Pricol Engineering Industries Limited: Ratings Reaffirmed; Outlook on the Long-Term Rating Revised to Stable from Positive Summary of Rating Action

June 08, 2020 Pricol Engineering Industries Limited: Ratings reaffirmed; outlook on the long-term rating revised to Stable from Positive Summary of rating action

Previous Rated Current Rated Instrument* Amount Amount Rating Action (Rs. crore) (Rs. crore) [ICRA]BB+ reaffirmed; Outlook on Long-term - Term Loan 10.00 6.00 long-term rating revised to Stable from Positive [ICRA]BB+ reaffirmed; Outlook on Long-term fund-based 5.00 5.00 long-term rating revised to Stable from Positive [ICRA]BB+ reaffirmed; Outlook on Long-term fund-based (sublimit)# (USD 1.54 million) (USD 0.75 million) long-term rating revised to Stable from Positive Short-term non-fund based 7.50 7.50 [ICRA]A4+; reaffirmed [ICRA]BB+/ [ICRA]A4+ reaffirmed; Long-term/ Short-term fund- (2.50) (2.50) Outlook on long-term rating revised to based facilities (sublimit) Stable from Positive [ICRA]BB+/ [ICRA]A4+ reaffirmed; Long-term/ Short-term non-fund (7.50) (7.50) Outlook on long-term rating revised to based facilities (sublimit) Stable from Positive [ICRA]BB+/ [ICRA]A4+ reaffirmed; Long-term/ Short-term 17.50 21.50 Outlook on long-term rating revised to unallocated facilities Stable from Positive Total 40.00 40.00 *Instrument details are provided in Annexure-1 # Although the facility is denominated in foreign currency, ICRA’s rating for the same is on national scale as distinct from international rating scale. Rationale

The revision in outlook on the long-term rating considers the moderation in Pricol Engineering Industries Limited’s (PEIL) operating income (OI) and margins in FY2020 and the muted performance expected in FY2021. PEIL derives 57% of its revenues from the auto component segment (catering to all sub-segments except 2W) and the remaining from defence and railways. As a result of the auto slowdown and volatility in tender-based orders in railways and defence, PEIL’s OI declined to Rs. 74.2 crore in 9M FY2020 (by 9.2% on annualised basis). While the loss of business because of the lockdown in March 2020 is estimated to have resulted in double-digit revenue decline in FY2020, the revenues are expected moderate further in FY2021 because of the lockdown impact for 40 days and muted demand outlook across auto segments with weakening liquidity and poor consumer sentiments, and volatility in revenues from defence/railways due to tender-based orders. The company’s operating margins remained thin at 3.9% in 9M FY2020, weaker than the 5.5% in FY2019, given the high proportion of revenues from the relatively low-margin auto component segment and weaker absorption of costs with lower revenues. Going forward, the margins would remain susceptible to unfavourable movement in electronic component prices and

unfavourable fluctuations in exchange rates (PEIL is a net importer). However, the accommodative commodity prices and the company’s cost saving initiatives on several fronts such as rentals, employee costs are likely to cap the margin decline. PEIL’s debt metrics also remain weak, with debt/OPBIDTA of 3.3x as on December 31, 2019 (2.6x as on March 31, 2019) due to the low accruals. PEIL has Rs. 3.2 crore of repayment obligations and discretionary capex of up to Rs. 1.0 crore for FY2021. In relation to this, the company had cash and cash equivalents of Rs. 2.0 crore and undrawn working capital limit of Rs. 2.6 crore as on May 31, 2020. ICRA expects the company to meet its near-term and medium-term commitments through internal sources of cash and debt, and financial support from the promoters if required.

The ratings take into account from the company’s diversified product profile comprising of hull electrical equipment, driver panels and instrumental clusters, cable accessories, alternators, wind shield washer kits and oil pressure switches catered to auto components, defence and railways. PEIL sells its products under the ‘Pricol’ brand, which has relatively strong brand equity in the Indian auto industry. While the company has an established customer base comprising of Tata Motors Limited (rated [ICRA]AA-(Negative)/ [ICRA]A1+), Tractors and Farm Equipment Limited, Mahindra & Mahindra Limited (rated [ICRA]AAA (Stable)/ [ICRA]A1+) and Daimler India Commercial Vehicles Private Limited, its high customer concentration with top 5 customers contributing to 64% of revenues in 9M FY2020, results in potential vulnerability of revenues to slowdown in orders from the clients or attrition to competition.

Key rating drivers and their description

Credit strengths

Diversified product portfolio with presence in the auto component, railways and defence - PEIL has presence in the defence (18% of revenues in 9M FY2020), railways (25% of revenues in 9M FY2020) and auto component segment (57% of revenues in 9M FY2020). PEIL sells its products under the ‘Pricol’ brand, which has relatively strong brand equity in the Indian auto industry. Its product portfolio comprises various products such as cable accessories (22% of revenues in 9M FY2020), alternators (36%), oil pressure switches (9%) and balance 33% revenues were derived from wind shield washer kits, hull electrical equipment, driver panels and instrumental clusters. PEIL was earlier catering to defence and railways; and started catering to auto component industries since September 2017 post acquisition of non-wiping business from PMP Auto Components Private Limited. The diversification mitigates risks arising from revenue decline from any single product/segment to an extent.

Reputed client profile - The company’s client profile comprises of auto original equipment manufacturers (OEMs) like Tata Motors Limited (rated [ICRA]AA-(Negative)/[ICRA]A1+), Tractors and Farm Equipment Limited, Mahindra & Mahindra Limited (rated [ICRA]AAA (Stable)/[ICRA]A1+) and Daimler India Commercial Vehicles Private Limited to name a few. PEIL supplies to Indian Railways through Integral Coach Factory, Chennai and Defence through Ordnance Factory, Medak.

Credit challenges

Decline in revenues expected because of Covid-19 pandemic; volatility in revenues from railways and defence as the orders are tender based – PEIL derives 57% of revenues from the auto component industry, catering to all sub- segments except 2W. The Covid-19 outbreak and consequent lockdown has significantly impacted auto component demand in the last few months. Further, weakening liquidity and poor consumer sentiments are expected to significantly impact the auto component segment over the next few months. Orders from Railways and defence are dependent on price-sensitive tenders and are expected to remain volatile, akin to the past. As a result, PEIL is estimated to have reported double-digit revenue decline in FY2020 and the top-line is expected to moderate further in FY2021 impacted by the lockdown, muted demand outlook across auto segments and volatility in revenues from defence/railways.

Modest scale of operations; thin margins and weak coverage metrics - PEIL has relatively modest scale of operations, with an operating income of Rs. 109.1 crore in FY2019 and Rs. 74.2 crore in 9M FY2020, despite significant improvement from Rs. 26.4 crore in FY2017 post the acquisition. However, the margins have declined over the last few years from 18.5% in FY2017 to 3.9% in 9M FY2020. The increase in proportion of revenues from the relatively low-margin auto component segment and weaker absorption of costs with lower revenues led to the margin decline in 9M FY2020. The company’s margins would be susceptible to unfavourable movement in electronic component prices which form a meaningful proportion of raw material costs and unfavourable fluctuations in exchange rates (PEIL is a net importer) in FY2021. However, the accommodative commodity prices and the company’s cost saving initiatives on several fronts such as rentals, employee costs are likely to cap the margin decline. PEIL’s coverage metrics also remain stretched with debt/OPBITDA of 3.3x as on December 31, 2019 (2.6x as on March 31, 2019).

Relatively high customer concentration - PEIL’s concentration with its top five customers remained high at 64% for 9M FY2020, indicating vulnerability of revenues to any slowdown in orders from the clients or attrition to competition. Nevertheless, its established customer relationships and history of repeat orders mitigates the risk to an extent.

Liquidity position: Stretched The company’s liquidity remains stretched with fund flow from operations of Rs. 3.9 crore in FY2019, cash and cash equivalents of Rs. 2.0 crore and undrawn working capital limit of Rs. 2.6 crore as on May 31, 2020. PEIL’s working capital utilization was at 84% of sanctioned limits for the 12-month period ended December 2019. In relation to these sources of cash, PEIL has discretionary capex of up to Rs. 1.0 crore and term loan repayments of Rs. 3.2 crore and Rs. 2.0 crore, respectively in FY2021 and FY2022. ICRA expects the company to meet its near-term and medium-term commitments through internal sources of cash and debt, and financial support from the promoters if required.

Rating sensitivities

Positive triggers – An upgrade in ratings is unlikely in the near-term due to business disruptions caused by the Covid-19 pandemic. PEIL’s ratings may however be upgraded with sustained improvement in revenues and margins coupled with debt service coverage ratio (DSCR) above 1.4x on a sustained basis.

Negative triggers – Pressure on PEIL’s ratings could arise in case of deterioration in liquidity and coverage metrics arising from significant moderation in revenues and margins.

Analytical approach

Analytical Approach Comments

Applicable Rating Methodologies Corporate Credit Rating Methodology Parent/Group Support Not applicable Consolidation/Standalone The ratings are based on the standalone financial profile of the company. About the company

Pricol Engineering Industries Limited (PEIL) manufactures instrument clusters (IC)/ driver control panels, hull electrical equipment for tanks and armored vehicles, alternators, wind shield washer kits and oil pressure switches, catering to defence, railways and auto component sectors. The auto component business, manufacturing alternators, oil pressure switches and wind shield washer kits was acquired by the company from PMP Auto Components Private Limited in FY2018. The company currently has four manufacturing facilities – one each in Coimbatore (Tamil Nadu), Rudrapur (Uttarakhand), Mumbai (Maharashtra) and Satara (Maharashtra).

The company is part of the Coimbatore-based Pricol Group, which has other entities such as Pricol Limited (rated [ICRA]BB+&/[ICRA]A4+&), PPL Enterprises Limited, Pricol Travel Limited, Pricol Corporate Services Limited to name a few. PEIL is held by held by Mr. Vijay Mohan and family either directly or through Pricol Holdings Limited. Key financial indicators (audited)

Standalone FY2018 FY2019 Operating Income (Rs. crore) 71.7 109.1 PAT (Rs. crore) 2.6 2.8 OPBDIT/OI (%) 7.9% 5.5% RoCE (%) 18.0% 12.5%

Total Outside Liabilities/Tangible Net Worth 1.0 1.8 (times) Total Debt/OPBDIT (times) 2.3 2.6 Interest Coverage (times) 5.4 4.7 DSCR 4.2 1.6 Source: Pricol Engineering Industries Limited Status of non-cooperation with previous CRA: Not applicable Any other information: None

Rating history for past three years

Current Rating (FY2021) Rating History for the Past 3 Years Amount Amount Date & Rating in Date & Rating in Date & Rating in Rated Outstanding Date & Rating FY2019 FY2018 FY2017 Instrument Type (Rs. crore) (Rs. crore) 8-Jun-2020 6-Dec-2018 7-Jul-2017 14-Jun-2016 1 Term Loan Long Term 6.00 5.20 [ICRA]BB+ (Stable) [ICRA]BB+ (Positive) - - 2 Cash Credit Long Term 5.00 [ICRA]BB+ (Stable) [ICRA]BB+ (Positive) [ICRA]BB+ (Stable) [ICRA]BB+ (Stable) 3 FCNRB (sublimit)# Long Term (USD 0.75 [ICRA]BB+ (Stable) [ICRA]BB+ (Positive) - - million) 4 Letter of Credit Short Term 7.50 [ICRA]A4+ [ICRA]A4+ [ICRA]A4+ [ICRA]A4+ 5 Bank Guarantee Long Term/ (7.50) [ICRA]BB+ (Stable) [ICRA]BB+ (Positive)/ [ICRA]BB+ (Stable) [ICRA]BB+ (Stable)/ (sublimit) Short Term / [ICRA]A4+ [ICRA]A4+ / [ICRA]A4+ [ICRA]A4+ 6 WCDL (sublimit) Long Term/ (2.50) [ICRA]BB+ (Stable) [ICRA]BB+ (Positive)/ [ICRA]BB+ (Stable) [ICRA]BB+ (Stable)/ Short Term / [ICRA]A4+ [ICRA]A4+ / [ICRA]A4+ [ICRA]A4+ 7 Unallocated Limits Long Term/ 21.50 [ICRA]BB+ (Stable) [ICRA]BB+ (Positive)/ [ICRA]BB+ (Stable) [ICRA]BB+ (Stable)/ Short Term / [ICRA]A4+ [ICRA]A4+ / [ICRA]A4+ [ICRA]A4+ Source: Pricol Engineering Industries Limited #Although the facility is denominated in foreign currency, ICRA’s rating for the same is on national scale as distinct from international rating scale. Complexity level of the rated instrument

ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The classification of instruments according to their complexity levels is available on the website www.icra.in

Annexure-1: Instrument details

Date of Amount ISIN Instrument Issuance Coupon Maturity Rated No Name Sanction Rate Date (Rs. crore) Current Rating and Outlook NA Term Loan Aug 2017 Aug 2021 6.00 [ICRA]BB+ (Stable) NA Cash Credit NA NA NA 5.00 [ICRA]BB+ (Stable) (USD 0.75 NA FCNRB# Aug 2017 Aug 2021 [ICRA]BB+ (Stable) million) NA Letter of Credit NA NA NA 7.50 [ICRA]A4+ Bank Guarantee* (7.50) [ICRA]BB+ (Stable)/ NA NA NA NA [ICRA]A4+ WCDL* (2.50) [ICRA]BB+ (Stable)/ NA NA NA NA [ICRA]A4+ Unallocated 21.50 [ICRA]BB+ (Stable)/ NA NA NA NA Limits [ICRA]A4+ Source: Pricol Engineering Industries Limited

* Bank Guarantee of Rs. 7.50 crore is a sub-limit of Letter of Credit of Rs. 7.50 crore, Working Capital Demand Loan of Rs. 2.50 crore is a sublimit of cash credit of Rs. 5.00 crore and FCNRB of USD 1.54 million is a sublimit of term loan of Rs. 10.00 crore #- Although the facility is denominated in foreign currency, ICRA’s rating for the same is on national scale as distinct from international rating scale.

Analyst Contacts

Subrata Ray Vinutaa S +91 22 6114 3408 +91 44 4596 4305 [email protected] [email protected]

Ravina R Haran +91 44 4596 4311 [email protected]

Relationship Contact

Jayanta Chatterjee +91 80 4332 6401 [email protected]

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani Tel: +91 124 4545 860 [email protected]

Helpline for business queries:

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm) [email protected]

About ICRA Limited:

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Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. The international Credit Rating Agency Moody’s Investors Service is ICRA’s largest shareholder.

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