Wednesday, December 21, 2016

Analysis: Pricol Ltd.

Pricol is a Coimbatore based family run business manufacturing automotive components and related products. Pricol provides service to all segments of auto industry - two wheelers, tractors, passenger cars & off road vehicles across Asia, Europe and Amercias.

Pricol’s key business lines are:

1. Driver Information Systems & Sensors: Instrument cluster, fuel level sensors, speed sensor, temperature sensor, pressure sensor. Pricol is the second largest manufacturer of two-wheeler instrument cluster market. 
2. Asset Management Solutions: Asset tracking and monitoring system, centralised lubrication system, digital fare metre, speed governor.
3. Telematics, Body Control and Security Solutions: Park assist system, body control unit, display & infotainment 
4. Pumps & Mechanical Products: Oil pumps, water pumps, fuel pumps, vacuums switching valves, idle speed control valves pressure relief valve 

Pricol has five wholly owned subsidiaries: 

1. PT Pricol Surya Indonesia: Pricol expanded to Indonesia to serve its clients in one of the largest two-wheeler market. Indian two-wheelers couldn’t capture enough business in Indonesian market. Pricol, however, was able to successfully forge business relationship with Japanese two-wheeler companies. 
2. Pricol do Brasil Componentes Automotivos Ltd, Brazil (PdB): PdB serves wide range of customers such as Volkswagen, Fiat, Fiat Powertrain, General Motors, Harley Davidson, Mack Trucks etc.
3. Pricol Pune Limited: Pricol Pune supplies Instrument Clusters to Bajaj Auto & auto components to Renault Nissan, Tata Motors, Mahindra & Mahindra, General Motors & FIAT. Pricol Pune has now merged with Pricol Ltd. through scheme of amalgamation. 
4. Pricol Asia Pte Limited, Singapore: Singapore subsidiary to procure raw material for Pricol. 
5. Pricol Espana Sociedad Limitada, Spain: Investment arm to acquire companies in Europe and America. 

Indonesia and Brazil are central locations to serve South East Asia and Latin America markets respectively. Company looks to grow in off-road and tractor industry both organically and inorganically.

Pricol shut down one of its subsidiary Pricol Castings in FY2015 due to consistent losses. Pricol also exited from Denso Pricol India Private Limited, a JV with Denso since the performance of the company did not improve as envisaged. These exits are part of Pricol's consolidation strategy. 

Pricol’s strategy is to focus on businesses where they could be among top three players globally. Management believe they could lead the two-wheeler and off-road vehicle segments. 

Pricol doesn't want to focus on Passenger car segment as its expected to see competition from larger players. Pricol believes Instrument Cluster will cease to exist in large cars by 2020. It will be a driver information system with infotainment, navigation, climate control with one touch screen panel and lot of software. 


Pricol could only double its revenue in last 10 years, a meagre CAGR of 8%. 5-6 years after 2007 were difficult for the company due to labour unrests. Margins have been volatile too.  Exports contribute around 9% to the top line due to fall in exports to Europe.

Company made losses in FY2015 due to sales de-growth in exports, after market and asset management systems. High increase in employee cost was another key reason for the same. Employee costs increased due to higher outflow in first year of long term wage settlement.

Pricol expects revenue growth of 20-25% over next 4 years reaching a revenue number of INR 3000 cr by 2020. Revenue of INR 800-1000 cr is expected to come from inorganic route and rest from organic. 

To achieve these targets, Pricol plans to invest INR 350-400 cr over next 3 years through debt and internal accruals to acquire 2-3 companies globally and set up one greenfield facility in India. Pricol generated free cash flow of INR 440 cr over last 10 years (~FCF of 130 cr over 3 years). Pricol may need to take INR 200-250 cr debt for expansion increasing debt to equity ratio closer to 1.   

Pricol has receivables of INR 200 cr on annual sales of INR 1127 cr (~18%). High receivables indicate Pricol's low bargaining power with its clients.

Management Renumeration:

MD's renumeration has significantly increased in FY2016 as percentage of net profits. Company’s performance dipped in FY2015, but MD’s salary was increased by around INR 10 mn. It is only fair that management compensates itself for good performance; however increase in compensation which is not in line with performance should be questioned.  

Promoter Shareholding: 

Promoter shareholding is 40.67% as on 30th Sept 2016, of which 2.94% is pledged to lenders. Promoter shareholding is relatively low and doesn’t provide enough comfort to the investors.

R&D expenditure:

R&D expenditure has been reducing since FY2013 as percentage of sales. Jump in 2013 could be attributed to 9% fall in top line over previous year. R&D is integral to future growth of the business. Reduction in R&D should be a red flag for the investors. 

Labour Issues:

Pricol faced major labour issued in 2007-2009 period which led to significant losses in business. 

Pricol seem to have recovered well from this episode. Management has learnt the lessons hard way and believes the worst is behind them. Pricol provided provision for INR 32.3 million for labour settlements in FY2015 of which INR 4.8 million was utilised in FY2016. 

Rating Movement: 

Pricol’s ratings have remained same over last 3 years. 

Factors supporting ICRA rating:

1. Established market position as the primary supplier of Instrument clusters (IC) to two-wheeler OEM’s, its well-diversified product and customer mix, and its conservative capital structure. 

2. Long-standing association with reputed OEM’s such as Hero MotoCorp, TVS Motors and Bajaj Auto. Pricol enjoys healthy share of business (~25% in the 2W industry) in the IC segment. 

3. Diversified revenue profile of the company with 2W segment accounting for 44% of revenues followed by passenger vehicles (23%) and the rest from commercial vehicles (CV), tractors and mining and construction equipments (MCE) among others. 

Factors constraining ICRA rating:

1. Weak performance of overseas subsidiaries viz., Pricol Do Brasil (Brazil) and PT Pricol Surya (Indonesia). These loss-making overseas operations have dragged down the consolidated profitability leading to weakening of coverage metrics and liquidity profile. The cash losses have been funded through periodic equity infusion from the parent (Rs.40.0 crore over the past one year); fund support is likely to continue over the near term, although management stated its intent to keep incremental support minimal. 

2. Weak near term outlook for the company’s export business owing to tepid global demand, intensifying competition in the domestic market and susceptibility of profit margins to foreign exchange fluctuation

Impact of business regulations:

New legislation mandated all new Commercial Vehicles to be fitted with Speed Limiters effective 1st October, 2015. Pricol is the only approved source by ARAI for all OEM fitments. Pricol being market leader in Speed Limiting Devices hopes to benefit from the recent notifications in some of the States on retro-fitting of speed limiters in used commercial vehicles.

Increase in Share Capital: 

As on 31st March 2013, 4.500,000 convertible share warrants of INR 1/- each were issued to M/s. PHI Capital Solutions LLP with each warrant convertible into one equity share of INR 1/- each for a price of INR 18/- per warrant. On 13th June 2013, Company allotted 4,500,000 equity shares to M/s. PHI Capital Solutions LLP at a price of INR 18/- per share on exercise of conversion option of share warrants allotted to them. Consequently, the paid up share capital of the Company increased to INR 94.5 mn from INR 90 mn. 

The share price on 31st March was ~INR 16 per share which increased to around INR 17 per share on 13th June 2016. Warrants may be used by company to allot shares at cheaper rates but the same doesn't seem to be the case here.

Imported Technology:

Pricol has collaborated foreign companies to bring in technology supporting development of new devices. Some of the collaborations are:

1. Magneti Marelli Sistemi Elettronici S.P.A., Italy for manufacture of Instrument Cluster for Renault - Mahindra's Logan Model
2. Garant GmbH Germany for the manufacture of New Design Stepper Motor
3. Mashad Powder Metallurgy Company Iran to enhance the knowledge of manufacturing powder metal and powder forged components
4. IAV GmbH Germany for the manufacture of VAN Type Oil Pump and Vacuum Pump


1. Price to Earning (PE) Ratio: Pricol is not trading on bourses for last few days. This is due to procedural reasons for scheme of amalgamation. The last trade happened at price of INR 91 per share, which is at PE ratio of 11.

2. Price to Sales (PS ratio): The PS ratio is 0.8 (market cap of INR 862 cr / annual sales is INR 1127 cr). PS ratio of less than 1 provides margin of safety to the investor. 

Traditional PE and PS ratio indicates Pricol business is available at decent valuations. Investors should remind herself Ben Graham’s rule for identifying underpriced securities:

“The market doesn’t perfectly price the business value of a stock”.


Pricol is an interesting auto ancillary business available at decent valuations. While Pricol is leading player in Instrument Cluster segment for 2 wheeler, it has far looking ambitions to lead in other related auto ancillary segments of telematics, sensors and pumps. Existing customer base and foreign collaborations provide a strong base to the company. Company has also actively exited businesses which were unprofitable. This consolidation has strengthened its balance sheet for future growth. 

Pricol, however, needs significant investments to grow at CAGR of 20-25%. Slowdown in Europe and continuous non-performance of Indonesia and Brazil subsidiaries are huge drag to the business. Red flags include reduced R&D expenditure and substantial increase in MD’s salary. 


All data has been taken from public sources. I don't have any financial interest in Pricol Ltd. or any of its affiliate. I don’t own shares of Pricol Ltd. shares at the time of writing this article. I may or may not invest in Pricol Ltd. or its affiliates in future. An investor should do her own analysis before making an investment decision. The views expressed are personal and doesn't represent that of my employer’s.

This article is just a collection of my thoughts about the company.

I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations.

Please refer to 'Disclaimer' page for further details.

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