Why Minda has its eyes on Pricol’s dashboard

A Pricol factory in Pune where clusters, sensors and fuel pumps are made. Overall, the company has eight plants in India and one in Indonesia. Over 35,000 clusters and 25,000 fuel sensors are produced every day.
A Pricol factory in Pune where clusters, sensors and fuel pumps are made. Overall, the company has eight plants in India and one in Indonesia. Over 35,000 clusters and 25,000 fuel sensors are produced every day.

Summary

  • Can the Coimbatore-based auto components maker preempt a possible takeover attempt?
  • In February, Minda said it acquired a 15.6% stake in Pricol from the open market. This set off panic among Pricol’s stakeholders as the promoters do not have a majority stake.

Coimbatore: When Vikram Mohan got a call from his elder daughter on 17 February, he thought it would be a routine chat. The managing director of Pricol Ltd, a Coimbatore-based auto component company, was in New Delhi on work. His daughter was calling from London. The call, as it turned out, was anything but routine. Rival Minda Corporation Ltd, she told the stunned Vikram, had acquired a substantial stake in Pricol.

In an announcement to stock exchanges, Minda said it had built up a 15.57% stake from the open market at a cost of 400 crore. This set off panic among Pricol’s stakeholders as the promoters do not have a majority stake—they own 36.53%—in the company.

“I had to spend the rest of the day explaining to the media and other stakeholders that I have absolutely no intention of relinquishing control, now or at any time in the near future," Vikram told Mint, recalling that exhausting day.

Graphic: Mint
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Graphic: Mint

Minda had stated that the investment was “purely" financial in nature. But its executive director, Aakash Minda, hinted at the company’s true intentions a few days later (on 20 February) when he said in an investor call, “This is a financial investment as of now and as and when any inorganic opportunity comes across...we will take it to the Board".

Less than three months later, on 2 May, Minda sought permission from the Competition Commission of India (CCI) to increase its stake in Pricol to 24.5%. Pricol strongly objected to this move and has challenged Minda’s CCI application in the Madras High Court.

“This is a very unfair and unethical thing to do (to acquire a stake surreptitiously)," said Vikram. He added he is now ready with a war chest and a “strong strategy" to counter the threat.

“I will do everything financially and legally to retain control. My father started this company almost 50 years ago and the next generation is joining the management soon. The company has been through the worst and is now poised for success. Why will I let go now?" he asked.

Why Pricol?

It is not hard to see why Manesar-headquartered Minda, which makes speedometer cables, electronic and mechanical security systems, information and connected systems for two-wheelers, cars and commercial vehicles, finds Pricol so attractive.

Coimbatore-based Pricol is a dominant player in the manufacturing of driver information systems (instrument clusters, which house various displays and indicators, such as the speedometers, fuel and oil gauges on a vehicle’s dashboard) as well as sensors. Indeed, it is the second largest manufacturer in the world of instrument clusters and fuel-level sensors for two-and three-wheeler applications. Minda is keen on making it big in this market.

Pricol’s market share in India is 50% in the two-wheeler segment, 70% in commercial vehicles and 50% in the tractor segment. It also has a strong play in the connected-vehicle solution space, where demand is growing. The company’s other business vertical—actuation, control and fuel management systems—is also doing well.

The southern company’s customers include the who’s who of the automotive world, from all the major vehicle manufacturers in India to BMW, Harley Davidson, Ducati and Triumph internationally. In 2022-23, Pricol, whose major rivals include Visteon Corporation, Bosch Ltd and Nippon Seiki, posted its highest-ever annual sales of 1,902 crore. Its net profit stood at 124 crore. The company expects to record sales of 3,600 crore by 2025-26.

What makes Pricol even more attractive is that its products are already propulsion agnostic. “Even if internal combustion engines are to die tomorrow, we will lose only 120 crore of our 1,900 crore revenue," said Vikram. Among all its products, only fuel pumps will be impacted by electrification.

“Pricol’s products will see an increase in content per vehicle as the industry transitions from internal combustion engines to electric vehicles. Its products are good and largely fuel agnostic. Its biggest strength is its client relationships," said Jay Kale, senior vice-president, Elara Capital.

A cross-section of analysts that Mint spoke to feel that the stock, which is trading at around 231 per share, is undervalued and has potential for growth. They point to Pricol’s price-earnings ratio of 25.5 times to Minda’s 28.12, Sundram Fasteners’ 47 times and Samvardhana Motherson’s 52 times. “Past issues and unsuccessful global forays are behind the very low institutional interest in the stock. That explains its lower valuation," said an analyst at a wealth management firm who didn’t want to be identified.

A good start

While it has a stellar pedigree, Pricol hasn’t had a smooth run in the recent past. The company, which was founded in 1974 by Vikram’s father Vijay Mohan, has been staggering from one crisis to another over the last two decades. Named Premier Instruments Coimbatore Ltd at its founding, it started out by making components for speedometers.

In the 1980s, when Japanese two-wheeler makers roared into India through a slew of joint ventures (JVs), they began scouting for local outfits to manufacture components. Soon, the company signed up with Nippon Seiki for technology collaboration to manufacture instrument clusters for two-wheelers.

The entry of Maruti Suzuki transformed the Indian passenger vehicle market, leading Pricol to partner with Denso Corporation to start manufacturing instrument clusters for cars, as well. The Japanese firm also took a 12% stake in the company. In 2004, the company was re-christened Pricol.

The initial two-and-a-half decades were good. The company grew, set up plants across India and a subsidiary in Indonesia. Today, it has eight plants in India and one in Indonesia. But, in 2005, it began facing problems.

The troubles begin

“My father was a technocrat. He loved making products for customers. Not all of them were commercially viable," recalled Vikram. Pricol began incurring losses, its debt began to mount and labour issues flared up. Workers complained about low wages, tough working conditions, employment of temporary workers and non-recognition of new unions. Over time, the unions became increasingly militant.

The problems came to a head in September 2009 when a few employees attacked vice-president HR Roy George with iron rods at a unit in Coimbatore after 42 employees were laid off in a disciplinary action. George succumbed to his injuries. This incident was the lowest point in Pricol’s history and forced Vikram, who until then was happy in the role of a serial entrepreneur investing in hospitality, logistics, travel management and the industrial packaging space, to step in.

“When I began getting involved in the business, I realized that Pricol had a diverse range of small products. Also, the Denso partnership which had helped the company grow in the early days was now throttling it," Vikram recalled.

He jettisoned many products, sold some assets and spun the Denso partnership into a JV, which Pricol exited in March 2015. The cash these moves generated helped ease the financial position of the company significantly.

As things settled down, Vikram began to look beyond India for assets and partnerships as being part of the international supply chain was becoming critical for growth. But least did he realize then that such efforts were doomed to fail. In March 2012, Pricol formed a JV with Johnson Controls for instrument clusters, but in January 2014 Johnson Controls sold its automotive electronics unit to Visteon Corporation globally. In India, Pricol competed with Visteon. So, it bought out Johnson Controls’ stake in the JV.

In December 2014, Dana Corporation of the US wanted to exit the auto pump business in Brazil. The unit had a full-fledged technology centre as well. Pricol, which was looking to move up the value chain in its pumps business, acquired it. But within seven months, Brazil’s economy went into a tailspin, shrinking 3.5% in 2015 and 3.3% in 2016. The asset started bleeding.

These developments set the company thinking about the need to develop its own technological capabilities. In 2015-16, Pricol set up two technology centres — one for clusters and another for two-wheeler oil pumps. It began investing heavily in product and process development.

But the continuous losses at the Brazilian unit began to hurt Pricol back home. Finally, in June 2019, it sold the business to a private equity firm.

These mishaps did not stop Pricol from acquiring foreign assets. In 2018, it decided to buy PMP Auto Components, which made wipers and had operations in the Czech Republic, Mexico and India. It had a strong product line-up and Pricol improved its operations. But the Brazilian misadventure had taken a toll on the company’s balance sheet. The debt load became unbearable and the company’s credit rating fell. Banks pulled back funds and Pricol once again faced an existential crisis. The covid-19 lockdown only added to its woes. In May 2020, Pricol’s Board decided to sell the Czech unit in a bid to generate cash and de-leverage the balance sheet. The sale was completed in August.

Even as the company’s financial position improved, its investment in technology development began to pay off. It launched new products, including top-end clusters. Its order pipeline has since improved dramatically. Addressing analysts in a recent call, Vikram said that the pipeline of orders is such that Pricol will touch 3,600 crore in turnover by 2025-26.

Its market share in India rose sharply and exports have touched 10% of revenues. The company has been able to post strong results—despite the chip shortage.

The balance sheet is fully deleveraged—net debt to equity has dropped from 0.9 in 2019-20 to just 0.1 in 2022-23. “Bankers who refused to lend money to us a few years ago are now queuing to offer us funds that we don’t require," he claimed.

But just when Pricol looked like it was settling into a period of steady growth, a new threat has emerged in the form of Minda’s inorganic ambitions.

Few options

The options before Vikram to fend off a hostile takeover attempt by Minda are limited, said the merger & acquisition experts that Mint spoke to. Using the war chest, Vikram and his family can acquire shares, but the creeping acquisition limit is set at 5% per year. A preferential issue can raise the promoters’ share, but it needs a special resolution to be approved and that may become difficult considering that not all shareholders attend extraordinary general body meetings. Minda, which already holds a 15.5% stake, is certain to vote against such a resolution.

The experts see the issue turning emotional and political — “a northern company acquiring a company based in the south". A white knight or squire could be brought in, they add, but note that if there was such an entity, it would have emerged by now. A white squire is a friendly investor who buys a significant stake in the company to keep the hostile bidder out.

Some see merit in Pricol’s legal manoeuvres. The legal process initiated in the Madras High Court will also delay matters and Minda could face a little pressure holding on to its shares (the 400 crore investment is almost two times its annual profit). Going ahead with the acquisition will need the Manesar-based company to spend an additional 1,000 crore to reach the 25% stake level, and fund an open offer.

Has Minda readied such a war chest, the equivalent of a third of its annual revenue? In 2022-23, the company posted revenue of 3,492 crore and a profit of 240 crore. Minda did not respond to Mint’s attempts to ascertain its views on the matter.

Meanwhile, as Pricol gears up for a 600 crore expansion, Vikram wants to step back from routine operations. “The company is in a beautiful operating rhythm and it is time for the senior management to take over," he explained. He wants to focus on strategies pertaining to technology, people and finance as the company pivots to become an automotive technology player. His immediate challenge, however, is to ward off the threat from Minda.

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