RACL Geartech – Niche AutoComp Player

Updated: Feb 15


Company Name – RACL Geartech Limited (RACL Geartech)


Current Share Price – INR 673 (January 14, 2022)


Market Cap – INR 725 cr


 

1. What is interesting about the stock?

Phoenix is a bird that came into a dictionary from Greek mythology.


In simple terms, the Phoenix is a figment of imagination that originated in the Greek mythology. It is known for its specialty to be reborn from its own ashes.


Why are we talking about Phoenix? RACL Geartech was started in 1989 by Raunak Group faced bankruptcy in 2002 and has come back strongly after new management took over like a phoenix.


RACL Geartech is engaged in the business of making auto components like transmission gears and shafts, sub-assemblies, precision machined parts and industrial components. It is a niche auto component company focused on premium end vehicles.


Current Promoter, Head of the Plant at the time of bankruptcy, bought the company and has gradually improved operations. He is supported by a team of professionals who have been with the company for more than two decades.


Company spent the time between 2007 to 2015 in building capabilities and thereafter growth focus has been stepped up. Given that it takes 2-3 years of work with an OEM before a product is launched, growth started picking up from FY18.


RACL Geartech’s main clients are top global OEM’s like BMW (Germany), Kubota Corporation (Japan, Thailand and USA), KTM AG (Austria) Schneider Electric (Germany), Dana (Italy and China). Company has recently added Kawasaki, TVS (for the BMW collaboration bikes), KTM’s Chinese JV, Escorts-Kubota as clients.


RACL Geartech has moderate concentration risk with top five customers contributing ~78% revenue in FY21, however, comfort is drawn from the fact that the Company is a preferred vendor for many of its premium segment export customers with whom it has had long-term relationships. Also, the management as a part of its strategy ensures that sales does not exceed 20% to any single customer. The largest contributor during FY21 was 18% of the sales and thereby reduces dependence on few customers.


The export sales of the company have been increasing consistently and it formed around 76% of total gross sales during FY21. Of the total sales in FY21, nearly 51% of the sales were in Europe, 39% in India and Asia Pacific region and remaining from USA and Mexico. RACL Geartech earns relatively higher margins in export as the company is exporting its products to OEMs catering to premium segment. Company generated 50% of revenues comes from 2W (all 600cc+ bikes largely), 20% from tractors, 18% from recreational vehicles, 5% from 3W in H1FY22.


Company has increased its capacity in FY21 for supplying to ZF and MAN trucks – gross block has moved up from INR 130 cr to INR 175 cr or capex of INR 45 cr. Company expects the supply to start from June 2022. This should help drive the revenue growth for next couple of years.


One of the key concern 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 FY23. This alleviates the concern.


Key strengths of the Company are:


· Experienced management team

· Focus on high end bikes where impact of EV is expected to be relatively lower

· Company is increasing its product portfolio and entering into new segment


Key weakness of the Company are:

  • Asset turnover of ~1.5x – so any growth in revenue will require capex

  • High working capital of 140 days

  • Promoter compensation of ~ INR 1.6 cr in FY21 (7% of profit)

Company is targeting revenues of INR 500 cr (2.5x of FY21) by FY25 with PAT of 80-100 cr (4x of FY 21). I think the PAT target looks quite ambitious as the PAT margin will need to improve from 11% to 16-20%.


2. Key Historical Financials

  • Company operations in FY21 got impacted by COVID which led to fall in revenue

  • Growth spurt in FY22 – driven by capex done in 2021 and normalization after dip in FY21

  • EBITDA Margins have almost doubled between FY18 to FY21 from 13% to 25%, largely on operating leverage but also on account of improved efficiencies, insourcing of forging, increase in exports (exchange rate depreciation) and contract maturity (they have cost reduction clauses for first 3 years and post that the efficiency gains are retained by company).

  • High ROCE and ROE – more than 20%

  • Free cash flow will be a challenge

  • Low asset turnover ratio (~1.5x)

  • High working capital cycle – growth would imply higher investment in WC

3. What is my view on company valuation?


Company trades at EV/EBITDA (TTM) and P/E (TTM) of 13x and 26x respectively. Long term P/E ratio of the Company is 7x which is partly due to size discount and lack of ownership by institutional investors. Share price has jumped 3x in last 6 months and 10x since March 2020. I expect the revenue and profit to grow at 15% with PEG ratio of 1x (low due to poor FCF conversion), implying P/E multiple of 15x which is ~40% lower than current levels.


Investor should evaluate the stock for long term and look to enter at the right levels.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  1. Corporate governance needs to be further evaluated as the company size is small

  2. Key man risk with the promoter – is there any succession planning?

  3. Automobile industry is highly cyclical in nature and automotive component suppliers’ sales are directly linked to sales of auto OEMs. Furthermore, the auto-ancillary industry is highly competitive with the presence of a large number of players in the organized as well as unorganized sector

  4. High working capital or low Free Cash Flow

  5. Company’s main raw material include steel and forgings and the increase/decrease in their prices also exposes the company to raw material price risk, however, the same is mitigated as there is pass through to the customers

 

About the Author


I have over 15 years of experience in equities with detailed focus on autos, auto component and media. I am an engineer and an MBA from a premier institute in India.


Disclosure


I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.




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