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17th April, 2010
ANS Research Desk (Research Wing of ANS Pvt Ltd)
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Harihar Chowk, RAJKOT (Guj)
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Drop a line to: [email protected]
PENNAR INDUSTRIES LIMITED
Research By,
Bhaskar Patel
Pranav Mehta
Trushik Tekwani
Nifty 5262.60
Sensex 17591.18
Script Details
Industry Engg. Diversified
Equity 123560000
Face Value 5
Market Cap 474 Crores
52 Weeks High/Low 39.90/20.55
6-month avg. volume 208,817
Shareholding Pattern As On DEC’09 (%)
Promoters 37
Corporate Bodies 16.9
Institutions 26.5
Public 19.6
Overview
Pennar Industries Limited (PIL) is a multirolled steel strips, tubes, electroformed sections, sheet metal components, and road safety systems. PIL has transformed itself from a pure commodity player intothereby improving its overall profitability over last 5
Pennar Engineered Buildings Systems, the subsidiary company, has completed the construction of its new manufacturing facility engineered building structures.
Plants
Location
Patancheru, AP
Chennai, TN
Isnapur, AP
Tarapur, Maharashtra
Hosur, TN
37%43%
20%
PROMOTER CB & INST PUBLIC
Recommendation: BSE NSE Code: Current MP: Price Targets: Rs. 41
Overview
Pennar Industries Limited (PIL) is a multi-location, multi-product rolled steel strips, tubes, electro-static precipitators, pre-engineered building systems, cold rolled formed sections, sheet metal components, and road safety systems. PIL has transformed itself from a pure commodity player into value added & niche engineering products manufacturing company, thereby improving its overall profitability over last 5-6 years.
Pennar Engineered Buildings Systems, the subsidiary company, has completed the construction of its new manufacturing facility at Sadasivapet near Hyderabad. The company manufactures preengineered building structures.
Plants
Location Products Installed Capacity (MTPA)
Patancheru, AP Products for railways, automobiles, building sectors, ESP electrodes, road safety systems, pressed components and precision tubes
108,000
Chennai, TN Formed products, pressed components, and fabricated items for railways and automobile sectors
30,000
Isnapur, AP Specialty cold-rolled products 50,000
Tarapur, Maharashtra
Cold-rolled formed products, automotive bumpers and fenders
10,000
Hosur, TN Engineered components for auto sector 2,000
Recommendation: Buy at Current Levels– for Medium to Long Term (1
BSE Code: 513228 Bloomberg Code: PSLIN NSE Code: NA Reuters Code: PENN.BO
Current MP: INR 37.50 Price Targets: Rs. 41- Rs. 55- Rs. 75
product company manufacturing cold engineered building systems, cold rolled
formed sections, sheet metal components, and road safety systems. PIL has transformed itself from value added & niche engineering products manufacturing company,
Pennar Engineered Buildings Systems, the subsidiary company, has completed the construction of at Sadasivapet near Hyderabad. The company manufactures pre-
Installed Capacity (MTPA)
Capacity Utilization (08—09)
108,000 75 percent
30,000 50 percent
50,000 71 percent
10,000 45 percent
2,000 50 percent
for Medium to Long Term (1-2 Years Time Frame)
Bloomberg Code: PSLIN
Products and Client Portfolio
Railway
Automobile Products
Building Products
Pollution Control
Pressed Steel Components
Road Safety Systems
Fabricated Products
Precision Tubes
Cold-
Railways
24%
Revenue Segmentation
Products and Client Portfolio
Railway Products Integral Coach Factory (ICF), BEML, Texmaco and Titagarh Wagons
Automobile Products Tata Motors, Ashok Leyland and Eicher Motors
Building Products L&T, Shapoorji Pallonji and Nagarjuna Construction
Pollution Control ABB, Thermax and Bharat Heavy Electricals (BHEL)
Pressed Steel Components Emerson Electric, Tecumseh, TVS Motors and IFB
Road Safety Systems National Highways Authority of India (NHAI) and other road construction companies
Fabricated Products Thermax, ABB and Prasad Seeds
Precision Tubes Bus body builders
-rolled Steel Strips Automobile, white goods, electrical and engineering companies
Automobile
19%
Electrical
8%
Packaging
7%
White goods
6%General
engineering
13%
Railways
24%
Building
14%
ESP &
Fabricated
products
5%
Roads
4%
Revenue Segmentation
Integral Coach Factory (ICF), BEML, Texmaco and Titagarh
Tata Motors, Ashok Leyland and Eicher Motors
L&T, Shapoorji Pallonji and Nagarjuna Construction
Heavy Electricals (BHEL)
Emerson Electric, Tecumseh, TVS Motors and IFB
National Highways Authority of India (NHAI) and other road
Automobile, white goods, electrical and engineering companies
Industry Outlook
India is fast emerging as a global manufacturing hub. India has all the requisite skills in product,
process and capital engineering, thanks to its long manufacturing history and higher education
system. India's cheap, skilled manpower is attracting a number of companies, spanning diverse
industries, making India a global manufacturing powerhouse. India with its vast design skills has
attracted a lot of outsourcing technological orders.
According to a United Nations Industrial Development Organization (UNIDO) analysis based on
2007 figures mentioned in the International Yearbook of Industrial Statistics 2009, India ranks
among the top 12 producers of manufacturing value added (MVA). It holds sixth position in the
basic metals category; seventh in chemicals and chemical products; 10th in leather, leather
products, refined petroleum products and nuclear fuel; twelfth in machinery and equipment and
motor vehicles.
India's manufacturing sector is on an uptrend with the majority of sectors recording positive trends
in the first half of fiscal year 2009-10, as compared with the corresponding period in 2008-09,
according to a Confederation of Indian Industry (CII) survey. The buoyant manufacturing growth in
the first half is led by a rise in production of basic goods, intermediate goods and consumer
durables.
Company Background
Pennar's manufacturing is focused on the production of value added products such as formed
profiles for automobiles, building construction and railway sectors. A precision tube line
manufactures products for the auto, transportation and a fabrication shop is to fabricate structures
for Electro Static Precipitators (ESP), boiler and seed processing plants.
The company currently has a capacity of 1,04,000 TPA of cold rolled steel strips and 96,000 TPA of
value added products like cold-formed metal profiles and pressed components. Pennar Industries
has been making Electrostatic Precipitators (ESP) components for the past 16 years. The
components include Collecting Electrodes & Discharge Electrodes. These components are
manufactured by cold roll forming and then finished by carrying out various post forming
operations. The Company has established itself among the lowest cost converters of steel into
value-added engineered products. It is well positioned to make use of the strong growth in
railways, highways, and automobile segment. The growth in railways segment and the demand for
pre engineered building systems are the strong revenue growth drivers for the company.
Future and Current Expansion
� To cater to the expanding market for railway coaches, the company is putting up additional
Buildings and manufacturing facilities at its Chennai Plant.
� The company has commissioned an Automated Rotary Compressor Shell manufacturing
facility at its Isnapur Plant.
� The company has launched its new facility in Medak district near Hyderabad for
manufacturing world class green pre-engineered buildings. The facility has been set up by its
subsidiary PEBS Pennar. The capacity of Pennar Engineered building System will increase
from 30000 tons per annum to 60000 tons per annum by July 2010 and will be scaled up to
120000 tons per annum by mid 2011.
� The company is scouting for acquisitions in the precision engineering segment to cater to
customers in defense and nuclear energy.
Financial Highlights
1.
2.
3.
4.
PROFIT & LOSS
Particulars
Net Sales
Other Income
Total Exp.
Op. Profit
Depreciation
Interest
Tax
PAT/ Net Profit
Adjusted
Div (%)
0
200
400
600
800
1000
1200
1400
NET
SALES
EXPEND PAT EPS
P & L COMPARISON
2008 2009 2010 (E) 2011 (E) 2012 (E)
Financial Highlights
Net Sales have shown a CAGR of 9% for last 3 years
transformation mode since last couple of years, hence the Net Sales growth as been
conservative. But from FY10 we expect the company’s sales to grow in excess of 25% as the
revenues have starting coming from the Value Added Products. We expect the revenue growth
in the range to 15-20% for the following 2 years i.e. 2011 (E) and 2012 (E).
The expenditures have historically formed an average 88
the expenditure is due to High Raw Materials Costs, increasing Power & Fuel Costs, higher
General & Administrative Expenses and increase in ‘Other Manufacturing Expenses’.
the coming years we expect the profit margin to increase as the sale of Value
carries a high margin.
The Interest Costs are nominal because the company is not highly leveraged
should continue provided that the company does not take further loans on its books.
4. The company has started paying dividend in the last year
Source
PROFIT & LOSS
Particulars MAR 07 (8Mnths)
MAR08 MAR 09 MAR10 (E) MAR11 (E)
Net Sales 384.6 641.2 730.52 848.9 1018.68
Other Income 0.21 0.60 0.32 0.60 0.72
Total Exp. 296.69 490.69 572.73 745.11 894.13
Op. Profit 37.11 69.55 80.87 104.39 125.27
Depreciation 4.88 8.05 8.55 12 14.4
Interest 13.38 21.53 19.56 27.53 33.04
Tax 3.97 9.17 14.72 13.41 16.09
PAT/ Net Profit 14.87 30.81 38.09 51.44 61.72
Adjusted EPS 1.61 2.44 3.01 4.16 4.99
Div (%) 0 0 20 N.A. N.A.
years. The company has been in a
transformation mode since last couple of years, hence the Net Sales growth as been
conservative. But from FY10 we expect the company’s sales to grow in excess of 25% as the
ts. We expect the revenue growth
2 years i.e. 2011 (E) and 2012 (E).
88% of the Net Sales. Most of
increasing Power & Fuel Costs, higher
and increase in ‘Other Manufacturing Expenses’. But from
we expect the profit margin to increase as the sale of Value-Added products
is not highly leveraged. The same trend
should continue provided that the company does not take further loans on its books.
in the last year.
Sources: ACE Equity, Company Reports
(Standalone Results) (IN CRORES)
MAR11 (E) MAR12(E)
1018.68 1222.41
0.72 0.87
894.13 1072.95
125.27 150.3
14.4 17.28
33.04 39.65
16.09 19.31
61.72 74.07
4.99 5.99
N.A. N.A.
1.
2.
3.
4.
5.
Balance Sheet (Standalone Results)
Particulars
Total Funds
Total Debts
Net Block
Inventories
Cash & Bank
Net Current Assets
Contingent Liab
Adjusted
0
50
100
150
200
250
300
FUNDS DEBTS BV/SHR CONT. LIA
BALANCE SHEET
2006 2007 2008 2009
The company’s Funds have increased by 220% in last 5
decreased by 35%. Most of the Share Holder’s Funds is into General Reserves which have
increased on a continuous basis. This shows that the company is having sufficient funds
The Company was having a Bank balance of Rs. 7.35 Crores as of Mar 09.
Net Current Assets for the company have increased along with
Contingent Liabilities has always been ‘Liabilities under Guarantees’.
4. The book value has increased 3 fold over last four years.
5. The latest Enterprise Value for the company is Rs. 587
Cap for the Company is Rs. 467 Crores and its Reserves are Rs.
Sources: ACE Equity
Balance Sheet (Standalone Results) (In Crores)
Particulars JUL 06 (16mths)
MAR07 (8mths)
MAR 08 MAR 09
Total Funds 93.44 109.58 188.19 198.18
Total Debts 176.59 181.62 119.54 127.20
Net Block 111.42 114.01 127.99 134.52
Inventories 46 47.4 72.94 72.68
Cash & Bank 8.86 4.58 11.19 7.35
Net Current Assets 115.29 126.08 150.43 181.37
Contingent Liabilities 11.74 20.39 7.34 7.8
Adjusted Book Value 4.15 6.11 10.91 11.93
5 years while its Debts have
Most of the Share Holder’s Funds is into General Reserves which have
is having sufficient funds.
Crores as of Mar 09.
Inventory levels. A major part of
rantees’.
587 Crores while latest Market
Crores and its Reserves are Rs. 126 Crores.
: ACE Equity, Company Reports
(In Crores)
MAR 09
198.18
127.20
134.52
72.68
181.37
11.93
1.
2.
3.
Cash Flow
Particulars
Cash From
Cash From Investments
Cash From Financing
Net Cash Inflow/Outflow
Opening Cash & Cash Equity
Closing Cash & Cash Equiv.
-30
-20
-10
0
10
20
30
Cash Flow
from operations from investing from financing
Cash from Operating activities has been positive for past many years
Cash from Investments have increased mainly due to increased spending for purchase of Fixed
Assets and Advances given on Capital Expenditures.
Cash from financing activities was negative in 08 because it had repaid
Sources: ACE Equity, Company Reports
Cash Flow (Standalone Results)
(In Crores)
Particulars JUL 06 (16mths)
MAR07 (8mths)
MAR 08 MAR 09
Cash From Operations 18.87 8.68 25.16 4.61
Cash From Investments -16.41 -21.05 -9.12 -17.48
Cash From Financing 0.15 7.99 -11.76 7.66
Net Cash Inflow/Outflow 2.6 -4.38 4.28 -5.2
Opening Cash & Cash uity
5.55 8.16 3.77 8.05
Closing Cash & Cash Equiv. 8.16 3.77 8.05 2.85
perating activities has been positive for past many years.
increased mainly due to increased spending for purchase of Fixed
repaid Long Term Borrowings.
: ACE Equity, Company Reports
(Standalone Results)
(In Crores)
MAR 09
17.48
1. The Company has succeeded in decreasing its D/E from 34.90 in Mar 06 to 0.81 in
Mar 09. The Company has paid off a substantial amount of its debt over last 3 years and this
has brought D/E ratio down considerably.
2. The Company has succeeded in maintaining an ROCE and ROE of above 25% on a consistent
basis. However the ratios have decreased in Mar 09 due to lower profits, increased debt and
increased Shareholder’s Funds.
3. Net Sales Growth has also been good for last many years. It is to be noted that the % Growth
has decreased in recent years compared to the initial years mainly because of low base effects in
the initial years.
4. Interest Coverage Ratio is at comfortable position and indicates that the company has been able
to service its debt efficiently.
Sources: ACE Equity, Company Reports
Ratios (Standalone Results)
Particulars JUL 06 (16mths)
MAR07 (8mths)
MAR 08 MAR 09
D/E Ratio 34.90 3.27 1.42 0.81
Current Ratio 6.68 7.47 5.04 13.09
Interest Coverage Ratio 4.06 2.41 2.86 3.7
PBIDTM (%) 7.92 9.65 10.85 11.07
PBDTM (%) 10.12 8.38 9.59 9.91
ROCE (%) 30.58 13.7 23.97 26.17
ROE (%) 0 32.3 31.7 26.38
Net Sales Growth (%) 74.98 -47.17 67.76 16.73
EBIT Growth (%) 263.87 -50.79 90.86 17.66
PAT Growth (%) 153.11 91.33 40.27 -20.91
Z score
The Z-score formula for predicting bankruptcy was developed in 1968 by Edward I. Altman, a
financial economist and professor at the Leonard N. Stern School of Business at New York University.
The Z-score is a multivariate formula that measures the financial health of a company and predicts the
probability of bankruptcy within two years.
• PIL was in the GREY zone in 2006 and 2007 but up in SAFE zone in 2008 and 2009, even during
the economic downturn. Hence, the company is in a healthy financial position and has good
buffer for expansion too.
• The company has shown constant growth over the years and this is apparent in the Z Score
analysis.
PARTICULARS 2006 2007 2008 2009
T1 0.47 0.49 0.47 0.51
T2 0.17 0.06 0.10 0.07
T3 0.17 0.12 0.19 0.20
T4 0.65 1.07 3.13 1.86
T5 0.55 0.56 0.60 0.62
Z SCORE 2.30 2.27 3.81 3.11
REMARKS Grey Grey Safe Safe
Positives
Well Diversified Business Model
PIL serves a wide range of industries namely Automobile, Packaging, Electrical, General Engineering,
Railways, Building, ESP and Fabricated Products. Also, the client base is well diversified with
approximately 300 clients and top five clients only contributing to 20% of the total revenue. It also
has a high end client base with clients including Integral Coach Factory, BEML, Texmaco, Tata
Motors, Ashok Leyland, Eicher Motors, L&T, Shapoorji Pallonji, Nagarjuna Construction Company,
Emerson Electric, Tecumseh, TVS Motors, IFB, Thermax, ABB, Prasad Seeds and National
Highways Authority of India, among others.
Growth Opportunities in the Railway Sector
The Railways earmarked an outlay of Rs. 250,000 crores in the 11th Five-year Plan, which is thrice
the outlay of 10th Five-year Plan. Indian Railways plans to substitute older wagons with stainless
steel wagons having higher axle load design which gives ample opportunities to PIL, as it
manufactures railway components for its esteemed clients like Texmaco, ICF, Titagarh Wagons,
etc.
Subsidiary Expansion
Pennar has forayed into a new opportunity named Pre‐engineered Business Segment (PEBS), where
it has technical collaboration with NCI Building Systems (USA), one of the world's largest pre-
engineered building solution providers. The concept is gaining momentum in Indian market, which
we feel will positively impact the Revenues of the company. Currently PEBS has order book worth
of Rs. 60 crores for Q1FY11 & is expected to contribute around Rs.150 crores to the top‐line in
FY11. With margins higher than its traditional businesses, which we believe will be instrumental in
better margins going forward.
Share buyback by PIL
Pennar Industries Ltd. has recently conducted buyback offer and bought back 31 lakhs shares from
the existing shareholders through the stock exchange route at a price of Rs. 27 per share (face
value of Rs. 5 per share), for an amount of Rs. 8.37 crores. This increases the investor confidence
in the company.
Risks
Quality of Management
The Management of Pennar Industries Limited is the one which was in Pennar Patterson where
the management had failed to deliver the goods. But the things look different with this
company with the restructuring done by management and things seem to fall in places.
Other risks:
• Any delay in the commencement of its project on time would pose a negative effect on the operating margin.
• Lower than expected volume growth and execution delays will hamper revenues of the company and our projections.
• Lower than expected price realization is also a major concern for the company’s performance.
Recommendations
We recommend that investors should Buy at Current Levels for Long Term investment.
We give a one year target price of Rs. 55 and a two years target of Rs. 75.
INVESTMENT RATIONALE: Our recommendation is Purely Based on the Fact that the
Company is currently trading at a very cheap price considering its expansion plans. The
Company has good Financials and Cash Flows but the same is not being reflected in the stock’s
price. Patient investors may start buying at current levels to ride the new growth wave that
the company can generate in the future.
Disclaimer: The information being provided to you is compiled from sources we believe to be reliable. ANS Pvt. Ltd cannot and does not take any guarantees about the accuracy,
reliability, validity or timeliness of the information and/or data provided/made available to you in this document. The views are purely indicative. Neither ANSPL nor any of its
associates, subsidiaries, affiliates, directors, and/or officials become liable or have any kind of responsibility for any loss or damage that you may incur from any decisions taken
by you based on our recommendations. None of the information contained herein constitutes a solicitation from ANSPL to Buy and/or Sell securities and/or any Future, Options
or Other Financial Contracts. Clients may exercise their own caution and double check or verify the information contained in our recommendations.
