The Company
A family-owned and managed business that began in 1989 as a steel trading concern. The company moved into commercial manufacturing of pre-stressed concrete wires and stands. Rajratan entered into a technical collaboration and joint venture with Gustav Wolf Group of Germany following which the name of the company was changed to Rajratan Gustav Wolf Ltd. in 1998. Following the joint venture for five years, the Indian promoters bought back equity held by Gustav Wolf after which the name of the company was changed to Rajratan Global Wire Ltd in 2004. The company extended to the launch of operations in Thailand In 2006, resulting in the commissioning of Rajratan Thai Wire Co. Ltd. The Thailand operations of the company commenced commercial production in 2008.
The family of Mr Sunil Chordia along with him continues to own 64.53% in the company.
The Product
"TYRE BEAD WIRE" (84% of revenue) - A steel product on the higher side of the steel value-addition pyramid. Finds it's purpose in all kinds of tyres, automotive, earth-moving and aeroplanes alike. Its function is to hold the tyre on the rim and resist the action of the inflated pressure, which constantly tries to force it off. Bead wire is the crucial link through which the vehicle load is transferred from rim to tyre, preventing vibration during driving. The product enhances tyre safety, strength and durability. The company specializes in bead wire of customised tensile grades as per requirements.
While the product makes up roughly 3% of a tyre manufacturing, its extremely crucial, hence manufacturers prefer having longterm existing partnerships with companies, increasing barriers to entries.
In the current post -COVID economic situation we strongly believe many companies for whom this isn't a major segment would reduce focus, allowing Rajratan to expand market share. Rajratan is the only company in India with a singular focus on the said product.
Growth Triggers
The company over the years has established itself as a favoured supplier with a total installed capacity of 1,06,800 TPA (67.4% India & 32.6% Thailand) increased from a total of 62,000 TPA in 2018-19.
The company already dominates over 35% market share in India, while 20% in Thailand. Interestingly, Thailand has grown itself into a Tyre manufacturing hub. As the USA-China trade wars bitter, Chinese tyre manufacturers are setting up units in Thailand from which Rajratan stand to benefit since it is the only local manufacturer.
The Thailand subsidiary also benefits from a tax shield on profits on production in excess of 22k TPA (viz.- Utilisation above 64.32%).
Valuation & Probable Re-Rating
The Company currently trades at an EV/EBIT of 10.02x with an SGR of 20%. Considering how the company has recently finished CAPEX the D/E of 0.82x is justified while the P/S ratio of 0.76x is cheap. Like, with most manufacturing concerns a low P/S does not sustain post CAPEX, as the company earns and reduces its D/E it would be valued at a higher P/S and in turn a higher PE.
The company has consistently clocked an OPM of over 10%, considering how the auto-industry is due for a revival and pull back soon owing to lower inventory levels at most auto manufacturers, the same margins could convert into very impressive EPS only making the current valuations seem cheaper.
Currently, the stock is rated and valued as Steel Manufacturing Company, however, we strongly feel it would soon get re-rated as an auto-ancillary company.
While it trades expensive to Median PE of Steel Manufacturing companies at 12.69x, it trades cheaper than the Median PE of Auto Ancilliary companies.
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