By Pallavi Bhati

India Ratings and Research (Ind-Ra) has rated Pricol Limited’s bank loans as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based and non-fund-based working capital limits

-

-

-

INR1,000

IND BBB/Stable/IND A3+

Assigned

Long-term loans

-

-

FY25

INR1,700

IND BBB/Stable

Assigned

Analytical Approach: Ind-Ra has taken a consolidated view of Pricol and its subsidiaries - PT Pricol Surya Indonesia (100% stake), PT Sripri Wiring Systems Indonesia (100% step-down subsidiary), Pricol Asia Pte Limited, Singapore (100%) and Pricol Wiping Systems India Limited (100%) - while assigning the ratings, on account of the strong operational linkages among them. Pricol has also guaranteed majority of the debt at its subsidiaries.

KEY RATING DRIVERS

Increase in Profitability: Pricol’s consolidated EBITDA margins expanded to 12.7% in 9MFY21 (FY20: 5.3%, FY19: 0.9%,  9MFY20: 6.0%), primarily on account of divestment of its loss-making subsidiaries, increasing sale of new components, an improvement in operating leverage and cost reduction measures across entities particularly towards rationalisation of labour force. The company spent 3%-4.5% of the revenue over FY18-FY20 on research and development activities, aiding it in introducing margin-accretive new components such as electronic connected cluster, fuel pump modules, purge valves, among others, following the transition to Bharat Stage-VI (BS-VI) emission norms. Despite generating relatively higher margins at a standalone level (FY20: 7.1%, FY19: 6.2%), the consolidated EBITDA margins were constrained over the last few years as its subsidiaries were incurring losses. The standalone EBITDA margins improved to 14.3% in 3QFY21 (2QFY21: 13.5%, 1QFY21: EBITDA losses).

Furthermore, Pricol’s subsidiaries in India and Indonesia secured new orders. The agency expects this, along with the cost reduction measures to gradually result in increased profitability for these entities. Ind-Ra expects the consolidated EBITDA margins to remain above 10% FY21 onwards with the divestment of some of the larger loss-making subsidiaries, coupled with the favourable product portfolio and improved operating leverage. However, the company’s margins are susceptible to any significant increase in input prices, similar to that witnessed in FY18-FY19. Although, about 90% of the same can be passed on to the original equipment manufacturers with a lag of three-to-six months. A sustained improvement in the profitability margins will remain a key rating monitorable.

Divestment of Loss-making Subsidiaries: 
Pricol sold its subsidiary in Spain (holding company) and the step-down subsidiary in Czech Republic in August 2020 for EUR50,000 and two other step-down subsidiaries in Brazil and Mexico in February 2020 for USD2,000. Consequently, the consolidated gross debt (inclusive of all subsidiaries) reduced to about INR3,763 million at 1HFYE21 (FYE20: INR4,314 million, FYE19: INR5,700 million). The debt at subsidiaries of about INR2,000 million was repaid prior to their sale and was funded largely through additional bank borrowings by Pricol, as the debt was guaranteed by Pricol. About INR834 million of the subsidiary debt was taken over by the acquiring entities. Pricol had written off its entire investment of about INR4,124 million in these subsidiaries in FY19-FY20. The Brazil-based entity was acquired by Pricol in FY15, while the Czech Republic and Mexico-based entities were acquired in FY18 as part of the acquisition of the wiping systems business, along with the acquisition of Pricol Wiping Systems India. The divestment of the loss-making subsidiaries will enable Pricol to better allocate its cash flows, while leading to an improvement in the operating  and credit metrics. Pricol’s continuing subsidiaries in India and Indonesia also incurred net losses of INR32 million and INR25 million, respectively, in FY20, which were funded partly through Pricol and partly through internal resources. Together these subsidiaries accounted only 3% of the consolidated revenue in FY20. Given the company’s track record, Ind-Ra will closely monitor any future acquisition and the company’s capability to turn it around.

Improvement in Credit Metrics: 
On a consolidated basis, the net leverage (net debt/trailing 12 months (TTM) EBITDA) improved to 1.1x in 9MFY21 (1HFY21: 3.5x, FY20: 4.6x, FY19: 13.8x), mainly due to the improvement in standalone profitability, the divestment of the loss-making subsidiaries, and a capital infusion through rights issue of INR813 million in December 2020. The interest coverage (EBITDA/interest expense) also increased to 3.6x in 9MFY21 (1HFY20: 2.5x, FY20: 1.9x, FY19: 0.4x). However, elevated creditors as of December 2020 limited the improvement in the total outside liabilities (gross debt and creditors)/TTM EBITDA (TOL/EBITDA) to 4.4x in 9MFY21 (1HFY21: 6.8x, FY20: 8.8x, FY19: 30.9x). The credit metrics had weakened significantly over FY18- FY20, due to a low profitability in domestic operations and losses from the overseas subsidiaries requiring additional debt to support cash flows.

However, Ind-Ra expects the net leverage to increase to 2.5x in FY21, as the company utilised proceeds from the rights issue in January 2021 to make payments to its creditors. As such, the TOL/EBITDA is likely to improve to around 4.0x. Also, the continued erosion of equity through net losses over FY18-FY20 led to a skewed capital structure, which is likely to improve in FY21 with the gross debt/tangible net worth (adjusted for intangible assets) improving to about 1.2x in FY21 (FY20: 2.7x) as per the agency’s expectations. Ind-Ra expects the credit metrics to improve further over FY22-FY23 backed by the absence of any large debt-funded capex and improved profitability.

Improving Product Portfolio to Increase Revenue Base:
The company derived about 65% of its standalone revenue in 9MFY21 (FY20: 66%) from the two-wheeler (2W) segment. The company has taken initiatives to increase exposure to other automotive verticals and industry sectors such as passenger vehicle, commercial vehicle, exports and other tier 1 suppliers. It has three main product verticals: dashboard instruments (55% of FY20 revenue), pumps and mechanical products (28%), and switches and sensors (12%). The addition of new components to its portfolio, led to strong growth in the consolidated revenue from continuing operations to INR4,623 million (up 19.3% yoy) in 3QFY21 and INR3,899 million (up 18.2% yoy) in 2QFY21 (9MFY21: up 1.1% yoy to INR9,669 million offset by subdued revenue in 1QFY21). Ind-Ra expects the revenue in 4QFY21 to remain healthy on the back of improved consumer demand.

For FY21, on a like-for-like basis, the agency expects the revenue from continuing operations to be largely stable at INR13,000 million-13,500 million. The agency expects the revenue from margin-accretive new products to contribute about 40% to the revenue in FY21 and thereafter increase to about 50% in FY22. Ind-Ra believes Pricol’s varied product offering and continuous product development efforts over FY17-FY20 has enabled it to cater to multiple customers, enhance its ability to attract new customers, improve the share of business among existing customers and help reduce dependency on any single product family, end-application or customer.

Established Market Position in 2W Instrument Clusters
: Pricol has strong relationships with 2W original equipment manufacturers of over four decades. In the instrument cluster vertical, its share of business with the top four customers ranges between 50% and 75%, making the company the leading supplier of 2W instrument clusters in India. For the fuel pump module, the company has 100% share of business for the models it caters to. It also enjoys a healthy share of business with a large number of customers in the pump and mechanical product, and sensor and switches verticals.

Improving Customer Sentiments:
Continued consumer preference for personal mobility, coupled with the festive season demand led to an 11% yoy rise in the domestic automobile industry volumes in 3QFY21 with passenger vehicle and 2W sales volume increasing14% yoy and 13% yoy, respectively. Moreover, the fall in commercial vehicle sales volume was curtailed to 1% yoy. While 4QFY21 sales volumes could see a sequential decline, Ind-Ra expects it to remain higher on a year-on-year basis. Furthermore, Ind-Ra expects the auto demand to pick up in FY22 with the opening up of the economy post the COVID-19 led disruptions.

Import Dependence for Certain Raw Materials:
Pricol imports about 30% of its raw material requirements, of which 70% is from China. The company mainly imports electronic child parts, for which it is facing higher lead times for procurement due to a supply shortage. Pricol has adequate inventory of these components, however, any significant delay in raw material shipments could impact its ability to meet order flow, leading to a lower revenue and profitability.

High Customer Concentration:
 Pricol’s top five customers - TVS Motor Company Limited, Bajaj Auto Limited, Hero MotoCorp Limited, Royal Enfield Motors Limited, and JCB India Limited - contributed 68% to its revenue in 9MFY21 (FY20: 61%, FY19: 57%). The increase in contribution was because of Pricol’s ability to increase its wallet share in FY20 and 9MFY21, both slowdown years, with at least three of the top five customers. Although concentration risk from the top five customers remains high, Ind-Ra derives comfort from the company’s long-established relationships with the customers. Its other large customers include Tata Motors Limited, Ashok Leyland Limited, Mahindra & Mahindra Limited (‘IND AAA’/Stable), VE Commercial Vehicles Limited and Suzuki Motorcycle India Private Limited.

Liquidity Indicator- Stretched: 
On a consolidated basis, the free cash flow turned positive to INR255 million in FY20 (FY19: negative INR1,295 million), due to working capital release of about INR1,073 million. However, Pricol’s working capital requirements remain high and the release was mainly due to a stretch in the creditor days (FY20: 77 days, FY19: 45 days), on account the lockdown beginning last week of March 2020. The company also completed its capex cycle of about INR4,203 million over FY17-FY20 for setting up of capacity for new products at its greenfield plants in Manesar, Sricity and Hosur (later disposed-off), which started revenue generation largely from 4QFY20, and certain brownfield expansion. In 1HFY21, it recorded a negative free cash flow of INR47 million, due to higher receivables and inventory, leading to working capital absorption as sales picked up; although the payables remained elevated. At 9MFYE21, Pricol’s creditor days further increased due to the high inventory requirements as well as delay in certain overseas payments due to year-end holidays. However, in January 2021, the creditor days reduced considerably as the company made payments using the rights issue proceeds and internal accruals.

Nevertheless, Ind-Ra expects Pricol’s working capital cycle (FY20: 27 days, FY19: 35 days) to remain elongated, due to the higher inventory holding on account of increased demand and the shortage of raw materials, leading to higher lead times. The capex outgo is likely to remain limited at about INR500 million, each, in FY21 and FY22, as the company has completed its capex cycle. Pricol’s average month-end utilisation of the working capital limits against drawing power was around 71% over the 12 months ended December 2020, however, the peak utilisation trends at about 90%. The utilisation reduced October 2020 onwards due to the improved profitability and cash flows. The company had an unencumbered cash and bank balance of about INR395 million at 1HFYE21. It has consolidated scheduled debt repayments of about INR461 million in FY21, INR591 million in FY22 and INR567 million in FY23, which are likely to be comfortably met through internal accruals. The company is also looking at prepaying its debt in 4QFY21, given the healthy profitability.

Standalone Financials:
Pricol’s revenue was INR9,529 million in 9MFY21 (FY20: INR12,033 million, FY19: INR13,655 million), EBITDA was INR1,139 million (INR860 million, INR841 million), interest coverage was 3.6x (2.7x, 4.5x), net leverage was 1.3x (2.7x, 4.5x) and TOL/EBITDA was 4.4x (7.1x, 5.6x).


RATING SENSITIVITIES

Positive: A significant and sustained improvement in the profitability margins, along with reduction in the working capital cycle, while reducing TOL/EBITDA below 4.0x from FY22, could lead to a positive rating action.

Negative
: A significant decline in the revenue or profitability, a further stretch the in working capital cycle or any large debt-funded organic or inorganic expansions, leading to the TOL/EBITDA increasing above 5.0x from FY22 on a sustained, could lead to a negative rating action.


COMPANY PROFILE

Headquartered in Coimbatore (Tamil Nadu), Pricol (erstwhile Pricol Pune Limited) manufactures over 2,000 products such as instrument clusters/telematics, fuel pump modules, oil and water pumps, fuel level sensors, temperature and pressure sensors, wiping systems, among others at its plants located in Gurugram (Haryana), Phulgaon (Pune), Pantnagar (Uttarakhand) and Sricity (Andhra Pradesh).

It has three subsidiaries, one each in India (wiping systems), Indonesia (instrument clusters and pumps) and Singapore (procurement arm of Pricol for overseas supplies).

CONSOLIDATED FINANCIAL SUMMARY

Particulars

9MFY21

FY20

FY19

Net revenue (INR million)

9,669

15,998

18,019

EBITDA (INR million)

1,226

854

161

Interest coverage (x)

3.6

1.9

0.4

Net Leverage (x)

1.1

4.6

13.8

TOL/EBITDA (x)

4.4

8.8

30.9

Note: The financials represent continuing operations of Pricol and its subsidiaries. 9MFY21 net leverage and TOL/EBITDA ratios are based on provisional debt, cash and creditor figures.

Source: Pricol, Ind-Ra



COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.
 

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Analyst Names

  • Primary Analyst

    Pallavi Bhati

    Senior Analyst
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurgaon Haryana 122002
    0124 6687256

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121