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 in fiscal 2024 (revenue growth of 16% reaching Rs 2,273 crore), and expectations of steady double digit revenue growth continuing in fiscal 2025 and over the medium term, supported by the company’s leading position in the instrument cluster segment, steady demand from auto original equipment manufacturers (OEMs), addition of new customers, and increase in wallet share with existing customers, as well as new product additions. Operating profitability improved to 12.6% in fiscal 2024 from 11.8% in fiscal 2023 and is expected to sustain above 12-13% over the medium term on account of stable raw material prices, coupled with better operating efficiency given the company’s expertise in the instrument cluster (dashboard) business, and higher operating leverage.

 

Pricol has also strengthened its financial risk profile over time, even as its business risk profile continues to improve. Debt has considerably reduced (to Rs 71 crore as on March 31, 2024, from Rs 176 crores as on March 31, 2022), with long-term debt being retired ahead of scheduled payments, and despite the company undertaking sizeable capital expenditure (capex) of ~Rs 273 crore between fiscals 2022 and 2024. This has been possible by generation of healthy cash accrual through optimising product mix and focusing on cost reduction and prudent working capital management. Hence, there is a significant improvement in debt metrics; gearing improved to 0.10 time as on March 31, 2024, from 0.44 time as on March 31, 2022, while the ratio of debt to earnings before depreciation, interest, tax and amortisation (Ebitda) improved to 0.25 time in fiscal 2024 from 0.59 time in fiscal 2023 and 0.95 time in fiscal 2022. The company is expected to generate healthy cash accrual of over Rs 275 crore on an annual basis over the medium term, which will suffice to meet its yearly capex needs of Rs 150-200 crore, leading to continued healthy debt metrics. While the company is also on the lookout for inorganic growth opportunities, management is inclined to keep leverage at comfortable levels. Besides, such opportunities are likely to be profitable entities.

 

CRISIL Ratings also notes that in February 2023, Minda Corporation Ltd (rated ‘CRISIL AA-/Stable/CRISIL A1+’) acquired ~15.70% stake in Pricol. However, during January 2024, Minda Corporation Ltd had sold its entire stake held in Pricol to mutual fund houses and institutions. CRISIL Ratings will continue to monitor any key changes in the shareholding pattern of Pricol.

 

The ratings continue to reflect Pricol’s established business risk profile, supported by its healthy relationships with domestic OEMs, leadership position in two-wheeler (2W) instrument clusters, improving product diversity on account of industry transition from mechanical clusters to light-emitting diode (LED) and thin-film transistors (TFT) clusters. The ratings are also supported by improving operating efficiency and the company’s healthy financial risk profile. These strengths are partially offset by revenue concentration in 2W OEMs; and high dependence on imported raw materials, which renders profitability vulnerable to adverse foreign exchange (forex) movements.

Analytical Approach

CRISIL Ratings has consolidated Pricol’s financials with its wholly owned subsidiaries, PT Pricol Surya – Indonesia, and Pricol Asia Pte Ltd, Singapore, since all of these are in the same business with significant business and financial linkages. CRISIL Ratings has also consolidated Pricol Electronics Pvt Ltd and Pricol Asia Exim DMCC, wholly owned subsidiaries 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 with track record of about 50 years in supplying to leading domestic OEMs. Revenue share of dashboard instruments increased to 68% in fiscal 2024 from 59% in fiscal 2023 on account of improvement in product mix, leading to better realisations. Also, the volume growth was driven mainly by the domestic 2W industry growing 13% during the fiscal. Pumps and mechanical products contributed 20% to the revenue in fiscal 2024 (same as previous fiscal), while switches and sensor contribution dropped to 12% of the revenue in fiscal 2024 from 18% in fiscal 2023. Presence in different segments adds to the product diversity. The company has in-house R&D (research and development) and has a track record of launching new products quickly. It 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 second-largest instrument cluster maker in terms of volumes, next to Nippon Seiki & Co Ltd, Japan. Pricol also holds 55-60% market share in the domestic instrument cluster business, and 65% market share in 2W instrument clusters.

 

Majority of revenue comes from domestic OEMs (~89% in fiscal 2024) with relatively modest aftermarket and exports presence. 2Ws OEMs contribute ~69% to the revenue and the company has healthy relationships with key OEMs such as 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.

 

Revenue increased 16%% to Rs 2,273 crore in fiscal 2024 from ~Rs 1,963 crore in fiscal 2023, supported by rise in wallet share from existing customers, improved product mix leading to better realisations, and increase in volumes backed by steady demand from domestic OEMs. This healthy performance is expected to continue in fiscal 2025, backed by continuing OEM demand and change in product mix with OEMs preferring LED and TFT clusters from the existing mechanical clusters, which has higher realisations.

 

A sizeable portion of Pricol’ s products are electric vehicle (EV) agnostic; hence the impact on revenue 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.

 

Improving operating efficiency: Operating profitability has continued to improve to 13% in the first quarter of fiscal 2025 from 12.62% in fiscal 2024 and 11.7% in fiscal 2023. Over the medium term, profitability is expected to be rangebound at 12-13% with stable raw material costs and continued increase in volumes, leading to better operating leverage.

 

Pricol has strong R&D capabilities and has also 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 the workforce, enhancing share of wallet with existing customers, and moving up the value chain have enabled it to improve profitability. The hive off of the loss-making overseas subsidiaries and change in product mix in favour of better premium price complex products has also contributed to the profitability.

 

Operations were impacted by labour issues and strikes in the past; however, there have been cordial relations in recent years. Any major labour issue impacting operations will remain monitorable.

 

Healthy financial risk profile: Health cash accrual since fiscal 2021 and a rights issue of Rs 81 crore in fiscal 2021, which enabled debt reduction, have strengthened the balance sheet and debt metrics. Financial risk profile was constrained in the past due to losses and write-offs taken due to hive off of overseas subsidiaries, mainly in Brazil (Rs 400-420 crore), which eroded networth. Besides, the debt taken for acquisition and later to support losses of subsidiaries led to moderation in the company’s financial risk profile between fiscals 2018 and 2020.

 

Pricol acquired three companies from the Ashok Piramal group (PMP Czech, PMP Mexico and PMP India) in fiscal 2018 for a consideration of Rs 100 crore. 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 in Brazil, Pricol 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; also, 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 accrual, debt metrics have improved significantly since fiscal 2021.

 

Gearing improved to 0.10 time as on March 31, 2024, from 0.25 time as on March 31, 2023, while the debt to Ebitda improved to 0.25 time in fiscal 2024 from 0.959 time as compared to fiscal 2022. The company has only working capital debt outstanding as on June 30, 2024, with long-term debt being prepaid in second half of fiscal 2024.

 

Pricol had planned for capex of ~Rs 600 crore, including possible inorganic opportunities, during fiscals 2023-2025, which was to be funded mainly from accrual. Out of the same, Pricol incurred Rs 84 crore in fiscal 2023, Rs 14 crore in fiscal 2024, and close to Rs 200 crore is proposed to be incurred in fiscal 2025. Another Rs 150 crore is expected to be spent next fiscal. Debt metrics are, therefore, expected to remain healthy, with cash generation expected at over Rs 275 crore annually, and which will suffice to fund capex.

 

In the event of material acquisitions, the company may also dip into its cash surpluses (Rs 136 crore as on June 30, 2024) besides contracting debt. Management is, however, inclined to keep leverage under control. The same will be monitorable.

 

Weaknesses:

Revenue concentration in the 2W segment: Domestic OEMs contribute 88-89% to the revenue, with exports contributing ~6% while the remaining ~5% is contributed by the aftermarket segment. The company has no significant share in the aftermarket due to long life-cycle of products. Similarly, export revenue share is minimal on account of strong competition from global giants. High exposure to domestic OEMs therefore makes Pricol vulnerable to automobile demand cycle and the consequent offtake by its customers. Pricol has improved its segmental revenue with 2Ws contributing ~69% to its revenue in fiscal 2024 against 74% during fiscal 2020. However, any prolonged slowdown in 2W demand, as was witnessed during fiscals 2020-2022, impacts offtake for components.

 

The revenue dependence on the 2W segment is expected to continue to reduce over time as Pricol has taken initiatives to improve its share in the PV segment (represented ~10% of sales as of first quarter of fiscal 2025), where it is already in discussions with PV OEMs in this regard. Besides, improved demand from commercial vehicles will also help 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. Besides, to mitigate the revenue dependence on dashboard and other existing products, Pricol incorporated a new subsidiary in fiscal 2024, Pricol Electronics Pvt Ltd (PEPL), which shall engage in supply of electronic parts to the auto industry in the long term.

 

High import dependence rendering profitability vulnerable to adverse forex movements: The company currently imports 45-50% of its raw materials (such as LCD and TFT screens) against ~40% earlier, which was driven by increased imports in the TFT segment. Out of the same, 65-70% is from China while other import sources include South Korea, Japan 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 expose the profitability to fluctuations in forex and freight costs, especially during volatile periods globally.

Liquidity: Strong

Liquidity remains strong, supported by cash surplus of Rs 136 crore (as on June 30, 2024), healthy accrual of over Rs 275-300 crore per annum over the medium term and largely unutilised bank limit (utilisation was moderate at ~56% over the nine months through July 2024). The company had prepaid its long-term debt during the second half of fiscal 2024 and hence, does not have any debt obligation. Additional working capital requirement is expected to remain under control, supported by prudent working capital management, while capex spending is estimated at ~Rs 200 crore this fiscal and ~Rs 150 crore annually over the medium term, which will be met from internal accrual.

Outlook: Stable

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

Rating Sensitivity Factors

Upward factors

• Sustained improvement double-digit growth in revenue, supported by better customer and product diversity, and operating profitability sustaining above 12-13% leading to better-than-expected cash generation
• Sustenance of healthy financial risk profile and debt metrics
• Maintenance of sizeable cash surpluses

 

Downward factors

• Sluggish revenue or fall in operating profitability below 8-9% on a sustained basis impacting cash accrual
• Any material labour-related issues impacting operations
• Large, debt-funded capex or acquisitions and increase in working capital cycle impacting debt metrics materially.

About the Company

Pricol commenced operations in 1975 in Coimbatore, South India, and is one of India's leading dashboard manufacturers. The company offers driver information systems and sensors, pumps and allied products, telematics and wiping systems catering to leading automotive OEMs in 2/3W, PV, commercial vehicles, farm equipment and offroad vehicles across India and overseas (45+ countries) with more than 2,000 product variants. The company has eight manufacturing facilities across Coimbatore, Manesar (Haryana), Pantnagar (Uttarakhand), Pune, Satara (both in Maharashtra) and Sri City (Andhra Pradesh) in India, one manufacturing plant in Jakarta, Indonesia, with two international offices in Tokyo, Japan and in Singapore.

 

On June 30, 2024, the promoters, Mr Vikram Mohan and his family members, held 38.5% stake in Pricol, foreign portfolio investors 15.01%, mutual funds 9.8%, alternate investment funds 2.8%, insurance companies 3.9%, and public and others the balance.

 

On a consolidated basis, Pricol reported operating income of Rs 620 crore in the first quarter of fiscal 2025 (Rs 537 crore in the first quarter of fiscal 2024) and operating margin of 13% (12% in the first quarter of fiscal 2024).

Key Financial Indicators*

As on/for the period ended March 31		2024	2023
Revenue	Rs.Crore	2273	1959
Profit after tax (PAT)	Rs.Crore	141	125
PAT margin	%	6.2	6.4
Adjusted debt/adjusted networth	Times	0.10	0.25
Interest coverage	Times	15.91	12.50

*CRISIL Ratings-adjusted numbers

Any other information: Not Applicable