4 Recommendation CMP Target Price Sector Stock Details BUY Rs. 25 Rs.31 Metals Moderate Quarter Pennar Industries has reported a moderate consolidated quarter due to lower demand in the auto, engineering, railways and infrastructure sectors for the steel products which includes steel strips and engineered profiles. We believe the scenario looks challenging in near term due to subdued performance by the heavy engineering segment and overall slower growth in the infrastructure in India though we draw comfort on the steady performance in PEBS. However, BSE Code 513228 EV/EBITDA of 3.8x FY13E and 3.3x FY14E broadly factors the challenging scenario. NSE Code Bloomberg Code PENNARSTEEL PSL IN Market Cap (Rs cr) 305 Free Float (%) 59.8% 52- wk HI/Lo (Rs) 35/24 Avg. volume BSE (Quarterly) 16321 Face Value (Rs) 5.0 Dividend (FY 12) 20% Shares o/s (Crs) 12.2 Relative Performance 1Mth 3Mth 1Yr Pennar -11.0% -5.5% -23.3% Sensex -1.3% 3.4% 9.3% Shareholding Pattern 31 st Dec 12 Indian Promoters Holding 40.2% Institutional (Incl. FII) 30.6% Corporate Bodies 11.0% Public & others 18.2% Ruchita Maheshwari Research Analyst (+91 22 3926 8023) (ruchita.maheshwari@nirmalbang.com) Year Net Sales Growth % EBIDTA EBIDTAM (%) PAT PATM (%) Net Sales was flat YoY to Rs. 266.4 crore and up by 2.5% QoQ. The sales improved due to the growth in Tubes by 66% YoY, Industrial Components by 30.8% YoY and System Projects divisions by 17.4%. The Consolidated EBITDA fell by 17.5% YoY to Rs. 27.7 crore and was flattish QoQ basis. The EBIDTA margin fell by 210bps to 10.4% in Q3FY13 as against 12.5% in Q3FY12 and down by 30bps QoQ basis. This was primarily due to margin pressures in the Systems and Projects, Engineered Profiles and Cold Rolled Steel Strips businesses. The Adj PAT declined by 19.9% YoY to Rs. 10.8 crore and down by 3.5% QoQ. The PAT margin stood at 4.1% in Q3FY13 as against 5% in Q3FY12 and 4.3% in Q2FY13. Decline in tax rate supported the steep fall in profitability of the company. Tax rate stood at 30.9% in Q3FY13 as against 33% in Q3FY12 though tax rate was low at 24.8% in Q2FY13 as compared to Q3FY13. The fluctuation in tax rate is attributed to the tax benefit in PEBS for the period of five years which is valid till 2016. PEBS, a subsidiary of Pennar Industries has reported a consistent performance, contributed to 25.4% of total consolidated Net Sales in Q3FY13 up from 22.8% in Q3FY12 and 24.1% in Q2FY13. The Net sale was Rs. 67.5 crore, up by 10.4% YoY and 7.9% QoQ. An EBITDA margin was 10.6%, down by 70bps YoY. The order book at PEBS currently stands at Rs. 235 crore. We are of the view that this segment has the capacity to outperform other segments though margins will remain under pressure due to the increase in competition from its peers. Valuation & Recommendation At CMP of Rs. 25, Pennar is trading at a P/E of 6.6x FY13E and 5.8x FY14E. The EV/EBITDA is 3.8x FY13E and 3.3x FY14E. The company has been able to maintain the top-line during the quarter but the pressure on operating margin continues, which is a matter of concern. We have introduced FY14E estimates where we expect net revenue to grow by 8.6% to Rs. 1215.5 crore on account of benefit of capacity expansion in PEBS Gujarat from 60000MTPA to 90000MTPA and solar segment. We rollover our target multiple from FY13E to FY14E to a target of Rs. 31 per share (Rs. 29 per share), valued on an EV/EBITDA 4x FY14E and recommend BUY rating. EPS (Rs.) P/E (x) EV/EBITDA (x) ROE FY11 1208.2 51.5% 150.0 12.4% 73.9 6.1% 6.1 4.1 2.8 30.6% FY12 1267.9 4.9% 134.8 10.6% 62.0 4.9% 5.1 4.9 3.3 21.3% FY13E 1118.9-11.8% 117.3 10.5% 46.3 4.1% 3.8 6.6 3.8 14.0% FY14E 1215.5 8.6% 128.2 10.5% 52.9 4.4% 4.3 5.8 3.3 14.3% 1 P a g e
Strategic Initiatives Expansion of PEBS capacity: The Company is in the final stages of signing a deal for expansion of the capacity by an additional 30,000 MTPA to 90,000 MTPA by commissioning a plant in the state of Gujarat in Northern India. The company has taken a plant on lease for a period of 8 years which can be extendable thereafter. The company has to pay Rs. 3 cr of lease (includes rent, lease, etc) devoid of any escalation clause. The plant is expected to get commissioned by Q4FY13E and the full impact will be visible from FY14E onwards. Solar Power Plant: The Company has set up a captive solar power plant of 2.5 MW to achieve energy security and low cost power for its plants in Andhra Pradesh. Segmental Performance Industrial Components: The Industrial Components business (comprising of pressed steel precision components for Auto, Industrial and White Goods segments) recorded a strong growth in Net Sales of 30% over Q3FY12 with EBITDA also increasing 35% YoY. This was on account of increase in the number of customers as well as products. Systems & Projects: During the quarter, the Systems & Projects division (comprising of Railways and Solar businesses) 17% YoY sales growth was primarily driven by a 27% YoY growth in the Solar Structurals business. EBITDA, however, declined by 11% YoY due to decrease in the higher-margin Railways business and changed product mix. Engineered Profiles: The sales declined by 223% YoY and by 9% QoQ. Low demand from the Auto and the Buildings segments led to a decline in the Engineered Profiles division. The EBITDA margin faced pressure on account of lower realizations. Cold Rolled Steel Strips: The segment posted a 17% Net Sales decline, and registered a 36% decline in EBITDA. Though QoQ the EBITDA grew by 36% due to continued focus towards higher value-added products. The Net Sales grew by 2% QoQ. Tubes: Tubes division (comprising of CDW and other tubes) registered a growth of 66% YoY and was flat QoQ. EBITDA also posted a strong growth of 55% YoY and by 13% QoQ. Segment Break-up Segment Performance Sales EBITDA EBITDA (Margin) Q3FY13 Q3FY12 YoY% Q2FY13 QoQ% Q3FY13 Q3FY12 YoY% Q2FY13 QoQ% Q3FY13 Q3FY12 Q2FY13 Engineered Products 53 69-23% 58-9% 5 9-46% 5-4% 9% 13% 9% Cold Rolled Steel Strips 53 64-17% 52 2% 5 7-36% 3 36% 8% 11% 6% Tubes 22 13 66% 22 0% 2 1 55% 2 13% 8% 8% 7% Industrial Components 16 12 30% 19-15% 3 2 35% 3-21% 17% 16% 18% System & Projects 57 48 17% 47 21% 7 7-11% 7-6% 12% 15% 15% Total Standlone 201 207-3% 198 2% 21 27-23% 20 0% 10% 13% 10% PEBS 68 61 10% 63 8% 7 7 4% 7-3% 11% 11% 12% Sub Total 269 268 0% 261 3% 28 34-18% 28 0% 10% 13% 11% Regrouping Adjustments -2 1 0 0 0 0 Total Consolidated 266 269-1% 260 2% 28 34-18% 28 0% 10% 13% 11% Source: Company & Nirmal Bang Research 2 P a g e
Q3FY13: Consolidated Result Analysis Particulars Q3FY13 Q3FY12 YoY% Q2FY13 QoQ% Gross Sales 301.0 303.6-0.9% 300.4 0.2% Less: Excise Duty 25.3 25.2 0.3% 30.2-16.3% Less: Sales Tax 9.3 9.8-4.5% 10.2-8.3% Net Sales 266.4 268.7-0.8% 260.0 2.5% Raw Material Consumed 163.4 201.3-18.8% 156.3 4.5% Stock Adjustment 8.4-26.3 15.1 Employee Expenses 14.2 12.7 11.4% 13.7 3.4% Other Expenses 52.8 47.4 11.5% 47.1 12.0% TOTAL EXPENDITURE 238.7 235.0 1.5% 232.3 2.8% EBITDA 27.7 33.6-17.5% 27.8-0.1% Interest 6.9 7.9-12.6% 7.4-6.3% Other Income 0.4 0.1 157.1% 0.1 200.0% EBDT 21.2 25.8-18.1% 20.5 3.3% Depreciation 4.4 4.5-2.9% 4.5-2.0% PBT 16.8 21.3-21.2% 16.0 4.7% Tax 5.0 6.4 3.7 Deferred Tax 0.2 0.6 0.3 Reported Profit After Tax 11.6 14.3-18.8% 12.1-3.7% Minority Interest 0.8 0.8 0.9 Adjusted Profit After Minority Interest 10.8 13.5-19.9% 11.2-3.5% EPS (Unit Curr.) 0.9 1.1 0.9 Equity 61.0 61.0 61.0 BPS BPS EBITDA(%) 10.4% 12.5% -210 10.7% -30 PBT(%) 7.9% 7.9% 0 7.9% 0 PAT(%) 4.1% 5.0% -90 4.3% -20 S Source: Company and Nirmal Bang Research 3 P a g e
Consolidated Financials Profitability (Rs. In Cr) FY11 FY12 FY13E FY14E Balance Sheet (Rs. In Cr) FY11 FY12 FY13E FY14E Y/E - March Share Capital 61.0 61.0 61.0 61.0 Revenues - Net 1208.2 1267.9 1118.9 1215.5 Peference Share Capital 8.8 8.8 8.8 8.8 % change 51.5% 4.9% -11.8% 8.6% Reserves & Surplus 198.9 244.3 279.1 318.8 EBITDA 150.0 134.8 117.3 128.2 Net Worth 268.7 314.1 348.9 388.5 Interest 17.1 21.0 29.0 26.1 Minority Interest 8.3 11.0 14.3 17.0 Other Income 2.7 3.8 1.2 2.5 Total Loans 138.7 166.2 141.2 136.2 EBDT 135.7 117.6 89.6 104.5 Net Deferred Tax Assets 11.8 14.7 14.7 14.7 Depreciation 13.2 17.0 17.7 18.1 Total Liabilities 427.5 506.0 519.0 556.4 Extraordinary/Exceptional 0.0 0.0 0.0 0.0 Net Fixed Assets 203.3 245.8 241.3 230.9 PBT 122.5 100.6 71.9 86.4 Investments 0.0 0.0 0.0 0.0 Tax 46.4 35.9 22.3 28.5 CWIP 6.9 1.6 0.0 0.0 PAT 76.1 64.7 49.6 57.9 Misc Exps Not W/off 0.0 0.0 0.0 0.0 Share of Profit & loss 0.0 0.0 0.0 0.0 Inventories 148.1 161.4 184.2 207.7 Minority Interest in Income 1.7 2.7 3.3 5.0 Sundry Debtors 165.9 209.6 219.0 237.9 Adj PAT 74.4 62.0 46.3 52.9 Cash & Bank 16.9 16.1 7.0 19.5 Shares o/s ( No. in Cr.)* 12.2 12.2 12.2 12.2 Loans & Advances 47.2 56.4 56.3 64.2 EPS 6.1 5.1 3.8 4.3 C A L&A 378.0 443.6 466.4 529.2 Adj EPS* 6.1 5.1 3.8 4.3 CL & P 160.7 185.0 188.7 203.8 Cash EPS 7.3 6.7 5.5 6.2 Working Capital 217.3 258.6 277.7 325.5 DPS (Rs.) 2.6 2.2 1.7 2.2 Misc Exp 0.0 0.0 0.0 0.0 Quarterly (Rs. In Cr) Mar.12 Jun.12 Sep.12 Dec.12 Total Assets 427.5 506.0 519.0 556.4 Net Revenue 358.0 286.1 260.0 266.4 Cash Flow (Rs. In Cr) FY11 FY12 FY13E FY14E EBITDA 26.1 30.6 27.8 27.7 Operating Interest 3.6 7.6 7.4 6.9 Profit Before Tax 122.5 100.6 71.9 86.4 EBDT 22.5 23.0 20.4 20.8 Direct Taxes paid -38.7-33.0-22.3-28.5 Dep 4.9 4.4 4.5 4.4 Depreciation 13.2 17.0 17.7 18.1 Other Inc. 1.2 0.1 0.1 0.4 Change in WC 10.2-42.0-28.2-35.3 Extraordinary 0.0 0.0 0.0 0.0 Interest Expenses 17.1 21.0 29.0 26.1 PBT 18.8 18.8 16.0 16.8 Other Operating Activities -2.7-3.8-1.2-3.8 Tax 6.6 7.0 4.0 5.2 CF from Operation 121.6 59.8 66.8 63.1 PAT from ordinary activities 12.2 11.8 12.1 11.6 Investment Minority Interest 0.0 0.8 0.9 0.8 Capex -35.9-55.4-11.6-10.0 PAT 12.2 10.9 11.2 10.8 Other Investment 2.7 3.8 1.2 3.8 EPS (Rs.) 1.0 0.9 0.9 0.9 Total Investment -33.3-51.6-10.4-6.2 Operational Ratio FY11 FY12 FY13E FY14E Free Cash Flow 88.3 8.2 56.4 56.9 EBITDA margin (%) 12.4% 10.6% 10.5% 10.5% Financing Adj.PAT margin (%) 6.2% 4.9% 4.1% 4.4% Equity raised/(repaid) 0.0 0.0 0.0 0.0 Adj.PAT Growth (%) 49.5% -16.7% -25.3% 14.2% Inc/Dec in Reserves 0.0 0.0 0.0 0.0 Price Earnings (x) 4.1 4.9 6.6 5.8 Proceeds from Issue of Shares 0.0 0.0 0.0 0.0 Book Value (Rs.) 22.0 25.7 28.6 31.8 Debt raised/(repaid) -53.8 27.5-25.0-5.0 ROCE (%) 34.3% 27.4% 20.8% 22.2% Dividend (incl. tax) paid -18.5-15.5-11.6-13.2 RONW (%) 30.6% 21.3% 14.0% 14.3% Deferred Revenue Exp. 0.0 0.0 0.0 0.0 Debt Equity Ratio 0.5 0.5 0.4 0.4 Interest Expenses -17.1-21.0-29.0-26.1 Price / Book Value (x) 1.1 1.0 0.9 0.8 Cash Flow from Financing Activities -89.3-9.0-65.5-44.4 EV / Sales 0.3 0.3 0.4 0.3 Net Cash Flow -1.0-0.7-9.1 12.5 EV / EBIDTA 2.8 3.3 3.8 3.3 Beginning Cash Flow 17.9 16.9 16.1 7.0 Cash as reported in Balance Sheet 16.9 16.1 7.0 19.5 Source: Company and Nirmal Bang Research 4 P a g e
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