Q. Rane Group’s revenue from the peak of INR 5,300 crore has come down to INR 4,000 crore. What triggered this fall; what are your plans for moving forward?
FY19 was a record year for all segments. But a slowdown had started in FY 20, even before the pandemic. The industry saw six consecutive quarters of decline and on top of that came the COVID-19.
However, Q3 and Q4 of FY21 saw better than expected revival in demand. But the second wave hit us in Q1 of this fiscal year. I am quite optimistic about the coming years because there is strong demand across all segments. Even on the commercial vehicle side we expect sales to resume by Q3 and Q4 of this financial year.
Q. Do you think over-dependence on passenger vehicles (PV) affected your business?
As a Group we are reasonably diversified into all segments though over 60% of our revenue comes from the PV segment. We also have a significant presence (about 12%) in the aftermarket, which also got severely impacted due to COVID-19.
Exports contribute about 20% of the revenue. This segment has helped us a lot in sustaining our business in the last three quarters because the markets in the US and Europe picked up to good levels quite quickly.
Of course, the chip shortage has impacted some of the export markets.
Q. Exports revenue of both OEMs and auto component makers increased in the last few quarters. But the exports surge of OEMs was higher than that of the component makers. What did hold back the component makers on the export front?
The economic drivers of exports for OEMS and component industry are different. The OEMs are making vehicles in India specifically for other markets. Our exports are, by and large, not linked with the Indian OEMs. Majority of the auto component makers are supplying to other OEMs unconnected to Europe and the US.
For sure our exports took a toll last year largely because of COVID. For instance, Rane Group’s biggest markets are North America and Europe which severely came down during this period.
But I’m still optimistic about the export bus from Rane Group’s perspective. We have won a lot of business in the last two years and we will start exporting in 2022 and 2023.
Q. What kind of revenue gain is expected from exports in the coming years?
Today almost 20% of our revenue is generated from international business. Last year exports contribution was about INR 800 crore to the overall revenue and this share is continuing to grow by about 10%-12%.
We are also looking at the target of moving up our Group’s export portfolio from the current 20% to 25% in the coming years.
Q. You are engaged in steering systems and airbags. How is chip shortage changing the course of your business?
Unfortunately, we are also feeling the heat. The problem is it is not going to go away soon. Despite robust demand in the domestic and exports market, I believe in both the coming quarters we are not going to achieve numbers because of the semiconductor crisis. While sales growth will be there I think we are not going to realise full potential because of this issue. I think this problem will persist till the early part of next year.
It is very difficult to calculate the numbers as this situation is dynamic. Approximately 5%-7% is the sales loss auto component industry is facing due to chip shortage.
Q. You have three companies operating in steering and seat belts. Rane also acquired one company in the US in 2018 for diecasting. Do you have any plans for further diversification?
In the long run our engine valve business will be at risk and this holds around 10% of our Group sales. Because of electric vehicles clearly we are not seeing much requirement in the long run.
Other than that we are seeing a lot of opportunities. In fact, many of our businesses are winning orders from electric vehicle platforms in both the domestic and the export fronts. We have already started production for a few electric vehicle models in the US and Europe and there are a lot more business coming in.
With the existing product portfolio we are quite optimistic about organic growth as well as penetration to electric vehicles. Adding products is part of our core strategy.
Diecasting was a business that we got in 2008 and in 2012 we added airbags to our portfolio. In 2016, with the US acquisition, we increased our diecasting business.
In the last three years we have not added any new products to our portfolio but going forward we expect to expand our range either through in house R&D or through strategic acquisition.
Q. What is your guidance for the engine valve business and where will you take this business to?
As I mentioned 10% of our Group’s revenue is at risk but it is a long-term risk as I believe that we still have 10 years till EVs come in full swing in India. Till 2030, there will be reasonably strong demand for ICE vehicles.
Q. How do you see the top line of Rane Group in the next few years and what is planned for the company?
Without any acquisition, we are looking at 11% compounded growth in the next few years led by domestic revival and enhanced exports. We have already initiated our investment in this direction.
In the past three years capacity utilisation has been low and we still haven’t reached the Fy19 levels. If we manage to keep infections under control I expect we will bounce back to the peak levels.
However, the capex program is still on as we have won a lot more new programmes for the next three years. We will start investing INR 275 crore to INR 300 crore in 2022 on the capacity front as our export business is growing significantly followed by some R&D investment. Last year we invested about INR 150 crore.
Q. What is the share of investment planned for EVs?
About 90% of our products such as steering, seat belt, and diecasting are applicable for electric vehicles. The aluminium content is more in electric vehicles than in ICE vehicles. It is good for our aluminium investment. Large part of our investment is directed towards electric vehicles.
Q. One of the strongest strategies of the Rane Group was aggressive acquisitions. We don’t see that happen in recent years. Are you planning to have any new acquisition this year?
Acquisitions are part of our growth strategy. We faced some challenges with the previous two acquisitions and so we decided to take a pause. It will start again but for now there is no definite timeline
Q. How do you see your return on capital employed (ROCE) and what’s the current situation on debt?
We aim to see all our businesses to have an ROCE of above 20%. Some of our businesses are higher than 20% and some are below 10%. On debt we are fairly conservative. Our debt to capital employed and internal target is never to go above 50%. We try to keep our capital employed between 33%-50% on the Group level.
Q. OEMs have now started to directly engage with software partners. Do you think the tire-I parts suppliers’ business is getting cornered?
Definitely the software content is increasing in a car regardless of electrification. At this stage most of the companies that are involved in this are tier-I. And that’s why they are focusing more on software system providers.
I see this as an opportunity. We have a partnership with ZF which is spending a lot of money on software development. We are focusing on high quality components. However we are still reviewing our chances of getting entirely into software development.
As of now our focus is to supply components to large tier-ones and to the vehicle manufacturers.
