Rationale

The rating reaffirmation factorsin the extensive experience of Pricol Engineering Industries Private Limited’s (PEIPL) promoters in the auto sector and the company’s established track record, which has supported addition of new customers and products lines and maintaining a diversified business profile with reputed clientele. Consequently, its operating income increased to Rs. 147.4 crore in FY2024 (YoY growth of 17%), supported by a pick-up in domestic demand in the auto sector and addition of new division in its product portfolio segment. ICRA expects PEIPL’s growth momentum to continue in FY2025, led by the healthy order book of ~Rs. 166.5 crore as on May 01, 2024, driven by an increase in orders for alternators and switches. In FY2024, the operating margin moderated to around 8%. PEIPL is expected to maintain range-bound margins in the foreseeable future. The company’s debt protection metrics and liquidity moderated in FY2024. However, the same is likely to recover in FY2025 and in the future years, aided by stable cash accruals and reducing debt. Notwithstanding the above, the ratings remain constrained by PEIPL’s small scale of operations and low net worth, exposing it to increased vulnerability during periods of sustained downturn. Further, its profitability remains volatile and vulnerable to raw material prices and competition in the business, which would impact its cash accruals and debt coverage metrics. The company’s tender-based orders in the defence and railway sectors also lead to low revenue visibility and thin profit margin. While PEIPL’s customer diversification has improved from the previous levels, it remains moderately high with the top five customers contributing 55% to the revenue in FY2024. Therefore, it remains exposed to concentration risks. ICRA notes that the company made an investment of around Rs. 41.0 crore in FY2024 towards an acquisition of 1.42% stake in Pricol Limited (flagship company of the promoter Group), which was funded partially by internal accruals and partly by availing additional working capital facilities. Consequently, the investment affected the company’s liquidity and debt protection metrics in FY2024. Nevertheless, the stable business operations with steady cash accruals supported it in absorbing the impact. Going forward, with improving business, stable cash accruals and reducing debt, the company’s debt protection metrics is likely to improve. However, any further large incremental investment or capex funded by fresh debt would adversely impact its credit profile and would be a key monitorable. The Stable outlook on long term rating of PEIPL’s reflect ICRA’s opinion that the company is likely to sustain it operating metrics though with some volatility in its profitability. Further, the outlook underlines ICRA’s expectations that the company’s working capital and short-term fund requirements would be funded in a manner that is able to durably maintain its debt protection metrics commensurate with the existing rating level, along with adequate liquidity.