JKFEL, through its subsidiary Ring Plus Aqua Ltd (RPAL), delivers high quality precision engineering products which cater to the automotive segment.  RPAL is into the manufacturing, sale and distribution of auto components and engineering products such as ring gears, flexplates and water pump bearings. RPAL has a market leadership position in ring gears with a volume share of more than 50 per cent in passenger vehicles and more than 45 per cent in commercial vehicles in India in FY2021. In flexplates, RPAL is the sole domestic manufacturer in India.

Within the auto segment, JKFEL has developed in-house engineering and manufacturing capabilities to deliver technology-driven products to a large number of global OEMs and over 100 Tier-1 suppliers that enable it to manufacture high-precision customer-centric products. This customer-centricity has enabled JKFEL to carve a niche for itself in the auto market with innovative and high-entry barrier products. 

The business is simple, as the company sells industrial and other engineering consumables. And the end-users are many. For instance, the products are used in segments that include engineering, agriculture, construction, engineering, automotive, industrial, carpentry, plumbing, and other end-segments. 

JKFEL has a presence in the domestic market with a well-established network of over 730 active distributors catering to more than 600 towns and over 1,50,000 retail outlets. In addition, with over 135 active distributors across international markets, its tools and hardware businesses also stand tall. The company’s long-standing and well-developed relationships with several distributors have been instrumental in its B2C business accounting for 47.85 per cent of its total sale of products in India.

In fact, the market reckons that this consumer division gives it the extremely important steady diversification of being consumer-oriented which de-risks its business model significantly, as the company is not just dependent on the B2B side to grow its business which accounted for 52.15 per cent of its sales in FY21. It also supplies to OEMs and Tier 1 suppliers.

White label partner

In fact, the company is growing its stature as an outsourcer and steady supplier to global companies underlining the impetus to the ‘Make in India’ initiative. One of the big segments of growth in the coming years is the fact that global companies are increasingly looking at outsourcing their products and have been implementing a China Plus One policy to diversify the sourcing risk. 

According to the CRISIL report, the large, highly skilled but low-cost manufacturing base makes India an ideal partner for global companies. Not only that, Covid-19 has tested the supply chains for several raw materials and intermediates, increasing the need for diversifying the supplier base. In fact, JK Files has already made a good head-start in the outsourcing space. It has already established strong outsourcing ties with strategic global files and drills companies including Apex Tools Group, LLC and MOB Mondelin.

“These alliances are for end-to-end manufacturing solutions for files. Some of these are white-label customers who brand the products with their own brands. Global companies are looking to enhance their supply chain resilience by diversifying manufacturing to other countries, and JK files is strategically positioned to capitalise on these trends. We have already become exclusive suppliers for a few customers as we have maintained the high quality and timely delivery standards that global firms aspire to,” avers Vishwanathan.

Meanwhile, JK Files is also focussing on R&D and constantly innovates to introduce new products in its tools and hardware business. While the firm already has over 3,200 SKUs of files, including machinist, saw, needle and diamond coated files, it is constantly on the lookout for developing new products. Its tools and hardware division has over 1,600 SKUs of drills and over 500 SKUs of hand tools and power tool accessories.

In fact, over the past three years, JK Files has launched an array of new SKUs to further cement its position in the tools market. The CRISIL report points out that the domestic demand for drills, hand tools and power tools markets is expected to grow at an annual growth of 5-8 per cent.

In order to meet the growing demand in both domestic and international markets, the company is expanding its manufacturing capacity across all product lines. This is also being done to ensure continued market leadership.

“We intend to focus on consolidating our leading market position, both in the domestic and international markets, across our existing product portfolio and by expanding our product portfolio. Our long-standing experience and extensive product portfolio place us in a good position to increase our penetration in various geographies as well as end-user segments such as agriculture, industrial and automotive segments,” points out Vishwanathan. 

In fact, many of the segments in which the company operates have good potential. Agriculture, which is a key consumer of steel files for sharpening tools to produce palm oil, sugarcane, coffee and rubber among others, has potential for growth. Besides Indian agricultural growth, African countries also have a huge agrarian growth base. 

Construction investments are also on the rise and are expected to register a 6-8 per cent CAGR between FY22 and FY2026 led by a 7-9 per cent growth in the infrastructure segment and a 6-8 per cent rise in building construction during this period. Further, the global construction industry is expected to register a 4-5 per cent CAGR during 2020 and 2026, after recovering from the impact of the COVID-19 pandemic, notes the CRISIL report. 

In addition, government initiatives of about Rs1.7 lakh crore (budgeted) as production-linked incentives (PLI) to local manufacturing companies in 13 sectors also bodes well for JKFEL, which will boost domestic manufacturing and reduce dependence on raw material imports from China. 

Geared up

Even in its auto division, growth opportunities are high. The firm has manufactured over 750 active SKUs of ring gears, flexplates, and water pump bearings that find applications in the passenger and commercial vehicle segment including industries such as construction and mining equipment, tractors, industrial power generators, marine engine and lawn movers. Its auto segment provides a wide range of ring gears too, which has a higher realisation in the international market. 

An important factor in the growth of the auto component industry is the estimated growth in passenger and commercial vehicles. However, the market opportunity is quite huge with already around 50 per cent market share in India. In fact, the auto component market size is expected to grow at a good pace of 13-15 per cent CAGR between FY21 and FY26 to reach approximately Rs5,875 billion led by OEM demand. 

Even exports are expected to pace their growth comfortably at about 11-13 per cent over FY21 to FY26 driven by schemes such as PLI schemes. Besides, the global auto industry is expected to register a steady growth of 4-5 per cent CAGR during FY21-FY26 due to growth in personal incomes, increasing affordability and adoption of electric vehicles as well, says a CRISIL report. JKFEL’s products are used across various type of automobiles including electric vehicles, which puts it in the pole position in the domestic auto market.

JKFEL’s integrated manufacturing facilities should stand it in good stead. The firm’s five manufacturing facilities in its tools and hardware business and three facilities in the auto business are integrated with all support systems including waste management systems. In fact, the auto components facilities are situated close to customer clients, some of whom include Tata Motors, Mahindra and Mahindra, John Deere, Maruti, Toyota among others. 

Needless to say, with demand steady, JKFEL is looking to capitalise on the emerging opportunities in all its segments. Currently, the firm is expanding its ring gear manufacturing capacity from 8.2 million units per annum as of 30 June, 2021 to 9.2 million units per annum. In addition, its water pump bearing capacity is also being racked up from 3.9 million units per annum, as of 30 June, 2021, to 5.70 million units per annum. 

Further, based on its pipeline of programs, JKFEL intends to undertake another phase of capacity expansion to further increase its ring gears and water pump bearing capacity by 2.00 million units and 3.00 million units, respectively. In addition, JKFEL also intends to increase the manufacturing capacity for flexplates by 0.40 million units. All these expansions should increase its domination. 

Net debt free 

JKFEL’s business base has enabled it to clock a good pace of revenue growth over the years with its products in demand across the world. Over the years, the firm has been able to generate strong cash flows with little or no reliance on debt. As a result, JKFEL is net debt-free at the enterprise level. In addition, return on capital employed has also been quite high with core RoCE in the range of over 40 per cent.

In Q3FY22, JKFEL’s revenues on an aggregate basis grew by 28 per cent to Rs209 crore as compared to Rs163 crore in the year-ago period. One of the highlights of the third quarter has been its sales growth which has been driven in the export markets of the US, Europe, Asia and Africa. JKFEL’s 9-month revenue showed solid growth of about 72 per cent in revenue to Rs607 crore. Operating profit (EBITDA) levels jumped to Rs89 crore with margins coming in at 14.6 per cent for the period. 

It derives benefits from synergy by the consolidation of engineering and auto components wherein raw material sourcing such as procurement of steel brings in the value addition through optimised costs. “This will also result in rationalisation of logistics expenses given the common markets. The consolidation also presents a lucrative business opportunity of cross-selling for both the businesses,” adds Vishwanathan.

For its next phase of growth, apart from expansions and tapping into growth opportunities, JKFEL has implemented various automation solutions to reduce cycle times and manpower requirements. The firm has automated teeth cutting and is also switching from traditional manual processes to automated robotic systems. “We are streamlining our operations and manufacturing process which will give us the flexibility to respond quickly and efficiently to customer demands and product specifications,” says Vishwanathan. 

In addition, JKFEL’s data analytics and digital control systems will help it improve its capacity utilisation and provide effective control and cost efficiencies. In addition, the firm is constantly endeavouring to improve its efficiencies through efficient control of raw material and leveraging its sourcing network and just-in-time inventory. 

All this places JKFEL in a good spot to deliver the goods. JKFEL plans to increase the wallet share of its business with existing distributors and customers. “JKFEL is a classic example of how an indigenously developed company operating in a niche segment is a proud supplier to the global players generating foreign exchange. Today, it gives us a great sense of pride to see JKFEL realising the dream of Make In India”, signs off Amit Agarwal, group CFO, Raymond Ltd.