Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Pricol Limited (Pricol) to 'CRISIL A/Stable' from 'CRISIL A-/Stable' 

 

The rating upgrade reflects the healthy and sustained improvement in Pricol’s business performance during fiscal 2023, which is expected to continue over medium term, supported by steady demand from auto OEMs. Besides, due to steady supply of raw materials recently coupled with better operating efficiencies and company’s expertise in the dashboard business will continue to register operating profitability of above 11.5% over medium term. Pricol’s financial risk profile has also strengthened over the last 2 fiscals supported by healthy cash accruals generated from sustained revenue growth and steady profitability. With prudent funding of capex and working capital management, debt metrics are expected to remain at comfortable levels over the medium term.

 

CRISIL Ratings also notes that Minda Corporation Ltd (rated ‘CRISIL AA-/Stable/CRISIL A1+’) acquired ~15.70% shares of the Pricol’s total issued and paid-up equity share capital. However, CRISIL Ratings do not anticipate any major impact on account of the acquisition of minority stake by Minda Corp in Pricol in the near term, as management control and majority shareholding of Pricol continue to vest with the existing promoters. However, since the acquisition, it may be noted that, the existing promoters increased their stake from 36.5% to 38.5% respectively. Nevertheless, CRISIL Ratings will continue to monitor changes in shareholding pattern of Pricol.

 

The ratings reflect the established business risk profile of Pricol supported by its healthy relationship with domestic original equipment manufacturers (OEMs), leadership position in two-wheeler (2W) instrument clusters, improving product diversity on account of industry transition from mechanical clusters to LED and TFT clusters over a period of time. Financial risk profile has also strengthened with marked improvement in adjusted networth to Rs. 544 crore in fiscal 2023 as compared to Rs. 393 crore in fiscal 2022 and Rs. 319 crore in fiscal 2021 supported by continued healthy profitability. However, these strengths are offset by Pricol’s revenue dependence on 2W OEMs and high dependence on imported raw materials, which renders its profitability vulnerable to adverse foreign exchange movements.

 

Pricol derives over ~85% of its revenues from OEMs, especially 2W OEMs and enjoys strong relationship with a market share of ~65% in 2W instrument clusters. Between fiscal 2019-21, Pricol’s revenues remained muted in line with sluggish 2W demand; besides it also sold off its loss-making overseas subsidiaries in fiscal 2019-20, which had impacted revenues, albeit hiving off these subsidiaries along with improved focus on enhancing cost efficiencies, including through automation, operating profitability improved to ~11-12% in fiscal 2021 and fiscal 2022. Subsequently, during fiscal 2023, revenues increased by 27% to Rs.1960 crore and the momentum is expected to continue in fiscal 2024 backed by continued healthy OEM demand from all segments. Over the medium term, the operating profitability is expected to be around 11.5-12% with decline in raw material costs.

 

Pricol has a planned capex activity for Rs. 600 crore from fiscal 2023 to fiscal 2025 to enhance capacity, mainly of new products, which are part of the productivity linked incentive (PLI) scheme, announced by the government of India and also for routine modernization and refurbishment of lines. During fiscal 2024, company is expected to spend ~Rs. 140 crore for a new plant in Pune and ~Rs.50 crore for maintenance capex and so far ~Rs.80 crore was spent during the current fiscal. Capex for next fiscal is ~Rs. 120 crore, while ~Rs.200 crore will be reserved for any potential inorganic expansions. With steady accruals and control over working capital and capex being funded through internal accruals, debt levels are expected to remain low, leading to healthy debt metrics over the medium term. Annual repayment obligation of ~Rs.10 crore will be comfortably met through net cash accruals of ~Rs.230 crore over the medium term. Besides, company also has a liquid surplus of Rs.97 crore as of September 2023 and has adequate headroom in the form of unutilized bank limits with modest utilization levels of ~44% (against average drawing power of ~Rs.130 crore) for 9 months ended October 2023 respectively.

Analytical Approach

CRISIL Ratings has consolidated Pricol’s financials with its wholly owned subsidiaries PT Pricol Surya – Indonesia, Pricol Asia Pte Limited, Singapore since these are wholly owned subsidiaries in the same line of business with significant business and financial linkages. CRISIL Ratings has also consolidated PT Sripri Wiring Systems, Indonesia which is the wholly owned subsidiary of PT Pricol Surya- Indonesia and Pricol Asia Exim DMCC, wholly owned subsidiary of Pricol Asia Pte Ltd.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Leading position in 2W instrument clusters, and improving product diversity, supported by healthy relationships with OEMs: Pricol has healthy market position in dashboard instruments and driver information systems (~59% of the revenues in fiscal 2023) with track record of about 50 years in supplying to leading domestic OEMs. Pumps and mechanical products contribute 23% of revenues while switches and sensors contribute 18% of the revenues. Presence in different segments, adds to the product diversity of Pricol. The company has its own inhouse R&D which develops the new products and has a track record of launching new products quickly. The company plans to add new products to its portfolio such as sensors and battery management systems, which will further enhance its product basket.

 

Globally, Pricol is the 2nd largest instrument cluster maker in terms of volumes next to Nippo Seiki & Co. Ltd, Japan. Pricol also holds ~53% market share in the domestic instrument cluster business.

 

Pricol derives majority of its revenues from domestic OEMs (~87% in fiscal 2023) with relatively modest aftermarket and exports presence. 2Ws OEMs contribute ~65% of the revenues and the company has healthy relationship with key OEMs including 2W OEMs - TVS Motor Company Ltd, Hero MotoCorp Ltd (rated ‘CRISIL AAA/Stable/CRISIL A1+’), Bajaj Auto Ltd (rated ‘CRISIL AAA/Stable/CRISIL A1+’), Eicher Motors Ltd (Royal Enfield 2Ws), CV OEMs - Tata Motors Ltd (rated ‘CRISIL AA/Stable/CRISIL A1+’), JCB India Ltd (rated ‘CRISIL AAA/Stable’) and Ashok Leyland Ltd. The company earlier had a non-compete agreement with its erstwhile joint venture partner, Denso Corporation, Japan, which recently expired, following which Pricol has avenues to supply to passenger vehicle (PV) OEMs.

 

A sizeable portion of Pricol’ s products are electric vehicle (EV) agnostic; hence the impact on revenues due to a gradual shift towards EV will not be material, and revenue loss will be more than offset by new product launches expected over the medium term.

 

Good operating efficiencies: Pricol has strong R&D capabilities and has off late started manufacturing more critical components in-house, which ensures better quality and less wastage. Also, its focus on automation which allowed for material pruning of workforce, and on enhancing share of wallet with existing customers, and moving up the value chain has enabled it to maintain above average profitability of ~11-12% since fiscal 2021. The hive off of the loss-making overseas subsidiaries and change in product mix in favor of better premium price complex products, has also contributed to the profitability improvement.

 

The company’s operations were impacted by labour issues and strikes in the past; however there have been cordial relations in recent years.

 

Financial risk profile is healthy with low debt levels and nil debt funded capex plans over medium term: The company’s financial risk profile has benefitted from health cash accruals generated since fiscal 2021 and a rights issue of Rs. 81 crores in fiscal 2021, which enabled debt reduction, strengthening of the balance sheet, and debt metrics. Pricol’s financial risk profile was constrained in the past due to losses and write-offs taken due to hive off of overseas subsidiaries, prirmarily in Brazil (~Rs.400-420 crores), which eroded net worth. Besides, the debt taken for acquisition and later to support losses of subsidiaries led to moderation in the company’s financial profile between fiscal 2018-20.

 

Pricol acquired three companies from Ashok Piramal group (PMP Czech, PMP Mexico & PMP India) in fiscal 2018 for a consideration of Rs.100 crores. Pricol already had one subsidiary in Brazil (Pricol do Brasil Components automotives Ltd), acquired in fiscal 2015, which had been making losses due to high employee costs and stagnating economy. Due to inability to turn around operations at Brazil, Pricol also decided to exit the Mexican and Czech subsidiaries, and all three subsidiaries were sold at a marginal price, compared with their acquisition cost, resulting in huge losses and write-offs and PMP India was later merged with Pricol.

 

With a sizeable portion of the debt being paid down in fiscal 2021 and only moderate capital spending coupled with healthy cash accruals, debt metrics such as gearing and ratio of debt/EBITDA has improved over the past 3 fiscals. As of fiscal 2023, gearing further improved to 0.25 times as compared to 0.45 times, with lesser working capital borrowings and nil debt funded capex activities. Pricol had planned for Rs.600 crore capex activity from fiscal 2023 to fiscal 2025 which will be adequately funded through its internal accruals. Out of the same, Pricol incurred Rs. 80 crore in FY2023. During the current fiscal, Rs. 95 crore incurred in H1 and Rs.100 crore expected in H2. Another Rs. 120 crore is expected to be spent in next fiscal, while Rs. 200 crore will be reserved for inorganic expansion activities. The present facilities of Pricol has the ability to generate revenues of Rs.2400-2500 crore per annum respectively. Since revenues have almost touched optimum utilization, Pricol is in process of setting up a new unit in Pune at a cost of Rs.140-150 crore, which is expected to commence operations from next fiscal.

 

With steady accruals and control over working capital, debt levels are expected to remain low, leading to debt metrics remaining at healthy levels over the medium term.

 

Weaknesses:

Revenue concentration in 2W segment: Domestic OEMs contribute over 85-88% of the revenues of Pricol, with exports contributing ~7% of the revenues in fiscal 2023. The company has no significant share in the aftermarket due to long life-cycle of products. High exposure to OEMs therefore makes Pricol vulnerable to automobile demand cycle and the consequent offtake by its customers. Pricol has improved its segmental revenues with 2Ws contributing ~65% of its revenues in fiscal 2023 as compared to 74% during fiscal 2020. However, any prolonged slowdown in 2W demand, as was witnessed between fiscal 2020-22 impacts off-take for components.

 

The revenue dependence on the 2W segment, is expected to continue reducing over the time, as Pricol can now re-enter the PV segment, where it is already in discussions with PV OEMs in this regard. Besides, improved demand from commercial vehicles (CVs) will also help the reduce revenue dependence on the 2W segment. Albeit, given its strong relationship with 2W OEMs and leading position in the instrument cluster business, revenue concentration on OEMs and the 2W segment in particular, will continue over the medium term.

 

High import dependence rendering profitability vulnerable to adverse forex movements: Pricol presently imports about 45-50% of its raw materials as compared to ~40% imports earlier, which was primarily driven by increased imports in the TFT segment. Out of the same, ~65-70% of the same are from China while other import sources include South Korea and Taiwan. All imports are routed through its subsidiary in Singapore, Pricol Asia Pte Ltd. The high import content in its raw material mix and limited hedging activity by the company exposes the company’s profitability to foreign currency fluctuations and freight costs, especially during volatile periods globally.

Liquidity: Strong

The company’s liquidity position is adequate and supported by healthy accruals of over Rs.230-250 crores per annum expected over the medium term and largely unutilized bank lines (utilization was sparse at ~46% over 9months ended October 2023, compared with drawing power ranging from Rs.120-130 crores). The company had long term debt of Rs.38.65 crores on March 31, 2023, of which it has repaid ~Rs.10 crores in H1 fiscal 2024 which comprises of only ECLGS facilities. Repayment obligations are minimal at ~Rs.10 crore over the medium term. Additional working capital borrowings are expected to remain under control, while capex spending is estimated at ~Rs.400 crores from fiscal 2024 to 2026 will be met largely from accruals and surpluses. As of September 2023, Pricol had liquid surplus of ~Rs.97 crore respectively.

Outlook: Stable

Pricol will benefit from healthy relationships with its existing customers which will translate into strong business performance supported by healthy demand for its products from OEMs and export customers and sustain its operating profitability at current levels. Company is also expected to sustain its existing financial risk profile supported by healthy cashflows, prudent working capital management and capex being adequately funded through accruals and existing surpluses.

Rating Sensitivity Factors

Upward factors

• Sustained healthy double-digit growth in revenues, supported by better customer and product diversity, and operating profitability of over 12-13%, leading to better-than-expected cash generation.
• Sustenance of healthy financial risk profile and debt metrics.

 

Downward factors

• Sluggish revenue or fall in operating profitability below 7-8% on sustained basis impacting cash accruals.
• Any material labour related issues impacting operations of the company.
• Large, debt-funded capex or acquisitions, increase in working capital cycle, impacting debt metrics materially.

About the Company

Pricol commenced its operations in the year 1975 in Coimbatore, South India. Pricol is one of India's leading dashboard manufacturers headquartered in Coimbatore. The company carries out its business and operations in Driver Information Systems and Sensors, Pumps and Allied Products, Telematics and Wiping Systems catering to leading automotive OEMs in Two / Three-Wheeler, Passenger Vehicles, Commercial Vehicles, Farm Equipment and Offroad Vehicles across India and in International Markets (45+countries) with 2000+ product variants. The company has 8 manufacturing facilities across Coimbatore, Manesar, Pantnagar, Pune, Satara and Sri city in India, 1 manufacturing plant in Jakarta, Indonesia, with 2 international offices in Tokyo, Japan and in Singapore.

 

As of 6M fiscal 2024, the company had reported operating income of Rs. 1115 crore with EBITDA margin at 11.8% and net cash accruals of Rs.106 crore on consolidated basis.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Cr)	Complexity Levels	Rating Assigned with Outlook
NA	Proposed Term loan	NA	NA	NA	36.42	NA	CRISIL A/Stable
NA	Term loan	NA	NA	May-2026	17.85	NA	CRISIL A/Stable
NA	Term loan	NA	NA	Jun-2026	10.73	NA	CRISIL A/Stable
NA	Cash Credit^	NA	NA	NA	80	NA	CRISIL A/Stable

^Includes sublimit of Letter of Credit & Bank Guarantee