Understanding the Business
The company makes just two products:
- Tyre bead wire
- High carbon steel wire
It derives major revenue from ‘Tyre bead wire’ which accounts for 89% of total capacity and 91% of revenues.
For the uninitiated, ‘Tyre bead wire’ is the soul of every tyre. It is core to the safety of tyre use; it holds the tyre to the rim, enhancing product safety. The product is mature and its application has been unchanged for more than five decades. Hence, it is unlikely to see any replacement in the years to come.
Application of the Product
Tyre bead wire is used in all types of tyres for automobiles, earth moving equipment, aircraft, cycles, passenger vehicles, two-wheelers, three-wheelers and truck bus radials.
The other product, i.e High carbon steel wire plays a vital role in industries like automobile, construction and engineering.
Bead wire 3% of the cost of a tyre. So, even though its share is less, it is still a very critical component for a good quality tyre.
Working in the tyre industry
Now, what is more, interesting is that the ‘Tyre’ industry works differently from an ‘Automobile’ industry? The reason being the fact that 70% of the tyre sales are ‘replacement sales’. So to say, a vehicle is sold once but the tyre is bought multiple times.
A truck has to replace its tyres every 3–4 months and a car has to do the same every year. Hence, the mobility of a vehicle and economic activity impacts the sale of a tyre.
Symbiotic Relationship
When two living beings mutually help each other, it creates a symbiotic relationship. Oxpecker (bird) lands on rhino or zebra and eat ticks and other parasites that live on their skin. The oxpeckers get food and the beasts get pest control.
A ‘Tyre’ manufacturer and a ‘Tyre Bead’ manufacturer share the same bond.
For a tyre component manufacturing company (bead) to grow, it must go where the tyre manufacturers are going. It must expand capacities if the tyre manufacturers are going for CAPEX.
About the company
Rajratan is the second-largest bead wire manufacturer in Asia (excluding China), the largest manufacturer in India and the only manufacturer in Thailand.
The company manufactures its products in two countries: India and Thailand. Both these places are of key importance and perfectly suit the company’s requirements.
Why Thailand?
Rajratan Thai Wire Co. Ltd, the subsidiary of the main co, enjoys a tax benefit on the profits reported on all the production in excess of 22,000 TPA — for a period of 8 years subject to a ceiling of the amount invested by the company above 22,000 TPA. This 8 years tax period will come to an end in 2025.
Also, Thailand is the hub for tyre manufactures around the world. Some of the largest Chinese tyre brands have commissioned larger and more sophisticated manufacturing facilities in Thailand than even within their own country.
Why India?
India enjoys a large captive and growing demand for the company’s downstream product (tyres) at a time when automobile penetration is lower than the global average.
The company embarked on commissioning a warehouse in South India (Chennai) to deliver faster and closer to customers. Also, as the Chennai plant will be closer to the port, there will be a good opportunity to export from this plant. Currently, the India unit serves only Indian tyre companies.
Interesting Opportunities Ahead
1] Capex in Tyre Industry
Looking at the increase in the number of tyre manufacturers in Thailand, the company is expanding its capacity to seize the opportunity. Oxpecker follows the Zebra, remember?
Some of the interesting developments are:
- Bridgestone announced the creation of aviation tyre capacity;
- Continental completed the construction of a factory;
- Goodyear intends to expand tyre capacity;
- Chinese tyre companies in Thailand announced expansion plans.
- To put the numbers in perspective, the company doubled its capacity in India from 36000 TPA to 72000 TPA from 2018–19 to 2020–21.
- For Thailand, the number went from 26000 TPA to 40000 TPA. The current capacity is 112000 TPA (72000+40000). This will again be increased to 120000 TPA by FY22–23.
In India, the company is not able to meet the demand of customers and hence capacity expansion in India makes more sense.
There are many structural changes happening in the Tyre industry in India. The government has banned imports of tyres in India by imposing tariffs and non-tariff barriers. Hence, tyres will have to be made in India. Also, there is a resistance to importing from China, not only by India but other countries also. So, we can see China plus one story in Tyre too. The company believes this to continue for few more years.
Indian tyre companies may grow at 7–8% p.a. Hence, the total capacity of the company may rise from 120000TPA to 160000TPA in 4–5 years.
1] Alternative to China (China plus one)
Also, as the world is seeking alternative supplier options away from China with the objective to de-risk a single country risk, it will enhance business sustainability for Rajratan.
Let us look at the market share of Rajratan in various economies.
In Thailand, the company has just a 20% market share. Here, the balance lion’s share is eaten by Chinese companies. So, the potential to grow is huge. The company is guiding a share of 30% by the end of FY22.
In India, the company commands a share of 50%. Here too the company aims at gaining the market share.
In Sri Lanka, the company has a major chunk of 65%. Companies like Michelin are expanding in Sri Lanka and that is an indication of a good opportunity.
The best market to grow is the USA. Companies in the USA are looking for alternatives to Chinese players. Hence, China plus one can play out strong in favour of Rajratan. There are some tyre companies which are only in the USA, ex: Cooper Tyre. And there are only three players in the US market for making bead wires, all MNCs. The USA is the second-largest market after China So huge opportunity to grow.
Competitive Advantages
Let us now focus on the moat factor.
- Low-cost producer
The company doubled capacity in its Indian operations at a project cost that was 60%
of the global benchmark for an equivalent greenfield capacity. This means a new entrant would have to pay more to set up the same facility.
- Sticky customers
On the customer side, it enjoys a healthy relationship. Customers of five years or more accounted for 83% of the company’s revenues in FY 2020–21. This means the customers are sticky. It enjoys product and process approvals from these customers, a high entry barrier for industry entrants.
- Greater value addition for customers
The customers are sticky as the company customizes the products as per their needs. It sells to make, which makes it possible to customize its B2B product to the complete needs of its customers.
- Conservative Aggression
The company’s approach to growth is clear. It wants to grow at a calculated risk. The company wants to expand only when nearly 80% of the long-term debt related to a previous expansion has been covered. That’s conservative aggression.
- Barriers to entry
A bead wire is a very important component for a tyre and hence quality is of utmost importance here. Michelin, a leading tyre company took 3 years to do an audit of the quality of bead wires Rajratan makes and then approved Rajratan.
So, it is difficult for a new company to enter and compete Rajratan.
In India, the company competes with Aradhya Steel and Tata Steel. Aradhya Steel’s assets are taken over by a company in Delhi and it is having a small market share as it supplies to local players making cycles. Tata Steel, on the other hand, is a big company and bigger companies do not focus on a small product like bead wire.
- Pricing Power
The company’s raw material is steel. So, with an increase in steel prices, the cost of production is bound to go up. However, the company is still able to maintain its margins.
In the Q4 FY21 conference call, the management specified that they are able to pass on the cost increase to the customers. Ideally, it takes a quarter to pass on the cost increase but in a volatile scenario where the steel prices are fluctuating, the company is able to do this in a month or so.
Positive guidance by the management
Upside potential in coming years
The expansion in FY 2021–22 should generate an attractive upside in FY 2022–23 and FY 2022–23. In view of this, we foresee three straight years of growth from this point onwards. (Source: Annual Report 2021)
We will achieve a growth of 30–35% this year (revenue). Thailand will be at least 20% higher than the last year in the volume and topline (Source: CNBC TV 18).
Increasing market share in Thailand due to China plus one
We are the only company doing bead wire in Thailand. And there are challenges in logistics globally. So, local tyre companies in Thailand are keen to buy more from us. So, our market share last year was 20%, which we are targeting a 30% market share which is happening on a monthly basis also. And this is because people are looking at an alternative to Chinese bead wire. And they are keen to develop a second source and Rajratan is the obvious choice in Thailand. (Source: CNBC TV 18).
Robust market share in India
Talking about India we have a market share of close to 50% and we are looking at the growth of the tyre companies in coming years. And we have already expanded the capacity in India. We have also explored the possibilities of putting up a new greenfield project in Chennai to cater to the growing demand of the tyre industries for bead wire. (Source: CNBC TV 18).
On Margins for the coming year
The steel prices have been very volatile in the last year and they continue to be like that. That is the forecast we get from the global steel market. But fortunately, we have been able to pass on the price increase. And our margin are not only because of our passing of price increase to our customer but also because of our raising the additional capacity in India.
We are able to generate better margins (17–18%) because of the higher capacity and lower cost of production. (Source: CNBC TV 18).
I am not a SEBI registered advisor. As a disclaimer, I am sharing this from my view.
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