PRICOL: A Hidden Auto Ancillaries Company in Indian Markets
A major restructuring is underway in global supply chains following widespread disruption in recent times due to Covid and the Russia-Ukraine conflict. To diversify their supply chain, many global companies are moving away from traditional manufacturing bases to countries with similar manufacturing strengths. This has benefited countries like Vietnam, (in electronics) and Mexico (in furnishings and appliances).
In Industrial and Automotive products, India will be a huge beneficiary due to its available supplier ecosystem, scale, competitive cost structure, and most recent government policy initiatives. This shift is likely to be accelerated by recent cost pressures (energy and labour) on European and US Industrial companies and continued lockdowns in China (till recently).
In the automotive sector, several global companies are looking at export-oriented production in India. FDI inflow into the automotive industry in FY22 jumped sharply to USD7bn to form 12% of the total FDI inflows into India. India’s automotive exports have traditionally grown by 6-8% pre-pandemic vis-à-vis strong double-digit growth in the preceding year.
Automotive exports to both North America and Europe grew by over 40% led by drive transmission, engine suspension, and braking components. This growth is attributable to:
1) Global impetus on supply chain diversification,
2) Strength of Tier 2 & 3 domestic supplier base,
3) Low-cost advantage vs. developed economies and
4) Government initiatives on Make in India (PLI, FAME scheme)
India’s growing automotive and components industry
Indian automotive manufacturers have been very successful across segments in the local market as the population becomes more and more upwardly mobile. Globally, India’s automotive industry is at the forefront of many segments by volumes, it ranks number in two-wheelers, segment A cars, and tractors.
India is renowned as a global hub for frugal and scalable engineering. Busy automotive clusters across India drive the industry, especially the three major clusters of Mumbai–Pune–Nasik–Aurangabad in the West, Chennai–Bangalore–Hosur in the South, and Delhi–Gurgaon–Faridabad in the North,14 as well as upcoming areas like Sri City, Anantapur, and Sanand.
The industry aspires to triple in size by 2026. Optimism pervades all vehicle categories passenger vehicles, commercial vehicles, two-wheelers, and tractors. The pace of infrastructure development (adding an average of 40 km of road per day) could support this growth.
This exciting forecast for automotive manufacturers also implies healthy growth for auto component manufacturers. The auto component industry’s turnover increased from INR 1.1 lakh cr (USD 24 bn) in FY 2009, to INR 3.5 lakh cr (USD 51.2 bn) in FY 2018.18 The industry now aspires to double its contribution to manufacturing GDP with a four-fold growth in size and a six-fold growth in exports by 2026.
Big aspirations ahead for automotive OEMs and component manufacturers
Multiple trends along the following four themes could shape the future of the automotive and the auto component industry:
Constantly shifting market dynamics
Changing OEM needs
Technological improvements and discontinuities
Evolving regulatory and trade environment
“Rising star” components which could take off in the long run due to an increase in EV sales
Industry experts in India believe that EVs could grow by 2030, especially for public buses, motorcycles (under 125 cc), scooters, three-wheelers, and light commercial vehicles, which are likely to see at least 25% penetration.
Various forecasts estimate that global EV penetration is likely to go up as well, at upwards of 30% penetration for several vehicle segments.76 This could result in some “rising star” components, such as batteries and battery materials, electric motors, and power electronics the demand for which is certain to spike with EV penetration. Auto component manufacturers could benefit from the opportunity to produce and supply some of these components.
Key Growth Drivers
The enforcement of BS-VI safety and emission standards is anticipated to help the export market expand during the forecast period for the benefit of auto component players in India. Foreign players prefer India because it is a cost-effective location for manufacturing, which bodes well for the auto ancillary market
Company Overview
Headquartered in Coimbatore, Tamil Nadu, Pricol manufactures over 2,000 products such as instrument clusters/telematics, fuel pump modules, oil and water pumps, fuel level sensors, temperature and pressure sensors, and wiping systems. The company’s manufacturing units are located in Gurugram (Haryana), Phulgaon (Pune), Pantnagar (Uttarakhand), and Sricity (Andhra Pradesh).
Pricol Ltd (Pricol), established in 1974, is a Coimbatore-based supplier of diversified auto components like instrument clusters, sensors & switches, pumps and mechanical products, telematics solutions, and wiping systems. Pricol is a market leader in DIS &Telematics
∙ Product mix - ~65% from 2-W, 3-W, ~15% from CV, ~10% from PV, ~10% from off-road & tractors.
∙ Segment mix – ~55% from driver information system (instrument cluster), ~30% from actuation & fluid control system, ~15% from sensors, and others.
Financial snapshot
Product Profile
Customer profile
The company has been growing consistently with the majority of its existing portfolio also. For example, Polaris has been their customer for several years, so we have been continuously growing with them, and there are new opportunities that we are working with them as well. There are many recreation vehicles and then the higher cc motorcycles like KTM, Ducati, and Harley Davidson, which they have been traditionally working with them for many years. So, they have seen a lot of growth opportunities with them in the next few years.
Today, the majority of their export come from mechanical products, but going forward, there’s a good opportunity in the Driver Information System as well. The company is working already with multiple customers of Indian origin also, where it is exported through the Indian JV partners, and then it is exported to their parent company.
There is a good opportunity in front of the Driver Information System using the new technology like the TFT clusters, whatever now is launched in the domestic market, the company then exports to customers as well. So at this point in time, the function of mechanical products is more on the export, but as the company is going along, they find that it is going to have equal opportunities in both segments growing.
The company is on a growth path primarily because of its new technology products. Whatever they are seeing in the market. They have gone upstream in terms of value add to their Driver Information System. You know that a few years back they were only in the mechanical type of instrument clusters, they have migrated to LCD instrument clusters and thereby they have moved into electric integration TFT clusters.
This is how the technology migration has been happening in the industry, number one, and then you know that all the EV vehicles primarily go into this type of technology whatever the recent launches of EV vehicles by the OEMs are affected by the Pricol, so you can see that how the technology is moving about.
Also, the company is working with multiple new companies who have started with EV manufacturing, with the new entrants into the market with these types of technologies, and also there is an opportunity for the company on to the telematics space as well because for you to monitor the battery performance and the vehicle performance you require telematics also, and as they know, that Pricol has been in the telematics space for more than 10 years.
The company started with JCB more than 10 years back, and there are more than 300,000 telematics successfully running in the field. So there they find the opportunities, both in their Driver Information System, and also on the telematics for the EV vehicle, which has picked up the momentum you can see that last month the EV vehicle production has been 75,000 vehicles, it is an all-time high, and they expect this trend to continue in the few years, where I feel for rising crude oil prices, EV could be an alternative where the industry is working.
So, they are well positioned, in terms of the technology that they can offer for the EV, and, they have also announced that they have entered a partnership with BMS power state, a French pioneer in making the Battery Management System.
Established Market Position in 2W Instrument Clusters
Pricol has over four decades of relationships with 2W OEMs. The major OEMs are TVS Motor Company, Hero MotoCorp Limited, Bajaj Auto Limited, and Tata Motors Ltd. Furthermore, the company has seven manufacturing plants in India in proximity to the OEMs, which eases supply chain management. It also enjoys a healthy share of business with many customers in the pump and mechanical product, and sensor and switches verticals. The first mover advantage because of manufacturing and delivering to the EV market will most likely benefit the company in the near term.
Importing Raw Materials can be a risk
Pricol imports 50%-55% of its raw material requirements, of which 65%-70% are from China. Apart from China, it also imports from South Korea, Taiwan, Thailand, and Vietnam. This exposes the company to procurement-related risk, especially amid the uncertain geopolitical situation globally.
Further, limited hedges were taken against high import content in the raw material exposing the company’s profitability to foreign currency fluctuation risk, especially during volatile periods. However, Ind-Ra derives comfort from the fact
Although Pricol has an adequate order pipeline of these components, any significant delay in raw material shipments could impact its ability to meet order flow, leading to lower revenue and profitability.
Customer Concentration can be one of the risks.
Pricol derived about 62% of its standalone revenue in FY22 (FY21: 68%; FY20: 66%) from the 2W segment. As of August 2022, it was 69%. The company has taken various initiatives to increase its exposure to other automotive verticals and industry sectors, such as passenger vehicles, commercial vehicle exports, and other tier-1 suppliers.
It has also added a significant market share in the commercial vehicle segment in DIS post-migration to Bharat Stage Emission Standard 6 norms. It is on track to enter into the latest technology to supply to the EV market. Pricol’s top five customers - TVS Motor Company Limited, Bajaj Auto Limited, Hero MotoCorp, Royal Enfield Motors Limited, and JCB India Limited - contributed 65% to its revenue until August 2022 (FY22: 56%, FY21: 64%, FY20: 61%).
Although the concentration risk from the top five customers remains high. Other large customers include Tata Motors, Ashok Leyland Limited, Mahindra & Mahindra Limited, VE Commercial Vehicles Limited, and Suzuki Motorcycle India Private Limited. It also added new customers in FY22-FY23, which will aid the diversification of its customer base.
Employee Profile
The company is having 800-850 employees among which 300-350 employees are engineers. 4.5-5% is spent on R&D and the company has strong hardware capabilities the company has certain tie-ups for software capabilities to strengthen its core. So here we must track the tie-up of the company, JV’s, and upcoming tie-ups.
Recent tech-tie-ups to bolster the growth.
Recent Product Launches
Their recent partnership with Sibros, a company based out of Silicon Valley and founded by ex-Tesla members, to enhance their Telematics Solutions offering and provide a deeply connected end-to-end solution is one such example. Similarly, with a focus on electrification, their teams have internally developed Electric Coolant Pump a case in point as yet another example.
Today, Pricol is seen as one of the leading automotive technology companies providing a holistic solution and benchmarked as best in class in the industry against global competition. The company is continuing to put its focused and sustained efforts to become an innovation powerhouse to address future mobility trends.
Manufacturing Excellence
Pricol Corporate Manufacturing Engineering has developed Pricol's first 4-axis robot with a 10 kg Payload, and 600 mm reach Designed, developed, and manufactured in a customized way, implemented for Pointer Pressing in an assembly line.
Pricol Corporate Manufacturing Engineering has developed Pricol's first 6-axis robot with an 8 kg Payload, and 900 mm reach Designed, developed, and manufactured in a customized way, suitable for assembly, machine tending, welding, soldering, painting, dispensing, etc.,
Automated Water Pump Assembly Line A Completely Flexible Assembly line for medium to heavy-sized Water pump assembly (ranges from 8-80 kgs) has been developed with IoT applications and traceability systems in place. Management views
Opportunities to kick in through newly acquired renowned clients like – Caterpillar, Ducati, and Harley Davidson.
There’s a great opportunity in the Driver Information System for which the company is already dealing with multiple customers across India.
The company recently won TATA PV as a client. Expecting TATA to be 5-7%+ of sales. All the TATA nexons have Pricols DIS.
The company has started working with renowned brands like a caterpillar for which they are confident that export revenue would sustain around 20% in the next 2 years.
Current Capacity
The company currently has a capacity of about 2,200 crores for varying products which could come as low as 2,000 it could go as high as 2,400 crores. If they invest these 350 to 400 crores, they will get closer to a capacity of 3,500 crores.
CAPEX
Update given in Q1FY23 – Company plans to spend 350-400 cr over the next 30-34 months in order to meet their goals for FY25-26. The company is having a few new product launches and alliances in line. Currently, the company has EBITDA margins of around 12% which is expected to improve to 14.5% in a few months.
Valuations
You let us know what is the right valuations for this business in the comment section below!!
Risks
The majority of sales are from 2Wheelers. Any cyclical downturn can lead to growth risk.
Past capital allocation track record isn't impressive.
The majority of RM is imported for DIS, and import of RM risk exists.
Customer concentration
Growth Triggers
De-leveraging of b/s along with the target of being debt free by FY24. Sweating of assets, healthy cash flow generation, and calibrated capex spending.
Company growing quarter on quarter. Improving ROE & ROCE y-o-y as well as improving Interest Coverage Ratios
Growing presence in the PV space with clients like Tata Motors, Citroen, etc.
New product pipeline and confirmed LoI from customers including new-age EV OEMs to help boost sales, PAT, and Margins to improve.
Recent technology tie-ups for the battery management system (BMS) with BMS Power safe and foray into connected clusters including Telematics with SIBROS
Disclosure: Nothing on this website should be construed as investment advice. Please consult your financial advisor. We are not SEBI registered Analysts/Advisors. We are not accountable for any loss or gains that might occur to you from this or any analysis on the website. The author and SOIC do not hold the stocks in their portfolio at the date this post was published.
AUTHOR
Shuchi Nahar
Masters in Finance with 5 years of industry experience. My approach is to take one sector at a time and explore plausible Investment ideas.