies to expand share in the domestic market with certain identified customers in the automotive segment and also focus on EV insulated sales, which includes the application like power generation, stationary engine, marine, locomotor, et cetera. The company has revised its vision to enhance product portfolio with some [ non-IT ] components, which has similar manufacturing process. Coming to Rane Break Lining, I'm happy to share that RBL also achieved the highest sales for the quarter and for the fiscal year. FY '24 sales grew by 10% with support of strong sales to the 2-wheeler segment. The aftermarket customers grew by 6% and export sales grew by 33%. For the year, EBITDA margin improved by 105 bps, mainly due to lower material prices and favorable ForEx. Operational improvement initiatives and energy savings initiatives helped to mitigate inflationary pressure on other operational costs. Coming to our joint venture with ZF. As you are aware, ZF Rane Automotive India Private Limited acquired 100% of the steering wheel manufacturer TRW Sun Steering Wheels Private Limited. This acquisition places our company in a strong position to provide comprehensive solutions covering Occupant Safety and system integration services to domestic customers. Despite the sluggish M&HCV market in Q4, the steering business grew by 12% during the year. The occupant safety business is benefiting from the evolving safety regulation in India and the revenue grew by 20%, supported by some offtake from domestic customers. And this growth does not include the TSSW acquisition. The EBITDA margin for the joint venture improved by 33 bps during the year. Vertical integration of inflators and webbing plants will help improve competitiveness in the Indian market, and both the plants are fully ready and nearing production. Turning to Rane NSK joint venture. RNSS had a 14% growth for the year. The EPS business registered a good growth driven by strong offtake in the served model. The company won new business worth INR 550 crores across various customers. EBITDA margin was unfortunately impacted due to the unfavorable mix, as explained in past call, some of the new businesses have a much lower profitability compared to some of the earlier programs. So the management is working on improving this. Given the return trends on the quality issue, there was no further warranty provision, and we see a closure on this issue. Coming to the outlook, FY '24 has been an eventful year for the group, given our efforts to rebalance the product portfolio. We achieved the divestment of both the telematics business, Rane [ t4u ] our castings business in the U.S. In merger announcement of the operating entities of the group to create a larger company, will serve as a strong platform for future growth. And the acquisition of the steering wheel, TRW Sun Steering Wheels business enhanced Occupant Safety product portfolio to provide comprehensive solutions. As we look ahead in FY '25, we remain reasonably positive on the prospects given our order book position. We plan to invest about INR 1,000 crores over the next 3 years in terms of CapEx. We continue to prioritize operational improvements and cost savings. With these remarks, we'll now open for any questions that you may have. Thank you.

[Operator Instructions] The first question is from the line of Sunil Kothari from Unique PMS.

And Harish, congratulations and lots of good wishes for this more responsibility and Chairmanship of the well-respected group. Sir, my first question is on this -- if you can talk something more about qualitative benefits of this merger. Basically, as you announced, you have taken the decision of merging these 3 operating entity in a 1 company on the basis of investor expectation and solutions. So normally, as the investor, we only expect better performance, better profitability and better return. So what type of benefits in terms of costs integration, maybe some merging of some factories, what type of advantage and benefits will we have over the next 2, 3 years? If you can talk a little bit more, it will be really helpful to guide us about our investment for next many years.

Thank you, Sunil, for your wishes and your question. I mean, as you said, I can only talk in general language about the benefits of the merger. We are not yet ready to put any specific numbers to it because we are still working on them. But clearly, the idea of behind the merger, as you know, I think this has been asked by many investors over many years. And internally also, for a very long time, we have been discussing this and waiting for the right time to do it. I think the idea is to clearly create one large company, which will serve as the platform for future growth in addition to whatever growth we see in existing product lines. But in the process of merger, obviously, there are going to be some straight benefits, some of that are direct and -- very direct, for example, from 3 listed companies to 1 listed company, right away, being a listed company, costs come down, compliance cost comes down, board positions and Board-related costs start coming down. So straight away, there are benefits like that. Then there are second benefits like the combined balance sheet will be stronger than the individual balance sheet. Therefore, the ability to raise capital at lower cost, talking predominantly debt, in ability to leverage on debt, tax benefits, as you know, a company like Rane Engine Valves made losses for many years and there are accumulated losses. So there are ability to accelerate tax setoff for taxes, et cetera. So there are those kind of synergies. Then the third bucket is a little bit more long term in terms of can we combine certain operations, can we combine certain support functions that provides support to various businesses by consolidating, there will be more -- further benefits. So we are splitting these benefit -- cost-related benefits into these 3 buckets. And we're still working on the numbers. I'm sure at the appropriate time, we will share with our investors what savings will be -- that will happen immediately over time across these 3 buckets. Over and above this, of course, the idea is to be able to leverage this single balance sheet and drive further growth, cross-selling between customers. So today, for example, Rane Madras, I'm talking both the steering and castings division, has got INR 700 crores of exports -- of close to INR 700 crores of exports whereas Break Lining has only INR 35 crores of exports. So straight away, we can leverage the customer base by enhancing this. Similarly, Rane Madras can leverage on the aftermarket trends of Rane Break Lining. So there are also these kind of synergies, it's really very difficult to numberize, but there will be a very clear benefit by the ability to, what I call, cross-sell some of these products. So these are the -- any positive things that we see from the merger. Of course, the merger, just for everyone's benefit, the merger process is still underway. I think it's as everyone knows, there is a -- it has to go through the stock exchanges and then the NCLT, et cetera. So all the preparatory work is still going on. And obviously, it's going to take several more months for the merger to be complete. So hopefully, once that process is completed, hopefully, the market will better appreciate this new merged entity.

Yes. Sir, second question is on -- one very interesting observation from my side is Rane, we been a very conservative group, we never feel good about paying very high interest burden and all. And if you take this on these 3 collective combined entity, our interest burden is currently INR 60 crores, INR 65 crores per annum. I'm -- in my first question's reply, you not been mentioned about any extra resources. So I would like to just draw your here, our Velachery plant, which we vacated, we may have some corporate office or something like that there. But just 2, 3 meters away -- 200, 300 meters away from this Velachery -- our factory of Rane Madras, the DLF has sold a 4.5-acre land to Chola Group, Murugappa Group at INR 735 crores. So I feel that area is now getting reasonable values, and we were expecting since last 5, 7 years back. And we have this little bit strained balance sheet, and we are paying very high interest. So would you like to take this type of tough decisions like you've taken during last year or 2? Because these are the unused or may be extra resources, which may be useful to improve the business balancing and grow in a confident manner. So your thoughts will be really helpful.

I mean there are no clear thoughts as of now Sunil. From what I hear, Chola has purchased this land to build their own corporate office. So we also are having our corporate office in Velachery. And of course, as far as the debt is concerned, we are -- as I explained very clearly, I want to assure the investors, there is a lot of focus on reducing debt. And we must look at the post merge the balance sheet and how the debt level is for this new Rane Madras. And based on that, we will be taking actions. But I can assure you the intent is to reduce the debt. So what actions we will be taking. I'm not able to share at this point in time.

Got it. And sir, just last question. Will you be open to use any extra resources whatever Rane group we have if required to strengthen the balance sheet and the business?

Yes, yes, absolutely. Absolutely.

The next question is from the line of Pratik Kothari from Unique PMS.

Best wishes for your new role. Sir, my first question is on this warranty claim. I mean it's a tough topic for us for the past 2 years. So Rane Madras now again at Engine Valves some. So I'm sure you'll be more disappointed than anyone else. But your comments on what is it that we are doing, how we are solving it, what is it that we have done because time and again, we are seeing something like that. I mean the quantum might be different. I mean it's very small in Engine Valves was this quarter or this year, but time and again, we are seeing this repeat. So some comments, what are we doing to solve it.

No, I mean, it's always a challenge, Pratik. This is -- a lot of effort goes into making sure our product quality and robustness is right. As far as, of course, the Rane [ MSC ], and that has been a very clearly painful journey. And of course, as I mentioned in the opening remarks, we believe that it's behind us and no more provisions, et cetera, and that issue will come up. Yes, but it's unfortunate. Yes, during last year, not only Rane Engine Valves, Rane Madras also had an unexpected warranty came that hit us, of course, much, much smaller magnitude, but still, it is costing the company. So there is a lot more focus on our product development and manufacturing process. And of course, in some times when there is also export business, the risk does go up to that extent more because we need sort of warranty in an overseas market as was the case with Rane Engine Valves turns out to be even more expensive. So I mean, the only answer is making sure our quality, both product development quality as well as manufacturing quality continues to improve and there is a lot of focus all of us are putting into that area.

Fair enough. Sir, my second question on export. I believe for the past, I don't know, maybe 10, 15 quarters from growing at a very, very healthy cliff. I mean, 30%, 40% year-on-year. Surprisingly, in the last few quarters and in quarter 3, it was flat this quarter, we were down 10%. So I mean this sudden change -- anything has materially changed outside? I mean then how should we look at exports going forward?

So I just want to put it in perspective. As I mentioned in my opening comments, the international, what we call international sales included our casting business in U.S. So for the year, while the growth has tapered is also because of the sale of our U.S. investment. Actually, on a year-on-year basis, the export has grown by about 15% for the year. Now on a Q4 basis, I think, again, you will see that number lower because -- again, because of the U.S. investment would have been in last year's Q4, it is not there this year.

[Technical Difficulty]

Sorry sir. Your voice is breaking.

Yes, you take the numbers and get back. Sir, the third question on other expansion either quarter-on-quarter, year-on-year. This is specifically to Rane Madras. Our sales are substantially lower but other expenses moved up substantially some 20%, 25%. So any one-off, anything which is sitting there, INR 90 crores becoming INR 110 crores.

Yes, yes. There were certain one-off provisions that have to be made. So -- and these are only provisions at this point in time, we will have better clarity in the coming months on whether they can be realized or not.

But any quantum, what is it regarding?

So it has got something to do with our sale of the U.S. business. The quantum is approximately INR 12 crores out of that, where there is some deferment in the payment that is to be received. If you recollect, when we sold the U.S. investment for close to $4.9 million, there were some deferred payments. So there is some delay in that. But as of now, we don't see any risk to receiving the amount. There is just some delay, but we went ahead and decided to make a provision.

[Operator Instructions] The next question is from the line of Manish Goyal from Thinqwise Wealth Managers.

Congratulations, Harish, on becoming a Chairman for Rane Group. Best wishes, Sir. I have a few questions, kindly bear with me. So in -- particularly, when Pratik was asking question on the exports business, but where probably whatever you report in your presentation and quarterly press release, so I believe those numbers are always for standalone. And in Q4, we are seeing an 11% decline in the exports business which probably in the last 2, 3 quarters are on a declining turn. So I was just wondering that if you have been getting so many export orders for last few quarters. Why is it that the run rate has been probably on a downward curve? And how do you see it going forward? That was my first question.

Okay, I think I misunderstood that question when he had asked. So that is only on a Q4 basis. Q4 to Q4, there was a decline, and that's mainly because of some slowdown in the ops, which I mentioned again in the opening remarks about the off-highway vehicle segment in the U.S. that we export to. So there is no concern on the export front. But at the same time, the rate at which we grew in the last 24 months, if you look at Rane Madras, the last 2 years, the export jumped significantly. In fact, if I remember, last year, we grew actually 40% in export, but that is because of launching of many new programs. So during this last 6 months as well as during the next 12 months, there are no major new programs we are launching at that level. So to duplicate the last to what the significant growth we saw in that last 2 years will not happen in the next 12 months, but it will still continue to grow. There is no doubt that exports are going to continue to grow. But the rate of growth may not match last 2 years, but we are still in discussions for many new programs that are going into production in 2026, some in 2027. So some will jump again when we introduce some new large programs. So I hope I'm answering your question.

Okay. Sure. Sure. And on -- particularly for ZF sir, so if you can just give more perspective on the acquisition of TRW Sun, basically, what we read was that it is a steering wheel company. And so how is it complementary to us and what is the size, what is the cost of acquisition? That was one question. And then also related to ZF Rane again that, sir, we have set up facility in subsidiary. You did mention in opening remarks that both the plant inflator and webbing has started. So what is the kind of CapEx we have done? I believe this is under the PLI benefit. So what kind of revenues we -- or maybe benefits we can see in terms of margin improvement. And also, like how would you be reporting it going forward because now you have 2 subsidiaries at ZF Rane.

Yes. So I'll try and answer all the questions. So as far as the acquisition is concerned, this was the -- while the company is still called TRW Sun Steering Wheels, it was owned by ZF by 49% and 51% was held by some other Indian promoters. And this joint venture has been there for many years. And this is actually the -- actual Steering Wheel that we have inside the car and which where the driver is holding on to. And as you know, the airbag, especially the driver airbag is inside this steering wheel. So today, our joint venture with ZF Rane while we make driver airbags, we actually many times supply the airbag to a steering wheel manufacturer and then it's integrated into the steering wheel and then supplied to the OEM, not in all cases, but in many cases. So -- and this product is already their in ZF portfolio. So there was an opportunity for -- to exit the other Indian promoter in that company. So after a lot of discussion with ZF, we decided that our joint venture will make the acquisition. And we will integrate it into our seatbelt and airbag business. And globally also for ZF, the steering wheel, seatbelt and airbag is all consolidated into one division of ZF. So from a pure product strategy and a market standpoint, this is a very good acquisition. I think in terms of the acquisition price, we paid INR 139 crores for this business. The business has about INR 140 crore turnover and the EBITDA is at about 8.2%. And the idea now is that post this acquisition, Rane will be fully managing this. And hopefully, we can grow this with ZF even faster than they have been able to with the other Indian promoters. So broadly, this is be strategy behind the acquisition. Now coming to the second point. Yes, under the PLI scheme, both the plant investments have been made. So we have invested close to INR 350 crores over the last 2 years. I mean, not only for these 2, but also in some capacity expansions. I don't have the exact split up. But -- sorry, INR 260 crores, I said that because I included the steering. So on the occupant safety side, we invested about INR 260 crores going in for both inflator as well as the webbing plant as well as some capacity expansion in peoples and airbag. So the main purpose of this investment is for margin improvement because both the initiatives are backward integration. We were importing these 2 products, the webbing and the inflator and now we are going to localize them. Webbing production has already started, inflator is going to start very soon. So this will improve the margin my guess is close to about 1.5% improvement in margin, obviously not from next quarter, but let's say, a year from now, we will be seeing about 1.5% improvement in the margins in this business. As far as your third question on how we will be presenting the numbers. Obviously, we will be presenting only the consolidated numbers. But what we share with our investors, since this acquisition just got completed, we have not had the time to -- we are still talking with that management. We have to first focus on integrating the management of that business into ours. So we're still doing a few things post-acquisition integration. So very soon, we will have a clear idea on how we will communicate this with our investors.

Sure. Okay. And sir, one question on Rane NSK. So this quarter, particularly press release mentioned that we have won a large order of INR 250 crores. So sir, I just like to get a perspective like when we say new order wins, would it mean that this will be incremental revenues for us or probably as time passes over the next 2, 3 years, as this new program starts, we probably lose some old business as well. So how should we read into it? And you did mention that for full year, you have got INR 550 crores order -- new orders in NSK. So then second question to this is that by when do you think that we can probably see the margin improvement in NSK?

Yes. So these are new businesses. Of course, they go into production one in 2026, one in 2027. So the impact of this in terms of our sales, et cetera, we will see only in the later years. But these are incremental businesses. They are not model replacement business, not -- so that is the answer to the first question. Second, I mean, unfortunately, as I said, this margin pressure over and above coming from the warranty is definitely a concern. We are working on several margin improvement initiatives to see what we can do. I think trying to show the same level of operating profit, what I'm talking without warranty, what we have had in the last 2, 3 years, it will take another couple of years to get back to those kind of profitability levels. But clearly, beyond the 2-year time frame, we are seeing a lot of opportunities to enhance the margin in that business.

The next question is from the line of [ Ankur Jain ] an individual investor.

I have a question regarding Rane Madras. When can we expect some margin improvement?

So we're all waiting to see how the market is post first quarter. There is a general view that post election, market will improve. And especially the farm tractor segment as well as the commercial vehicle segment. As you know, Rane Madras has a significant dependence on these 2 segments. So hopefully, the market picks up, we should see some improvement even during this year.

Okay. I have another question regarding the TRW Sun acquisition. The INR 139 crores you mentioned, is it Rane's share or TRW marks the same amount?

So we -- what we did is we purchased 100% of the shares of that company. So it's for the total company, for the 100% of the share, in which ZF owns 49%.

The next question is from the line of [ Raj Kumar Vidyanandan ] an Individual Investor.

Sir, the first question is on ZF Rane. The presentation says the EBITDA margin improvement is due to some one-off deals. So if you could please quantify what is the amount of deals?

Sorry, your question was not clear. Can you repeat?

In the presentation, for ZF Rane, the JV, it says EBITDA margin improved mainly due to one-off deals. So just wondering, what is the amount of one-off deals?

Amount was about INR 14 crores.

So which means if you go back and see...

It's about INR 11.5 crores, not INR 14 crores that was the one-off.

So for next quarter onwards, if we go back to the 10.5%, which we did in Q4 FY '23, right?

Yes.

That's a steady state margin. Okay. And sir, the second question is, the INR 1,000 crore CapEx that you mentioned that you will invest in the next 2 years. I just want to know how much would be to the JV venture and how much will be to the RML, the merged group.

More towards the JV. About [ INR 400 crores ] 55% will be from JV and 45% from the Merged RML.

Okay. Okay. And sir, the next question is what is the closing warranty provision we have in Rane NSK and any chance of any of that amount not getting reversed?

Yes. So I think there is about close to about INR 28 crores of balance remaining. And as I mentioned in the opening comments, the way the warranties have been coming in the last 6 months, we don't see the need for [indiscernible]

Okay. But the entire amount will get continuated...

Yes.

Okay. And sir, any update on the compensation because in the previous calls you have been mentioning that we are talking about getting some compensation from NSK, given that they are getting the royalty payments. So on this warranty...

No, as I said, it's a complex issue with multiple entities. So various conversations are going on. So as and when those conversations are completed, we'll share with the investors.

Okay. Okay. And sir, the last question, what is the outlook for the tractor segment given that the IMD has given a good monsoon outlook. So do you see any green shift appearing there?

So we don't have any additional insights. We are going by what Mahindra's and TAFE and ITL, some of our major customers, we go by what they are saying. The general expectation is that this year also is not going to be a great year. Once it's -- hold on. So we are forecasting actually a zero percent growth in the tractor segment this year. That is the outlook that we have looking at based on what we hear from our customers.

[Operator Instructions] The next question is from the line of Abhishek Jain from InvestWell.

I've got a couple of questions. One among them is that we are in auto TECH firm. Do we have any synergies with the industry companies like we have been some business with them or those are some heightened startups that we intend to acquire going forward?

So this is through Rane Holdings. This is a VC fund that we invested almost 5 years ago. And this VC fund invests in some startups, mainly in the North American market. And this fund is also based out of Silicon Valley. So other than the investment that we have and us being a limited partner in that fund, there is no other no other specific business dealings with them. Of course, we obviously have a business relationship with them. So for some evaluation of some new technologies, et cetera, we might have some phone calls with them and get their views, things like that, but nothing more than that.

All right. And sir, these days, India is emerging as a manufacturing hub, we design and provide tremendous opportunity in same page. So many engineering companies as well as group have successfully diversified into other [ sunrise ] sectors like defense, aerospace, electronics and all. Do we have any vision of getting diversifying into other product segments, other than auto?

Yes. I mean, currently, I would say no. I mean, it's not that we will never look at it. But right now, our focus is to capitalize on the growth opportunities we have at hand, consolidate our business, reduce debt. I think these are the main focus from the next 1 or 2 years perspective. And even when I look at the next a 3-, 4-year perspective, there's plenty of opportunities within our own product lines as well as maybe new product lines in the automotive segment. So I think that's where the focus is right now. But if you ask me from a 10-year perspective, yes, it's possible that we also look at certain non-automotive investments.

All right, sir. And sir, the provision that we have provided in NSK for warranty, that's, I think, over INR 500 crores, INR 550 crores. So basically, these are just a provision, not the company has made cash losses till now.

No, no, cash. No, no, this is -- we made a provision. And as I explained earlier, most of the cash has been disbursed as well. So there's only about INR 28 crores of provision left.

All right. And how much cash did we disbursed in NSK for -- warranty in NSK?

Out of the INR 500-odd crores that you mentioned, yes, only INR 28 crores is remaining.

You mean INR 472 crores has already been disbursed.

Yes.

Okay. Fine then. And another thing is that in the Precision Die Casting company or the Rane Light Metal, we have incurred losses of over INR 400 crores, correct? But during the acquisition time, the enterprise value of this Precision Die Casting that we acquired was $9 million, of which $2 million was the equity, am I right? So the thing is that we have provided the losses, when I see the financials of Rane Madras, the standalone entity has shown almost INR 400 crores of losses, but whereas in the consolidated entity, the losses are substantially down. So what is the reason behind the two, standalone and consolidated showing losses -- so much of differences in losses?