Rane (Madras) Limited (RML.BO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Rane Group Limited Q1 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Diwakar Pingle from EY Investor Relations. Thank you and over to you, sir.

Thank you so much. Good afternoon, everyone. Welcome to the Q1 FY '26 Investor Call of Rane Group. To discuss the results and answer your questions today, we have the management team from Rane Group represented by Mr. Harish Lakshman, Group Chairman of the Rane Group; Mr. P.A. Padmanabhan, President, Finance and Group CFO; and Mr. J. Ananth, Executive Vice President, Finance and CFO, Rane Holdings. Please note that the results and presentations have already been mailed to you and you can also view it on the company's website. In case anyone does not have the copy of the presentation and you're not marked in the mail, please do write to us and we'll be happy to send the same to you. Before we start, I'd 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 the risks and uncertainties that we face. These uncertainties and risks are included but not limited to what we mentioned in the prospectus and subsequently in annual reports, which you can find on our website. With that said, let me kind of invite Harish to take over. Over to you, Harish.

Good afternoon, ladies and gentlemen. Thank you for dialing in. I'd like to welcome you all for this teleconference. I'd like to start with a few comments on the industry. The automotive industry began FY '26 on a mixed footing. While early quarter momentum was initially encouraging, the demand softened towards the close of the quarter leading to subdued overall growth across vehicle categories. The passenger vehicles maintained their growth trajectory supported by robust demand in the multi-utility vehicle segment and healthy export performance. However, the passenger car segment saw a noticeable slowdown signaling a shift in consumer preferences. The commercial vehicle segment witnessed growth supported by seasonal recovery and improved financing conditions while the MHCV segment saw an uptick driven by fleet replacement and prebuying ahead of the mandatory airconditioned cabin implementation. The farm tractor segment recorded a strong growth during the quarter reflecting a revival in rural sentiment, early monsoon progress in key agricultural belts. The 2-wheeler segment saw muted growth impacted by OEM inventory correction as well as decline in demand for some of the entry-level commuter bikes. Coming to our company's financial performance. The total revenue was INR 884.4 crores for the first quarter compared to INR 823.8 crores in the first quarter of last year with an increase of 7.4%. I'm happy to share that we had INR 800 crores of new business wins in the quarter. This will position us to drive future growth and cement our leadership position across our product categories. Following the completion of the merger, Rane (Madras) has sharpened its focus on unlocking synergies across operations. We have made tangible progress in improving operational efficiency, lowering costs and enhancing profitability levers. During Q1 FY '26, EBITDA margin improved by 30 bps from 8.6% to 8.9%. The aftermarket segment faced a challenging quarter, but we are actively driving capability building, range expansion and new product introductions to strengthen the market presence. On the U.S. tariff, the U.S. business currently contributes around 8% of Rane (Madras) revenue and it has not seen any immediate tariff-related impact. Our strong global quality reputation and competitive cost base position us well to navigate the evolving trade scenario. On the global front, the auto component industry is navigating geopolitical shifts. The recent tariff announcements by the U.S. administration could impact pricing and supply chain flows in the short term. We are closely monitoring these developments especially in the context of India-U.S. trade negotiations. While the near-term uncertainty persists due to global trade tensions and the recent tariff measures, we remain cautiously optimistic about FY '26. Domestic demand fundamentals are intact supported by infrastructure projects, festive season momentum and rural income stability. We anticipate moderate growth across major segments. However, the impact of component shortages, inventory adjustments of OEMs and price increases will remain key monitorables. With these remarks, we'll now open for any questions that you may have. Thank you.

[Operator Instructions] The next question from the line of Lakshminarayanan K G from Tunga Investments.

Just want to understand in ZF Rane Automotive India Private Limited, what is the debt we are actually carrying?

The total debt is INR 679 crores.

Okay. And what is the pathway? Is it that the debt would kind of come down or how do you think about in this business in ZF Rane?

Eventually it will come down. But I think in the short term when I can look at the next 1 or 2 years, it will continue at these levels because of the strong order position of ZRAI especially on the -- most of the debt is on the seatbelt and airbag side. So we are seeing good growth opportunities and therefore, the business needs more investment. So we are using debt as one of the reasons here.

We are almost doing close to INR 2,500 crores in this business. Want to understand in the next 2, 3 years what is the kind of capacity you are building and what would be the peak revenue that you can actually expect based on the capacity you are building for the next 3 years in this business?

Yes. So I'll answer the question in 2 parts. One is the Occupant Safety Systems Division, which is making the seatbelt and airbags. That business is growing very fast. It's a strong double digit, sometimes even touching 15%, 20% and we are looking at that kind of growth rate continuing over the next 3, 4 years. And that is a mix of both domestic because of the 6 airbags, the market; regardless of legislation, the market is moving. The consumer preference is moving towards more airbags in a vehicle. And on top of it, we have a healthy book of business for exports both directly to vehicle manufacturers supported by ZF as well as to other ZF plants. So we are quite optimistic about this business for strong double-digit growth and more investments are continuing and, as you are aware, some of the investments are also approved through the PLI scheme. As far as the e Steering Gear Division is concerned, the [indiscernible] are tied more to the commercial vehicle segment and that market has softened a bit. So there we are not seeing as much growth. But of course the e Steering Gear Division is the more solid business in terms from a balance sheet perspective. There's no debt as well as the margins tend to be higher than the occupant safety business. But that business will pick up as soon as the CV market rises.

Got it. So I'm just trying to understand from a capacity of building on this business over the next 2, 3 years, what is the -- right now we are around INR 2,500 crores kind of a run rate. How much it can actually really be theoretically possible?

So the capacity is at peak optimum. That is why we are continuously investing. See, the business is going to grow at about 15% to 18% per annum. And for the incremental sales, generally the investment on the occupant safety side is about 1:5. So for every INR 5 of sales, INR 1 investment is needed. So we will continue to make those investments.

Got it. And what's the kind of margin you typically would like to keep it either at an EBITDA level or at a PAT level for this business?

So the EBITDA for this business will generally hover around 10%, 11%.

[Operator Instructions] The next question is from the line of [ Rithik ] from Beyond Capital.

Congratulations on a good set of numbers. Sir, so 1 question around Rane Steering Limited. So sequentially our revenue has gone down, but our margins have improved over here. So what is that has changed plus where do we see this business in next 2 to 3 years and are there any business wins towards this business?

Yes, I'll answer that question. So as far as the revenue is concerned, I think this quarter there has actually been a 6% growth. But yes, the margins have improved even more. There are a couple of reasons for that. I think one, there were some extraordinary items of land sales which is nonoperating. But even in the operating also, we have got some increases because of certain price settlements that we received from our customers that were pending, but a lot of it was to do with some of the past claims as well. So therefore, I think that would have also got reflected in this quarter. But going forward also, the operating margin will be slightly better than last year's performance, but we still have ways to go in terms of improving the margins further on this business. And as I've said in the past calls, this is going to take about a couple of years because of the poor pricing of some of the new businesses, which we are doing our best to correct. But as and when some new businesses that we have booked, which are at much better profit margins, as and when they start coming into the P&L, we will see the margin improvement.

And sir, have we added any other customers except Maruti over here?

Yes, we have added 1 more customer during the January to March quarter, which we had announced for a new electric steering program for a passenger car platform.

We take the next question from the line of Mihir Vora from Equirus.

So basically my question was that I was going through the order book and it has been quite good in the quarter. So is it something that those are new order wins or is it replacement of some previous products also?

It's a combination of both. I don't have the exact split up. But a lot of it is also the new business.

And can we expect this to continue in the same range or slightly below, but it was quite positive to see that number.

Yes. So I don't want to give any numbers except I can tell you that we are optimistic that the order book pipeline looks good and we are confident of continuing to book lot of new business. Now whether we can maintain this, there are always quarter-to-quarter variations. So I don't want to predict, but I can tell you that we feel positive about winning new businesses or even booking even more businesses.

Right. And sir, second part is on the technology front. Now we are also seeing steer-by-wire technology coming in from ZF. So basically this still has a very nascent penetration. But if this product starts -- penetration for this increases, how do we see Rane (Madras) products into the steering system placed here because that is mainly into the intermediate parts? So how do we see that risk?

Yes. So the steer-by-wire, I'll put it into 2 parts. As far as the export is concerned, Rane (Madras) has a lot of opportunities to be a Tier 2 supplier to the major steering players like Bosch, ZF next year. In fact I can share with you that we already supply 1 or 2 steer-by-wire products for exports. As far as the Indian market is concerned, the market is still far away for steer-by-wire type of products in the Indian market. But however, certain other advanced steering technologies like rack drives, those will start coming into the Indian market. And as you know, we have signed a license agreement with ZF to bring those through the joint venture that we have. So those as far as Indian market is concerned, that we are hopeful that ZF Rane will capture that business and once we do that, there is potential for Rane (Madras) to be a supplier of certain components for those products in the domestic market.

Okay, sir. And the final question would be like recently with the land sale, which we have done. So just wanted to understand whether this would be a complete full-on land sale or there's some terms like we'll be receiving payments in a period of, say, 2 years, 3 years or it would be a spot payment?

No, no, no. It's over a fixed period.

Okay. And so our debt reduction target remains the same around INR 150 crores.

Correct. Correct. Yes.

We take the next question from the line of Pratik Kothari from Unique PMS.

Sir, on the land sale again. Given this kind of exceeds what our expectations were overall, does the other land parcel also still stay in play for us to monetize or not anymore?

Sorry, can you repeat your question?

Yes. So this Velachery land sale, which we did, exceeds. So earlier our expectations were we wanted to monetize INR 100 crores, INR 200 crores of land. This itself gave us INR 350 crores. So do we intend to do another parcels of land, which we had put out in that shareholders' vote we have taken for some 3, 4 land parcels. So does that still stay in play or we are done in terms of selling of land?

Yes. So all those properties mentioned in that shareholders' approval are surplus and there is no foreseeable need. So if we find an economically valuable proposal, if it's a good deal, we may do it. So the short answer to your question is yes, we are continuing to evaluate some more options. No decisions have been taken.

Right. So there's a possibility that we might be able to monetize a large part of our -- I mean we might be able to repay large part of our debt this year itself, Velachery plus maybe those other parcels?

It's a possibility.

Fair enough. And sir, second 2 aspects. One, we wanted to -- I mean this is Rane (Madras) specific. So one, after I think 4, 6 quarters, we are seeing some movement in exports. We are seeing some growth coming back, which we used to see for 3, 5 years earlier. So 1 comment is anything changing? Anything you would like to highlight there?

Well, no. I mean clearly there has been after almost 4 quarters of flat or negative growth in exports, we are seeing some uptick in the market. But obviously the latest development on -- the unexpected development on the tariffs is making us concerned or nervous. So we'll have to see what happens. But otherwise, with some of the market coming back as well as some new business that we have won should continue.

But this export growth that we saw would be across geography, right, including Europe?

Yes, yes.

Fair enough. And sir, lastly, on margins, right? So we intended to take this margins up to double digit, maybe 11%, 12%. And also last quarter we did speak about some synergies coming in after merging all of these businesses together. So one, if you can highlight I mean 3, 6 months into this process, are those synergies materializing? Is it material enough for our size and scale? And second, on our trajectory towards this double-digit margins?

So yes, definitely the synergies are beginning to come in as we have communicated earlier. I would break down the synergies into 3 buckets. One is straightaway immediate act on the day of the merger, which are largely compliance-driven costs from running 3 public listed companies to 1 public listed company. So obviously those have already been realized. Then there are some short-term synergy benefits of consolidating the financial position, therefore, leveraging the balance sheet to reduce things like interest rate, et cetera. So those kind of things are also underway and some of it has also been realized and some more will be realized soon. And in that also, there are also some other like indirect materials, that procurement whether through consolidated buying. So those are in active discussion right now and we expect some results also during this year. So I think all put together from a short-term perspective, we expect 1%. As I had shared during the RML AGM, 1% improvement in margin is a sure possibility at the current volume level. And then in the longer term is the third bucket, which is little bit more synergies of consolidated direct material purchasing, centralization of certain organization functions, et cetera, which will take a few more years to come. But in the next 18, 24 months we will start to see those. So a combination of these initiatives combined with hopefully some growth in the market, the passenger car market and the CV market start growing in high single digit if not double digit. If all that happens, I think we are on track to hit double-digit EBITDA margins.

Fair enough. Just to clarify this 1 percentage increase in margin is just from this very immediate and short-term synergies which you are expecting?

Yes, over a year. That's as I said, over a year.

We take the next question from the line of [ Mitul from Kiva Advisors ].

One question on the ZF Rane business. We have seen a quarter-on-quarter slight decline in the margin. I just wanted to know out of this INR 625 crores, how much is in the safety business and how much in the remaining business is the revenue mix currently?

Yes. So if you look at the safety business during the Q1. So the INR 389 crores was from the safety business and INR 218 crores was from the steering business. And actually the safety business, there was a 28% growth and also of course that's also because of the acquisition that we did of the steering wheel business. So that's the reason for the growth. The steering business had a minus 3%, as I mentioned, largely because of the commercial vehicle market.

Got it. And I just wanted to understand and you mentioned that the steering business has higher margins than the safety business, right?

Yes.

So we will get top line growth, but maybe the margins will be more in the 10%, 11% range or could we do better than that in this ZF Rane business?

No. I mean unless the commercial vehicle market picks up, I'm not seeing an opportunity. We are all hopeful the commercial market will pick up during the second half. If that happens, margin expansion is definitely possible.

Also you had mentioned last time that the safety business of ZF Rane would be moved and housed into a separate company. I just wanted to understand the timeline for that and any implications of that happening?

Yes. So the process is well underway as announced earlier. Right now the matter is going through the NCLT process. I'm not able to give an exact timeline, but it should happen during this financial year. So in the next 2 quarters, Q2, Q3, I don't know; in case of some procedural, it could go to Q4. But I think during the next 6 to 9 months, it should happen.

And then we would have 49% of that business or it would become a 100% subsidiary of ZF Rane?

No, no. This will be 2 separate joint ventures. Yes. So RSL will own 49% in one joint venture and 49% in the other joint venture.

Got it. Any implication of costs or any sort of benefit?

No. I mean this is largely being done because ZF took a decision to globally carve out their occupant safety business. So as a part of that process, we are also supporting ZF in that move.

Understood. And on the Rane Steering Systems business, we've seen some quarter-on-quarter improvement on the margins even on a year-on-year basis to about 3.9%. So just wanted to understand -- that's quite a significant improvement. So just wanted to understand how the trajectory of the margins here would move on an annual basis?

As I explained earlier already, this quarter there were also some price increases of last year that were received during this quarter. So that drove the margin improvement. And of course there is some improvement also through efficiency that's happening. But as I explained, it's going to take a few more years before we see EBITDA levels going up further. I mean this 3%, 4% EBITDA definitely we have visibility. But beyond that is a function of some of the new business kicking in, et cetera. So it's going to take some time.

So what levels would the new business be at, sir, just to understand? What levels of margins would the new business be at?

Those would be at about 8% EBITDA.

We take the next question from the line of Komal from Ratnabali Group.