Q2FY19 Result Update

Pennar Industries Limited

Independent Equity Research

December - 2018

Equentis Wealth Advisory Services (P) Ltd

Registered Office:
712, Raheja Chambers, Nariman Point,
Mumbai – 400021 India

Tel: +91 22 61013800

Email: info@researchandranking.com
 PENNAR INDUSTRIES LIMITED (PENNAR)
Synopsis
Recommendation BUY
CMP (BSE) Rs.36
Upside (15-18mths) Rs.97 – 111 (174% – 213%)
Upside (5yrs) Rs. 125– 145 (3.5 – 4.1xs)
Outlook Cautious as PEBS performance is dragging consolidated business
Nature of Result Un-Audited financial results for quarter ended 30th Sep 2018

Q2FY19 Performance Snapshot –Standalone

Particulars (Rs.mn.) Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 H1FY18 H1FY19 Comments
Net Sales 2,994 2,855 2,994 3,431 3,402 3,807 5,849 7,210 Standalone entity continued to perform well. Sales grew by 33% YoY and 23% YoY in
quarter and half year ended Sep 2018 respectively.
YoY (%) 41.4% 14.3% 22.1% 22.2% 13.6% 33.4% 26.7% 23.3%

QoQ (%) 6.6% -4.7% 4.9% 14.6% -0.8% 11.9% Going ahead, management expects continuation of strong double digit growth
in revenues.
Raw Material 2,105 1,998 2,042 2,160 2,153 2,551 4,103 4,704
as % of net sales 70.3% 70.0% 68.2% 63.0% 63.3% 67.0% 70.1% 65.2%
YoY (%) 46.6% 14.6% 21.7% 11.8% 2.2% 27.7% 29.1% 14.6% Gross margin for the quarter stood at 33% (300bps higher YoY) and for half year at
QoQ (%) 9.0% -5.1% 2.2% 5.8% -0.3% 18.5% 35% (~500bps higher YoY). This was mainly led by lower growth in RM cost in
respective periods.
GROSS PROFIT 889 858 952 1,271 1,250 1,256 1,747 2,506
Gross Profit Margin (%) 29.7% 30.0% 31.8% 37.0% 36.7% 33.0% 29.9% 34.8% However sequentially margin have contracted by ~400bps.
YoY (%) 30.4% 13.5% 22.9% 45.1% 40.6% 46.5% 21.5% 43.5%
QoQ (%) 1.5% -3.6% 11.0% 33.6% -1.7% 0.5%
Employee Costs 169 167 177 198 234 229 336 464
as % of net sales 5.6% 5.8% 5.9% 5.8% 6.9% 6.0% 5.7% 6.4%
Employee cost continued to remain in its historical range of 5.5% - 7% of Net sales.
YoY (%) 15.9% 12.1% 13.3% 17.3% 38.7% 37.7% 14.0% 38.2%
QoQ (%) 0.1% -1.5% 6.3% 11.9% 18.4% -2.2%
Operating & Manufacturing expenses 456 433 525 701 677 714 889 1,391
as % of net sales 15.2% 15.2% 17.5% 20.4% 19.9% 18.8% 15.2% 19.3%
YoY (%) 27.1% 9.6% 24.2% 67.4% 48.5% 65.1% 17.9% 56.6%
QoQ (%) 8.9% -5.1% 21.4% 33.5% -3.4% 5.4%
 Particulars (Rs.mn.) Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 H1FY18 H1FY19 Comments
Total Operating Expenses 2,730 2,597 2,744 3,059 3,064 3,495 5,327 6,559
as % of net sales 91.2% 90.9% 91.7% 89.1% 90.1% 91.8% 91.1% 91.0%
YoY (%) 40.7% 13.6% 21.6% 21.4% 12.2% 34.6% 26.0% 23.1%
QoQ (%) 8.4% -4.9% 5.7% 11.4% 0.2% 14.0%
Core EBITDA 264 258 250 372 338 313 523 651
EBITDA margin for the quarter contracted by 90bps YoY, led by higher growth in
as % of net sales 8.8% 9.1% 8.3% 10.9% 9.9% 8.2% 8.9% 9.0% Operating expenses.
YoY (%) 49.0% 21.9% 27.7% 29.0% 28.0% 21.1% 34.3% 24.6%
For half year, EBITDA margin remained flat at 9%.
QoQ (%) -8.5% -2.2% -3.4% 49.2% -9.2% -7.4%
Less: depreciation & amortisation 29 35 40 63 48 50 64 98
as % of net sales 1.0% 1.2% 1.3% 1.8% 1.4% 1.3% 1.1% 1.4%
YoY (%) -1.4% -16.7% 12.9% 507.7% 63.4% 43.4% -10.4% 52.5%
QoQ (%) 180.8% 19.2% 15.8% 56.8% -24.5% 4.6%
EBIT 235 224 209 309 290 263 459 553
as % of net sales 7.8% 7.8% 7.0% 9.0% 8.5% 6.9% 7.8% 7.7%
YoY (%) 59.1% 31.5% 31.1% 11.1% 23.6% 17.6% 44.3% 20.7%
QoQ (%) -15.6% -4.8% -6.4% 47.7% -6.1% -9.4%
Less: Interest & finance charges 89 101 100 143 119 141 191 260
Interest as % of EBIT 38.1% 45.3% 47.8% 46.4% 40.9% 53.7% 41.6% 47.0%
Add: Non-op income 6 11 15 28 19 39 17 58
Extra-Ordinary Items - - - 213 - - - -
PBT 151 133 124 407 191 160 285 351
as % of net sales 5.0% 4.7% 4.1% 11.9% 5.6% 4.2% 4.9% 4.9%
YoY (%) 102.7% 21.2% 45.8% 120.2% 26.1% 20.1% 54.1% 23.3%
QoQ (%) -18.2% -11.8% -7.1% 228.4% -53.2% -15.9%
Less: taxes 86 56 38 92 79 48 142 127
Tax/PBT 56.8% 42.1% 30.8% 22.7% 41.2% 30.2% 49.9% 36.2%
Reported PAT 65 77 86 315 112 112 143 224
as % of net sales 2.2% 2.7% 2.9% 9.2% 3.3% 2.9% 2.4% 3.1% Significant drop in tax rate, led 45% YoY PAT growth in current quarter.
YoY (%) 51.9% 40.9% 72.4% 128.2% 71.7% 44.8% 45.7% 57.1% For half year, PAT rose by 57% YoY with ~70bps expansion in margin.
QoQ (%) -52.6% 18.2% 11.0% 267.2% -64.4% -0.3%
 Particulars (Rs.mn.) Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 H1FY18 H1FY19 Comments
Normalised PAT 65 77 86 150 112 112 143 224
as % of net sales 2.2% 2.7% 2.9% 4.4% 3.3% 2.9% 2.4% 3.1%
YoY (%) 51.9% 40.9% 72.4% 8.8% 71.7% 44.8% 45.7% 57.1%
QoQ (%) -52.6% 18.2% 11.0% 75.1% -25.3% -0.3%
No. of shares (Mn.) 120 120 120 120 120 120 120 120
Reported EPS (Rs.) at current share
0.54 0.64 0.71 2.62 0.93 0.93 1.18 1.86
count
Normalised EPS (Rs.) at current
0.54 0.64 0.71 1.25 0.93 0.93 1.18 1.86
share count
Cash EPS (Rs.) at current share
0.79 0.93 1.05 1.77 1.33 1.34 1.72 2.67
count

Other Highlights from Press release

1. During the previous year, the Company divested its entire shareholding in its subsidiary, Pennar Renewables Private Limited (PRPL). Upon divestment, the resultant gain of Rs.
1,295lakhs in the consolidated financial results and gain of Rs. 2,129lakhs in the standalone financial results are disclosed as ‘exceptional item’.

2. During the previous year, the Company incorporated a subsidiary Pennar Global Inc, United State of America, which commenced Commercial operations during the quarter
ended March 31, 2018. Hence, the results for the quarter and half year ended September 30, 2018 and quarter and half year ended September 30, 2017 are not comparable.

3. The Board of Directors of the Parent Company have approved a Scheme of Arrangement ("the Scheme") for amalgamation of its subsidiaries, Pennar Engineering Building
Systems Limited and Pennar Enviro Limited with the Company, effective April 01, 2018, subject to necessary statutory and regulatory approvals. The Company has received
clearance from the stock exchanges. Subsequent to the Half year ended September 30, 2018, National Company Law Tribunal (NCLT) has passed an order to hold meeting of the
equity shareholders on December 14,2018 and the meeting of the unsecured creditors on December 15, 2018 of the company, PEBS & PEL for the purpose of considering and if,
thought fit, approving with or without modification(s) of the proposed scheme of amalgamation.
 Q2FY19 Performance Snapshot – PEBS

Particulars (Rs. Mn.) Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 H1FY18 H1FY19 Comments
Net Sales 1,196 1,325 1,159 1,423 1,135 1,342 2,521 2,477 Net Sales for the quarter rose marginally by 1.3% YoY, whereas for half year it de grew by 1.7%
YoY. While company has reported flat performance in both the periods, management is
YoY (%) 27.4% 10.4% -16.2% -4.6% -5.1% 1.3% 17.8% -1.7%
confident of achieving strong revenue growth in coming period which would be supported
QoQ (%) -19.8% 10.8% -12.5% 22.8% -20.2% 18.2% by large order book. For Q3FY19, management has guided strong double digit growth in
topline.
Raw Material 585 736 602 948 587 933 1,322 1,520
as % of net sales 48.9% 55.6% 51.9% 66.6% 51.7% 69.5% 52.4% 61.3%
YoY (%) 51.9% 32.9% -19.1% 39.4% 0.3% 26.7% 40.7% 15.0%
RM cost for the quarter rose by 27% YoY, primarily led by higher steel prices. Effectively Gross
QoQ (%) -13.9% 25.9% -18.3% 57.5% -38.1% 59.0% margin contracted by ~1500bps YoY over same period.
GROSS PROFIT 611 589 557 475 549 409 1,200 958
For half year, Gross margin compressed by ~900bps YoY.
Gross Profit Margin (%) 51.1% 44.4% 48.1% 33.4% 48.3% 30.5% 47.6% 38.7%
YoY (%) 10.3% -9.0% -12.9% -41.4% -10.3% -30.5% -0.1% -20.2%
QoQ (%) -24.7% -3.7% -5.3% -14.7% 15.4% -25.4%
Employee Costs 104 100 107 108 124 110 204 234
as % of net sales 8.7% 7.5% 9.2% 7.6% 10.9% 8.2% 8.1% 9.4%
YoY (%) 19.0% 10.6% 19.1% -1.5% 18.8% 10.3% 14.7% 14.6%
QoQ (%) -4.7% -3.9% 7.2% 0.4% 14.9% -10.8%
Operating & Manufacturing
411 400 379 288 382 301 811 682
expenses
as % of net sales 34.4% 30.2% 32.7% 20.2% 33.6% 22.4% 32.2% 27.5%
YoY (%) 16.1% -5.5% -9.5% -57.5% -7.1% -24.8% 4.3% -15.9%
QoQ (%) -39.3% -2.7% -5.3% -24.0% 32.7% -21.2%
Total Operating Expenses 1,100 1,236 1,088 1,343 1,092 1,344 2,336 2,436
as % of net sales 92.0% 93.3% 93.8% 94.4% 96.2% 100.1% 92.7% 98.3%
YoY (%) 33.1% 15.8% -13.2% -8.4% -0.7% 8.7% 23.4% 4.3%
QoQ (%) -24.9% 12.4% -12.0% 23.5% -18.7% 23.0%
Core EBITDA 96 89 72 80 43 (2) 185 42 Due to higher operating expenses against flat sales growth, company reported loss at operating
level. However, management has guided at least 200bps margin expansion in next 2 quarters.
as % of net sales 8.0% 6.7% 6.2% 5.6% 3.8% -0.1% 7.3% 1.7%
YoY (%) -14.5% -33.4% -45.5% 213.3% -55.0% -102.0% -24.7% -77.6% In half year, company reported EBITDA degrowth of 78% YoY with ~550bps contraction in margin.

Going forward, management expects contribution margin to be in the current

range of 14-15% or may be 1-2% higher. However, considering strong order
QoQ (%) 275.8% -7.6% -19.5% 12.0% -46.0% -104.2% book, fixed cost is likely to moderate from current level of 10% to 7-8%. This
difference is expected to flow down to EBITDA. Management expects this
change to come immediately as revenue growth is expected to come
immediately considering order book and its execution timeline.
 Particulars (Rs. Mn.) Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 H1FY18 H1FY19 Comments
Less: depreciation &
15 15 15 15 13 15 30 28
amortisation
as % of net sales 1.2% 1.1% 1.3% 1.0% 1.1% 1.1% 1.2% 1.1%
YoY (%) 8.1% 12.9% 15.9% 1.4% -12.3% 2.7% 10.5% -4.7%
QoQ (%) -0.7% 2.1% 2.7% -2.6% -14.1% 19.5%
EBIT 82 74 56 65 31 (17) 156 13
as % of net sales 6.8% 5.6% 4.9% 4.6% 2.7% -1.3% 6.2% 0.5%
YoY (%) -17.6% -38.4% -52.4% 499.1% -62.6% -123.1% -29.0% -91.4%
QoQ (%) 648.6% -9.3% -23.9% 16.0% -53.3% -156.1%
Less: Interest & finance charges 43 44 34 36 42 36 87 77
Interest as % of EBIT 52.3% 59.2% 60.6% 55.1% 136.7% -208.8% 55.6% 577.6%
Other income mainly comprises of interest on Mutual Fund investments & BS loans and foreign
Add: Non-op income 10 25 14 69 31 68 36 98
exchange gain.
PBT 49 55 37 98 20 15 105 34
as % of net sales 4.1% 4.2% 3.2% 6.9% 1.7% 1.1% 4.2% 1.4%
YoY (%) -29.1% -40.0% -55.4% NMF -60.0% -73.5% -35.3% -67.1%
QoQ (%) -476.3% 12.4% -33.9% 168.6% -80.0% -25.4%
Less: taxes 15 19 16 32 7 3 34 10
Tax/PBT 29.6% 34.3% 42.6% 33.0% 33.5% 22.4% 32.1% 28.8%
Company managed to report profit as against operating loss in current quarter due to higher Other
Reported PAT 35 36 21 66 13 11 71 25 Income.
For Q3FY19, management has guided strong double digit growth in profitability.
as % of net sales 2.9% 2.7% 1.8% 4.6% 1.2% 0.8% 2.8% 1.0%
YoY (%) -19.7% -39.6% -60.2% 342.3% -62.2% -68.7% -31.3% -65.5%
QoQ (%) 132.9% 4.9% -42.3% 213.8% -80.1% -13.0%
No. of shares (Mn.) 34 34 34 34 34 34 34 34
Reported EPS (Rs.)
1.01 1.06 0.61 1.92 0.38 0.33 2.07 0.71
at current share count
Cash EPS (Rs.)
1.44 1.50 1.06 2.36 0.76 0.78 2.94 1.53
at current share count

Key comments by the management in Q2FY19 conference call -

Overall the systemic changes like focusing on increasing profitability, revenue growth, prioritizing contribution margin and cash flow generation is likely to support results.
Last 4-6 quarters company was struggling with revenues, however management is now quite bullish on revenue and profitability growth
Currently its order book is at record high of Rs.422cr, which is likely to have an execution cycle 6-8months. Effectively management expects ~Rs. 200cr revenue in next two
quarters each.
 Other Highlights from Press release
1. The Company vide its board meeting dated 10 November 2017 has approved the proposed scheme of amalgamation between the Company, Pennar Enviro Limited (related
company) with Pennar Industries Limited (PIL) effective from 01 April 2018, as per terms and conditions mentioned in the draft Scheme. Approval letters were received from
BSE Limited (‘BSE’) and National Stock Exchange of India Limited ('NSE') on the Scheme of Amalgamation and no objection letter has been received from secured creditors
i.e., Bankers. Subsequent to quarter end, National Company Law Tribunal (NCLT) has passed an order to hold meeting of the equity shareholders on December 14,2018 and the
meeting of the unsecured creditors on December 15, 2018 for the purpose of considering and if, thought fit, approving with or without modification(s) of the proposed scheme of
amalgamation.

2. The details of the funds raised through Initial Public Offer (IPO) during the financial year 2015-2016 and utilization of said funds as at 30 September 2018 are as follows:

Objects of the issue as per Utilization up to 30 Utilized amount up to 30

Particulars
prospectus September 2018 September 2018
A) Repayment / Prepayment, in full or part, of certain working capital facilities
3,400 3,400 -
availed by the company
B) Financing the procurement of infrastructure (including software and hardware)
800 274 526
for the expansion of design and engineering services
C) General corporate purposes 1,079 1,079 -
D) Share issue expenses 521 517 4
Total 5,800 5,270 530

As on 30 September 2018, unutilized funds have been temporarily invested in short term liquid scheme of mutual funds and in bank balances.
 Q2FY19 Performance Snapshot – Pennar Consolidated

Particulars (Rs. Mn.) Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 H1FY18 H1FY19
Net Sales 4,276 4,225 4,149 5,031 4,622 5,182 8,501 9,804
YoY (%) 39.4% 12.1% 5.4% 8.4% 8.1% 22.6% 24.3% 15.3%
QoQ (%) -7.8% -1.2% -1.8% 21.3% -8.1% 12.1%
Raw Material 2,655 2,675 2,493 2,953 2,746 3,445 5,330 6,191
as % of net sales 62.1% 63.3% 60.1% 58.7% 59.4% 66.5% 62.7% 63.2%
YoY (%) 54.0% 18.2% 4.3% 3.0% 3.4% 28.8% 33.7% 16.2%
QoQ (%) -7.4% 0.7% -6.8% 18.4% -7.0% 25.5%
GROSS PROFIT 1,621 1,550 1,656 2,078 1,876 1,736 3,171 3,613
Gross Profit Margin (%) 37.9% 36.7% 39.9% 41.3% 40.6% 33.5% 37.3% 36.8%
YoY (%) 20.7% 2.9% 7.1% 17.2% 15.8% 12.0% 11.3% 13.9%
QoQ (%) -8.6% -4.4% 6.8% 25.5% -9.7% -7.5%
Employee Costs 295 287 307 338 385 370 583 755
as % of net sales 6.9% 6.8% 7.4% 6.7% 8.3% 7.1% 6.9% 7.7%
YoY (%) 16.4% 10.1% 14.8% 18.8% 30.5% 28.7% 13.2% 29.6%
QoQ (%) 3.7% -2.8% 6.8% 10.3% 13.9% -4.1%
Operating & Manufacturing expenses 884 853 914 967 1,078 1,044 1,737 2,122
as % of net sales 20.7% 20.2% 22.0% 19.2% 23.3% 20.2% 20.4% 21.6%
YoY (%) 21.5% 0.7% 6.4% -14.2% 21.9% 22.4% 10.3% 22.1%
QoQ (%) -21.6% -3.5% 7.1% 5.8% 11.5% -3.1%
Total Operating Expenses 3,834 3,815 3,714 4,258 4,209 4,859 7,650 9,069
as % of net sales 89.7% 90.3% 89.5% 84.6% 91.1% 93.8% 90.0% 92.5%
YoY (%) 41.7% 13.2% 5.6% -0.5% 9.8% 27.4% 25.9% 18.5%
QoQ (%) -10.4% -0.5% -2.7% 14.7% -1.2% 15.4%
Core EBITDA 441 410 435 773 413 322 851 736
as % of net sales 10.3% 9.7% 10.5% 15.4% 8.9% 6.2% 10.0% 7.5%
YoY (%) 22.0% 2.9% 3.5% 114.1% -6.4% -21.3% 12.0% -13.6%
QoQ (%) 22.3% -7.2% 6.3% 77.4% -46.5% -22.0%
Less: depreciation & amortisation 63 72 77 81 63 68 135 132
as % of net sales 1.5% 1.7% 1.9% 1.6% 1.4% 1.3% 1.6% 1.3%
YoY (%) -6.5% -6.5% 8.6% 109.1% 0.3% -5.3% -6.5% -2.7%
QoQ (%) 64.2% 14.1% 6.5% 4.8% -21.2% 7.7%
EBIT 378 338 359 692 350 254 716 604
as % of net sales 8.8% 8.0% 8.6% 13.8% 7.6% 4.9% 8.4% 6.2%
YoY (%) 28.5% 5.2% 2.5% 114.7% -7.5% -24.7% 16.4% -15.6%
QoQ (%) 17.3% -10.7% 6.2% 93.0% -49.5% -27.4%
Less: Interest & finance charges 156 174 147 197 159 173 330 332
Interest as % of EBIT 41.3% 51.5% 41.0% 28.4% 45.4% 68.0% 46.1% 54.9%
Add: Non-op income 21 39 20 80 43 98 60 140
Extra-Ordinary Items - - - 130 - - - -
PBT 243 202 231 704 234 179 446 413
as % of net sales 5.7% 4.8% 5.6% 14.0% 5.1% 3.5% 5.2% 4.2%
YoY (%) 38.2% -8.8% 9.9% 401.2% -4.0% -11.5% 12.0% -7.4%
QoQ (%) 73.2% -16.9% 14.2% 204.8% -66.8% -23.4%
Less: taxes 113 77 57 229 90 52 190 142
Tax/PBT 46.4% 38.3% 24.5% 32.5% 38.4% 29.3% 42.7% 34.4%
PAT before MI 130 125 174 475 144 127 255 270
as % of net sales 3.0% 3.0% 4.2% 9.4% 3.1% 2.4% 3.0% 2.8%
YoY (%) 31.2% 0.3% 24.6% 254.9% 10.4% 1.4% 14.0% 6.0%
 Particulars (Rs. Mn.) Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 H1FY18 H1FY19
QoQ (%) -2.6% -4.2% 39.6% 172.5% -69.7% -12.0%
Minority Interest (24) (20) (42) (116) (13) (4) (44) (17)
as % of sales 0.5% 0.5% 1.0% 2.3% 0.3% 0.1% 0.5% 0.2%
Reported PAT 107 105 133 359 131 122 212 254
as % of net sales 2.5% 2.5% 3.2% 7.1% 2.8% 2.4% 2.5% 2.6%
YoY (%) 37.8% 12.4% 29.4% 395.9% 22.8% 16.7% 23.9% 19.8%
QoQ (%) 47.7% -2.0% 26.4% 170.9% -63.4% -6.9%
Normalised PAT 107 105 133 272 131 122 212 254
as % of net sales 2.5% 2.5% 3.2% 5.4% 2.8% 2.4% 2.5% 2.6%
YoY (%) 37.8% 12.4% 29.4% 275.2% 22.8% 16.7% 23.9% 19.8%
QoQ (%) 47.7% -2.0% 26.4% 105.0% -51.7% -6.9%
No. of shares (Mn.) 120 120 120 120 120 120 120 120
Reported EPS(Rs.) at current share count 0.89 0.87 1.10 2.98 1.09 1.02 1.76 2.11
Normalised EPS(Rs.) at current share count 0.89 0.87 1.10 2.26 1.09 1.02 1.76 2.11
Cash EPS (Rs.) at current share count 1.41 1.47 1.74 3.65 1.62 1.58 2.88 3.20

Key comments by the managements on Consolidated entity – Q2FY19 conference call

Company has healthy order book for Railways, Solar and PEB business
Solar business has several headwinds; rest other segments are doing quite well and expected to grow
Solar is expected to deliver flat growth this year. Management want to decrease its contribution to the rest of
the company.
Company has put several steps in place to create new revenue streams, to diversify revenue streams to
compensate for lack of revenue growth in Solar.
Over next 3 years, all the businesses should have ~20% ROCE
Full year margin guidance still continues to be in the range of 10%-11%
 Q2FY19 Balance Sheet

Consolidated Standalone PEBS

Particulars (Rs. Mn.) Comments
Mar-18 Sep-18 Mar-18 Sep-18 Mar-18 Sep-18
Net worth 5,128 5,386 4,060 4,284 1,872 1,897
Long Term Debt 1,188 1,125 933 1,020 76 101 Gross debt stands at Rs.94cr for both
standalone as well as consolidated entity.
Short Term Debt 2,356 3,451 1,522 2,681 757 849
Total debt 3,543 4,575 2,455 3,701 833 950 Short term borrowing is mainly from cash
credit which stands at Rs.268cr for
Gearing (D/E) 0.69 0.85 0.60 0.86 0.44 0.50 standalone entity and Rs.345cr for
consolidated entity.
Deferred Tax Liabilities 238 260 297 321 (65) (65)
Minority Interest 912 929 - - - -
Total Liabilities 9,821 11,150 6,812 8,306 2,640 2,782
Net Block 3,691 4,468 2,971 3,290 682 1,128
At standalone entity company has cash of
Rs. 151mn as on Sep 18 as against Rs
Cash 499 256 377 151 87 73
377mn as on Mar 18. This sharp decline is
mainly due to higher Wcap requirement.
Liquid Investments 693 638 229 209 464 429
Total Cash & Liquid Investments 1,193 894 606 360 551 501
Other Investments 0 0 246 246 8 8
Inventories 4,326 4,912 2,151 2,753 2,074 1,994
as days of sales 89 91 64 70 148 147
Debtors 4,046 4,785 3,130 3,216 925 714
as days of sales 84 89 93 81 66 53
Loans and Advances - 223 - 6 307 488
as % of sales 0.0% 1.1% 0.0% 0.0% 6.0% 9.8%
Other Current Assets 1,859 1,604 1,030 1,463 539 430 Other current assets have grown
substantially, mainly due to input credit
as days of sales 38 30 31 37 39 32 provisioning led by GST
Total Current Assets 10,231 11,525 6,311 7,439 3,845 3,626
Current Liabilities 5,194 5,713 3,312 3,017 2,392 2,468
as days of sales 107 106 98 76 171 182
Provisions 100 25 10 11 55 14
as days of sales 2 0 0 0 4 1
Total Current Liabilities and Provisions 5,294 5,737 3,322 3,028 2,447 2,481
Net Working Capital / Net Sales 27.9% 29.5% 24.3% 30.6% 27.4% 23.1%
Total Assets 9,821 11,150 6,812 8,306 2,640 2,782
RoCE (%) 18.0% 10.8% 10.6% 13.3% 10.5% 1.0%
 Outlook
Pennar reported decent performance in its standalone business with operating margin of 8% in current quarter. However,
PEBS performance continued to remain subdued, impacting the consolidated EBITDA margin. PEBS delivered flat
growth in Topline with operating loss of Rs2mn. in current quarter. Higher RM cost, mainly steel prices continues to
remain a concern. However, management expects improvement in next few quarters in terms of both EBITDA margin
and profitability. Given all this, we continue to maintain conservative estimates on Pennar and would revisit our
estimates as and when performance improvement is visible in PEBS.

Key Monitorables
Improvement in PEBS performance and its impact on overall consolidated numbers.
Standalone business has healthy order book, however to what extent it is converted in to Revenues is something
which needs to be monitored.
Management of rising input cost, mainly Steel prices.

Key Risk
Any delay in economic recovery would lead to slow movement of orders in its order book.
While the Government has made ambitious announcements regarding investments in various sectors, any delay
/ alteration / reduction in these plans can alter the total pie size for companies such as Pennar and its
subsidiaries, which are looking to capitalize on the opportunity.
Volatility in steel prices (which constitute a major portion of total operating expenses) can alter the operating
profit margin profile of Pennar.
Given that Pennar is a highly capital-intensive company, any deterioration in the working capital intensity
would put pressure on cash flow and limit growth expectations or increase liquidity risk
 Concall Highlights – Pennar

Particulars Details Outlook

Good quarter for standalone entity.
Consolidated revenues 24% up and PAT up 19% YoY.
Going forward strong double digit growth to continue in standalone business
In PEBS too, management expects strong growth in revenues (high double digit) to come led by
Business Highlights improved operating structure and large order book.
Solar business has seen several headwinds. Management expects flattish growth in this segment in
this year. Management wants to decrease its contribution in total business.
Worker cost increases every 3 years which is visible in this quarter, impacting margins.
Higher wages (~30% up) and lower margin in Solar orders has impacted standalone EBITDA margin
Business done well
Very high % growth
Railways segment Revenue stood at ~Rs.220cr on gross basis. Management expects high double digit growth in this
segment.
New wagon orders to come in q4.
According to the management this segment is not adding much value and hence they want to decrease
Solar Segment
exposure to this segment. Management want to exit this business.
Order book doing well.
Pennar Enviro
Not working capital intensive at all
Tube business grown quite well.
Management is aware of the fact that company’s share price is trading very low at PE multiple of ~6xs.
Other Highlights
From Retail, company is making ~100cr of sales in current financial year. The current run rate is at 72cr
per year, which management expects to improve.
Order Book Order book for the whole entity is quite good
Gross debt (Long term) stands at Rs.94cr for both standalone as well as consolidated entity.
Short term borrowing is mainly from cash credit which stands at Rs.268cr for standalone entity and
Rs.345cr for consolidated entity.
Balance Sheet Cash stands at Rs.120cr at consolidated level.
Cash lower at standalone level as more of cash is pushed in Wcap cycle.
Other current asset grown substantially mainly due to input credit provisioning led by GST
Inventory for various products by and large is different but on an average can be taken as 1.5 – 2months
Over next 3 years, all the businesses should have ~20% ROCE
Outlook
Full year margin guidance still continues to be in the range of 10%-11%
Capex Rs.70-80cr every year (maintenance 3% of gross block which is ~10crs)
Note - Above – Blue, In-Line – Green, Below – Red
 Concall Highlights – PEBS

Particulars Details Outlook

Gross revenues of 153crs, Net Revenues of 134cr, EBITDA of 6.57 and PAT of 1.14crs
Gross revenue for the PEB division 140.7cr up substantially by 18.26cr YoY.
Solar division was much lower, it continued to struggle delivering de-growth in revenues YoY due to
dramatic change in the market and number of executable projects.
Engineering division did quite well at 6.42cr up 46% YoY.
Overall the systemic changes like focusing on increasing profitability, revenue growth, prioritizing
Business Highlights
contribution margin and cash flow generation have yielded results.
Last 4-6 quarters company was struggling to increase revenues that ends as of this quarter.
Management is now quite bullish on revenue and profitability growth.
Management strategies have yielded in results.
Other income mainly comprises of interest on Mutual Fund investments & BS loans and foreign
exchange gain.
At record high of 422cr. (Solar – Rs.30cr, PEB – Rs.350cr, no order book for engineering)
Order book Execution cycle 6-8months for above order book. Hence Revenue nos to be ~200cr in next two quarters
each.
Management is confident of growth from now onwards with sustainability to be seen in future.
Quite bullish on revenue and profitability from q3 onwards.
Outlook PEBS is on the way to high double digit growth from 3rd quarter onwards
Solar outlook continues to be muted. Management does not expect heavy growth in operating profit in
FY19 on yoy basis.
Stake holder gave approval to have GM to be held on 14th Dec, voting started from 14th Nov 18
Merger
NCLT and bankers have also approved merger.
Ebitda negative due to low revenue. Once topline goes up, it will support EBITDA
COGS up as impacted by steel prices. Steel price are increasing every month.
While taking any order management prioritizes contribution margin (Operating margin) of 20% prior to
fixed cost, at times end up at 15-16%.
Contribution margin @~15% is the normal range in this industry in PEB. However, in engineering its
higher.
Considering Q2FY19 revenues as base, fixed cost comes at ~10% of sales. Effectively EBITDA margin
comes at 4-5%.
EBITDA
Fixed cost not increasing as high as revenue.
EBITDA margin is nothing but Contribution margin minus fixed cost.
Going forward, management expects contribution margin to be in the current range of 14-15% or
may be 1-2% higher. However, considering strong order book, management sees fixed cost to
moderate from current level of 10% to 7-8%. This difference would come down to EBITDA. This
change will come immediately as revenue growth is expected to come immediately considering
order book and its execution timeline.
EBITDA margin to increase by at least 200bps in next 2 quarters.
Loan amount in Current assets is mainly the initial payment company has paid to quote for the various
tenders. Company will get this money back if tender not passed and would go to cost if tender passed.
So anyways this amount would be moved from loans.
Balance Sheet
Capital WIP is for internal expansion at Sadashiv peth.
Capacity expansion is in process. Company would be 50% above their current capacity by Feb 2019.
From 90,000 the capacity for PEBs would increase to 1,35,000k Feb 19, post start of this facility.
In last 6 months’ lot of enquires are coming up in the industry especially in other segments like
warehousing
Industry
Currently 20-25% of business in PEB is for structures built in India. Management expects it to increase
to 30-35%. In 2000 this was at 0%.
Note - Above – Blue, In-Line – Green, Below – Red
 Valuation – 15-18M

15-18M valuation FY19 FY20 Avg.

Consolidated EBITDA 2,272 2,599 2,436

Target Multiple Range 8 9 8.5

Target EV (using EBITDA FY20) 20,795 23,394 22,094
less: consolidated debt 3,543 3,543 3,543
add: consol. cash 1,193 1,193 1,193

Target M. Cap 18,444 21,043 19,744

Sh. o/s 189 189 189
Fair Value 97 111 104
Upside 174% 213% 194%

We attach a multiple (EV/EBITDA) of 8-9xs to Pennar’s FY20E EBITDA to arrive at intrinsic value range of Rs. 97
- 111, implying potential upside of 174-213% over the next 15 – 18 months. We have a BUY rating on the stock.

Valuation 5-year

5yr - FY23 Valuation FY23 Avg.

Consolidated EBITDA 3,754

Target Multiple Range 7 8 7.5

Target EV 26,281 30,036 28,159
less: consolidated debt 3,653 3,653 3,653
add: consol. cash 1,008 1,008 1,008

Target M. Cap 23,636 27,391 25,514

Sh. o/s 189 189 189
Fair Value 125 145 135
Upside 252% 307% 280%
Disclaimer - “Our 5yr. Target prices are rolling estimates; hence they may be different on the dashboard, from the ones published
at the time of initiation. Disclaimer for same is also updated in our Initiation reports for your reference.”

Recommendation & Outlook

‘BUY’ Upside 174% - 213% 15 - 18mths

To Summarize –

1. Business: Pennar’s standalone business is divided into strategic business units across segments such as Steel
Products, Tubes, Industrial Components, and Systems & Projects. The consolidated entity comprises of two
subsidiaries in addition to the standalone entity; namely, Pennar Engineered Building Systems Limited (PEBS)
and Pennar Enviro Limited. PEBS is present in segments such as Pre-Engineered Buildings, Custom designed
Steel Structures and Engineering Services while Pennar Enviro Limited is into water treatment solutions, water
treatment chemicals and fuel additives.

2. Earnings: Over the past five years (FY13-18), Consolidated Revenues, EBITDA and PAT for Pennar have
grown at 9%, 13% and 11% CaGR respectively. Growth rates over past three years (FY15-18) have been much
stronger at 11%, 21% and 25% CaGR respectively.

3. Balance Sheet: Pennar has huge scope for leveraging its balance sheet to push growth given that its
consolidated D/E ratio is only 0.85xs as on 30th September, 2018 (the latest available figures). The same is true
for PEBS wherein D/E ratio is at 0.50xs over same period.
4. Management: Pennar is one of the very few companies in India that have emerged successfully from a
corporate debt restructuring (CDR) exercise (FY06) and has managed to turnaround its operations considerably
by venturing into new business segments and introducing value-added products in its existing segments. The
company successfully listed its pre-engineered buildings subsidiary (PEBS) through an IPO worth Rs. 1.5bn,
which was fully subscribed. PEBS is a near debt-free company with a significant institutional shareholding that
includes Mutual Funds, FII, a VC fund and a PE fund (Zephyr Peacock India Fund).

5. Outlook: Pennar reported decent performance in its standalone business with operating margin of 8% in current
quarter. However, PEBS performance continued to remain subdued, impacting the consolidated EBITDA
margin. PEBS delivered flat growth in Topline with operating loss of Rs2mn. in current quarter. Higher RM
cost, mainly steel prices continues to remain a concern. However, management expects improvement in next
few quarters in terms of both EBITDA margin and profitability. Given all this, we continue to maintain
conservative estimates on Pennar and would revisit our estimates as and when performance improvement is
visible in PEBS.
 ANNEXURE

Segmental Performance - Consolidated

Particulars Q1FY18 Q2FY18 Q1FY19 Q2FY19 H1FY18 H1FY19

Revenues
Diversified Eng 3,206 2,855 3,402 3,807 6,061 7,210
Custom designed building solutions & auxiliaries 1,594 1,579 1,418 1,668 3,173 3,086
Less - Intersegment Revenue 221 209 198 293 430 491
Total Revenue 4,579 4,225 4,622 5,182 8,804 9,804
Revenues YoY
Diversified Eng 6.1% 11.0% 18.9%
Custom designed building solutions & auxiliaries -11.0% -7.9% -2.7%
Less - Intersegment Revenue -10.3% 39.8% 14.3%
Total Revenue 0.9% 3.0% 11.4%
Revenues QoQ
Diversified Eng 6.2% -11.0% -0.8% 11.9%
Custom designed building solutions & auxiliaries -41.5% -0.9% -21.7% 17.6%
Less - Intersegment Revenue -32.0% -5.1% -5.8% 48.4%
Total Revenue -15.5% -7.7% -8.1% 12.1%
EBIT
Diversified Eng 270 270 357 351 539 709
Custom designed building solutions & auxiliaries 193 179 99 69 372 167
Total 463 448 456 420 911 876
EBIT YoY
Diversified Eng 32.4% -42.7% 31.4%
Custom designed building solutions & auxiliaries -48.8% -81.3% -55.0%
Total -1.5% -57.2% -3.8%
EBIT QoQ
Diversified Eng -10.4% -0.1% -41.8% -1.6%
Custom designed building solutions & auxiliaries 201.7% -7.3% -73.2% -30.4%
Total 26.7% -3.1% -53.6% -7.8%
EBIT Margin
Diversified Eng 8.4% 9.4% 10.5% 9.2% 8.9% 9.8%
Custom designed building solutions & auxiliaries 12.1% 11.3% 7.0% 4.1% 11.7% 5.4%
Total 10.1% 10.6% 9.9% 8.1% 10.3% 8.9%
Capital Employed
Diversified Eng 3,900 3,848 4,172 4,284
Custom designed building solutions & auxiliaries 2,742 2,855 2,013 2,031
Total 6,642 6,703 6,185 6,315
**Company has recently started this kind of segmental reporting pattern. Hence data is not available for all the periods.
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