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

Ladies and gentlemen, good day, and welcome to Rane Group Limited Q2 FY '26 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I now hand the conference over to Mr. Diwaker Pingle from EY. Thank you, and over to you, sir.

Thank you so much. Good afternoon, everyone. Welcome to the Q2 FY '26 Investor Call of Rane Group. To discuss the announcement and answer your questions today, we have the management team from Rane Group represented by Harish Lakshman, Chairman of Rane Group; P.A. Padmanabhan, President, Finance and Group CFO; J. Ananth, Executive Vice President, Finance and CFO of Rane Holdings; and S. Prasad, Associate Vice President, Corporate Planning, Rane Holdings. Please note that the results and presentations have been mailed to you, and you can also view it on the company's website. In case anyone does not have a copy of the presentation or you are not marked in the name, please do write to us and we'll be happy to send the same. 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 risks and uncertainties that we face. These uncertainties and risks are included, but not limited to what we have mentioned in the prospectus and subsequently in annual reports, which you can find on our website. With that said, I'll now hand over the call to Harish Lakshman. Over to you Harish.

Thanks, Diwaker. 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 second quarter of this financial year was mixed yet encouraging period for the automotive industry in India. The quarter began cautiously with subdued consumer sentiment and challenging weather conditions weighing on early performance. However, momentum gathered pace towards the later half, driven by the onset of the festive season and the rollout of GST 2.0 with its lower tax rates from late September. These developments revised market confidence and spurred a notable uptick in the overall sales. The passenger vehicle segment sustained its growth trajectory, benefiting from a series of new launches and face shift models, stable rural demand and [indiscernible] inventory buildup. Tax incentives offers through supply conditions enabled automakers to clear inventory and maintain healthy momentum. The commercial vehicle segment continued its positive growth, supported by strong infrastructure activity and increased government spending. Fleet operators returned to the market to expand capacity, encouraged by rising freight movement, higher construction demand, improved vehicle utilization and greater access to financing. The 2-wheeler segment was the standout performer this quarter, achieving a record sales in September. Though the electric 2-wheeler continues to grow, supported by new launches and improved financing options, it was, however, impacted by supply constraints from rare earth magnet shortages. The tractor segment maintained its strong performance through the quarter, supported by favorable monsoon conditions, strong agricultural sentiment and improved rural incomes. This continued resilience highlights the stability of rural demand, which remains a key driver for the industry. Overall, the quarter reflected a gradual, but broad-based recovery, setting a positive tone for the remainder of the fiscal year. Coming to the highlights of our performance. Rane Madras total revenue was INR 923.4 crores for the second quarter compared to INR 851.8 crores in Q2 of FY '25, which shows an increase of about 8.4%. I'm also happy to share that we won new business worth INR 500 crores plus per annum across product categories during the quarter. The new tariff situation in U.S. has not impacted sales in this quarter. However, we continue to monitor the evolving tariff situation, and we are still hopeful that the ongoing diplomatic dialogues will provide necessary clarity and stability of the policy. During this quarter, the EBITDA margin improved by 18 bps from 8.8% to 9%. We are working on several new margin improvement initiatives, and we expect the results to flow in from Q1 of next financial year. As we move into the second half of this fiscal year, optimism across the industry is definitely strengthening, supported by improving demand across all key segments. The near-term environment remains favorable, supported by steady volume growth across all vehicle segments in India. We continue to see healthy demand trends from both domestic OEMs as well as export market. The powertrain agnostic portfolio of the group, the proven capabilities in export market and higher opportunities in the Indian aftermarket are important growth drivers for us. India's position as a global auto component hub remains intact, and this is presenting a significant long-term opportunity for us. In alignment with this industry direction, we are strengthening our capabilities in electronics and software integration, lightweight materials and sustainable manufacturing. These initiatives are aimed at ensuring that Rane remains a trusted and future-ready partner to global and domestic OEMs alike. With these remarks, we'll now open for any questions that you may have.

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

I have a few questions on each of the company. First on Rane Madras. Sir, just there was some article on new services, which said that for Rane Madras that company is ready with EV-ready steering and suspension systems for sustainable growth. And we are planning to invest INR 250 crores in technology upgradation. And we are targeting EBITDA margin of 11% to 12% over 3 years and a 15% revenue compounding. So would just like to get your comments on this news item number one. Number two, you did mention that we are expecting margins to improve from quarter 1 next year. So if you can highlight what are the several initiatives, sir? And I have some other questions as well.

No. The first one, Manish, I don't know what article you're referring to. We are not aware. So I think some misrepresentation, et cetera. As we have explained, the EV electric steering is all coming through the Rane Steering Systems Limited, RSSL, and there is some investments that we are doing in that area. As you know, we have already announced that we continue to manufacture licensed products with NSK and now we also have a license agreement with ZF and we are winning new -- I'm not aware specifically on Rane Madras. On the second question, as I've said in multiple calls in the past, our target is to get to a double-digit EBITDA margin even when the market has got only moderate growth. So we are continuing to work on several initiatives. And post the merger, there are also certain synergy buying that we're doing in terms of indirect material. There are also some additional new cost reduction measures that we have initiated for direct material -- raw material, et cetera. So -- and while it's still early days, we are hopeful that those initiatives will lead to further margin improvement. So our objective is clearly is continuing to get to that double-digit EBITDA crossing 11% to 12% is the goal that we are working towards.

Right, sir. And any time line would you like to specify on -- because we are right now at 8.6% EBITDA margin.

Last quarter was 9%. So -- and we are hopeful that second half will be better than that. And therefore, going into Q1 of next year -- see the volumes continue to grow, then the confidence level is higher that we will continuously see improvement in every quarter.

Sure, sir. And just on the current quarter, we have seen that your raw material cost has gone up. So despite your aftermarket sales growing quite strongly, high double digit. So is there a mix related impact? Should we understand that aftermarket has a lot of bought-out elements and probably that leads to a higher raw material? If you can clarify that, it would be helpful.

No, no. I think -- see the -- there has been a lot of raw material cost increase in the brake components division, which is erstwhile RBL. That has had a significant growth in RM cost because of certain special material that we use for our friction business. It is not because of aftermarket. In aftermarket, as we explained in our results, it is not comparable to last quarter because we have consolidated all the group aftermarket business into RML. So even some of our JV business, et cetera, the aftermarket goes through Rane Madras now. So that is why it is showing growth.

And sir, one clarification on ZF share of associate profit in Rane Holding shows INR 12 crores versus INR 5 crores. But if you look at the presentation where ZF Rane has reported a INR 30 crores profit in the quarter. So ideally, the share of [Technical Difficulty] somewhere near INR 15 crores. So why is it share of profit is [Technical Difficulty] so that was one question and if you can provide another clarification that these are consolidated numbers including steering wheel business, which was acquired and the new plants in the subsidiaries.

Can you repeat the question, Manish?

Sir, in your Rane Holding results for the share of profit from associate that number is INR 12 crores [Technical Difficulty] but now we have only 1 associate, ZF Rane, so if you look at ZF Rane numbers what you have given in the presentation, the profit after tax number is INR 30 crores. So 49% share, it should be near INR 15 crores. So why there is a difference of INR 3 crores. So maybe you can come back on this later.

We'll come back definitely on this, so...

Yes, and my related question was also on the ZF. I have a couple of questions [indiscernible] on the steering wheel business. Is the number what you shared in the presentation includes consolidated revenues from all these businesses, steering wheel business and the new plants in the subsidiaries for inflator and wedding and also new capacities which have come.

Yes, I think the answer is yes, yes.

And how...

Sorry, to interrupt sir, but I may request you to rejoin the question queue for follow-up questions. [Operator Instructions] The next question is from the line of Mihir Vora from Equirus.

Sir, my first question is on Rane Brakes basically. So in the brakes division, given the current -- like we are hearing the chatter about the ABS norms kicking in. So how will it benefit our brakes division? What are we foreseeing in terms of growth there?

Yes. So your question is about the 2-wheeler, right, 2-wheeler ABS?

Yes, yes.

It is definitely a positive development for RML BCD business because with ABS coming into 2-wheelers, the need for dispatch in 2-wheeler goes up. And therefore, RML BCD has the products to pursue this opportunity. So definitely, we see it impacting our business positively.

Right. But sir, in terms of any traction from the customers we are seeing currently or any kind of color on that front or still there's not much traction yet?

Sorry, can you repeat? I didn't hear you.

So I'm saying in terms of any traction from the customers that they have started looking at options and few talks of how they'll be looking at the supplies or something like that. Are we receiving some RFQs there?

Yes, yes. You mean for this ABS, right?

Yes.

Yes, yes. Definitely, see, whichever bikes where ABS is already fitted, we are already supplying and there are a lot more talks going on. Of course, as far as regulation is concerned, the exact date is not yet decided. We are hoping it will happen and that will increase the opportunity further for us. But yes, the answer is yes, conversations are going on for enhancing the business.

Okay. Sir, and secondly, on the ZF part, if I look at the revenue growth, our order book over the last few quarters have been quite strong into the ZF and especially the occupant safety division. But the growth, if you see is not something which is aligned to the order book. So just some color whether -- how do we see the growth of ZF division going ahead?

See, the ZF division has 2 parts, which is the commercial vehicle steering and the safety business. As far as the commercial vehicle business, the growth is in low single digits, in line with the CV market, by and large, how the commercial vehicle industry is growing. Whereas the safety business has 2 drivers for growth. One is the domestic market, increased penetration of airbags, 6 airbags, new vehicle launches, et cetera. Over and above that, we are -- we have a significant export portfolio where we supply to some vehicle makers as well as to other ZF plants. So that is also growing in double digits. So therefore, the outlook for this business, especially the safety business is quite optimistic that the growth rate will continue to be strong, strong double-digit numbers.

Okay. And sir, just one clarification on the order book [Technical Difficulty] give us the current outstanding order book where you've given per quarter, but the outstanding...

As I said, I think INR 500 crores of new order booking has happened. So -- what is your question?

I'm saying the total like in every quarter you give the new orders, which have been [Technical Difficulty] in the quarter, but some total outstanding order book which you have in hand right now in terms of new orders which you have in now.

Okay. So that is something we'll have to calculate. We don't look at it that way. We'll review this.

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

I have 2 questions. I want to understand both ZF entity as well as the Rane Steering, what is the cost below EBITDA, what is the depreciation, what is the interest? And also what is the gross margin in these 2 companies? And how it actually compares with -- if possible, how it compares to the previous half year or quarter, whichever you think is appropriate? Yes, you can hear me...

Yes, you're audible.

I wanted to know -- yes, both in ZF, Rane and the RSSL. I want to know below EBITDA, what are the 2 cost items. I just want to know the exact proportion and the debt that is actually carried by these 2 entities.

So yes, we don't have this information right now readily available. We'll have to come back. We'll discuss this internally. I think we are truly showing the EBITDA and the PBT.

Yes, yes. And second, in terms of the EBITDA, I mean, you had actually mentioned about how Rane Steering EBITDA can actually go up. I always thought that what we are manufacturing is a system kind of a product, and it's not like a part we actually supply. And if I just look at systems across automotive components in industry in India, our margins are the lowest quartile, right? Now how do you really pull it up? And what is the respectable number, which you think you can actually achieve in RSSL?

So I have explained this in some of the past calls. When it comes to Rane Steering Systems Limited, the margins have steadily been coming down in the last 4, 5 years. This is -- of course, I'm not -- I'm ignoring the warranty problem that we had gone through. Despite that, that is because, as I explained, a lot of the new businesses that were booked at that time, NSK was also heavily involved in some of the pricing decisions being a 51% shareholder and a lot of business was -- the inherent profitability was not good, which has impacted the overall profitability. So we are working to change this. And it is going to take another few years before we see the EBITDA climb up. Today, we are only at about 4% EBITDA in that business. While definitely, we see the margins improving over the next 2, 3 years, it's -- I don't see a double-digit EBITDA happening in RSSL soon, unlike in Rane Madras. The answer to your question in terms of the margins, I don't have a clear answer, except one thing I can tell you is historically, a lot of the electronics components and even today is bought out in Rane Steering Systems Limited. So the material cost is still quite high. While, of course, the sales to CapEx is also low. So while the EBITDA margins are low, the possibility of a decent ROCE in this business is possible even with a low -- even with a single-digit EBITDA. But that's because a lot of the electronics is imported as well as bought out.

Got it. And whatever incremental business you have got in RSSL, what kind of margins they are actually coming in?

They are all better. They're still in single digits, but closer to 7%, 8%.

So maybe one feedback is that maybe you can actually segregate it and say that, look, this is historical and this is incremental. So as shareholders, we can appreciate that, we're actually on...

I can only share that in the call. It will be very difficult for us to start giving you that number profitability.

And what is the debt we are carrying in these 2 entities? And at the group level, what is the plan of debt for the entire year?

Yes. So RSSL, the debt is about INR 143 crores. And in Rane, the ZF joint venture, is it about INR 750 crores. As far as the group, as I said, in Rane Madras, the debt reduction plan, we are continuing to work on. And we are hopeful that by the end of this financial year as well as going into next financial year, we will see that INR 200 crores to INR 300 crores reduction in debt.

[Operator Instructions] The next question is from the line of Pratik Kothari from Unique PMS.

So one on exports and especially steering, this is -- sorry, my question is on Rane Madras. So the export portion in steering seems to be doing very, very well. So if you can just highlight what is going right there?

On Rane Madras, right?

Correct.

Yes, I think it's also partly because you're comparing it to last year quarter, which was not a great quarter. So if you see what happened last year, there was actually a small degrowth in exports in Rane Madras because the off-highway vehicle market in U.S. had a steep fall during last financial year. And since then, that market has stabilized a bit. And therefore, you're seeing some improvement in sales. And also there is some new programs that kicked in. So it's a combination of both that last year was extraordinarily -- I mean, more bad compared to now and some new business.

Correct. But this would be similar customers, similar geographies that we used to do? Or is this something new?

No, no, no, similar customers and similar geographies.

Correct. Sure. And second on this land sale, I mean, ex of Velachery, we also had plans to do another couple of them. Is that plan still on?

Yes, it is very much on. So as I explained in the past, we are continuing to receive offers and then see if offers can be concluded. So that process is still on. There's nothing immediate that we have to report. But as and when it happens, we'll surely disclose to the shareholder.

Correct. So sir, when you said that our debt reduction can be INR 200 crores, INR 300-odd crores here, we received INR 350 crores itself from Velachery, and I'm sure there will be some tax that we'll have to pay, but -- plus this incremental. So shouldn't the debt reduction be much more?

We have not received the INR 350 crores. The transaction has been announced. There are certain milestones, as I had explained in the past, which will happen over a period of 12 months. I think we have disclosed -- we have received only about...

INR 115 crores...

INR 115 crores, yes...

INR 115 crores only has been received, yes.

Correct. But this and the incremental land sale all effectively be used to repay debt?

Yes.

Correct. And there was this small change in aftermarket regrouping, if you can just highlight it, it's mentioned in the presentation.

Yes. So now that we have completed the merger, so all the aftermarket business of the erstwhile Rane Madras, erstwhile Rane Brake Lining and erstwhile Rane engine valves has been put together as a separate division. In addition to that, some of the JV aftermarket of ZF Rane also is flowing through this division. So that is the restructuring that has happened.

Okay. Sure, sir. And last one. So post this restructuring or consolidating these entities, we were anticipating some margin changes and over a period of time, I mean, I think in the last call, you had highlighted some 12-odd months for it to play out. Just 3, 6 months into this merger, how are things? Are we on track? What has positively or negatively surprised you?

No, no. I think by and large, it is on track, and we are definitely continue to be hopeful that the margins will continue go up even during the second half of this year and even better next year, et cetera. But of course, the caveat is all the vehicle segments need to continue to have this positive single-digit growth, if not double digit. And the higher the growth, the faster this margin improvement for us.

[Operator Instructions] The next question is from the line of Raja Kumar, an individual investor.

Can you hear me?

Yes.

Sir, just a couple of questions. So first one is on the RML consolidated P&L. So if you see the PBT numbers of September, we have reported INR 31.27 crores as a PBT as compared to INR 24.68 crores year-over-year. So there's an increase of INR 6.59 crores. So -- but if I see the major contribution for this uplift is coming from reduction in interest costs and you have some exchange -- unrelated exchange loss in previous year, whereas this year you had a level of gain, so put together, that is what is contributing to the INR 6 crores. In fact, previously, we had some impairment provision of INR 15 crores. So this year INR 3.5 crores now. So which means operationally, we have not done well compared to last year. So what is driving this because we thought with the merger coming through, we should be seeing some improvement in your operational performance. Actually, the performance has kind of a little bit -- it's showing a deterioration.

Yes. So I mean, I think it's -- I don't have the exact breakup of numbers. As I said, clearly, if you take the brake component division, there has been a deterioration in the margin compared to last year due to material cost increases that we are not able to pass on or recover from the customers. Whereas the steering division as well as the engine component division, there is an operational improvement over last year, whereas the brake component as well as the light metal casting there isn't an improvement. So that is part of the reason.

So this is one-off or...

The contribution, however, remains the same. We have maintained at about 21.9%.

Yes. No, I'm talking about the absolute numbers.

Yes, yes, I understand. So this is the reason I gave you.

Got it. Okay. And what is the impairment we have done INR 3.5 crores this first half.

On impairment...

On the cash flow, I can see there is a INR 3.5 crores of impairment of financial assets.

1 second.

Yes, INR 3.59 crores, this is on the RML side...

RML side, INR 3.59 crores.

Yes, RML consol. It's in your cash, credit and debit number.

It's credit loss and receivable, just an accounting thing. There is no risk there.

Okay. And lastly, this -- I see there is no current tax provision in the P&L, but in your cash flow, you have shown tax paid of almost INR 28 crores. So how do we match these 2.

Last year, I think we wrote off that overseas investment on which we are carrying deferred tax assets. Deferred tax assets, we are taking up, last year, we set up around INR 29 crores, this year also the entire current tax will be set up against the deferred tax asset. That's why, we are not making any provision for the current -- we are not making any tax provisions. However, we are paying -- as a conservative measure we are paying, then we are getting refunds subsequently from the department. Otherwise, we may end up some kind of another [indiscernible]

The next question is from the line of Munjal Shah from NSFO.

Sir, a couple of questions. One is with regards to margins of Rane Madras. So last year -- and we don't include other income actually. So it was 8.3% last year. And we were guiding 100 basis points improvement in margins for this year and maybe double-digit margins from next year onwards. However, the first half numbers do not suggest any significant improvement in margins actually. And we are not including other income. So where do you see this 100 basis points improvement coming for this year?

I'm not clear, where -- what is the...