Pricol Limited

BUY

Target Price Rs. 120 CMP Rs. 86

Index Details Pricol is a manufacturer of automotive components for the Indian as well as Sensex 31,834 international markets. It manufactures auto components for two/three/four Nifty 9,985 wheelers, commercial vehicles, tractors, off-road vehicles and Industrial tooling Industry Auto segments across the global market. Driver Information Systems, Telematics and Ancillary 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 Scrip Details are expected to grow by 1130 bps to 12.8% and by 1200 bps to 20%, Mkt Cap (Rs 810.9 respectively. The key reason for margin expansion is the revenue growth and cr) turnaround of international subsidiaries. BVPS (Rs) 76.2 O/s Shares (Cr) 9.48 We initiate coverage on Pricol as a BUY with a price objective of Rs 120,

Av Vol 55,867 representing a potential upside of 40% in the next 12 months. We arrived at the 52 Week H/L 75.7/115.4 price target by applying 15 times PE multiple to earnings for the 12-month period Div Yield (%) 1.2 to June19. Pricol should be part of an investor’s long term portfolio for the following reasons: FVPS (Rs.) 1

Shareholding Pattern  Pricol is focussed on its revenue target of Rs. 3,000 cr by FY20. New Shareholders % plants and increased capacity, new products through partnerships and Promoters 37.2 acquisitions will combine to help Pricol achieve this target. Public 62.7  Restructuring of international subsidiaries is gaining momentum. Its

Total 100.0 Indonesian subsidiary has already turned around while the Brazilian STOCKPOINTER 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.

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

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 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.

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Pricol Business Divisions

Driver Information system

Switches and sensors

Pumps and Pricol India mechanical products Asset management Pricol Limited Pricol Brazil solutions and telematics

Pricol Auto Accessories Indonesia and others

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. This purchasing arm of the Company mainly assists in global Pricol Asia Pte Limited, Singapore procurement of raw materials and components for internal consumption and for sale to associate companies.

It is an investment arm of Pricol which acquires companies in Pricol Espana Sociedad Limitada, Spain Europe and South America. Pricol do Brasil Componentes Automotivos LtdA (PdB)manufactures and sells Pumps & Mechanical products to Pricol do Brasil Componentes Automotivos LtdA, a wide range of Domestic and International customers Brazil

Source: Company presentation, Ventura Research

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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

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Instrument Cluster Instrument cluster Fuel Pump Module

Source: Pricol presentation, Ventura Source: Pricol presentation, Ventura Source: Pricol presentation, Ventura Research Research Research

Oil Pumps Two wheeler TFT Instrument cluster After Market Telematics

Source: Pricol presentation, Ventura Source: Pricol presentation, Ventura Source: Pricol presentation, Ventura Research Research Research

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 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.

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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

Driver Information Systems 1% 6% 2W & 3W 20% Swiches and 11% Sensors 39% PPV CV Pumps and 21% 53% 29% mechanical Others products 11% 9% Tractor AMS and Telematics

Source: Pricol, Ventura Research 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.

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DIS Assembly line plant 1 Mechanical Cluster Line Plant II

Source: Company, Ventura Research Source: Company, Ventura Research Description : New assembly line with process interlock for Description : Semi-automatic line with closed loop processes

Royal Enfield’s DIS that conforms to BS IV standards and for assembling Honda Shine Cluster. This assembly line includes advanced features like LCD compass. 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

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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.

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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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Indonesian subsidiary turnaround and stabilization

Rs in Cr In % 120 8% 7% 7% 107 W 102 97 7% 7% e 100 92 87 6% 6% 80 e 5% x 60 4% p 3% e 40 2% c 20 7 7 t 6 7 1% - 0% -0.2% -0 t -20 -1% h 2016 FY17 FY18E FY19E FY20E e Revenue EBIDTA EBIDTA Margins(RHS)

Source: Pricol, Ventura Research

 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%.

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Brazil Operations turnaround

Rs in Cr In % 250 7% 10% 6% 191 5% 200 3%

155 0% 142 150 123 -5% 100 -10%

-15% 50 13 4 9 -20% 0 -25% -27% -50 -33 -30% FY17 FY18E FY19E FY20E Revenue EBIDTA EBIDTA Margins(RHS)

Source: Pricol, Ventura Research

 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.

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

Rs in Cr Rs in Cr 300 160 144 239 140 250 120 200 93 100 84 150 80 61 90 60 100 70 80 40 50 20 - - FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E Source: Pricol , Ventura Research Source: Pricol , Ventura Research

 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.

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 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

Source: Company presentation, Ventura Research

 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.

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SWOT

Weekness Strengths 1.Loss making Brazil subsidiary 1.Experienced Auto anciliary with new management 2. Ready to change 2. Presense in different low margins business is a drag on profits 3.Favourable debt equity ratio

4.Indonesian subsidiary has turned around as planned

SWOT

Threats Opportunities 1. Introduction of electric vehicles may change the whole landscape for 1. Presense in telematics will allow the auto anciliary industry. access to new businesses

2. Severe competition in few 2. Inorganic growth possible due to favourable debt equity ratio business 3. Unfavorable currency movements

Source: Pricol, Ventura Research

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 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.

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 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 Control cables and instruments engineering 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

Source: Pricol, Ventura Research

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 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) 1QFY18 1QFY17 Particulars (Rs. In Cr) FY17 (Ind AS) (Ind AS) 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 - - - 5 16 46 Profit after Tax 1.6 4.4 3.3 Margin (%)

Source: Pricol, Ventura Research

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 Financial outlook

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

In % 1.8 1.7 0.4 25% 1.6 20% 0.4 1.4 0.3 0.4 20% 1.4 1.1 0.3 14% 1.2 15% 13% 0.3 11% 1.0 0.9 0.3 8% 8% 0.8 10% 0.2 6% 0.6 0.2 5% 0.2 1% 0.4

0% 0.2 0.1 FY17 FY18 E FY19 E FY20 E FY17 FY18E FY19E FY20E ROE ROCE Debt to EBIDTA Debt to Equity (RHS)

Source: Pricol , Ventura Research Source: Pricol , Ventura Research

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.

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

Rs in Cr In % 3000 12% 10% 10% 2500 9% 10%

8% 2000 8% i 1500 6%

1000 4% 4% 3%

500 2% 2%

0.5% 0 0% FY 17 FY18E FY19E FY20E

India Business Brazil Indonesia

PMP Kardea tech EBIDTA Margins PAT Margins

Source: Pricol, Ventura Research

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%

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EBIDTA Turnaround

Rs in Cr In % 300 12% 10% 21 250 10% 9% 10% 45 - 7 200 8% 30 13 8% 7 - 9 150 18 6- 47 6%

100 185 157 136 132 4% 50

2% - -33

-50 0% FY 17 FY18E FY19E FY20E Total India Business Brazil Indonesia O PMP Kardea tech EBIDTA Margins (LHS) n Source: Pricol, Ventura Research

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%.

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 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.

Attractive valuation along with high growth

PAT Growth 1 yr 70.0% Pricol 60.0% 50.0%

40.0% Minda Corp

Sundram 30.0% fastners

20.0%

10.0% 0.0% 10 12 14 16 18 20 22 24 26 PE FY18E

Source: Pricol, Ventura Research

We have taken growth rate of FY18-19 PAT for chart preparation as earlier data for pricol is not comparable.

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Peer Comparison

EBIT EV/EBIT EBIT PAT ROE P/E P/BV In Rs Cr Sales PAT DA EPS DA DA Mgn (%) (x) (x) Mgn (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.

Source: Pricol, Ventura Research

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Financials & Projections Y/E March (` crore) FY17 FY18E FY19E FY20E Y/E March (` crore) FY17 FY18E FY19E FY20E Profit and Loss statement Per Share Data (Rs) 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 Capital, Liquidity, Returns Ratio 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 Valuation Ratio (x) 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

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