Rajratan Global – Leading Supplier to Tire Industry
Company Name – Rajratan Global Wire Limited (Rajratan Global)
Current Share Price – INR 767 (March 27, 2023)
Market Cap – INR 3,893 cr
1. What is interesting about the stock?
Have you ever used a stick to roll a tire? Kids have stopped doing this in the urban areas but it is still quite popular in the semi-urban and rural areas. Super fun but, when was the modern tire invented?
Archaeological evidence suggests that the ancient Egyptians used tree trunks with a hole in the center as rollers to move heavy objects. The Greeks and Romans also used similar rollers made from wood or metal. Over time, these rollers were improved by covering them with leather or other materials to increase their durability and reduce friction.
The modern rubber tire, as we know it today, was invented in the mid-19th century. In 1844, Charles Goodyear developed the process of vulcanization, which involves treating rubber with sulfur to improve its strength and durability. This led to the creation of the first practical rubber tire, which was first used on bicycles in the 1880s.
The tire industry is cyclical. Like many industries, the tire industry is subject to economic cycles that are characterized by periods of expansion and contraction.
During periods of economic expansion, consumer demand for tires typically increases as more people buy and use vehicles. This leads to increased production and sales of tires, which can drive revenue growth for tire manufacturers and related industries. However, during periods of economic contraction, consumer demand for tires tends to decline as people reduce their spending on discretionary items like vehicles and vehicle-related products. This can lead to decreased production and sales of tires, which can impact the revenue and profitability of tire manufacturers.
Tire bead wires (TBW) are an integral component of the modern tire and play a critical role in ensuring the safety and performance of vehicles on the road. Tire bead wires have been used in the production of modern tires since the early 20th century. The first patent for a tire bead wire was filed by Oscar Pfister in 1901, and since then, the use of bead wires in tire manufacturing has become widespread.
Before the use of bead wires, tires were held on the rim by the strength of the tire sidewalls alone, which made them less secure and more prone to slipping off the rim. The introduction of bead wires allowed for a stronger and more reliable tire design, which improved the safety and performance of vehicles.
Over the years, the use of bead wires has been refined and improved, with the introduction of high-strength steel wire and advanced manufacturing processes.
One such manufacturer of TBW in India is Rajratan Global Wire Limited. The Company was incorporated in 1988 by Mr. Sunil Chordia and commenced commercial production in 1991. It manufactures TBWs and supplies them to tire manufacturers in India. The manufacturing unit in India is located in Pithampur, Madhya Pradesh, and has a capacity of 60,000 TPA and a carbon steel wire capacity of 12,000 TPA. Rajratan Global is also setting up a greenfield unit in Chennai with a capacity of 60,000 TPA.
Rajratan Thailand, based in Thailand, was incorporated in 2006. It was set up to serve Thailand-based clients and emerging markets. Thailand is the largest producer of rubber, and hence, it is the hub of all major tire manufacturers. Rajratan Thailand operates one plant in Ratchaburi with a capacity of 60,000 MTPA.
Company has approximately 45% market share in India and 26% market share in Thailand. Revenue split between the two geographies in 9MFY23 was:
India – 66%
Thailand – 34%
Key customers of the Company are:
Geo-political conflicts continue to have an impact on demand. Muted demand in Europe led to lower off-take by tire companies in Thailand and thus created price pressure. The raw material prices remained volatile, during Q3FY23 resulting in inventory correction by major tire companies.
Why invest in Rajratan Global?
Strong market position in the TBW business – increasing wallet share with key customers
Capacity expansion to drive growth in the near to medium term
2. Key Historical Financials
Company revenue and profit have been growing 26% and 46% on a CAGR basis respectively in the last 5 years
Revenue increased 63% in FY22 but is showing pressure in FY23 with 10% de-growth in Q3FY23 on a YoY basis due to recession in Europe and inflation in the USA affecting their customers who are tire companies making tires for exporting to those significant markets
EBITDA margin has come down from 20% in FY22 to 17% in Q2FY23 and 19% in Q3FY23 – higher fuel cost and higher inventory cost partly balanced by lower raw material prices
Management has guided towards 20% growth in volume over the next 3-5 years
Higher receivables and inventory led to poor cash flow conversion (CFO/EBITDA) in FY22
ROE and ROCE were at 44% and 40% respectively in FY22 – it may not be sustainable
3. What is my view on company valuation?
The Company trades at P/E (TTM) multiple of 33x vs a 5-year median of 16x. Share price peaked in September 2022 and has fallen 40% since then. However, the valuation still looks expensive in the current market scenario, especially with the management expectation of 20% volume growth.
On an overall basis, Company looks quite exciting. Long-term investors should wait for the valuation to be closer to the median P/E levels.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Cyclical end-user demand
Exposure to volatile raw material prices
Additional volatility due to the current geopolitical situation and currency movements
About the Author
I have over 17 years of experience in venture capital, private equity, and investment banking across various sectors in India and the Middle East. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.
I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).
I am an Insignificant Investor in the public market and co-founder of SocInvest.
I have no stock, option, or similar derivative position in any of the companies mentioned in the 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 purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.