Pricol - Restructuring To Improve Profitability

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India Equity Value investor, Trivikram Consultants

Prashant Vaishampayan

India Equity Value investor

Picking Long Term Multi-bagger stocks

Trivikram Consultants

Trivikram Consultants is an equity research service founded by Prashant Vaishampayan, a registered Research Analyst with SEBI in India. Prashant has done equity research since 1992.  He worked with Jardine Fleming, SG Securities, UBS and Kotak Securities. Since 2010, he is managing his portfolio and doing outsourced equity research for institutional clients. A team of six professionals helps him in equity research. We focus on pharma, agro-chemicals, auto and auto components, banks and financial services, specialty chemicals and niche manufacturing sectors.   

Equity Bottom-Up

<ul>
<li>
<a href="https://www.smartkarma.com/entities/10346" target="_blank" data-smartkarma-citation="entities:10346:1">Pricol Ltd (PRIC IN)</a> (Pricol) reported an 18% YoY growth in revenues at Rs 3,400 mn, 31% YoY increase in EBITDA at Rs 304mn and YoY stable PAT of Rs 49mn in 1QFY19 in its standalone numbers. Profitability was impacted by an increase in finance costs and depreciation post acquisitions of new product businesses of FY18. </li>
<li>We have revised estimates for FY19E and FY20E to build in the impact of restructuring undertaken by the company and the acquisitions and JVs of FY18. Loss-making International subsidiaries will likely turn around and start contributing to EPS from FY19E onwards. Pricol's CapEx plan of Rs 2,250 mn for FY19E will likely be funded by debt. Increased finance costs are expected to impact the profitability till FY20E.  </li>
<li>We have not built in our estimates the effect of the JV with Kerdea Technologies for the Oxygen (O2) Sensor and of the partnership with Dongguan Shenpeng Electronics Co Limited for electric water pumps catering to the Bharat Standard (BS)-VI emission regulations which the Indian government has planned to implement by April 1, 2020E. We expect these JVs to contribute to revenues from FY21E. </li>
<li>We have valued Pricol at 15x the consolidated EPS for FY20E of Rs 7.3 (previously Rs 8.2) to arrive at the fair value estimate of Rs 110 per share (earlier Rs 120 per share). The Current Market Price of Rs 63 per share as of 17<sup>th</sup> September 2018, trades at 16x/ 9x the FY19E/ 20E consolidated EPS of Rs 4 and Rs 7 respectively.</li>
</ul>
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 236px;">Particulars</td>
<td style="text-align: right; width: 142px;">FY17</td>
<td style="text-align: right; width: 143px;">FY18</td>
<td style="text-align: right; width: 162.5px;">FY19E</td>
<td style="text-align: right; width: 164.5px;">FY20E</td>
</tr>
<tr>
<td style="width: 236px;">PE (x)</td>
<td style="text-align: right; width: 142px;">64</td>
<td style="text-align: right; width: 143px;"> -12</td>
<td style="text-align: right; width: 162.5px;">16</td>
<td style="text-align: right; width: 164.5px;">   9</td>
</tr>
<tr>
<td style="width: 236px;">ROE</td>
<td style="text-align: right; width: 142px;">7%</td>
<td style="text-align: right; width: 143px;">-7%</td>
<td style="text-align: right; width: 162.5px;">5%</td>
<td style="text-align: right; width: 164.5px;">10%</td>
</tr>
<tr>
<td style="width: 236px;">ROCE</td>
<td style="text-align: right; width: 142px;">8%</td>
<td style="text-align: right; width: 143px;">-5%</td>
<td style="text-align: right; width: 162.5px;">10%</td>
<td style="text-align: right; width: 164.5px;">14%</td>
</tr>
</tbody>
</table>
<div class="content-caption">Source: Pricol Annual Report 2018 and Trivikram Consultants Research as of 17<sup>th </sup>September 2018</div>
<div class="content-caption">E = Estimates</div>



Pricol Ltd (PRIC IN) (Pricol) reported an 18% YoY growth in revenues at Rs 3,400 mn, 31% YoY increase in EBITDA at Rs 304mn and YoY stable PAT of Rs 49mn in 1QFY19 in its standalone numbers. Profitability was impacted by an increase in finance costs and depreciation post acquisitions of new product businesses of FY18. 
We have revised estimates for FY19E and FY20E to build in the impact of restructuring undertaken by the company and the acquisitions and JVs of FY18. Loss-making International subsidiaries will likely turn around and start contributing to EPS from FY19E onwards. Pricol's CapEx plan of Rs 2,250 mn for FY19E will likely be funded by debt. Increased finance costs are expected to impact the profitability till FY20E.  
We have not built in our estimates the effect of the JV with Kerdea Technologies for the Oxygen (O2) Sensor and of the partnership with Dongguan Shenpeng Electronics Co Limited for electric water pumps catering to the Bharat Standard (BS)-VI emission regulations which the Indian government has planned to implement by April 1, 2020E. We expect these JVs to contribute to revenues from FY21E. 
We have valued Pricol at 15x the consolidated EPS for FY20E of Rs 7.3 (previously Rs 8.2) to arrive at the fair value estimate of Rs 110 per share (earlier Rs 120 per share). The Current Market Price of Rs 63 per share as of 17th September 2018, trades at 16x/ 9x the FY19E/ 20E consolidated EPS of Rs 4 and Rs 7 respectively.




Particulars
FY17
FY18
FY19E
FY20E


PE (x)
64
 -12
16
   9


ROE
7%
-7%
5%
10%


ROCE
8%
-5%
10%
14%



Source: Pricol Annual Report 2018 and Trivikram Consultants Research as of 17th September 2018
E = Estimates

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