Pennar Industries Q1FY18 Concall Summary

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Financial Highlights

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  • The Quarter was marked with improved revenue numbers, better leveraged EBITDA and better profit resulted.
  • On Consolidated level the net revenue increased from Rs.308 Crores to Rs.430 Crores resulting an increase of almost 40% and EBITDA increased by 21% from Rs.38.2 Crores to Rs.46.3 Crores and the net profit increased 38% from 7.8 to 10.7 Crores.
  • The incongruity in the growth for Revenue and the EBITDA is due to underperformance in the PEBS vertical & Cash profit increased from Rs.16.7 Crores to Rs.21 Crores.
  • On standalone level the company witnessed a gross revenue increase from Rs.233 Crores to Rs.321.2 Crores. The standalone net revenue increased from Rs.212.9 to Rs.300 Crores,which was an increase of 41%
  • The standalone EBITDA increased from Rs.18.8 Crores to Rs.27 Crores, an increase of 43.6% and the net profit increased to Rs.6.5 Crores from Rs.4.3 Crores, approximately 52% growth
  • The Margin for the standalone entity in FY 2017 Q1 stands at 8% and the projection for FY 2018 is 9%. The moderate projections on the margin front is primarily due to Raw materials
  • Price escalations and volatility and the same is yet to be passed on to the sales figure
  • The growth was led by the Systems and Projects business that registered a 106.5% Y-o-Y from Rs 68 crores in FY2016 to Rs. 140 crores FY 2017.This higher margin unit contributed to the overall profit.
  • There is 17.6% Y-o-Y growth in the Industrial Component business from Rs. 14.6 Crores to Rs. 17.2 Crores in FY 2017
  • Tube business grew from Rs. 40 crores in Q1FY2016 to Rs. 54.9 Crores FY 2017and EBITDA marked a 40 % rise from 3.2% to 4.6 % in Q1 FY17
  • The Steel Business unit bore the brunt of Raw Material Price volatility resultantly Revenue remain flat at Rs 81.9 Crores in Q1 FY17 vis-a vis Rs. Rs.79.7 crores in FY 2016.BITDA degrew from Rs. 3.6 crores to Rs. 3.2 Crores
  • Railways business is poised on a high growth trajectory due to Order book expansion and new product line addition
  • Cash balance would be about close to Rs.54 Crores in the standalone entity, consolidatedBwould be over Rs.100 Crores

Company overview

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  • In Pennar Enviro business model that the company has adopted is one of quickly picking up references and prequalifications. The operating margins for this vertical are good.Overall performance was affected by the raw material cost volatility
  • The company has been able to grow the revenue but the EBITDA is incommensurate mainly due to sluggish performance in PEBS vertical
  • Strategic sale of the Solar subsidiary will not only decrease the debt obligation but also saves on Interest outflow and bring in substantial capital gains. The interest cost is approx. 3%-3.5%
  • Consolidated debt for the proposed Pennar renewable subsidiary stands at Rs.14 crores (Debt of Rs. 101 Cr and Equity financing by the parent company of Rs. 40 Crores). So, debt reduction on consolidated basis will be Rs. 150 crores with the sales proceeds and the capital gains of approx. Rs.15-16 crores on equity investment of Rs. 40 crores(ROCE isapprox. Rs.17 crores)
  • The Order booking in the railways is at Rs.130 Crores and the company expects to it to go up in the next few quarters substantially.
  • The company is a raw material intensive industry where the cost of ram materials hovers around 55-60% so the spread is thin and margin performance ins moderate. The company is though eyeing to get close to the peak margin of 13% through business addition having a higher ROCE.
  • Any business that do not supply 10% ROCE is futile and the company will exit the same.
  • GP(Galvanised Plane), the strip galvanising line is a new initiative by the company started 1.5 months back. So far it has been successful and the sales of Rs. 100 crores will be achieved.
  • The capex plans will be met with internal accruals. The capex plan for FY 2018 is Rs 40-4
  • 5 crores against Rs. 35 crores for FY 2017 mainly due to strategy to expand in the tubes vertical which is faster cliff for revenue generation.
  • Exports is a focus area for the company. It is already shipping the CDW tubes to US.
  • Comprinox and Salem Steel are other customers. It has also set up sales office in US to driveBthe marketing ventures.
  • Foam tube is a new product the company is launching in US. Margins are almost double in the exports activity so the capacity for revenue generation will increase organically
  • Revenue earned form US form the customers Bailey, Xylem and Firestone has increased theBoverall revenue for the company
  • Proposed JV between Pennar Industries and PEBS in US will provide avenue for potential growth as the US market is huge and demand is perennial so this foray is highly successful in revenue augmentation. Export is the thrust area for market expansion
  • Goodwill of Rs 35 crores in FY 2017 has been capitalised in the latest balance sheet for the company as sales so naturally the revenues sees upscaling by Rs 35 crores
  • The company is planning to divest the surplus land for example 55 acres prime real estate in Hyderabad. The divestment of the unused land will monetise the company and bring in substantial capital for capacity expansion

Solar business 

  • The Solar unit has built up large capacities over the years and the online foray has increased the same manifold. A strong Q2 is predicting stronger Q3 and Q4 results
  • The higher interest cost for the company is being mitigated by the sale of solar subsidiary and this will not only romp in the capital but also save on the Interest outlay which is around 8.3% at standalone level
  • Gross sales from operations form the solar power plant in Q1 FY 2014 stands at Rs. 7.33 crores
  • ROCE through the capital gains on the solar subsidiary sales (Equity Investment by Pennar Industries Limited of Rs 40 Crores) is 17 % as this fetches around Rs. 55-57 crores
  • Solar vertical is not affected by the Price volatility of Raw materials so margin will be independent of market prices
  • The order book currently in solar, which covers the next couple of quarters for Pennar Industries, is close to about Rs.150 Crores

Railways business

  • Order booking in the railways is at Rs.130 Crores and it is expected to go up in the next few quarters substantially
  • For railways also, the Raw material cost is non-issue as the it is far higher and the company uses SS, stainless steel 316L, which are lakhs per tonne so 1%, 2% increase in raw material price does not materially impact the operating margin
  • In the Integrated coach factory there is substantial margin and with Metro and variour other customers this business unit is increasing its sustainability
  • Railways business is basically categorised into two pieces, wagons and coaches.In wagons, the prospects are not very bullish on wagons but Coaches on the other hand have a very well defined plan for growth, so the majority of scope for revenues is in Coaches. The company has seen rapid revenue rise in Integrated coach factory, BML and MCF.
  • Railways is one of the fastest growing businesses.

Industrial component business 

  • The high sales in Hydraulics and increasing export revenue will augment the vertical growth
  • The thrust area for this segment is Exports as Revenue earned form US form the customers
  • Bailey, Xylem and Firestone has increased the overall revenue for the company
  • The Market is Us is large enough to accommodate new operators to the proposed JV in US i.e between Pennar Industry and PEBS is adding not only the Industrial components I.e solar module mounting, tubes, hydraulics business, even the engineering services business in PEBS.
  • Industrial component grew 17.6% from Rs.14.6 Crores to Rs.17.2 Crores. The EBITDA grew even faster from 2.2 to 2.7, which is year-on-year growth of 21.5% for this division
  • It is a good profitable business, but considering market leaders like Wipro Infra having a 1000 Crore plus in hydraulics and Dantal at 200 Crores the scope for potential growth is monumental. Pennnar Industries revenue of Rs.5-6 Crores, which is miniscule compared to rivals
  • Over a five year period hydraulic business growing to at least Rs.500 form any conservative estimation
  • The new investment in capital is not going to be a more than 10%, 15% of total capex, and company is already quoting for two of the largest dealers in the US hydraulic dealers as well

Streel products and profiles

  • The addition of Galvanising line and hosting Hot-dip galvanising revenue will give larger addressable market. This will translate into better spread to beget higher margins
  • GP will hit close to Rs.100 Crores in revenue in the financial year itself
  • The Steel Products business unit primarily owing to continue steel price volatility did not see a substantial increase in fact revenues are relatively flattish from Rs.81.9 Crores to Rs.79.7 Crores and the EBITDA too as a result of input raw material cost increases did degrow from Rs.3.6 Crores to Rs.3.2 Crores
  • On output level the segment has reached 1300-1400 tonnes per month. This is bound to increase with capacity addition in Annealing and Auto gauge control. The company is asserting anywhere around an output level of 3000 tonnes a month.
  • The GP line has been successfully operationalised and company expects a margin over 10%
  • EBITDA wise.GP will contribute to Strip galvanising phase as well as downstream sales like GP tubes

Precision tubes business

  • Tubes vertical is focussing on increasing its ERW capacity and the nee GP line creating opportunities in the market increasing the revenue
  • Tubes business vertical also had very growth from Rs.40 Crores approximately Q1 last year, we grew to Rs.54.9 Crores, growth of 37.7% and even our EBITDA grew from 3.2% to 4.6%, which is the growth of 40%.
  • On a standalone basis the value of the inventory is 24000 tonnes which translates to Rs. 100 crores Revenue wise
  • CRSS affected by the raw material cost volatility so the company has entered into quarterly rate contract to get reprieve and generate margin.
  • ERW and CDW are both the growth drivers and there is huge scope for meeting the supply gap as last year company booked contracts worth 1600 tonnes but supply only 1000 tonnes.
  • The company has invested in stainless tubes business whose primary customer will be Integrated coach factories, pharmaceutical companies and some other process industries.
  • This is a new technology product and there is scope for leverage in Exports. The company expects the substantial revenue from this FY itself.

Pennar Enviro business 

  •  In Pennar Enviro business model that the company has adopted is one of quickly picking up references and prequalifications. The operating margins for this vertical are good.
  • In the last three years it has grown from Rs.5 Crores to last year closed it at about Rs.117 Crores
  • The addressable market size for that business is very, very high in tens or thousands of Crores. So, there is no market impediment to growth.
  • The order book currently is close to Rs.200 Crores