Pricol : Emerging Auto Ancillary

Disclaimer – Analysis is NOT a BUY/SELL/HOLD Recommendation. It can be used for educational purposes. There could be lot of things which might have been missed in analysis either due to lack of information or oversight etc.. Do your own diligence & contact your expert financial adviser before making any investment decision.

Business

Pricol Limited is an auto component supplier headquartered in Coimbatore, Tamil Nadu that manufactures various products such as driver information systems, oil/water pumps, chain tensioners, cab tilts, fuel sensors, temperature/pressure sensors, speed limiting devices, and wiping systems. Company is the world’s second largest DIS manufacturer for 2 wheeler.

The promoters, and related family members/family-owned entities hold a 36.53% stake in Pricol.

Manufacturing facilities

9 Manufacturing Locations, 8 Manufacturing Plants in India , 1 Subsidiary Plant in Indonesia. 3 International Office in Tokyo, Singapore & Dubai

Two direct subsidiaries in Indonesia (produces and markets instrument clusters, oil pumps and fuel sensors), and Singapore (procurement arm).

R&D Capabilities

2 Technology Centers at Coimbatore, ~ 4.5% spend on total revenue for R&D, As of march 2022, co. has made 13 inventions for which 18 patents have been filed. Out of which 12 are granted and remaining are under review.

Employee strength 850+, Engineers 300+

Customers and Regions of Revenue

Two-wheelers accounted for 61% of revenues and domestic sales constituted over 90% of its revenues in FY2022. Exports as a % of total revenues have dropped from ~30% to ~10% from FY20 to FY22. primarily due to divestment of various loss-making foreign subsidiaries.

In FY21 , DIS and pumps & mechanical products accounted for 50% and 33% of consolidated revenues respectively. Target is to take it to 70:30 ratio

Awards and Certications

Leading Industry Certifications IATF 16949:2016, ISO 14001:2015, ISO 45001:2018

Pricol has been recognized with the “Business Innovation” Award by the Confederation of Indian Industries (CII) Tamil Nadu for the various innovations done on Driver Information and Connected vehicle solutions

Award received from Honda Motorcycle and Scooters India “Best Delivery Management”

Award From TATA Motors (TML) on 07-Sept-2022

Award received under the category “Technology Excellence Award 2022” for the Best Interactive Product in Automotive.Award From Quantic India on 14-OCT-2022

Award From Hero MotoCorp on 07-NOV-2022. Award received under the category “Best In Innovation & Technology” at the Hero – NEXT 22

TOP 50 INNOVATIVE COMPANIES
Confederation of Indian Industries (CII) awarded Pricol as one of the “TOP 50 INNOVATIVE COMPANIES” as a part of Industrial Innovation award 2022

Product verticals

Driver information and Connected Vehicle solutions

This vertical is having products which are becoming need of every vehicle, 2W, 4W, CV, PV, LCV. Next stage could be CV, 3W and EV penetration

Moreover with EV domain coming up, this vertical has more legs

Customers

All Major customers are their clients

Experienced promoters and established track record of the company

Fundamental Ratios, Cash, Loans, EBITDA,PAT margin, Shareholding pattern

PAT transformation is sustained and growing, OPM got stable at 12%, we can expect OPM in range of 10-15% in coming years. Chances are it might get stable at 13-14% in next 2-3 years. EBITDA margins target of 15% from company side

ROE is improving over last decade and stands at 18%, ROCE at20%

Stable Cash conversion cycle and Working capital days are just under 25

Shareholding pattern

Low retail presence

IN house excellence

MANUFACTURING EXCELLENCE
PCB Assembly with SMT Lines
Robotic Lines with EOL Testing
State of the art Tool Room
Plastic Injection Molding
Pressure Die Casting
Machine Building
Sintering

Subject Matter Experts in Electronics
(Hardware & Software), Mechanical and
Electro-Mechanical domains
ASPICE level 2 practices

TESTING EXCELLENCE
EMI – EMC
Hil Lab
Environment
Endurance
Product Reliability

Triggers

Key partnerships of company with SIBROS, BMS, Technology provider, PSG institutions and Candera CGI studio can propel the company technically and come up with advanced products and solutions

Below snippet is from Q1FY23 Confcall Aug22 —talking about 12-36 months for different engines to fire

So 9 months has passed from that time.

New product launches in Q4FY23

In FY22, co. has launched certain new products, including some marking products especially for TVS on their iQube, the electric vehicle, a seven inch TFT the first of its kind, a hybrid TFT plus LCD instrument cluster, among others

Increase in exports to 20% of revenue

Exports as a % of total revenues have dropped from ~30% to ~10% from FY20 to FY22. Currently Plan of company is to take to 20% by 2025. Big deal with Caterpillar done and things will roll out in coming years

Capacity Enhancement and new machines

Production capacity enhancement in Tool room, Plastic Component Manufacturing Shop and SMT (Surface Mount Technology) for PCB assembly line by adding new machines.

Acquisition of shares by Minda

Minda holds 15.7% and wants to increase till 24.5%, That can trigger an open offer and push share price might move up. As of now Pricol is opposing the deal

Diversified product profile comprising of driver information systems, pumps and mechanical products mitigates product-specific risks to a large extent

Established relationships with OEMs with healthy share of business – Pricol is a reputed player in the Indian auto component industry with presence for over five decades and supplies to original equipment manufacturers (OEMs) like Hero MotoCorp Limited, TVS Motor Company, Bajaj Auto Limited, Ashok Leyland Limited and Tata Motors Limited.

Company has the target to reach 4000cr revenue by FY26. The company has an order pipeline for the next 3 years

Past Disposal of loss-making businesses–No overhang there
In order to reduce debt, co. has disposed off certain loss-making businesses and divested subsidiaries, for example, co. disposed off its Wholly Owned Subsidiaries – PWS India and Pricol and Pricol Espana in 2019 and 2020 respectively.
It has written off ~400 crores in the process of selling its loss-making foreign businesses

Venturing into new markets
Co. has plans of Venturing into motors and actuators, such as new sensors and newer technologies in driver information systems, like areas in EV vehicles and they have identified certain areas.
In FY22, co. has won many new businesses across various segments including products like Connected Vehicle Solution and around 10 % of the revenue of FY 22 was contributed by new business

PLI scheme approval and CAPEX plans

Pricol is approved for PLI (Production Linked Incentives) Scheme The PLI scheme (outlay of $ 3.5 bn(or)Rs 25,938 crore) for the automobile sector proposes financial incentives of up to 18% to boost domestic manufacturing of Advanced Automotive Technology (AAT) products and attract investments in the automotive manufacturing value chain…PRICOL LIMITED is approved by the Ministry of Heavy Industries(MHI) for the Component champion Incentive scheme

From Aug22 confcall

Targeting Exports and EV segment India’s growth story will be muted in the next 3 years for 2W auto segments; the company’s target is export. Company has a LOI for next 30 months and on the basis of that company projected the target of 4000cr. The company is working on premium products so even at low volume growth the target will be achieved. 8. Company is EV ready and in touch with all EV players in India. Currently 8% revenue is from EV in the DIS segment. Working with 22 EV players in the country. Margins are same from EV as well; also share of EV will go up as EV adoption increases in India

Demerger possibilities to unlock value To unlock value for shareholders, if there is a need to align with some other company to get technology from MNC players, then Pricol may demerge into 2 different companies for DIS and other businesses

Risks

Muted growth in Indian 2W Market

Company has shared at multiple times that next 2-3 years they expect muted growth in Indian 2W market, though with supply of premium products and margin, company may grow better than industry

Exposure to volatility of raw materials and forex rate fluctuations due to high reliance on imports
Semiconductors and electronic components account of ~20% of Pricol’s raw material requirements. Supplies have eased out in last few months. But any recurrence can again lead to volatile times

Heavy Dependency on few customers

High segment concentration with 2W contributing to over 70% revenues– Pricol continues to derive 70% of its revenues from the 2W segment, and 57% of its revenues from its top three customers. Further, over 90% of the revenues are from the domestic market

Heavy dependency on top 5 customers and top 12 customers for business –>12 strategic customers contributing to about (+) 85% for sale and we continue to
grow with all of these 12 customers and our primary sales are driven by these 12 customers comprising of two wheelers primarily followed by commercial vehicles and then passenger cars.

Hostile takeover bid by Minda

This creates an Overhang and use Management Bandwidth in wrong direction. Can lead to company stock price going nowhere

Technicals on 21st May