Rane Brake Lining (RBL) is engaged in the manufacture of safety critical friction
material products viz brake linings, disc pads and brake shoes. It is the leader in
the automobile OEM (Passenger and commercial vehicle) segment with a 38%
share, while it has an 18% share in the aftermarket segment.
Recovery in OEM segment coupled with aftermarket focus to drive growth
Passenger vehicle and the MHCV OEM segment, which contribute about 47% to
RBL’s revenues, are in an uptrend and slated to grow in double digits over the
next two years. Improved economic growth, further easing of interest rates, lower
fuel prices and low base during the recent slowdown period would lead to an
OEM upcycle in FY2016/17. RBL, with its market leadership (38% market share)
and well established client base, would reap benefits from an anticipated upsurge
in demand. Further, RBL’s strategy to enhance its distribution network in
underpenetrated Northern and Eastern markets and to introduce new products, is
likely to boost its aftermarket revenues. We expect RBL’s aftermarket segment
(constituting 38% of sales) to grow at 14% CAGR over FY2015-2017. RBL is likely
to outpace the industry and further augment its share in the aftermarket segment
(current aftermarket share is 18%).
Operating leverage, raw material localization and energy savings to
augment margins
RBL would reap benefits of operating leverage given the double digit top-line
growth over the next two years. Also, it is working on enhancing the localization
levels. Imported raw material currently forms about 48% of the material costs and
the company aims to realize 100-200bp cost reduction with increased domestic
procurement. Further, RBL is also working towards reducing its energy costs by
implementing best practices across manufacturing plants and utilizing power from
low cost sources. We expect RBL’s margins to improve by 70bp over FY2016/17.
Outlook and valuation: RBL’s revenues are estimated to grow at 12% CAGR over
the next two years. Upsurge in OEM volumes coupled with focus on the
aftermarket segment would drive the top-line. Also, the company’s margins are
expected to improve on account of operating leverage, enhanced local
procurement and energy savings. Given the healthy top-line growth and margin
improvement, RBL’s earnings are likely to grow at a CAGR of 17% over
FY2015-2017. Its return ratios are also estimated to expand due to margin
improvement and reduction in leverage. We initiate coverage on RBL with a Buy
recommendation and target price of Rs336 (based on 12x FY2017 earnings).

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