Pennar Industries Ltd - Research Report

 

Private Client Research

Rating

Buy

Sector

Iron & Steel

Company

Pennar Industries Ltd

Reco Price
Rs. 57.80
Price Target (12 Months)
Rs. 115
Upside
99%

Date

19 September 2014
Sensex
27090.42
CNX Nifty
8121.45

Exchange

Code

NSE
PENIND
BSE
513228

Economic turnaround will lead to a big positive trigger for Pennar.

Steel Segment Major Contributor:
The Steel Products comprises of Cold Rolled Steel Strips which includes special steels, Cold Rolled Formed Sections used for building products, infrastructure and auto profiles, road safety systems and sheet piles. Currently, this is the largest segment in terms of revenues (50%) and operates four plants. The Steel Products Unit (SBU) services some of the major customers in the industry such as Lloyds Insulation Ltd, Alstom Projects India Ltd, Lanco Infratech India Ltd., FL Smidth, Thermax, Johnson Lifts, Adani Power, VECV, L&T, Ashok Leyland and many others. The total market potential is Rs 6300 crores and company enjoys a market share of 8 – 10 %. Current Capacity is 1680000 MTPA with utilization levels of 60% - 65 %. Company is expecting stable growth in these segments for next two years.

Industrial components:
The business of Industrial components for the company consists of Hydraulic Cylinders, Press Metal components for Automotive and White Goods. The products offered includes A/C compressor shells, 4 wheeler parts such as car seating system assembly, parts for two wheelers such as disc brakes, and parts for heavy vehicle filters. Major clientele for this SBU includes some leading companies like Tecumseh products, Emerson Climate Technologies, Endurance Technologies, India Nippon Electricals, IFB Automotive Pvt. Ltd, Fleetguard Filters, Wabco India, Brakes India etc. South India contributes 55% to this SBU’s business, whereas rest ~45% comes from West India. The addressable market size of Industrial Components business is estimated to be over Rs 5000 crores with market share of 2%. Hence there is a lot of scope for growth in this industry.

Precision Tubes:
Tubes division manufactures (1) Electric Resistance Welded (ERW) pipes, (2) Cold Drawn Welded (CDW) tubes, (3) Air Pre-heater (APH) tubes, and (4) Indian Boiler Regulations (IBR) tubes. This division caters to Automobile, Power, Manufacturing, Structural & General Engineering and several others. The segment has major presence in Tamil Nadu, Karnataka and Maharashtra. The key clients in this segment are Mahindra, Volvo- Eicher commercial vehicles, Hyundai, TVS, Tata Motors, Ashok Leyland, Thermax, BGR, Paharpur, Cethar, KCP, Forbes Marshall, JSW, LMW and Airco Fin. Company is continuously focusing on this segment as it constitutes high margin products, also they are market leader with 7000 tonnes/month capacity with capacity utilization of 85%. The Company expects strong 20% revenue growth led by 60% growth from CDW business (on account of brown field expansion). Export is likely to contribute improve its share in overall volume during FY15.

Lower Debt:
The good part is that the company does not have significant long term debt (D/E Ratio of 0.40x). All the debt is working capital related. Hence even if economic recovery is delayed due to whatsoever reason it will not hurt the company too much. On the contrary in case of faster economic recovery the company is well equipped to benefit from the same.

Diversified its product Portfolio:
Pennar industries Ltd is one of the leading engineering company in India, They are diversifying itself from a steel manufacturer to a value added steel and pre-engineered steel buildings manufacturer. The company is on track in terms of foraying into newer verticals and acquisition of new customers. Pennar has forayed into Hydraulic business (plant will commission from Chennai facility by mid March 2014), Warehousing solution, Solar projects and focus on launching water treatment projects, in addition to expanding tube capacity and change in product mix by increasing the contribution of railway coaches compared to wagons (with the high visibility in the demand for coach compared to wagons).

Systems and Project:
Systems and Projects unit includes three business segments 1) Solar module mounting structure 2) Railway Wagons and Coaches and 3) Storage Solutions. Company has 35% market share in Solar business. Companies main clients for solar includes L&T, Tata power solar, Navalakha, Lanco Solar, ABB, Scneider Electric solaris. In railway segment company mainly serves to Integral Coach Factory, Southern railways, Texmaco, Besco. Execution in railways has become very fast as they use specific machine for the same. Opportunity to scale up in railway segment is very high as there is only 6 months lag period for real execution. After recent MOU signed with china there is lots of scope for upgradation and improvement in facilities and services. Company will be the major beneficial from future updation of railway facilities as company is one of the leaders in this segment.

Pre-Engineered Building Systems:
Pennar Engineered Building Systems Ltd (PBSL) is a subsidiary of Pennar Industries Ltd. PEBSL provides design, manufacture, supply and installation of custom designed metal buildings, Building components and structural steels. PEBSL also provides structural EPC solutions for solar power plants. Company has market share of 7% with strong EBIDTA margins of 12% in this segment. Some of the prominent clients that the company has worked with include Ultratech Cements, L&T, HCC, P&G, Godrej, Dr Reddy’s Lab, ABB, JSW, Scheneider Electric, Reliance Infocom, ACC, Volvo etc. To achieve high growth in business; PEBSL has aggressive growth plans in international emerging markets, solar infrastructure, high rise commercial buildings and cold form building systems.

Stock Data

CMP (Rs)
57
Face value (Rs)
5
52 Week Range (Rs)
60 - 18
Market cap (Rs Crores)
689
Price To Book Value (x)
2.35
P/E Ratio (x)
24.21
EV/EBIDTA (x)
8.79

One Year indexed Stock Performance

Pennar Industries LtdSensex
Pennar Industries Ltd
Performance (%)
1m
6m
12m
Absolute
27.52
185.00
168.87
Sensex
2.53
24.08
31.21

Shareholders

(in %)
30-Jun
Promoter
40.09
FII
20.01
DII
9.89
Others
30.01
Total
100

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Industry

Despite an ongoing slowdown, India reported a GDP growth of 4.7% during 2013-14,marginally surpassing the previous year’s 4.5% but unable to meet forecasts of around 4.9%.The country’s fiscal deficit was recorded at 4.5% of GDP, than 2012-13 readings by 0.4%. The current account deficit of the country declined from H88 billion to H32.4 billion.

Manufacturing, the biggest constituent of Indian industry, shrank 0.7 per cent in 2013-14, against 1.1 per cent growth in the previous financial year. Total FDI inflows into various infrastructural sectors were 22.8% higher than in the last fiscal. (Source: IBEF) The country is optimistic of reporting higher GDP growth on account of quicker government clearance for projects long stuck in procedural delays, easier FDI norms and focus on government project implementation.

Profile

Pennar Industries Limited is one of the leading engineering organizations in India well known for its expertise in providing engineered products & services. An epitome of quality, precision, and perfection, Pennar is driven by an unrelenting desire to excel with experience spanning over three decades.

Today, with an annual production capacity of more than 350,000 MTPA, They are multi-location, multi-product company manufacturing precision engineering products such as: Cold Rolled Steel Strips, Precision Tubes, Railway wagons / Coaches, Pre-Engineered Building Systems, Sheet Metal Components, Road Safety Systems ,etc. Recently they have also added Hydraulics and Warehousing solutions as two new products in their portfolio. Their products have a significant presence in sectors like Infrastructure, Automobiles, Power, General Engineering, Building & Construction among others. Pennar is offering solutions for various types of Storage systems.

Pennar Industries has a pan-India presence with six manufacturing facilities situated across the country. These facilities include laser cutting, plasma cutting, transfer presses and CNC machines that enable it to make products of very high quality. All the plants are ISO certified. Pennar Industries endeavors to achieve ‘total customer satisfaction through total quality management’ and is committed to produce and provide steel-based products and associated services of the highest quality to customers all over the world.

Profit & Loss Statement:- (Consolidated)
(Rs Crores)
Particulars
Mar 12
Mar 13
Mar 14
Mar 15E
Mar 16E
Income:-
  • Gross Sales
  • Less: Excise Duty
  • Net Sales
  • Total Expenditure
  • EBIDTA
  • Other Income
  • Operating Profit
  • Interest
  • PBDT
  • Depreciation
  • Profit Before Tax
  • Provision for Tax
  • Profit After Tax
  • Adjusted EPS
  • 1438.44
  • 122.90
  • 1315.54
  • 1170.95
  • 144.59
  • 3.89
  • 148.48
  • 30.92
  • 117.56
  • 17.01
  • 100.55
  • 35.86
  • 64.69
  • 5.08
  • 1274.37
  • 118.10
  • 1156.27
  • 1042.80
  • 113.47
  • 4.83
  • 118.30
  • 31.26
  • 87.04
  • 18.04
  • 69.00
  • 23.37
  • 45.63
  • 3.43
  • 1197.54
  • 123.08
  • 1074.46
  • 984.67
  • 89.79
  • 3.68
  • 93.47
  • 26.47
  • 67.00
  • 18.84
  • 48.16
  • 16.85
  • 31.31
  • 2.35
  • 1550.54
  • 159.36
  • 1391.18
  • 1250.50
  • 140.68
  • -
  • 140.68
  • 27.50
  • 113.18
  • 21.85
  • 91.33
  • 32.05
  • 59.28
  • 4.46
  • 1985.00
  • 204.01
  • 1780.99
  • 1580.50
  • 200.49
  • -
  • 200.49
  • 27.50
  • 172.99
  • 23.48
  • 149.51
  • 52.50
  • 97.01
  • 7.29
Source: Stockaxis Research, Company Data

Valuation

To counter the high dependence of steel products, Pennar has launched new high margin products and has acquired new customers. Management is confident of improving EBITDA margin going forward as the contribution of the newer products increases in overall sales.

The company has immense operational leverage to take the benefit in almost all of its businesses. Capacity in all segments is underutilized since last 4 years due to lack of demand. Hence on economic revival company will be the major beneficial as they will be ready for increase in utilisation levels without any constraints.

We assign valuation of 15.77x to FY 2016E indicating the target price of Rs 115 which is a fair valuation for stock considering the gradual shift in product portfolio of the company driving the future growth.

 

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