Rajratan strengthens market share and increases capacity

The stock of (RGW), a bead supplier to local and global tire makers, has gained 14% in four trading sessions through Wednesday after remaining in a range for the past three months. Adding capacity, alleviating competitive pressure, and a favorable demand scenario should help the company maintain improving market share.

The company headquartered in Indore supplies beads used to secure inflated tires to the oar to major tire manufacturers, including

,,, JK Tire Industries, Balkrishna Industries and Michelin. The consolidation of the industry which resulted in only three bead manufacturers in the country and the reduction in tire imports have helped RGW to increase sales volume faster than the rate of growth of the industry.

The total size of the domestic tire bead market (TBW) is 1,000,000 to 1,10,000 metric tons (MT) and is expected to grow at 7-8% per year. Tire imports in terms of revenue fell by a third in FY21 compared to three years ago. As a result, TBW’s domestic market share of the company increased to 50% in the first half of FY22, from 35% in FY20.

Company volume grew 50% year-on-year in the six months to September 2021 to 43,833 metric tons, while revenue increased 108% to Rs 423 crore on better achievement. A mix of higher utilization and lower cost production brought the company’s operating margin before depreciation and amortization (EBITDA margin) to 20%, up from 10% in FY18. The company expects to maintain the current level of profitability.

Of RGW’s total domestic cabling capacity of 72,000 MT, TBW represents 60,000 MT while the remainder is for supply to cable companies. The company also has 40,000 MT of TBW capacity in Thailand. To take advantage of the growing demand, the company has started to set up a capacity of 60,000 MT in Chennai for an investment of Rs 300 crore. It will be up and running by the middle of FY24 and has the potential to add Rs 500-600 crore per year to revenue. Once the new facility is commissioned, the company plans to increase its domestic market share to 60%.

It will also increase capacity in Thailand to 60,000 MT by the end of fiscal year 22. RGW is the only TBW manufacturer in Thailand which accounts for almost 8% of global tire production. Use of RGW’s Thai facility has improved amid declining Chinese imports since China removed 13% export rebate for TBW producers and several tire manufacturers are looking for chains supply alternatives as part of the China plus one strategy.

RGW’s combined TBW capacity will increase to 1,80,000 MT over the next two years. The company expects to record revenue of Rs 1,400-1,500 crore in FY 24, compared to Rs 546 crore in FY 21. Closing price of Rs 2,279.8 on Wednesday , the share traded at 18 times the expected earnings for fiscal year 23, a 7% discount to the valuation of tire manufacturers. This may be reduced given the superior profit growth and revenue visibility of RGW.

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