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Pricol Limited

BUY

- 1 of 25 - Thursday,12th October, 2017

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.

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Target Price Rs. 120 CMP Rs. 86

Index Details Pricol is a manufacturer of automotive components for the Indian as well as

international markets. It manufactures auto components for two/three/four

wheelers, commercial vehicles, tractors, off-road vehicles and Industrial tooling

segments across the global market. Driver Information Systems, Telematics and

Pumps & Mechanical products are the key revenue earners for the company.

Over the period FY17-20E, we expect CAGR growth in revenues of 22%,

EBITDA to grow by 36% and PAT by 145%. Return ratios - ROE and ROCE - too

are expected to grow by 1130 bps to 12.8% and by 1200 bps to 20%,

respectively. The key reason for margin expansion is the revenue growth and

turnaround of international subsidiaries.

We initiate coverage on Pricol as a BUY with a price objective of Rs 120,

representing a potential upside of 40% in the next 12 months. We arrived at the

price target by applying 15 times PE multiple to earnings for the 12-month period

to June19. Pricol should be part of an investor’s long term portfolio for the

following reasons:

Pricol is focussed on its revenue target of Rs. 3,000 cr by FY20. New

plants and increased capacity, new products through partnerships and

acquisitions will combine to help Pricol achieve this target.

Restructuring of international subsidiaries is gaining momentum. Its

Indonesian subsidiary has already turned around while the Brazilian

subsidiary may turn EBITDA positive in 4QFY18.

PMP acquisition will lead to an entry into the wiper segment and four

wheelers. New collaboration for oxygen sensors will boost revenues from

FY20. Both new activities will add to profits.

India business too has improved a lot. Changes in plant locations,

modernization of old plants and investments in green-field projects make

the Indian business growth more sustainable. DIS, telematics and pumps

& mechanical products are business areas which will be revenue growth

drivers.

Sensex 31,834

Nifty 9,985

Industry

Auto

Ancillary

Scrip Details

Mkt Cap (Rs

cr) 810.9

BVPS (Rs) 76.2

O/s Shares (Cr) 9.48

Av Vol 55,867

52 Week H/L 75.7/115.4

Div Yield (%) 1.2

FVPS (Rs.) 1

Shareholding Pattern

Shareholders %

Promoters 37.2

Public 62.7

Total 100.0

Key Financials (Rs. in Cr)

Y/E Mar Net sales EBIDTA PAT EPS EPS Growth ROE P/E EV/EBIDTA

(Rs) (%) (%) (x) (x)

2017 1,473.2 107.5 7.4 0.8 N.A. 1.5 109.8 7.5

2018E 1,747.3 161.8 41.2 4.3 458.0 5.6 19.7 5.7

2019E 2,061.7 203.5 65.1 6.9 57.9 8.4 12.5 4.4

2020E 2,603.2 271.7 108.3 11.4 66.3 12.8 7.5 3.2

- 2 of 25- Thursday, 12th October, 2017


Company Background

Pricol Limited, which was formerly known as Premier Instruments and Controls Limited,

was founded in 1972 by the late N. Damodaran and L. G. Varadarajulu but started

production in 1975. It is a manufacturer of automotive components for the Indian as well

as international markets. It manufactures auto components for two/three/four wheelers,

commercial vehicles, tractors, off-road vehicles and Industrial tooling segments across the

global market. Pricol has manufacturing facilities in Coimbatore, Pune, Pantnagar and

Manesar in India. It has plants in Brazil and Indonesia. Pricol is a Tier 1 supplier to OEMs

(Original Equipment Manufacturers) for most of its products.

Major Indian customers include TVS motor company, Royal Enfield Motor limited, Hero

Motocorp, Bajaj Auto, JCB, Tata Motors, John Deere, M&M, New Holland Tractor, etc.

Globally, major customers include Volkswagen, Fiat Chrysler, Deutz Engines, Harley

Davidson, Kohler engines, Kuboto Tractor Corp.

Reverse Merger creates the new entity

Pricol limited had a reverse merger with its subsidiary Pricol Pune Limited, in FY17. The

erstwhile Pricol Limited merged into its subsidiary and ceased to exist legally. After this

merger, Pricol Pune Limited’s name changed to Pricol Limited. The shares of the current

Pricol Limited were listed on stock exchanges on February 10, 2017.

The Pune subsidiary was formed in 2012 as a joint venture firm under a 50:50 partnership

between Johnson Controls and Pricol. Jonshon Controls was a global leader in

automotive seating, overhead systems, door and instrument panels and interior

electronics at that time. Johnson Controls lost interest in the sector later and in May,

2015, Pricol acquired Johnson Controls’ 50% stake, making it Pricol Pune Ltd, a fully

owned subsidiary of the company.

Pricol’s management justified this action to consolidate the business, which will provide a

high level of synergistic integration, better operational management and provide value

addition. They believe that synergies arising out of consolidation of business will lead to

enhancement of net worth of the combined business and reflection of true net-worth in the

financial statements, improved alignment of debt and enhancement in earnings and cash

flow.

http://www.business-standard.com/search?type=news&q=pricolhttp://www.business-standard.com/search?type=news&q=pricol



Pricol Business Divisions

Source: Company presentation, Ventura Research

Subsidiaries Information

Name Business Activity PT Pricol Surya Indonesia The Company supplies Instrument Clusters to the Two Wheeler

manufacturers in Indonesia & Thailand.

Pricol Asia Pte Limited, Singapore

This purchasing arm of the Company mainly assists in global procurement of raw materials and components for internal consumption and for sale to associate companies.

Pricol Espana Sociedad Limitada, Spain It is an investment arm of Pricol which acquires companies in Europe and South America.

Pricol do Brasil Componentes Automotivos LtdA, Brazil

Pricol do Brasil Componentes Automotivos LtdA (PdB)manufactures and sells Pumps & Mechanical products to a wide range of Domestic and International customers


Pricol Limited

Pricol India

Driver Information

system

Switches and sensors

Pumps and mechanical

products

Asset management solutions and

telematics

Auto Accessories and others

Pricol Brazil

Pricol Indonesia



Products Information

Segment Products

Two wheeler segment Auto Decompression Units, Auto fuel clocks, chain tensioners, Fuel level sensors, Fuel feed pumps, instrument clusters, oil pumps, oil level switches, speed sensors, vehicle security systems

Four Wheelers Analog clocks, break light switches, EGR Valves, Fuel level sensors, Instrument clusters, Map sensors, Oil pumps, power sockets, Speed sensors, temperature sensors, Top dash tachometers, Vacuum switching valves, Idle speed control valves, Vehicle convenience and security systems, windshield washer system

Tractors construction and industrial Neutral safety switches, vacuum switches, gauges, brake light switches, charge pumps, Hour meters, EGR Valves, Fuel level sensors, Instrument clusters, low oil pressure switches, oil pumps, neutral safety switches, pressure sensors, speed sensors, Temperature sensors, Temperature switches, Warning indicators

Commercial Vehicles Vacuum switches, speed governor, gauges, vehicle tracking system, Hydraulic cab tilt system, Centralised lubrication system, Digital tachograph, Brake light switches, fuel level sensors, instrument clusters, oil pumps, pressure relief valve, pressure sensors, speed sensors

Fleet management solutions Digital Fare Meters, Road speed warning systems, vehicle monitoring system, Journey Risk management, Centralised lubrication system, Road speed limiter, vehicle tracking system

Tooling solutions Mould and Press tool design, mould and tool manufacture, Mould testing, FAI Report and documentation.

Source : Company website, Ventura research



Instrument Cluster Instrument cluster Fuel Pump Module

Source: Pricol presentation, Ventura

Research


Research


Research

Oil Pumps Two wheeler TFT Instrument cluster After Market Telematics


Research


Research


Research



Key Investment Highlights :

Old guard in industry with new management initiative

Pricol started its operations 42 years back. Mr. Vikram Mohan, current managing director,

took over the current role in automotive components business in 2011. Pricol found that it

had been highly Coimbatore-centric despite the absence of any big customer or vendor

base there. Therefore, it decided to expand into other auto clusters in India. In order to

return to profitability Pricol shut down one plant in Coimbatore. It has sold a die-cast plant

in Coimbatore, shut down one plant in Pantnagar and expanded the other.

The company now has a robust growth outlook till FY20. Pricol’s revenue target of Rs

3,000 cr revenue by FY20 will be achieved by a combination of organic growth, joint

ventures and partnerships and inorganic growth.

Organic growth will come from 4 new plants. One of them is completed in Pune. The new

facility incorporates green concepts of solar power and variable refrigerant flow air

conditioning. The state-of-the-art manufacturing plant at Pune aims to generate annual

revenue of Rs.220 cr in the next two years, up from the current annual revenue of Rs. 120

cr, thus contributing to Pricol’s 2020 vision. New investments in surface mount technology

- printed circuit boards manufacturing lines will cater to the growing electronic cluster

business not only in the two-wheeler but also in the commercial vehicles and tractor

segment. Investments in electronics manufacturing will also contribute to the growing

body control module and telematics businesses. The plant also has new technology pump

production lines catering to domestic and export markets; two other plants are coming up

in Hosur and Tada.

Joint ventures/ Partnerships will form the second pillar of growth and will provide Pricol

entry into new segments. The first of such deals was announced as a technology tie up

with Kardea Tech for the production of oxygen sensors. Oxygen sensors will be

mandatory for 2W and 3W from April 1, 2020 onwards in India. Pricol has entered into an

exclusive agreement with Wenzhou Huirun Electrical Machinery Co. Ltd for technical

collaboration, supply and production of fuel pump and fuel pump modules in India. Pricol

is also planning to enter into joint ventures/partnerships in Park assist systems and

Hydraulics areas. Park assist systems represent sophisticated forms of parking aid

systems and perform the necessary parking maneuvers either autonomously or semi-

autonomously. Car hydraulics is installed into an automobile that allows for an adjustment

in the height of the vehicle. These suspensions are placed often in a low-rider, a vehicle

modified so that its ground clearance is less than its original design, to give extra leverage

when encountering harsh road conditions.

The third part of Vision 2020 is inorganic growth, i.e. acquisitions. Pricol has recently

acquired Ashok Piramal group’s PMP Auto Components’ wiping system business.

https://en.wikipedia.org/wiki/Lowrider



Please refer Page 9 for detailed information on the PMP auto acquisition. Pricol plans to

grow via the inorganic route in telematics and Automotive sensors.

Business growth drivers

The company’s India business contributed 85% of the total revenues in FY17. Driver

Information systems, which include instrument clusters, were the main contributors to the

revenue (39% of total revenues). Speed limiting devices, which contributed 16% of the

total revenue, will not be contributing meaningfully to sales from FY18. These were

mandated by the law for OE Fitment. As per the new laws introduced on 1st of April,

2017, this product has become obsolete. Absence of speed limiting devices will lower

revenues in FY18 but we expect that this drop will be compensated for by increased

revenues from telematics and sensors.

Product group wise revenue classification standalone Vehicle type revenue classification standalone

Source: Pricol, Ventura Research


Driver Information systems

DIS includes instrument clusters, auto fuel clocks and fuel gauges. DIS has remained

stagnant mainly on account of the sale of Renault’s business of instrument clusters to

Visteon and one of the key customers in the western region, Bajaj, has seen a drop in

sales in FY17. With new clusters introduced in the portfolio lately, we expect the DIS

segment to grow at a 17% CAGR over FY18-20. Acknowledging the changes in

dynamics and technology in the segment, the focus of the management is more on driver

information systems, which include entertainment, navigation, climate control and not only

instrumentation.

39%

11%

29%

20% 1%

Driver Information Systems

Swiches and Sensors

Pumps and mechanical products

AMS and Telematics

53%

9%

21%

11% 6% 2W & 3W

PPV

CV

Others

Tractor

sonali.ranaHighlight







DIS Assembly line plant 1 Mechanical Cluster Line Plant II

Source: Company, Ventura Research

Description : New assembly line with process interlock for Royal Enfield’s DIS that conforms to BS IV standards and includes advanced features like LCD compass.

Source: Company, Ventura Research

Description : Semi-automatic line with closed loop processes for assembling Honda Shine Cluster. This assembly line ensures defect free assembly with higher quality control.

Pumps and mechanical products

Pricol supplies water pumps and fuel pumps to passenger cars, commercial vehicles and

two-wheelers. It is one of the largest suppliers of pumps to two-wheelers. A fuel feed

pump is a crucial component in the combustion devices, which are present in a car and

other machines. The fuel feed pump pulls the petrol from the tank with the help of a pipe

and delivers it to the carburetor. Not all motorcycle devices require fuel feed pumps. It is

required only in cases where gravity is needed to feed the fuel from the tank. With the

help of the fuel feed pumps the delivery of the fuel is done at the maximum flow rate.

The global market for fuel feed pumps is fragmented into various types (such as turbo-

pumps, mechanical pumps and electric pumps) and applications. The major factor that is

driving the fuel feed pumps market is that it helps in saving a lot of fuel.

Pricol’s new JV with Wenzhou will further strengthen its automotive pump portfolio in India

and it will become a comprehensive supplier of the fuel pump module required for

Electronic fuel injection systems. Wenzhou will support Pricol with product and process

technologies. We have no information about the financial transaction of this agreement

hence we have not taken the effect of this JV into our financial model.

We expect Pricol’s fuel pumps revenue to grow at 16% CAGR in the next two years. The

introduction and commercialization of electric vehicles may impact this segment adversely



in the long run. We believe that the market will not change substantially in any adverse

way till FY20.

Telematics

Telematics includes vehicle tracking systems, vehicle monitoring systems, speed warning

systems and digital fare meters. New regulation for fitting location tracking devices and an

emergency button, in all public transport vehicles, will come into effect from April 1, 2018.

Pricol can benefit from this regulation as it has exposure to telematics and the fleet

management business. Vehicle monitoring systems and vehicle tracking systems are

used for location tracking purposes. With growing demand for vehicle tracking systems

and new, improved devices we expect the telematics business of Pricol to grow at 40%

CAGR in the next 3 years.

Oxygen sensors business:

Pricol entered into an agreement for technical collaboration and technology transfer with

Kerdea, which is a technology company based in the United States for Oxygen sensors.

Oxygen sensors are designed to monitor the oxygen content in the exhaust gases from

the engine. These sensors help to maintain the right air-fuel mixture so that the engine

runs efficiently with emissions that are well within the regulatory norms. Under the deal,

O2 sensors, made out of Pricol factories, will be supplied for use in combustion engine

applications in the two- and three-wheeler vehicle segments in India. Oxygen sensors will

be mandatory for two and three wheelers from April 1, 2020 under BS-VI norms. The

sales of Oxygen sensors will start from 3Q FY20 to OEMs. We expect the oxygen sensors

business will add at least Rs. 350 cr p.a. to the topline in FY21. No major competition,

niche technological product and favorable government regulation will benefit Pricol

venture into the Oxygen sensors business from FY20.

PMP auto Acquisition

Pricol acquired the wiping system business of Ashok Piramal Group’s PMP Auto

Components, which has operational manufacturing facilities in the Czech Republic,

Mexico and India. It manufactures and designs wiping systems, heavy duty wipers and

front wiper sets. It supplies wiper motors to global automotive customers. PMP is one of

the few global auto component manufacturers that produces all parts of a wiping system.

PMP will help Pricol make inroads into the 4Wheel segment, diversify the combined

revenue profile and get sizable access to a marquee customer base, including VW, Fiat,

Renault and Maruti. PMP’s acquisition will de-risk the high dependence of Pricol on the

two wheeler segment.



Wiper system

Source : Company presentation, Ventura Research

PMP Auto had revenues of about Rs 250 crs in FY17. The revenues are expected to grow

by 22% CAGR for next 3 years. The wiping business of PMP auto has about 8% to 9%

EBITDA margins. Going forward, on a normalized business, the management expects

that the company can achieve EBITDA margins of 9% to 10% on the wiping business.

A strong product pipeline of the new products like torque motors & pole motors, an

Advanced R&D centre in the Czech Republic, low levels of debt and access to global

customers are some of the advantages gained through the PMP acquisition.

PT Pricol Indonesia turnaround

Pricol Indonesia’s subsidiary has reported sales of Rs922 m in FY17, an increase of 9%

over the previous year. Its profit before tax has moved up to Rs10mn from a loss of

Rs28mn in FY16. The increase in sales is mainly on account of growth in the model in

which the company is present. The company attributes its turnaround to cost control

measures that led to a reduction in Material Costs from ~73% to 67% of Revenue and

Employee costs from 18.7% to 15% of Revenue. Pricol’s Indonesian subsidiary customers

include Honda, Yamaha and Suzuki. Although instrument clusters is the main segment

driving revenues in Indonesia, Pricol introduced a range of pumps for two wheelers in

FY17.

Pricol’s management expects revenues to remain flat for FY18-20 for its Indonesian

subsidiary. EBIDTA margins are likely to sustain at 7%. Assuming no major currency

movement, an 8-9% CAGR in EBIDTA is likely between FY18-20.



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Brazil subsidiary Restructuring

The Brazil subsidiary has been a drag on profits for Pricol. The management has decided

to restructure its plant in Brazil. It aims at better operational costs and increased

productivity. Pricol will invest in new machinery and additional production capacity to align

to OEMs’ new programs. By restructuring its Brazil operations, the management is aiming

for greater cost-efficiency and productivity enhancement.

With these actions, Pricol expects higher productivity, an increase in production capacity,

normalization of the current shipment schedule, room for new programs and profitable

operation with EBITDA margins, in accordance to Auto-Parts industry

Pricol won a contract to supply water pumps to General Motor's new engines – The CSS

project – which will be put in place at the end of 2019. The management expects

revenues to increase by 14% CAGR for FY18-20E. With support from major customers

like VW,GM, FIAT by extending price increases and reduced payments terms, a

turnaround in Brazil’s operations is possible in the near future. We expect the planned and

targeted efforts by management will turn around the Brazil operations to a profit at the

EBIDTA level in FY18 and the margin will stabilize at around 7%.

Indonesian subsidiary turnaround and stabilization


87 92

97 102

107

-0

6 7 7 7

-0.2%

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7%

-1%

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3%

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6%

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8%

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60

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120

2016 FY17 FY18E FY19E FY20E

In % Rs in Cr

Revenue EBIDTA EBIDTA Margins(RHS)



Asset light model will help reduce one time expenditure

The management has recently built a high efficiency plant in Phulgaon near Pune. The

plant is a greenfield expansion. A third party industrial park operator has built the plant

and the company has just invested in plant and machinery. Pricol has not invested in land

and building. The company is planning to put up new facilities in Tada and Hosur using

the same asset light model.

The company has invested Rs.40 cr in the plant in Coimbatore for pumps and mechanical

products. The company has modernized three plants last year. Investment is done with

the intent to improve productivity. At one of its plants, the company has got rid of 125

special purpose machines, involved in manufacturing, and replaced them by 12 automatic

machining centers. We believe that all these efforts will reduce costs for Pricol, in future.

The company is guiding with a capex of Rs.70-80 cr for FY18 and Rs.60-70 cr for FY19.

We expect the PMP acquisition may have cost Pricol about Rs160 cr.

Brazil Operations turnaround


123 142

155

191

-33

4 9 13

-27%

3%

6% 7%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

-50

0

50

100

150

200

250

FY17 FY18E FY19E FY20E

In % Rs in Cr

Revenue EBIDTA EBIDTA Margins(RHS)



Intangible assets impairment testing in future

In the amalgamation process, assets are revised and incorporated in the books of the

merged entity, Pricol, at revalued amounts. Revalued intangible assets include patents,

computer software, brand and trademark as well as goodwill. Intangible assets of Rs. 300

cr appear on the Balance sheet as at March 2017. Of this, Rs 129 cr is in the form of

Goodwill.

Goodwill has been treated as being at par with other separately identified intangible

assets and is amortized over a period of 15 years. Para 19 of AS-14 considers a period of

5 years as appropriate to amortize the goodwill on amalgamation, unless a longer period

is justified. As per the last annual report, the company has made a technical evaluation

on the useful life, which has been relied upon by the auditors, based on which the

goodwill has been amortized over a period of 15 years.

Ind-AS accounting norms are now applicable to Pricol. As per Ind-AS, even intangible

assets are required to be tested for impairment every year. The impairment testing

requirement may require management to expedite the process of amortization and they

may need to write off goodwill or any intangible assets within a lesser number of years.

Accordingly, we expect the amortization charge in Income statement may increase in the

near future.

Capex will slow down after PMP acquisition Brazil turnaround will improve Operating cash flows

Source: Pricol , Ventura Research


90

239

70 80

-

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100

150

200

250

300


Rs in Cr

61

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144

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100

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Rs in Cr



Revenue Break up

Segment-wise revenue projections

Segment wise revenue FY 17 FY18E FY19E FY20E

India Business

Driver Information Systems 510 594 701 827

Switches and Sensors 133 169 211 260

Pumps and mechanical products 318 372 428 492

Asset management solutions and telematics 26 40 55 70

Auto Accessories and others 30 30 30 33

Speed Limiting Devices 199 - - -

Total India Business 1,215 1,204 1,424 1,681

Brazil 123 142 155 191

Indonesia 92 97 102 107

PMP 250 304 380 450

Kardea Tech - - - 174

Consolidated Net Revenues 1,430 1,747 2,062 2,603


Key Risks and Threats

The auto component business always faces the risk of technological

obsolescence. The company is in the business of Fuel pumps. The entry and

success of electric vehicles can act as a disruption for a certain line of the

company’s business.

The auto ancillary business is competitive and margins in the business are

not flexible. Hence an increase in costs can reduce profits for the company.

The company has operations in 3 countries and 1 raw material procuring

subsidiary outside India. Any unfavorable impact on currency movements can

impact profitability considerably.

The requirement of many auto parts are dependent on government

regulations. Any policy change can impact negatively (as seen in case of

speed limiting devices) or positively (as seen in case of oxygen sensors).

A turnaround in the Brazil subsidiary may face some hurdles and result in

delays.

Sizeable intangible assets may require excess provisioning for amortization in

Income statements, which may reduce EPS.



SWOT


Strengths

1.Experienced Auto anciliary with new management

2. Ready to change

3.Favourable debt equity ratio

4.Indonesian subsidiary has turned around as planned

Weekness

1.Loss making Brazil subsidiary

2. Presense in different low margins business is a drag on profits

Threats

1. Introduction of electric vehicles may change the whole landscape for

the auto anciliary industry.

2. Severe competition in few business

3. Unfavorable currency movements

Opportunities

1. Presense in telematics will allow access to new businesses

2. Inorganic growth possible due to favourable debt equity ratio

SWOT



Overview of Auto Components Industry

The auto components industry is dependent on the auto industry for growth as well as

new opportunities. The auto industry in India produced a total of 25,316,044 vehicles,

including passenger vehicles, commercial vehicles, three wheelers, two wheelers and

quadri-cycles in FY17; this figure was up 5.4% over FY16.

In FY17, sales of Passenger Vehicles grew by 9.2% YoY and commercial vehicles grew

4%. Three-Wheeler sales declined by 4.9% but two wheelers sales grew 6.9%. The year

2016 saw a jump of 4.5% in total vehicles produced in the world, numbering 9.5 cr.

The auto-components industry accounts for almost 7% of India’s Gross Domestic Product

(GDP) and employs as many as 19 million people, both directly and indirectly. The Indian

auto-components industry can be broadly classified into the organized and unorganized

sectors. The organized sector caters to the Original Equipment Manufacturers (OEMs)

and consists of high-value precision instruments while the unorganized sector comprises

low-valued products and caters mostly to the after-market category.

Over the last decade, the revenues of the automotive components industry have scaled

three times to US$ 39 billion in FY16 while exports have grown even faster to US$ 10.8

billion. This has been driven by strong growth in the Indian market and increasing

international sales of several Indian suppliers.

Government Initiatives

The Government of India’s Automotive Mission Plan (AMP) FY16 has come a long way in

ensuring growth for the sector. It is expected that this sector's contribution to the GDP will

reach US$ 145 billion in 2016 due to the government’s special focus on exports of small

cars, multi-utility vehicles (MUVs), two and three-wheelers and auto components.

Separately, the deregulation of the FDI to this sector has also helped foreign companies

to make large investments in India. The Government of India’s Automotive Mission Plan

(AMP) 2016–2026 envisages the creation of an additional 50 million jobs along with an

ambitious target of increasing the value of the output of the sector to up to US$283 billion.



Road ahead

The rapidly globalizing world is opening up newer avenues for the transportation industry,

especially while it makes a shift towards electric, electronic and hybrid cars, which are

deemed more efficient, safer and more reliable modes of transportation. Over the next

decade, this will lead to newer verticals and opportunities for auto-component

manufacturers, who would need to adapt to the change via systematic research and

development.

The Indian auto-components industry is set to become the third largest in the world by

2025. Indian auto-component makers are well positioned to benefit from the globalisation

of the sector as their exports potential could increase by up to four times to US$ 40 billion

by 2020.

Major auto players and their products

Name Products

Motherson Sumi Wiring Harness, Mirrors, Polymers and Modules, elastomers

Bosch Diesel systems, spark plugs, bulbs, batteries, wiper blades, horns, petrol filters, ignition coil, alternators, source coil, stator

Exide Industries Batteries

WABCO India Advanced braking products, braking systems, air assisted products and systems

Minda Industries Horns, switches, light, alloy wheels

Shriram pistons Piston and piston pins, piston rings and engine valves

Suprajeet engineering

Control cables and instruments

Gabriel Shock absorbers, front forks, struts

Federal mogul OE pistons, sealing, system protection, bearings, valve seats and guides, Ignition rings and liners

Rane Holding Steering suspension systems, friction materials, valve train components, occupant safety systems

JBL auto Air tank, chassis and suspension parts, cross car beam/cross truck beam, BIW parts and assemblies




Financial Performance

Pricol reported a decline of 14% in sales in Q1FY18. From this quarter onwards, its

accounting will be as per Ind AS accounting standards. EBITDA margins declined from

10.8% to 7.3%. PAT margins too declined from 4.4% to 1.6%. The effective tax rate

stood at 34%.

Pricol limited has come into existence again in Feb 2017. As a result, no comparable data

is available about the company. The company gives consolidated numbers only on a

yearly basis. Hence, no meaningful comparison is possible with historical data.

Quarterly standalone financial performance (Rs in crores)

Particulars (Rs. In Cr) 1QFY18 (Ind AS)

1QFY17 (Ind AS)

FY17

Net Sales 319 371 1,394

Growth (%) -14.0 -

Total expenditure 296 331 1,261

EBITDA 23 40 133

Margin (%) 7.3 10.8 9.5

Depreciation 16 16 66

EBIT(Ex. Other Income) 7 24 67

Non-operating Income 3 1 4

EBIT 10 26 71

Margin (%) 3.2 6.9 5.1

Finance Cost 3 2 8

Exceptional Items - - -

PBT 8 24 63

Margin (%) 2.4 6.5 4.5

Prov. For Tax 3 8 17

Reported PAT 5.0 16.4 46

Margin (%) 1.6 4.4 3.3

Share of Associate - - -

Minority Interest - - -

Profit after Tax 5 16 46

Margin (%) 1.6 4.4 3.3




Financial outlook

A turnaround in the Brazil operations, the new business of wiping systems of PMP and

opportunities in existing businesses will help Pricol to increase its ROCE to double digits

and then raise it to 20% by FY20. The return on equity will increase to 6% in FY18 and

then to 13% by FY20.

Pricol’s debt level is expected to increase in FY18, on account of the PMP acquisition,

and the completion of two new assembly plants. Currently, the debt equity ratio is 0.16;

this is considered good. We expect the same to go up in FY18 to .40 but fall again till

FY20. With an EBIDTA margin expansion, the debt/EBITDA ratio will come down from the

current 1.1 to .9 in FY20. A favorable debt equity ratio is always considered good as the

company can easily plan and execute an acquisition and grow inorganically.

The assets turnover ratio will improve by 105bps in the next three years on account of

better use of resources in subsidiaries and new acquisitions.

Higher Return ratios due to Brazil turnaround Debt/Equity will remain stable



1%

6%

8%

13%

8%

11%

14%

20%

0%

5%

10%

15%

20%

25%

FY17 FY18 E FY19 E FY20 E

In %

ROE ROCE

1.1

1.7

1.4

0.9

0.2

0.4 0.3

0.3

0.1

0.2

0.2

0.3

0.3

0.4

0.4

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8


Debt to EBIDTA Debt to Equity (RHS)



i

The revenue portfolio will change due to the addition of PMP’s business and Kardea

Oxygen’s sensor business in FY20. The revenue from Brazil and Indonesia will grow at

14% and 5% CAGR for the next 3 years, respectively. The weightage of India current

standalone business will come down to 65% after the addition of PMP. In India, the

standalone business telematics, DIS and sensors will drive growth.

EBIDTA margin expansion will come from a turnaround in Brazilian operations. We

expect EBIDTA margins to improve to 9.3% in FY18. By FY20 we expect EBIDTA

margins stabilize at around 10-11%.

PAT margins will improve to 2.4% in FY18 and further by 80 bps in FY18. By FY20, we

expect the PAT margins to improve to 4.2%

New acquisitions and Brazil will drive EBIDTA but revenue composition will change


8%

9% 10%

10%

0.5%

2% 3%

4%

0%

2%

4%

6%

8%

10%

12%

0

500

1000

1500

2000

2500

3000

FY 17 FY18E FY19E FY20E

In % Rs in Cr

India Business Brazil Indonesia

PMP Kardea tech EBIDTA Margins

PAT Margins



O

n

c

On a consolidated basis, in FY17, Brazil had an EBIDTA loss of Rs. 32.9 cr and its

standalone operations had an EBIDTA of Rs.136.2 cr. Brazil’s EBIDTA loss has been a

drag on the total EBIDTA. In 4Q FY18, we expect Brazil’s operations to show EBIDTA

profits, which will increase the EBIDTA margins to 7.6% in FY18.

In FY19, we expect Brazil’s EBITDA margins to improve further to 6% and an integration

of the PMP business will improve EBIDTA margins by 60 bps further to 9.9%. In FY20,

the Oxygen sensors business will further improve the consolidated EBIDTA margins by

50 bps to 10.4%.

EBIDTA Turnaround


136 132 157

185

-33

4

9

13

6 7

7

7

- 18

30

45

-

-

-

21

8%

9% 10%

10%

0%

2%

4%

6%

8%

10%

12%

-50

-

50

100

150

200

250

300

FY 17 FY18E FY19E FY20E

In % Rs in Cr

Total India Business Brazil Indonesia

PMP Kardea tech EBIDTA Margins (LHS)



Valuation

We initiate coverage on Pricol with target price of Rs.120.This represents a

potential upside of 40% from the current market price of Rs.86. Currently, the

stock trades at 20x/13x/8x it’s forward earnings of FY18E/FY19E/FY20E. We

have assigned a PE of 15x to the EPS for the year ending June 19E to arrive at

our target price. We are positive on Pricol for the following reasons:

1. Brazil subsidiary to turnaround from EBIDTA loss to EBIDTA profit in

FY18.

2. New acquisitions will be bottom line accretive.

3. India business will grow steadily even after a reduction in the revenue from

speed limiting sensors.

4. The oxygen sensors business will start from FY20, which will contribute to

revenue and profit significantly.

5. Indonesian subsidiary, which has turned around in FY17, will stabilize.

We have taken growth rate of FY18-19 PAT for chart preparation as earlier data for pricol

is not comparable.

Attractive valuation along with high growth


Minda Corp

Pricol

Sundram fastners

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

10 12 14 16 18 20 22 24 26

PAT Growth 1 yr

PE FY18E



Peer Comparison

In Rs Cr Sales EBITDA

PAT EBITDA

Mgn

PAT Mgn

EPS ROE (%)

P/E (x)

P/BV (x)

EV/EBITDA (x)

Indian Peers

Minda Corp

FY17 2,962.0 198.1 96.1 6.7 3.2 4.6 15.8 30.1 4.4 15.5

FY18E 2,340.3 233.2 142.7 10.0 6.1 6.8 19.8 20.3 3.6 13.1

FY19E 2,644.5 290.9 191.3 11.0 7.2 9.1 21.5 15.1 2.9 10.4

Pricol

FY17 1,473.2 107.5 7.4 7.3 0.5 0.8 1.5 109.8 1.1 7.5

FY18E 1,747.3 161.8 41.2 9.3 2.4 4.3 5.6 19.7 1.1 5.7

FY19E 2,061.7 203.5 65.1 9.9 3.2 6.9 8.4 12.5 1.0 4.4

Sundaram Fastners

FY17 3,334.9 611.9 338.3 18.3 10.1 16.1 27.0 28.7 N.A, N.A,

FY18E 3,788.2 668.9 403.4 18 10.7 19.2 28.0 24.1 N.A. N.A.

FY19E 4,372.4 780.8 489.6 17.9 11.2 23.3 27.7 19.8 N.A. N.A.




Financials & Projections

Y/E March ( ̀crore) FY17 FY18E FY19E FY20E Y/E March ( ̀crore) FY17 FY18E FY19E FY20E

Net Sales 1,473 1,747 2,062 2,603 Adj. EPS 0.8 4.3 6.9 11.4

% Chg. 18.6 18.0 26.3 Cash EPS 8.5 13.0 16.0 21.1

Total Expenditure 1,366 1,585 1,858 2,331 DPS 1.0 1.0 2.0 2.0

% Chg. 16.1 17.2 25.5 Book Value 76.2 79.6 84.4 93.9

EBITDA 107 162 204 272

EBITDA Margin % 7.3 9.3 9.9 10.4 Debt/ Equity (x) 0.2 0.4 0.3 0.3

Other Income 8 9 10 10 Current Ratio (x) 1.0 0.9 1.0 1.1

PBDIT 116 171 214 282 ROE (%) 1.5 5.6 8.4 12.8

Depreciation 73 82 86 91 ROCE (%) 8.2 10.9 14.1 20.1

Interest 18 26 27 24 Dividend Yield (%) 1.2 1.2 2.3 2.3

Exceptional Items 1.1 0.0 0.0 0.0

PBT 26 63 100 167 P/E 109.8 19.7 12.5 7.5

Tax Provisions 18 22 35 58 P/BV 1.1 1.1 1.0 0.9

Reported PAT 7 41 65 108 EV/Sales 0.5 0.5 0.4 0.3

Minority Interest 0.0 0.0 0.0 0.0 EV/EBITDA 7.5 5.7 4.4 3.2

PAT 7 41 65 108 Efficiency Ratio (x)

PAT margin(%) 0.5 2.4 3.2 4.2 Inventory (days) 40.7 45.0 50.0 50.0

Other opr Exp/ Sales (%) 0.0 0.0 0.0 0.0 Debtors (days) 49.7 60.0 65.0 65.0

Tax Rate (%) 71.3 35.0 35.0 35.0 Creditors (Days) 64.4 70.0 70.0 70.0

Balance Sheet Cash Flow Statement

Share Capital 9 9 9 9 Profit Before Tax 26 63 100 167

Reserves and Surplus 713 745 791 880 Depreciation 73 82 86 91

Minority Interest 0.0 0.0 0.0 0.0 Working Capital Changes -30 -55 -95 -80

Long Term Borrow ings 24 136 116 86 Others -8 3 -8 -35

Deferred Tax Liability 42 42 42 42 Operating Cash Flow 61 93 84 144

Other Non Current Liabilities 30.0 30.9 32.9 34.9 Capital Expenditure -87 -239 -70 -80

Total Liabilities 819 963 991 1,053 Other Investment Activities 4 -1 -2 -2

Gross Block 1,012 1,257 1,327 1,407 Cash Flow from Investing -83 -240 -72 -82

Less: Acc. Depreciation 274 355 442 533 Changes in Share Capital

Net Block 738 902 886 874 Changes in Borrow ings 52 180 34 -19

Capital Work in Progress 27 20 20 20 Dividend and interest -29 -35 -46 -43

Non Current Investments 0 0 0 0 Cash flow from Financing 23 145 -12 -62

Net Current Assets -16 -30 12 83 Net Change in Cash 1 -2 0 0

Long term Loans & Advances 70 72 73 75 Opening Cash Balance 5 27 25 25

Total Assets 819 963 991 1,053 Closing Cash Balance 6 25 25 25

Profit and Loss statement Per Share Data (Rs)

Capital, Liquidity, Returns Ratio

Valuation Ratio (x)



i

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