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Pricol to invest more as demand picks up

R.Y. Narayanan

Coimbatore , July 4

PREMIER Instruments & Controls Ltd (Pricol), a major auto component manufacturer based in Coimbatore, has had a dream run during the last fiscal, recording a 24 per cent growth in sales and more than a 100 per cent growth in profit after tax.

While income from sales zoomed to Rs 375.7 crore in 2003-04 from Rs 303 crore in the previous year, the net profit more than doubled to Rs 33.6 crore (Rs 15.1 crore).

With the auto component market expected to continue to perform well in the coming years and with a view to catering to increasing product demand, the company is planning a substantial fresh investment during the current financial year and is confident of sustaining its previous year's performance.

In an interview with Business Line, Mr Vijay Mohan, Chairman and Managing Director of Pricol, explains the reasons behind the robust performance during last year and what he expects the future to be. Excerpts from the interview:

Pricol has performed exceedingly well during last year. What were the reasons?

The 2003-04 financial year was a `very good year' for Pricol; we had a sales growth of nearly 24 per cent. The main reasons were the substantial increase in production of trucks and tractors. In the previous three financial years, the tractor production was hit due to failure of monsoon and the growth in truck sales also was `below par'. Because of the revival in demand for trucks and tractors, the off-take of auto components was good.

The growth in the tractor and truck industry is expected to be good since a normal monsoon has been predicted. Therefore, for a majority of component manufacturers, a 20 per cent growth is achievable.

In addition, Pricol is looking at two other areas to further fuel growth. We have made concerted efforts in the last two years to develop new products specifically aimed at truck and bus operators such as road speed limiter, centralised lubrication system and fleet data logging systems to help them maximise the usage of their vehicles and to minimise operational costs. We expect additional revenue of around Rs 40 crore to Rs 50 crore from the sale of three new products during the current year.

In the export market, as against Rs 40 crore income during last financial year, we expect at least Rs 55 crore to Rs 60 crore this year. Do you expect the increase in credit to the farm sector to have an impact on the automobile and auto component industry?

The spin-off benefits will not be felt during the current fiscal and it may take at least a year or even two years before the benefits are seen. Therefore, the truck, tractor and to some extent the lower-end motorcycle sales would benefit from higher allocation to the agriculture sector but it would be a while before the impact is felt.

Do you expect the Indian auto component industry become a truly global outsourcing hub and be another success story like the software sector?

Thanks to liberalisation and intense competition among vehicle manufacturers, the auto component manufacturers have improved their manufacturing processes and productivity, and have cut costs. The component manufacturing industry is in a position to export quality products.

Whether it could be a success story to the level of software sector is doubtful. It takes a much longer period to make a success of manufactured items. The plan of Pricol is to increase exports from the current 11 per cent of sales to a minimum of 20 per cent by the end of 2010. It is not because of better realisation but due to the fact that as the production costs have come down, we are able to meet the target price of overseas customers.

Are you adopting outsourcing as a strategy?

It is not only in Pricol, but in other vehicle manufacturing units too, concerted efforts have been made to reduce in-house manufacturing, not the final assembly of products, but captive component manufacturing, and outsource more to tier II or tier III suppliers. More investment is made in final product manufacture, in testing, in software and hardware to design products and bring them out in a much shorter period.

Will you be able to sustain your last year's performance in the current fiscal?

Monsoon is expected to be good this year and sales of trucks and tractors are also expected to grow. Because of cheaper financing cost, car market also would do well and with higher rural income, the lower-end motorcycle sales would be strong. Therefore, in the domestic market, Pricol is expecting a growth of at least 15-20 per cent.

Because of the three new products for truck and bus operators, we expect an additional Rs 50 crore income and a higher export earning. So, we expect a minimum 20 per cent growth this year.

To meet the increased demand, are you making any fresh investment in plant and machinery?

Not in our component requirement that we are outsourcing. But to take care of our final product production, in our testing equipment, in our design hardware and software, we are investing this year. Apart from investment in Coimbatore, we are putting up a new plant in Pune to take care of our large customers such as Bajaj Auto, Tata Motors and M&M there. Construction work has already started and production could commence from this unit by the end of this financial year. This would involve an investment of about Rs 10 crore.

We are now operating from leased premises in Industrial Model Township (IMT), Manesar, near Delhi. As we want to expand, we have decided to put our own factory there at an investment of about Rs 12 crore and production would commence by the end of March 2005 that would meet the needs of Maruti and Hero Honda. Once the new units are in operation, the freed capacity of Coimbatore plants could be used to meet the needs of customers in the South, apart from exports and the new products for trucks and buses.

But even at Coimbatore, we have to expand. The total capex this year is between Rs 45 crore and Rs 48 crore as against Rs 30 crore in 2003-04 and Rs 24 crore in 2002-03. The factories are running to full capacity and unless we expand, we would not be able to cater to the growth prospects.

You have made provision for Rs 23 crore for overdue advances and Rs 2.5 crore towards diminution in value of investments in your audited results for 2003-04. Why?

Pricol is one of the main promoters of Terra Agro Technologies Ltd, which ceased to be in operation two years ago. We have been trying to sell Terra but have not been able to find a suitable buyer. Last year, a venture capitalist firm from the UK showed interest but the sale did not materialise.

We have totally written off the loans advanced to Terra and write-backs given to banks etc., from Pricol's books. This year, we are actively trying to locate a buyer for it. Sale proceeds, if we succeed in finalising a deal, would come as income into Pricol's books. All the money locked up in Terra was shown as loans in our books but this year we have accounted for it and reduced it from our net worth.

Is DENSO Corporation of Japan hiking its equity stake in Pricol from the present 12.5 per cent to 25 per cent as expected earlier?

Originally, DENSO had given a loan of 400 million yen to Pricol that was to mature in December 2002. At that time, the loan was to be converted into shares and any additional money payable to effect the conversion was also to be paid. The understanding was that the acquisition price would be a minimum Rs 200 per share (Rs 10 + Rs 190 as premium) or market price, if higher. But in July that year, SEBI issued a guideline that whenever a preferential issue was made to a party because of which its equity holding went beyond 15 per cent, an open offer to acquire up to 20 per cent should be made.

It did not suit DENSO's purpose since its main idea was to see that money flowed into Pricol. Expectation of a re-think on the part of SEBI has not come true so far. In fact, DENSO extended the loan up to December 2004 hoping for a change in rules. If that materialises, then DENSO may take a decision on increasing its stake in December this year.

Another reason was at that time, the price of Pricol shares had fallen to Rs 120 level whereas the shareholders had given a nod for a minimum acquisition price of Rs 200 a share.

Since Pricol's share price is now ruling above Rs 400 (cum bonus in the ratio of 1:2), are you willing to reduce the acquisition price?

No, I don't think the shareholders would accept any reduction in offer price to DENSO when the market price is higher. It would be up to DENSO to take a decision. If the loan matures, we are in a position to return the money. At today's exchange rate, it would come to about Rs 17 crore. Our cash flow position is good enough to return the money without any hitch.

If DENSO does not increase its stake, will it affect the relationship?

No. Our association has been good for the past seven years ever since they picked up a stake in Pricol's equity and I do not see any reason for it to deteriorate.

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