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  • Nov 28, 2023 - This Smallcap is All set to Ride the Premiumization Theme

This Smallcap is All set to Ride the Premiumization Theme podcast

Nov 28, 2023

The rise of middle class in India and the shift from rural to urban has for long been a key theme in the India investment story.

But now, the evolving theme is the shift to luxury. If not a direct leap, Indians are crossing the bridge to luxury.

The rich are getting richer, and we are seeing a premiumization trend.

It's not just the customer aspirations. Individual companies too are vying for bigger opportunities with value addition and premiumization.

Here's more on this...

Ethos, Brand Concepts, and DLF...

Can you spot a common factor among these stocks?

Ethos is India's largest retail luxury and premium watch firm with brands like Rolex, BVLGARI, Longines, OMEGA, and Rado under its belt.

Brand Concepts is a microcap, a multi brand retailer that makes trendy laptop bags, wallets, belts, women's handbags, and other fashion and lifestyle accessories. It has exclusive brand licenses for Tommy Hilfiger and UCB.

And DLF.

While the name has been long in existence, this year it made waves for selling over 1,100 flats at Rs 7 crores in Gurgaon just three days. As per the tweets doing rounds, there were at least 4,500 interested buyers.

The rise of middle class in India and the shift from rural to urban has for long been a key theme in the India investment story.

But now, the evolving theme is the shift to luxury. If not a direct leap, Indians are crossing the bridge to luxury.

The rich are getting richer and we are seeing a premiumisation trend.

Consider this...

iPhones' (Apple) share in the domestic mobile market used to be 1% in 2019. It's expected to be 6% by the end of this year and projected to rise higher.

Four wheelers i.e., passenger cars (PV) are growing at a faster clip than two wheelers.

And while the entry level vehicles share is hitting an all-time low in the PV category, SUVs have captured 52% of India's PV market in the month of September 2023, up from 43.6% last year, and from just 28% in 2018-19.

This is a classic case of value migration unfolding in India.

Frugality is outdated. Have wealth? Flaunting it the new mantra.

Now I'm not urging you to indulge. Or to spend on high priced depreciating assets.

But there is indeed a case of getting wealthy by capitalising on the trend. And I'm keen on the watchlist for premiumisation trend.

A lot of examples above were consumers shifting to premium products and services. There are also cases where businesses are in an upgrade mode.

In simple words, they are adding value to what they are offering, and commanding a higher price for it.

It's good for their revenue and profits, and indeed positive for the stock.

One such case is Pricol Ltd.

Pricol is an auto ancillary player that offers Driver Information and Connected Vehicle Solutions (DICVS).

These are products like speedometer, sensors, telematics, e cockpits, TFT or thin flm transistors clusters, head- up displays, and instrument clusters. The segment accounts for 65% of its revenues. 8 out of 10 two-wheelers supplied by Pricol.

The remaining 35% comes from Actuation, Control and Fluid Management Systems (ACFMS). This includes products like fuel pump module, oil pumps, electrical coolant pumps etc.

However, within this segment, a significant share comes from CVs, offroad and tractor vehicles, which is at less risk from EV disruption.

The company is a market leader in its niche. It enjoys a 50% market share in domestic two wheelers, 58% in commercial vehicles and 96% in the off-road segment..

Due to an earlier non-binding agreement, Pricol has been a late entrant in PV with only 7% contribution to the revenue from this segment.

But that agreement came to an end in 2019. And the company aims to grow in that segment in PVs too.

Coming to the key theme of this video, the Premiumisation Play...

In 2-wheelers, under the DICVS segment, the average value of Pricol's products has moved up from under Rs 300 to Rs 1,200. Over the next three years, it expects the average value to further rise to Rs 2500.

It has been migrating from mechanical driver information system to electromechanical and then further to LCD and TFT (thin film transistor), and touch screen-based systems.

In AICDS also, the average value of it's products is going up.

From being just another auto component manufacturer and supplier, Pricol is evolving into automotive tech solution provider.

The company has strong tech tie ups and R&D in place to make this shift. Its R&D budget for product and process development stands at 4.5-4.8% of its revenues.

Its recent partnerships include one with Sibros, a Silicon Valley firm founded by ex-Tesla members and backed by Google and Qualcomm.

Sibros' cloud-based platform will complement Pricol's products in driver information systems and telematics to offer complete solution range to OEMs.

To further deepen its presence in the EVs, the company has entered an international licensing agreement with BMS PowerSafe, a part of Startec Group, to manufacture and sell Battery Management System (BMS) for Indian market.

Even if growth in the auto sector remains muted, the growth drivers will come from premium range of products in the existing and new launches of vehicles.

All in all, Pricol seems well poised to ride the premiumisation story, while gaining from tech integration in the auto industry. It makes the cut to be in a watchlist for the premiumisation theme.

Here's a bit about the financial profile.

The return on equity and return on capital employed stand at 18% and 20% respectively.

Revenue guidance of 3600 crores by FY '26 vs a trailing 12 months revenue of Rs 2100 crore, and expects to reach a steady state margin of 13.5% margin vs 12% now.

The cash on the balance sheet is higher than gross debt and debt to equity is at 0.1 times. The cash flow from operations have been consistently positive.

The stock is trading at a PE of 33 times.

Now here is an interesting development in Pricol that you should take note of.

Its competitor Minda Corp in February 2023 had acquired 15.7% stake in Pricol as a financial investor. While Minda had stated that it is a mere financial investment, in May 2023, it approached the Competition Commission of India (CCI) to further increase its stake in Pricol to 24.5%.

Now the management of Pricol does not intend to give away the control. They want to be in the driver's seat and keep running the business with full autonomy. The promoters have infact been buying from the open market to increase stake in the business from 36.53% in FY23 to 38.51% promoter stake in Sep 2023.

As such, in response, Pricol had filed a petition against Minda Corp in the Madras High Court, challenging the validity of the application, and seeking a restraining order. In July 2023, Madras High Court vacated the interim injunction, and the matter is now to be decided by CCI.

There are two outcomes.

FIRST: Minda Corp gets permission from CCI for acquiring 24.5% stake in Pricol. In this case, Minda needs to acquire an additional 1.5% to trigger an open offer. Once an open offer is triggered, Minda Corp can possibly acquire a majority stake from non-promoters in the open offer. In our view, even if Minda Corporation manages to raise stake, as a key shareholder, it would want the business to grow further and may possibly seek synergies with its own business.

Second, Minda Corp doesn't get the permission to acquire 24.5% stake in Pricol from CCI because they are competitors, and an acquisition may make the market distorted. In that case, business runs status quo.

Until there is a clear verdict, this event could be an overhang for the stock.

In my view, in the long term, whichever way it goes, the business has potential to grow in the long term.

Do note that this is not a recommendation, but with a promising business potential, this company deserves to be on the watchlist for premiumisation theme.

With this, I have come to the end of this video.

Let me know tour feedback through your comments and press the like button if you found it useful.

Subscribe to Equitymaster YouTube channel for more such updates.

Thank you for watching.

Goodbye.

Richa Agarwal

Richa Agarwal (Research Analyst), Managing Editor, Hidden Treasure has over 7 years of experience as an equity research analyst. She routinely scours the small cap universe for fundamentally strong companies trading at attractive prices. Having degrees in both finance as well as engineering has served her well in analysing business models across the small cap space.

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