About four years after the Chennai-based Rane Group set up its manufacturing footprint in the US, challenging market conditions have compelled the global Tier 1 supplier to rethink its strategy in that market.
In the latest annual report shared with the company’s stakeholders, L Ganesh, chairman, Rane (Madras) said that the performance of Rane Light Metal Castings America (RLMCA) continues to remain a challenge, despite taking several measures to revive the business operations. “Covid19 has significantly impacted the future of this business. RML board will review the performance of the business closely in the next 12 months and take an appropriate decision, keeping in view the long term interest of shareholders”.
Another reason for the decline is understood to be the rising preference trend towards SUVs resulting in pre-closure of entry-level car segments by North American automakers.
Further, the company in a regulatory filing claimed that the current pandemic has significantly impacted sales projections for the company’s step-down subsidiary in the US, which has necessitated an impairment of investments made in/loans and guarantees given to the subsidiary. Also, the management has decided to limit further investments in the subsidiary. The company has reported an impairment of Rs 37.58 crore for the last fiscal on a standalone basis.
What went wrong?
During FY2020, while downtime of the casting section at RLMCA reduced significantly through initiatives such as preventive maintenance and die-cast machine rebuilding, the unexpected breakdowns of CNC machines resulted in increased manufacturing cost, higher repair and maintenance and tooling cost. Further, lower take off across existing customers and more moderate than anticipated volumes on the new program amidst Covid19, made things worse for the company.
Glimmer of hope
However, what has come as a silver lining is some progress on new orders from key customers. The company says it has gained significant new business in North America for ball joints, which it expects to deliver strong growth trajectory in the coming years. Secondly, while the steering gear business in the All-Terrain Vehicle (ATV) segment has consolidated, the orders for its passenger car application are likely to commence next year.
Furthermore, RLMCA is also trying to diversify its portfolio by pursuing both new OEMs and new product segments, which may enhance its growth potential. The developments required additional investments towards capacity enhancement which the company funded by way of equity and debt, the company added. In January, Rane Group has said it seems that the additional investment offers it visibility of $35 million worth of revenue in the near term.
RLMCA, based in Russellville (Kentucky) in the US, was set up in 2016 with the expectation that it will play a vital role in expanding opportunities for the Rane Group, which has been a major supplier to automakers in North America since many decades. These include Polaris, John Deere and Federal-Mogul amongst others.
Four years ago though the US automotive market was in prime shape. 2016 was one of its best years since 2000 when close to 17 million vehicles were produced, unemployment had fallen, and manufacturing was gathering a pace not seen since 2008. So optimistic was the Rane Group at that time that the company in its January 2016 newsletter remarked, “North America appears to be a market ripe to be tapped”.
FY2020: Reality check
Cut to FY2020 and the Rane Group, like the rest of the industry, has had a reality check. The company, which manufactures steering and linkages and light metal castings, reported total net revenue of Rs 1,291.5 crore, a YoY decline of 17.5 percent. It also saw net loss of Rs 45.5 crore in FY2020 compared to a net profit of Rs 2.4 crore in FY2019. Its sales to Indian and international customers also declined by 24 percent and 22 percent respectively.