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RACL Geartech was started in 1989 by Raunak Group, and by 2002 they were facing bankruptcy. The company came under new management and has made a very strong comeback. The company is engaged in the business of making auto components like transmission gears and shafts, sub-assemblies, precision machined parts and industrial components. Simply put, it is a niche auto component company focusing on premium end vehicles.
The company spent the year between 2007 and 2015 building capabilities and thereafter growth focus has been stepped up. RACL Geartech’s main clients are top global OEMs like BMW, Kubota Corporation, KTM AG, Schneider Electric and Dana among others. There is a concentration issue with the top 5 clients making up to 78% of the revenue in fiscal year 2021. In an effort to counter this, the management ensures that sales to any single customer do not exceed 20%. In the fiscal year 2021, the largest contributor was responsible for 18% of sales.
The company has focused on its export sales which have been increasing consistently. Currently they make up around 76% of sales of the company. Europe makes up around 51% of the export sales. India and the Asia Pacific region makes up 39%, with the remaining going to the USA and Mexico. Exports allow the company to benefit from the higher margins.
Company expects the supply to ZF and MAN trucks to start from June 2022. It has already raised capacity to be able to do so. This should help drive the revenue growth for next couple of years.
One of the key concerns with the company in the past has been lack of presence in the EV market. In the last conference call, Company mentioned that they have started supplying parts for BMW EV scooter which was launched in November 2021. Company expects the EV sales to increase to 4-8% of revenue by Fiscal Year 2023.
With an experienced management team, Company is increasing focus on its product portfolio and entering into new segments. However, they also have a high working capital of 140 days to deal with.
So, what is our view on company valuation?
RACL Geartech trades at EV/EBITDA of 12 times, and a Price to Earnings ratio of 24 times. The share price has risen 10 times since March 2020. Investor should evaluate the stock for long term and look to enter at the right levels.
As for the risks to this analysis, corporate governance needs to be further evaluated as the size of the company is small. Moreover, the auto-ancillary industry is highly competitive with the presence of a large number of players in the organized sector. There is also the key man risk with the promoter – investor should look for succession planning.
So, would you invest in RACL Geartech? Share your views in the comments section and like the video if you liked our analysis.
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