Pricol sharpens tech focus as chip crisis rages

by Murali Gopalan 19 Jan 2022


Pricol’s Managing Director, Vikram Mohan believes the worst two quarters of the Indian automotive industry will happen between October 2021 and March 2022 which will see record lows in production.

The biggest reason for this is the ongoing semiconductor crisis which has had a crippling effect on the automotive ecosystem. Two-wheelers, for instance, were down 36 percent year-on-year (November 2020-October 2021) which “is a direct impact on companies like ours because we cannot produce more products than what is consumed by our OEM customers”.

Mohan is quite candid when he says that “we will be lucky if we have a year that is flat in terms of growth” when compared to last year. He compares the present situation caused by the chip crisis to a patient in a hospital. “I would say we are in the ICU stage of the chip shortage where this quarter and the next will be the worst ever. Some amount of pain will start easing from April is what I am given to understand. From ICU, we will move to a post-operative mode for the next two quarters (April-September).”

From October 2022, Mohan expects the industry to get back on track and start scaling up though it will be only in March 2023 when it hits its full stride and gets back into run mode. “The advantage is that we are fundamentally strong in our economy . . . there is still a very robust demand because the waiting period is high for an automobile and there are just not enough stocks,” he says.

It is also Mohan’s view that the Centre is taking all the right steps and “fundamentally we are on a strong economic cycle for the next couple of years” which, in turn, will have a good impact on the auto industry.

In the case of Pricol, he points out that the auto ancillary supplier has demonstrated that it can post 15-16 percent EBITDA by redoing its processes, product portfolio and improving its cost structure. “We are a good four percent lower now . . . 2.5 percent because of direct material shortage and 1.5 percent because of various other commodities,” adds Mohan. While customers have been “kind enough” to accept 65 percent of the cost escalation, Pricol has had to absorb the balance 35 percent because of its customer relationships coupled with the reality that the entire burden cannot be passed on. “Our EBITDA will hover between 11-12 percent and slowly keep improving as the situation eases off and starts crawling back to normalcy,” says the MD. He is convinced that “we have hit rock bottom” and the company is in that place right now in terms of sales “which are a good 25-30 percent lower than what we should be doing”.

Yet, Mohan is categorical that he is not contemplating pruning costs short-term because rebuilding some of this human capital “which has the knowledge” is going to be very difficult. “We continue to invest in technology and that is something where we are not taking our foot off the pedal,” he says.

On an Atmanirbhar journey, Pricol recently acquired a piece of land to design a technology centre that will become operational in the next two to three years,  and is intended to be truly world-class. According to Mohan, one of the biggest advantages that the company has over other Indian competition is that it does not have JV/technology partners with everything developed in-house.

“We are reinforcing our spend on technology while constantly paring down our debt. I am pretty confident that by December 2022, we will be debt-free,” he says.

“We are in the ICU stage of the chip shortage where this quarter and the next will be the worst ever. We will move to a post-operative mode for the next two quarters (April-September 2022).'

Its next round of expansion will see it develop a new generation of products for electric two-wheelers. One of many next-gen thin film transistor connected clusters. scenario could be March 2023 if the slowdown continues and this will “give us a deleveraged healthy balance sheet and EBITDA with adequate cash flows”.

With the current product mix, Pricol’s turnover could be anywhere between Rs 2,200 crore and 2,400 crore for the capacity that was created in FY2020. “Under normal circumstances, our order book was Rs 1,900 crore this year and Rs 2,300 crore next year but we will be about 12-18 months behind because of this slowdown,” says Mohan.

However, once the company crosses the Rs 2,400 crore mark, it plans to go for a major round of capital infusion both in terms of product, process and capex. “We have clearly zeroed in on the three main areas we want to focus: sensing, display and actuation,” he adds.

Sensor and sensibility

At present, Pricol has a very small portfolio of sensors restricted to about six or seven. It is now keen on growing this to about 20-odd sensors and “active talks” have begun with two MNCs to close a JV. When this happens, the “entire sensor bit” can go into a JV because “we are a little back in technology on sensors, not as much as we are on driver information systems”.

As Mohan says, “We have clearly said that we want to be sensing whatever is sensed to be displayed and whatever is displayed should be based on that some actuation.” That is why driver information systems (DIS), sensors, mechanical, pumps and some hydraulic products will be the actuation bit of the business.

As for the DIS/instrument clusters part, “I think we are in a very sweet spot in terms of in-house technology that we have developed”. The good thing is that the company’s market share is at an all-time high and “we will continue to have it at a high” because there is a sufficient pipeline of new businesses in place for the next couple of years.

What is especially interesting is that the value per DIS has jumped from Rs 300 about a decade earlier to about Rs 1,200 today and will automatically go up to Rs 1,800-2,000 in the next three years. “So even if the industry remains flat, our top line will keep growing without significant investment in capacity and more only in technology,” says Mohan.

In today’s two-wheelers, the focus is on performance, styling and, more importantly, the DIS or the human machine interface (HMI). In this backdrop, Pricol will “naturally go up the value chain in an area where we have a strong market share and technology roadmap”. HMI, he adds, will “get richer and richer” going forward.

Actuation, the third bit of the business, will be driven through internal technology. “However, we will be adding a few products to our portfolio based on customer feedback and are in talks with companies for technology that we do not possess,” says Mohan.

Strong telematics connect

The last vertical connecting all “these pieces of the pie” will emerge in terms of connected vehicle solutions. Today, Pricol is the largest provider of telematics but it is still a small number since “we are in the beginning of a very big growth curve”.

The Coimbatore-based company is more in the hardware part of telematics and till about six months ago the plan was to acquire a strategic stake in a software company. Plans have now changed and Pricol plans to form a JV with a world class global telematics software company where it will have the hardware expertise and its partner the software part. A third ally partner will cater to the analytics bit. “That will also be a JV and we are talking to three companies,” says Mohan.

Hence, even while the semiconductor crisis continues, the Pricol leadership team has identified the four verticals it will be playing in: sensing, display and actuation and then tying all of these. With all these businesses coming through JVs and tech collaborations, the top line is expected to grow by Rs 1,800 crore to Rs 4,200 crore by 2025. “We are becoming more of a system company/ technology company and less of a product company,” declares Mohan.