Detailed Rationale

CRISIL Ratings has placed its rating on the long-term bank facilities of Pricol Ltd (Pricol) on ‘Rating Watch with Developing Implications’.

 

The rating action follows announcement by Pricol at the stock exchanges on December 2, 2024, that its board of directors have approved the proposal for acquisition of injection moulded plastic component solutions (IMPCS) division of Sundaram Auto Components Ltd (SACL; a subsidiary of TVS Motor Co Ltd), through its wholly-owned subsidiary, Pricol Precision Products Pvt Ltd (PPPL), on a slump sale basis through a business transfer agreement. The acquisition is expected to be completed by January 31, 2025, and will be an-all cash deal on debt-free basis. A consideration of Rs 215.30 crore will be paid to SACL by PPPL, which in turn will be funded through a combination of equity from Pricol and debt from PPPL. The watch will be resolved post completion of the acquisition of IMPCS division and further clarity emerges from the management of Pricol on synergies and strategic benefits and expansion plans.

 

SACL has strong injection moulding capabilities and production is spread across six manufacturing facilities across India, close to automotive (auto) original equipment manufacturers (OEMs). The acquisition of its IMPCS business will enable Pricol to scale its injection moulding business, besides diversifying its product base. Besides, some of the existing customers of Pricol are already customers of the IMPCS business of SACL.

 

Pricol’s segmental diversification is set to significantly improve with its dependence on the dashboard segment which contributed revenue of 68-70% in fiscal 2024 is expected to come down to 50-52% while the IMPCS business likely to contribute almost a fourth of Pricol’s consolidated revenue from fiscal 2026 onwards. SACL reported operating income of Rs 764 crore in fiscal 2024 (against Rs 783 crore in fiscal 2023), of which ~95% was contributed by the IMPCS business that is being acquired by PPPL. Pricol’s business performance continued to improve during the first half of fiscal 2025, with revenue increasing by 15% to Rs 1,289 crore (from Rs.1115 crore in the corresponding period of the previous fiscal), supported by healthy demand from OEMs, increase in wallet share and better realisations. Over the medium term, the traditional business of Pricol is expected to grow by 10-12%, driven by the company’s leading position in the instrument cluster segment, steady demand from auto OEMs, addition of new customers and increase in wallet share with existing customers as well as new product additions. Besides this, the proposed business acquisition is expected to add ~Rs 750 crore from next fiscal onwards.

 

SACL’s operating margin stood at 8.1% in fiscal 2024 (7.2% in fiscal 2023). Pricol’s consolidated operating margin of 12.2% in the first half of fiscal 2025 may moderate marginally post-acquisition of IMPCS, however will improve from fiscal 2027 onwards. Cash generation will also benefit from additional inflows from the IMPCS business.

 

Total debt of Pricol as on September 30, 2024, was Rs 42 crore as compared to Rs 71 crore as on March 31, 2024. Cash generation will continue to be healthy and given moderate debt at Pricol (even factoring part additional debt for the acquisition), debt protection metrics will remain comfortable. Gearing will remain around ~0.3 time (0.1 time on March 31, 2024) even after factoring the acquisition and part of capital expenditure (capex) of over Rs 200 crore in fiscal 2025 and ~Rs 225 crore in fiscal 2026, including for IMPCS. Other metrics such as interest coverage ratio will remain over 15 times and debt to earnings before depreciation, interest, tax and amortisation (Ebitda) will be less than 1 time over medium term.

 

The rating continues 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 rating is also supported by improving operating efficiency and 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, Pricol Precision Products Pvt Ltd, 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 (PEPL) 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 five decades in supplying to leading domestic OEMs. Revenue share of dashboard instruments increased to 68% in fiscal 2024 (from 59% in fiscal 2023) owing to 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% (from 18%). Presence in different segments adds to the product diversity. The company has in-house research and development (R&D) 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 the 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 (‘CRISIL AAA/Stable/CRISIL A1+’), Bajaj Auto Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Eicher Motors Ltd (Royal Enfield 2Ws), commercial vehicles (CVs) OEMs - Tata Motors Ltd (‘CRISIL AA+/Stable/CRISIL A1+’), JCB India Ltd (‘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: 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 boosted 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 operating margin, which improved to 12.6% in fiscal 2024 as compared to 11.8% in fiscal 2023.

 

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 protection 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 constrained the 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 Ltda), 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. This led to reduction in networth levels during fiscals 2019 and 2020. However, the rights issue during fiscal 2021 increased networth. Also, with a sizeable portion of the debt being paid down in fiscal 2021 and only moderate capital spending coupled with healthy cash accrual, debt protection 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 in fiscal 2022. The company has only working capital debt outstanding of Rs 42 crore as on September 30, 2024, with long-term debt being prepaid in second half of fiscal 2024. While the proposed acquisition is expected to result in increased debt levels, debt protection metrics are expected to remain healthy with cash generation of around Rs 350 crore from next fiscal onwards.

 

Pricol had earlier planned for capex of ~Rs 600 crore, including possible inorganic opportunities, during fiscals 2023-2025, which was to be funded mainly from cash accrual. Of this, 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. Pricol had spent Rs 102 crore during the first half of fiscal 2025, while the remaining will be spent in second half. Besides this, capex at its subsidiary is expected to be around Rs 150 crore, spent over the next two fiscals. Despite the company planning to avail debt for its part funding the acquisition and related capex, debt protection metrics are expected to remain comfortable, supported by steady cash generation.

 

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 lifecycle 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 the auto demand cycle and the consequent offtake by 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.

 

Revenue dependence on the 2W segment may 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 CVs 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 persist over the medium term. Besides, to mitigate the revenue dependence on dashboard and other existing products, Pricol incorporated a new subsidiary in fiscal 2024, PEPL, which shall supply electronic parts to the auto industry in the long term.

 

• High import dependence rendering profitability vulnerable to adverse forex movements: The company imports 45-50% of the raw materials (LCD and TFT screens) against ~40% earlier, which was driven by increased imports in the TFT segment. Of this, 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 healthy accrual of over Rs 275-300 crore expected this fiscal and cash surplus of Rs 99 crore (as on September 30, 2024). Cash accrual is expected at over Rs 350 crore from fiscal 2026, post acquisition of the IMPCS business of SACL. Annual repayment obligations for the proposed debt to be availed is estimated at around Rs 50 crore, which will be met through cash accrual. 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 225 crore each in fiscals 2026 and 2027, will be partly debt funded. Besides, the company has access to bank limit of Rs 85 crore (utilised at ~56% during the nine months through July 2024).

Rating sensitivity factors

Upward factors

• Sustained double-digit growth in revenue, supported by better customer and product diversity, and operating profitability, leading to better-than-expected cash generation
• Sustenance of healthy financial risk profile and key debt protection metrics such as debt/Ebitda remaining below 1.2 times, factoring in organic and inorganic expansion

 

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 stretch in the working capital cycle impacting debt metrics materially

About the Company

Pricol commenced operations in 1975 in Coimbatore, Tamil Nadu, 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 auto OEMs in 2/3W, PV, CVs, 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 and 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 Singapore.

 

On September 30, 2024, the promoters, Mr Vikram Mohan and his family members, held 38.5% stake in Pricol, foreign portfolio investors 15.36%, mutual funds 9.7%, alternate investment funds 2.43%, insurance companies 3.57%, and public and others the balance.

 

On a consolidated basis, Pricol reported operating income of Rs 1,289 crore in the first half of fiscal 2025 and operating margin of 12.2%, against Rs 1115 crore and 11.8%, respectively, in the corresponding period of the previous fiscal.

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