Detailed Rationale

CRISIL Ratings has reaffirmed the rating on the long-term bank facilities of Pricol Ltd. at ‘CRISIL A-/Stable’.

 

On February 17, 2023, Minda Corporation Ltd. (Minda Corp, rated ‘CRISIL AA-/Stable/CRISIL A1+’) announced that it had acquired 1,91,40,342 equity shares of Pricol through an open market transaction for an aggregate amount of Rs.400 crore representing ~15.70 % of the Pricol’s total issued and paid-up equity share capital., Minda Corp has informed the exchanges that the share acquisition is purely a financial investment in nature, and that as of now, the company will remain a significant minority shareholder.

 

CRISIL Ratings does 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. Nevertheless, CRISIL Ratings will continue to monitor changes in shareholding pattern of Pricol, if any.

 

The ratings continue to reflect the established business risk profile of Pricol supported by healthy relationship with domestic original equipment manufacturers (OEMs), leadership position in two-wheeler (2W) instrument clusters, improving product diversity and above average operating efficiencies. The ratings also reflect the company’s adequate financial risk profile. 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 80% of its revenues from OEMs, and 2W OEMs in particular. It enjoys strong relationship with OEMs and has a dominant share of over 65% in 2W instrument clusters. Between fiscal 2020-22, Pricol’s revenues remained muted in line with sluggish 2W demand; besides it also sold off loss making subsidiaries overseas in fiscal 2019-20, which also impacted revenues. On the other hand, the hive 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. Over the near to medium term, Pricol is expected to register revenue growth of ~5-10% supported by healthy demand from OEMs, while its operating profitability is expected to remain rangebound at current levels, with gradual pass on of the rise in input costs to OEMs.

 

The company has capital spending plans of Rs.400-450 crores over the next 3-4 years 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. With steady accruals and control over working capital, debt levels are expected to rise modestly, leading to debt metrics remaining at adequate levels over the medium term.

 

CRISIL Ratings had assigned its ‘CRISIL A-/Stable’ rating to the bank facilities of Pricol on October 12, 2022.

Analytical Approach

CRISIL Ratings has consolidated Pricol’s financials with its wholly owned subsidiaries PT Pricol Surya – Indonesia, Pricol Asia Pte Limited 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 which is the wholly owned subsidiary of PT Pricol Surya- Indonesia.

 

Please refer Annexure - List of a 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 (~52% of the revenues) 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 11% 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.

 

The company is the market leader in 2W instrument clusters (dashboard instruments), with over 50% market share.

 

Pricol derives majority of its revenues from domestic OEMs (~82% in fiscal 2022) with relatively modest aftermarket and exports presence. 2Ws OEMs contribute ~70% 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+’) and Eicher Motors Ltd (Royal Enfield 2Ws), CV OEMs - Tata Motors Ltd (rated ‘CRISIL AA-/Stable/CRISIL A1+’) and Ashok Leyland. The company earlier had a non-compete agreement with its erstwhile joint venture partner, Denso Corporation, Japan, which recently expired, following which Pricol is in discussions to supply components 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.

 

• Adequate financial risk profile: 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. Pricol was merged with PMP India, which was later renamed as Pricol.

 

With a sizeable portion of the debt being paid down and only moderate capital spending, debt metrics such as gearing and ratio of debt/EBITDA improved to 0.32 times and 0.7 times from 2.75 times and 4.8 times respectively in fiscal 2020. The company has capital spending plans of Rs.400-450 crores over the next 3-4 years to enhance capacity, mainly of new products, for routine modernization and refurbishment of lines. With steady accruals and control over working capital, debt levels are expected to rise only modestly, leading to debt metrics remaining at adequate levels over the medium term.

 

Weaknesses

• Revenue concentration in 2W segment: Domestic OEMs contribute over 80% of the revenues of Pricol, with exports contributing ~8% of the revenues in fiscal 2022. 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 and the consequent offtake by its customers. Further, Pricol derives ~65-70% of its revenues from the 2W segment. 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 gradually expected to reduce over 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) since fiscal 2022 will also help to reduce revenue dependence on the 2W segment. Albeit, given its strong relationship with OEMs and leading position in the 2W instrument cluster segment, 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 imports about 40-45% of its raw materials, and ~65-70% of the same are from China. Other import destinations include South Korea and Taiwan. All imports are routed through its subsidiary, Singapore based Pricol Asia Pte Ltd. The high import content in its raw material mix and limited hedges taken exposes the company’s profitability to foreign currency fluctuations and freight costs, especially during volatile periods globally.

Liquidity: Adequate

The company’s liquidity position is adequate and supported by healthy accruals of over Rs.120-130 crores per annum expected over the medium term and largely unutilized bank lines (utilization was sparse at ~25% over 9months ended December 2022, compared with drawing power ranging from Rs.50-70 crores). The company had long term debt of Rs.125 crores on March 31, 2022, of which it has repaid ~Rs.80 crores (including pre-payment) in the first half of fiscal 2023 and currently has only ECLGS outstanding of ~Rs.45 crore. Additional working capital borrowings are expected to remain under control, while capex spending is estimated at Rs.400-450 crores over the next 3-4 years, and will be met largely from accruals, and moderate debt. Repayment post fiscal 2023 will pertain to residual loans as well as loans which will be raised for capex, and are expected to be well spread out, ensuring adequate cushion against accruals.

Outlook Stable

Pricol is expected to register steady business performance, due to healthy demand for its products from OEMs and export customers and sustain its operating profitability at current levels. The financial risk profile is expected to remain adequate supported by good cashflows from operations and prudent working capital management, and notwithstanding large capex requirements.

Rating Sensitivity factors

Upward factors

• Stronger than anticipated revenue growth, including from new products, and sustained steady operating profitability (11-12%), resulting in better-than-expected cash generation.
• Steady improvement in financial risk profile, supported by steady cash generation, prudent funding of capex and good working capital management.

 

Downward factors

• Sluggish business performance due to weak demand from OEMs, impacting operating profitability (below 7-8%), and cash generation.
• Material labour related issues impacting operations.
• Larger than expected debt funded capex or acquisitions, and increase in working capital needs, impacting key debt metrics.

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 and Sri city in India, 1 manufacturing plant in Jakarta, Indonesia and 1 subsidiary in Satara in India, with 2 international offices in Tokyo, Japan and in Singapore.

 

As on 9M fiscal 2023, the company had reported operating income of Rs. 1393 crore with EBITDA margin at 12.2% and net cash accruals of Rs.157 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	17.43	NA	CRISIL A-/Stable
NA	Term loan [ECLGS facility]	NA	NA	May-26	25.96	NA	CRISIL A-/Stable
NA	Term loan [ECLGS facility]	NA	NA	Jun-26	21.61	NA	CRISIL A-/Stable
NA	Cash Credit^	NA	NA	NA	80	NA	CRISIL A-/Stable

^ - Includes sublimit of Letter of Credit &Bank Guarantee