About the company:
With the ripe IPO season currently underway, Rolex Rings Ltd is coming out with its IPO which opens on July 28, 2021 and closes on July 30, 2021. The price band has been set between Rs. 880 and Rs. 900 per share for a lot size of 16 shares. Accordingly, the company is looking to raise a sum of Rs. 56 crore via a fresh issue and an offer for sale of 7,500,000 shares, bringing the total issue range between Rs. 716 crore to Rs. 731 crore.
Company Overview:
Rolex Rings Ltd, one of the top five forging companies in India in terms of installed capacity, is a manufacturer and global supplier of hot rolled forged, machined bearing rings, and automotive components for two-wheelers, passenger vehicles, commercial vehicles, off-highway vehicles, electric vehicles, industrial machinery, wind turbines and railways, amongst other segments. They supply domestically and internationally to large marquee customers including some of the leading bearing manufacturing companies, tier-I suppliers to global auto companies and some auto OEMs. Currently, SKF India Limited, Schaeffler India Limited Timken India Limited, NEI and NRB collectively account for 81 percent of the market share of Indian bearing industry.
Currently, the company has 3 manufacturing facilities in Rajkot, Gujarat. They have 22 forging lines with a combined installed capacity of 1,44,750 MTPA, machining facilities consisting of 528 spindles with a combined installed capacity of 69 million parts per annum and other machinery including heat treatment furnaces, cold rolling machines and other infrastructure.
The product portfolio includes a wide range of bearing rings, parts of gear box and automotive components, among others. Till date, they have offered a diverse range of hot forged and machined alloy steel bearing rings weighing from 0.01 kg to over 163 kg, and with inner diameter of 25 mm to outer diameter of 900 mm which makes their products suitable for a wide range of end-user industries. Their customers typically order in large volumes, and they cater to their orders by using their flexible manufacturing infrastructure, skills and processes to achieve operational efficiency and quality. As of FY21, they supplied bearing rings and automotive components to over 60 customers in 17 countries, primarily located in India, United States of America and in European countries such as Germany, France, Italy, and Czech Republic, and Thailand. They have been able to maintain long standing relations with their customers and 70 percent of their 10 largest customers for FY21 have been with them for over a decade.
In lieu of de-risking their business from power tariffs and to reduce their carbon footprint, Rolex Rings has invested in renewable energy. As on date, the Company operates windmills with installed capacity of 8.75 MW. They are in the process of expanding capacity of their solar projects by an installed capacity of 16 MW and have already placed purchase orders for equipment with installed capacity of 7.35 MW. They believe that the proposed expansion will help them in reducing their carbon footprint and expanding their profit margins.
The company derives majority of its revenues from outside of India (54 percent from outside India in FY20). The management has highlighted that the revenues have grown at about 10 percent CAGR during normal times and can continue to grow at similar rates in the future.
The company is currently under Corporate Debt Restructuring (CDR) owing to its inability to pay off its debt which it had raised back around 2008-09. Ever since then, the company has been on its mission to reduce debt levels. Accordingly, it has managed to reduce its debt/equity ratio from 3.2x in FY18 to 0.6x in FY21. With the proceeds from the IPO, it expects to further reduce this debt load and get out of CDR by March 2022.
A recovery in global demand for automobiles will drive growth for the company going ahead as the world recovers from impacts of COVID-19 and other manufacturing bottlenecks. Fresh issue of funds of the amount of Rs. 56 crore will be utilised towards working capital requirements while the rest is an offer for sale.
Financial Overview:
| Particulars (Rs Cr) | FY19 | FY20 | FY21 |
| Operating Sales | 904.3 | 666 | 616.3 |
| Bearing Rings | 534.5 | 349.8 | 331 |
| % of Sales | 59% | 53% | 54% |
| Auto Comp | 294.4 | 266.1 | 237.4 |
| % of Sales | 33% | 40% | 39% |
| | | |
| EBITDA | 201.1 | 121.4 | 108.9 |
| EBITDA (%) | 22.20% | 18.20% | 17.70% |
| | | |
| Net Profit | 59 | 52.9 | 87 |
| Net Profit (%) | 6.50% | 7.90% | 14.10% |
As can be seen from the above schedule, the company has witnessed a consistent decline in its revenues, compounding at a negative 17.4 percent growth rate. Along with this, the revenue mix has also changed as Auto Components moved from 33 percent of sales to 39 percent in FY21 as bearings slumped.
With the decline in revenues, unfavorable cost economics have severely impacted the EBITDA margins, causing them to fall from 22.2 percent in FY19 to 17.7 percent in FY21. But its net profit margins have improved significantly primarily because of a sharp reduction in finance costs (down from Rs. 42 crore to Rs. 11.7 crore in FY21) as the company continued to pay off its debt.
During Fiscal 2021, 2020, and 2019, it has spent Rs. 38.7 crore, Rs. 16.1 crore, and Rs. 36.7 crore respectively towards purchase of property, plant and equipment and intangible assets (including capital advances) and capital work in progress. These investments have been made towards expanding their forging and machining capacity, heat treatment facilities, and investments into equipment for generation of solar energy.
On the working capital front, the company has had mostly stable cash conversion cycle at about 101 days for both FY19 and FY20 but spiked to as high as 133 days in FY21. This rise came as the both inventory and debtor days saw a sharp rise, partially offset by rise in payables. This happened primarily due to the impact of COVID-19 as vendors and, in turn, the company demanded better credit terms as sales saw a demand slump owing to a slowdown in auto sales globally.
Despite the hindrances from COVID-19, the company has managed to grow its cash and cash equivalents from Rs. 4.7 crore to Rs. 10.4 crore (up 123 percent over the past 3 years) driven by judicious cash management despite the paydown of debt over the years.
| Ratios | FY19 | FY20 | FY21 |
| ROE | 27.40% | 19.70% | 24.40% |
| ROCE | 46.60% | 24.30% | 18.90% |
| EV/EBITDA | 1.5 | 2.44 | 3.48 |
| OCF/EBITDA | 96% | 151% | 54% |
| Debt/Equity | 1.51 | 0.89 | 0.61 |
The company has delivered positive return ratios as can be seen in the above schedule. The ROEs saw a sharp dip in FY20 below 20 percent levels but have since rebounded to near pre-COVID levels at 24.4 percent as net profit margins doubled over the last 3 years. On the other hand, the ROCE has seen a consistent decline in value as operating profit took a severe hit from COVID-19 related issues which impacted overall auto demand.
While operating cash flow conversion was very strong in FY19 and FY20, it took a sharp hit in terms of EBITDA as more cash remained stuck in working capital causing the below par conversion of the same. Along with this, the EV/EBITDA also saw a jump since while the debt levels have reduced, the EBITDA decline has been much more steep pushing the valuation ratio higher.
The company has enough capacity currently, with capacity utilization at around 60 percent as of FY21. As per the management, the company will not need to incur major expansionary capex till at least 2025. They expect the revenues to grow at about 10-12 percent CAGR over this period.
Peer Comparison:
| Co. Name | OPM | ROE | ROCE | D/E | EV/EBITDA | P/E |
| Rolex Rings | 14% | 24% | 19% | 0.61 | 3.48 | 28.19 |
| BHARATFORG | 12% | 4% | 3% | 0.97 | 44.1 | 166.46 |
| SONACOMS | 28% | 18% | 21% | 0.34 | 56.59 | 109.55 |
| RKFORGE | 17% | 2% | 6% | 1.29 | 15.86 | 123.3 |
| MMFL | 17% | 10% | 8% | 1.06 | 14.53 | 37.14 |
As compared to its listed peers, Rolex rings has done pretty well. Despite the COVID-19 impact, the company managed to deliver highest ROE and the second-highest ROCE among peers. Its debt/equity ratio is also on the lower end of the band while it is very attractively valued in terms of the EV/EBITDA ratio as against its peers. On the PE front, the company is valued most attractively among its peers.
Strengths:
Sufficient Capacity: Rolex Rings currently has a capacity of 1,44,750 MTPA in forging and 69 million parts per annum in machining. The investment in infrastructure permits them the flexibility to manufacture high volume parts in a cost- effective manner. They believe that this helps them address a wide range of end user industries and service their customers across a broader product horizon. It also has unutilized land area of 32,071.44 square metres at Rajkot which can be utilized for any further expansion. In addition, their Company also owns 691,312 square metres of land in Taluka Gondal (Gujarat). Given the capacity right now, the management does not expect to see large/expansionary capex for at least the next 5 years.
Geographically Diversified: The company derives about 54 percent of its revenues from outside India (FY20). They serve to over 60 customers across 17 countries such as the US and European countries including Germany, France, Italy, and Czech Republic, and Thailand. Therefore, it has access to among the biggest automotive markets in world across large automakers.
Fundamental Tailwinds: As compared to its listed peers, Rolex rings has done pretty well. Despite the COVID-19 impact, the company managed to deliver highest ROE and the second-highest ROCE among peers. Its debt/equity ratio is also on the lower end of the band while it is very attractively valued in terms of EV/EBITDA and P/E ratio against its peers.
Risks:
CDR Overhang: Rolex Rings had entered into CDR in FY13 as it had defaulted in payment of certain loan facilities and restructured term debt amounting to Rs. 487.02 crore, availed from a couple of banks. As on March 31, 2021, the percentage of the restructured term debt still due is 6.89 percent and amounted to Rs. 33.57 crore .This outstanding amount has to be repaid in quarterly instalments. While the management is confident in paying this off, any future defaults will have severe repercussions as creditors will be entitled to gain control of the assets to cover their dues.
Margin sensitivity to Commodity prices: Rolex Rings uses metals as its primary raw materials and with the kind of volatility being witnessed in metal prices globally, the company stands to be negatively impacted by the higher prices. With the rise in metal prices in 2020 and the continuation of the rally in 2021, the operating margins saw a pretty sharp impact indicating how dependent the margins are to the raw material prices. Continued rally in commodities may continue to dampen the margins for Rolex Rings in the future.
Conclusion:
Overall, Rolex Rings is an established player in the bearing rings industry with a strong leadership both domestically as well as globally. The company has had long-standing relationships with established players which serve as a testament to its execution capabilities and ability to meet standards. Along with this, the company maintains a decent balance sheet with continued focus on deleveraging and generation of shareholder returns. Yet, concerns continue to remain around a decline rate of growth as well as narrowing of operating margins. Also, the CDR overhang continues to be a concern for the company, despite the management being confident of coming out of it by next year. Given these factors, we believe that the high optimism around the IPO season can drive the stock to deliver positive listing returns. Accordingly, investors can subscribe to the IPO for listing gains.
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