We had initiated a coverage on Rajratan Global Wire, the largest manufacturer of tyre bead wire (TBW) in India and the only manufacturer and sole supplier of TBW to various global players in Thailand (through its wholly-owned subsidiary).

The company’s September quarter performance was mixed; topline grew but higher input prices hurt margins. We remain positive on the company on the back of growth in Thailand, revival in Indian automobile sector after waning GST, capacity expansion and new clients.

Pick up in topline - GST hangover is over now

After the GST hangover, the company posted strong growth of 24.5 percent (YoY)/ 27.2 percent (QoQ) in net operating revenues mainly driven by both volume and price hikes taken this quarter. Domestic volumes rose 8.1 percent during the quarter and Thailand volumes rose 9.5 percent.

Raw material price - hike taken

The management had mentioned that they usually raise prices on a quarterly basis and hence higher raw material prices were passed on to the customer during the quarter. The management indicated that it passes on 60-100 percent of the higher raw material prices to its customers.

Thanks to the price hike, cost of material consumed as a percentage of net sales dropped to 57 percent from 70 percent in the previous quarter and 61 percent in the same quarter last year.

Continue to add new clients

As indicated in our earlier note, the company was in the final stages of approvals to get into an agreement with Bridgestone. The management mentioned that the deal has gone through and they have supplied 300 tons this quarter. This is expected to increase, going forward.

Apart from that, the management believes that there is a huge opportunity in auto spring business in India as many players have shut down their businesses. The management is focusing aggressively on this area as well.

Capacity expansion on track

The capacity expansion for Thailand plant is on track and would be completed in the next three years. Apart from that, the management highlighted that there are discussions going on to increase domestic capacity from 3,000 tons per month to 5,000 tons per month. This would help the company to capture additional demand as its India capacity is currently running at 100 percent utilization.

Estimates and valuation

In light of the second quarter numbers, we have revised our estimates upwards. Rajratan is trading at reasonable valuations of 12.5 and 11.6 times FY18e and FY19e projected earnings.

 08 Nov 2017, 11:24 AM