Rajratan Global Wire Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Demand shock hits volumes, outlook cut: Bead wire volumes fell sharply as Thai tyre exporters slashed production to ~50–60% utilization, forcing Rajratan to revise FY23 volume growth down to just 7–8% from an earlier implied ~100,000-ton target.
• Margins normalize toward 18–19%: EBITDA margin dropped ~100 bps to ~17% on operating deleverage and high-cost inventory; management reiterated that prior elevated margins were “unexpected” and 18–19% is the normal band.
• Chennai greenfield on track, Michelin win secured: Construction is 50% complete, trials targeted by fiscal year-end, and the company has received bulk approval plus regular supply orders from Michelin’s Chennai plant, with supplies starting in Q3.
• European ambition gets specific: The company is targeting ~15% of Europe’s 250,000-ton bead wire market within 2–3 years, which would absorb half of Chennai’s capacity, and has already hired a Europe-based marketing manager.
• What to watch next quarter: Whether the raw material cost tailwind materializes if steel prices stabilize, the pace of volume recovery in Thailand, and any progress on new customer wins in Korea, Vietnam and Europe.

Demand Shock & Volume Revision

• Thailand exports collapsed: Thai tyre companies, major exporters to Europe and America, cut production to ~50–60% capacity utilization, directly reducing bead wire offtake from Rajratan’s Thai facility.
• India exports also softened: Indian tyre exporters similarly reduced production, taking shutdowns of 6–10 days in August and September, which dented domestic bead wire demand.
• Volume guidance slashed: FY23 volume growth now seen at 7–8% (95,000–96,000 tons), down from an earlier trajectory implying ~100,000 tons; India is expected to grow 10–15% while Thailand volumes stay flat year-on-year.
• Sudden reversal after two-year run: Management noted the abrupt shift from facing shortages last quarter to a demand drop this quarter, ending a period of continuous quarter-on-quarter growth.

Chordia: “Till last quarter, we were facing the shortage. And we have suddenly seen the drop in demand. And this is in last two years, we have been continuously growing quarter-on-quarter, quarter-on-quarter. So this situation has come, but within the company, we see lot of work to be done.”

Margins & Cost Structure

• Operating deleverage the main drag: A ~100 bps EBITDA margin drop to ~17% was driven by lower volumes increasing per-unit production cost, compounded by a 10-day partial shutdown in Thailand.
• High-cost inventory overhang: Raw material as a percentage of sales rose in India because the company is carrying higher-priced inventory while wire rod prices keep falling; a correction is expected next quarter if prices do not decline further.
• Energy costs spiked: LNG prices rose 40% quarter-on-quarter, hitting both India and Thailand operations.
• Realization fell with steel prices: Realization per ton dropped ~6–7% QoQ as the company passed through wire rod price declines (from a ₹74,000 peak to ~₹58,000) to customers.
• Finance costs up: Higher interest rates across markets pushed up finance costs.
• Normal margin band reiterated: Management called prior elevated margins “unexpected” and guided investors to assume 18–19% as the normal EBITDA margin range.

Chordia: “The margins, EBITDA margins in previous quarters was unexpected, which probably there was no conference calls, but I had mentioned that that is not going to be a normal margin. You can always assume 18%, 19% as the normal margin.”

Chennai Greenfield & Michelin Win

• Construction halfway done: 50% of construction is complete at the Chennai greenfield facility; the shed is 50% ready and machinery is set to begin arriving.
• Trials targeted by fiscal year-end: Management aims to start trial production before the end of the financial year, with the project budget well within limits and no increase expected.
• Michelin supply secured: The company received bulk approval and regular supply orders from Michelin’s Chennai plant, with supplies commencing in Q3; this is a significant customer validation for the new facility.
• PLI benefit registered: Rajratan has registered for the Production-Linked Incentive scheme for the Chennai project, which offers an 8% benefit on sales over a 5-year window.
• European market groundwork underway: Market servicing for the entire European region has already been initiated in preparation for Chennai capacity coming online.

European Market Opportunity

• 15% market share target: Management estimates total European bead wire demand at 250,000 tons and is targeting a ~15% share within 2–3 years, which would absorb 50% of Chennai’s 60,000-ton capacity.
• Dual-location supply strategy: The company plans to serve European customers from both Chennai and Thailand, offering customers sourcing flexibility across two locations.
• Europe-based hire made: A marketing manager based in Europe was appointed last month to engage directly with large European tyre companies and gain market share.
• Cost advantage vs European producers: Management highlighted that European competitors pay ~$0.60 per unit of power, roughly six times the energy cost in India, creating a structural cost gap.
• No European manufacturing planned: Despite the market push, management ruled out setting up a manufacturing presence in Europe anytime soon, framing any future presence as customer-comfort-driven rather than production-driven.

Chordia: “Our estimates are total European region bead wire requirement is 2,50,000 tons. So even if we get 15% of that in next two, three years, our 50% of Chennai capacity will be sold.”

Thailand Operations & Expansion

• Environmental approval secured: The company received Environmental Impact Assessment approval for its Thailand expansion, clearing the path to move to 60,000 tons per annum capacity in November.
• Existing capacity underutilized: Current Thailand capacity is running below potential due to the drop in tyre exports to the U.S. and Europe; FY23 volumes are expected to be flat versus FY22.
• New line to improve quality: A new line planned to start soon is expected to deliver slightly better wire quality, though the primary constraint remains demand, not capacity.
• Untapped demand exists: Management asserted that demand in Thailand still exceeds capacity and that with approvals now in place, scope to increase volumes exists when end-market conditions improve.
• New customer discussions active: The company is in talks with potential new customers in Korea, Vietnam and Europe to fill the expanded Thai capacity.
• Chinese sourcing advantage: Rajratan is able to procure raw materials from China at significantly lower prices, which supports cost competitiveness.

Competitive Positioning & Long-Term Bets

• Chinese competitors losing edge: Management noted that Chinese labour rates have risen and 13% export rebates have been withdrawn, narrowing the cost gap and expanding the opportunity for Rajratan in global markets.
• 20% volume CAGR conviction intact: Despite the near-term demand shock, the company remains confident in delivering a 20% volume CAGR over the next three to five years, based on customer investment plans in India and Thailand.
• ₹1,800 crore revenue target: At current price levels, management sees a path to ₹1,800 crore in revenue over 3–4 years, assuming full utilization of both Thailand (60,000 tons) and Chennai (60,000 tons) capacities.
• Investment plan unchanged: The board has confirmed continuity of the investment plan, taking a long-term view despite the current demand softness.
• Productivity work during the lull: The lower-demand period was used to introduce productivity improvements through TPM projects and digitization across all factories.
• Debt to stay near current levels: Management plans to restrict debt close to the current ₹190–195 crore level, with no intention to borrow heavily.

Chordia: “Rajratan has seen, this is fourth time I'm seeing a pressure on demand and confusing situation. But Rajratan has always emerged as a winner out of all those situations.”

Guidance & Commitments

Key Metrics