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Loss making entities sold, clean slate growth ahead…

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. In Q3FY21, the company derived ~65% sales from 2-W, 3-W segment, ~4% from PV, ~8% from CV space, ~9% from off road vehicles & tractors and ~13% from aftermarket & exports. It also has subsidiaries in India for wiping systems, in Indonesia for instrument clusters and in Singapore for procurement of electronics for its manufacturing requirement.

Triggers

Profitability drags, B/S weakness getting addressed

Pricol with an ambition to diversify and attain a global footprint acquired businesses outside India, which had been draggers on its profitability & B/S. The company had a subsidiary in Spain that was the holding arm for stepdown subsidiaries in Brazil (acquired in FY15), Mexico and Czech Republic (both for wiping business; acquired in FY18). The companies were lossmaking with combined losses across three step-down subsidiaries at ~| 105 crore in FY19 and ~| 89 crore in FY20, respectively. The three companies along with Spanish holding company have now been hived off with all liabilities addressed and investment of ~| 400 crore in these companies written off. Consequently, consolidated debt on books has reduced sharply from ~| 431 crore in FY20 to ~| 283 crore as of February 2021. With no more cash support towards erstwhile loss making entities & heavy capex cycle behind it (invested ~| 300 crore in FY18-20), we expect B/S deleveraging exercise to gather pace. We build further reduction in debt by ~| 115 crore in FY21E-23E, with associated debt: equity at 0.3x by FY23E.

BS-VI led opportunities, new client wins to benefit topline

Instrument clusters, pumps & mechanical products and switches & sensors formed ~50%, ~25%, ~11% of standalone FY20 sales, respectively. The company is a leading supplier of instrument clusters for large 2-W players domestically and enjoys significant wallet share with them. Move towards increasing digitisation of instrument clusters post introduction of BS-VI emission norms is slated to be a large growth opportunity in coming times. BS-VI switchover has also benefited the fuel pumps vertical. Sales from these margin accretive new products formed 40% of 9MFY21 revenues, with further increase in contribution expected in coming years. Pricol serves most major OEMs such as Hero MotoCorp, TVS Motors and Bajaj Auto in 2- W, Tata Motors, Ashok Leyland and VECV in 4-W and M&M, Swaraj Tractors and TAFE in tractors. Expiry of non-compete clause with erstwhile partner post closure of JV has enabled the company to re-enter the PV segment over the past year. Importantly, it has emerged as the sole supplier to Tata Motors for its PV (most models) and CV divisions. Thus with new age electronic clusters in the offering, content increase in BS-VI transition and impressive client profile, Pricol is well poised to grow ahead of industry, going forward.

Valuation & Outlook

We build 16%, 33% sales, PAT CAGR at consolidated level for Pricol over FY21E-23E with margins seen clocking 12% by FY23E on higher contribution from technology intensive value added products, process automation, cost control measures and operating leverage benefits. We are enthused by the sale of loss-making subsidiaries and prospects of substantial deleveraging, going forward. We believe Pricol offers a turnaround play. With favourable risk-reward at hand, we ascribe a BUY rating to the stock with a target price of | 95 i.e. 6x EV/EBITDA on FY23E basis.

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