Pennar Industries Limited has informed the Exchange regarding 'Pennar Q3 FY 20 Conference Call Transcript.'.
“Pennar Industries Limited 3QFY20 Earnings hosted by PhillipCapital India Pvt. Ltd.”
February 12, 2020
MANAGEMENT: MR. ADITYA RAO – VICE CHAIRMAN AND MANAGING
DIRECTOR, PENNAR INDUSTRIES LIMITED MR. P. V. RAO – JOINT MD, PENNAR INDUSTRIES LIMITED MR. SHRIKANT BHAKKAD – VP, FINANCE, PENNAR INDUSTRIES LIMITED MR. J. KRISHNA PRASAD – CFO, PENNAR INDUSTRIES LIMITED MR. MANOJ CHERUKURI – HEAD, CORPORATE AFFAIRS, PENNAR INDUSTRIES LIMITED MR. K. M. SUNIL – PENNAR INDUSTRIES LIMITED MODERATOR: MR. VIKRAM SURYAVANSHI – ANALYST, PHILLIP CAPITAL INDIA PRIVATE LIMITED
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Pennar Industries Limited February 12, 2020
Moderator:
Ladies and gentlemen, good day and welcome to the Pennar Industries Limited Q3FY20 Earning
Conference Call, hosted by PhillipCapital (India) Private Limited. As a reminder, all participant
lines will be in the listen-only mode, and there will be an opportunity for you to ask questions
after the presentation concludes. Should you need assistance during the conference, please signal
an operator by pressing ‘*’ then ‘0’ on your touchtone telephone. I would now like to hand the
conference over to Mr. Vikram Suryavanshi from PhillipCapital (India) Private Limited. Thank
you and over to you.
Vikram Suryavanshi:
Thank you, Janice. Good morning and very warm welcome to everyone. Thank you for being
on the call of Pennar Industries. We are happy to have with us the management of Pennar
Industries for Q&A Session with the investor community. Management is represented by Mr.
Aditya Rao – Vice Chairman and Managing Director; Mr. PV Rao -- Joint M.D.; Mr. Shrikant
Bakkad – Vice President, Finance; Mr. J. Krishna Prasad – CFO; Mr. Manoj – Head, Corporate
Affairs and KM Sunil.
Before we start with the Q&A session, we will have some opening remarks from the
management. Over to you, sir.
Aditya Rao:
Thank you. This is Aditya. A warm welcome to all our stakeholders to Pennar Industries Q3
Conference Call. We have capped off a challenging quarter where we have seen a reasonably
high decrease in our addressable markets for the automotive process engineering and solar
sectors. Consequently, we had a decline in our Q3 profitability on PBT and profit after-tax basis.
We believe that the addressable market pressures we are facing are temporary and revenues for
all of our verticals have improved substantially in the fourth quarter, which we are going through
right now. It is our opinion that the worst is over; however, due to the lower revenue throughput
in Q3 and Q4 compared to the corresponding quarter last year, we expect a financial year to be
flat on a profit after tax point of view. However, our medium-term and long-term growth strategy
remains intact. We do not think any of our addressable markets have undertaken permanent
reduction or permanent damage. I think they will come back, but for some sectors, it may take a
little longer than others. We will continue to invest in a long-term addressable market, so we get
back to growth in revenue and profitability as soon as possible.
With that, I would like to hand the call over to our Joint Managing Director, Mr. P.V. Rao, to
take you through the quarter.
P.V. Rao:
Thanks, Aditya. Good morning, everybody. I appreciate everyone taking this time this morning
for our call. I will go through the specifics about financials. The consolidated financials for Q3
FY2, net revenue is at Rs.537.4 crores compared to the net revenue of 567.6 crores in last
corresponding year and previous year, and EBITDA is Rs.50.1 crores compared to Rs.48.7
crores in the corresponding period last year, PAT is at 12.2 as against 15.2 in the corresponding
period last year.
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Pennar Industries Limited February 12, 2020
If you look at the Consolidated Financial Highlights of Nine Months in Financial Year ‘20, the
net revenue is Rs.1,655.2 crores compared to revenue of Rs.1,548 cores, which is up by 6.9%.
EBITDA is 158.4 crores compared to Rs.136.3 crores, and there is an increase of Rs.16.3 crores
compared to the last year. PAT is Rs.52.1 crores compared to the PAT of the corresponding
period in the previous year, Rs.42.2 crores. So, there is an increase of 23.2% year-on-year.
The Business Highlights are during Q3 we received steady orders across business verticals such
as Building Products, Tubes, Solar, Railways, Industrial Components and Pre-Engineered
Buildings. The order book for Pre-Engineered Building segment is Rs.455 crores as of now. The
order book for Water Treatment and Chemicals segment is Rs.78 crores. The order book for
Railways division is at Rs.270 crores.
In yesterday’s board meeting, the board approved the acquisition of BIM Technologies Private
Limited in supporting science through the clinical process of building information modelling
management and data collection. It deals with 3D Digital Building Information Modeling. The
services include developing, modelling, converting and mapping of buildings, seamless
integration of building data in a 3D model, and the major clients are from Engineering and
Construction sectors. As you all know, we already have an Engineering Services division which
is doing design and detailing for customers overseas, and this has synergies with that.
Our Q3 performance got impacted due to a challenging business environment. Consequently,
we reported a 5.3% decrease in revenue and a 19.5% decrease in net profit. On a nine months
basis, our revenues up by 6.9%, our profit is up by 23.2% compared to the corresponding period.
Though the Q3 results are challenging, we continue to execute on our strategy, operational and
financial objectives of achieving margin expansion across our business segments.
Aditya Rao:
Margaret, I think we can open it up for questions.
Moderator:
Sure. Thank you very much. Ladies and gentlemen, we will now begin the question-answer
session. The first question is from the line of Vaibhav Gogate from Ashmore. Please go ahead.
Vaibhav Gogate:
Can you give me color on this acquisition, what sort of revenue will it add to our consol P&L?
Aditya Rao:
We are right now not going to comment on the revenue it can add, but we can say, it will be
immediately revenue and profit-accretive, it is a profitable entity, and we are quite confident that
it will start generating revenue and profitability right from February this month onwards, but we
will not right now be commenting on the exact revenue increase that we see through this
acquisition. But what I can say is that because we have done this acquisition, it opens up a pretty
large addressable market for us in the building information modelling sector, which we are
already
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Pennar Industries Limited February 12, 2020
Vaibhav Gogate:
What is the ballpark size of this acquisition that we have done?
Aditya Rao:
The exact number is Rs.6.22 crores.
Vaibhav Gogate:
In the past two quarters incrementally what has gone better and what has gone worse in terms of
the outlook for your railways, tubes and other ones?
Aditya Rao:
Our order book for Railways remains strong. Our order book for Environment business is also
quite strong, higher than it was. So we have not seen any decline in the addressable markets in
those specific sectors. Solar, Q3 was a very bad quarter. But our order booking in Q4 has jumped
up dramatically for both MMS modules and component supply, all three solar revenue streams
that we have. Regarding the other order books, I request Mr P.V. Rao.
P.V. Rao:
We have currently about Rs.455 crores order book. Recently, we got a big order from MRF also
of Rs.125 crores. So PEBS is doing well in terms of revenue compared to the past.
Vaibhav Gogate:
So if we look at the finance cost, they were pretty high this quarter which was around 4.2% of
sales. So what is driving this escalating cost?
Management:
Total impact if you see in terms of the last Q2, Q3 it is more or less a flat in terms of Rs.22.61
crores to Rs.22.62 crores where it is. Rs.22.62 crores predominantly increase you see is because
of IND AS which is applicable from 1st of April in 2019, and if you see the note #8 which we
have given in the presentation, the impact on account of IND AS 116 is specifically stated. This
Rs.1.12 crore for the quarter and Rs.3.2 crores for the overall nine months period. Overall, the
borrowings have substantially increased from where we were last. The slight increase in others
and the IND AS 16 that you will look into it is predominantly on account of non-fund being
used.
Vaibhav Gogate:
What is the gross debt and net debt as of December quarter?
Management:
Around Rs.444 crores versus Rs.415 crores, at March we were close to around Rs.401 crores,
now it is Rs.415 crores.
Vaibhav Gogate:
This is net debt?
Management:
Total debt. Net debt is Rs.40 crores.
Vaibhav Gogate:
So as of now we are at Rs.415 crores?
Management:
Yes, in comparison to March, which was at Rs.444 crores.
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Pennar Industries Limited February 12, 2020
Moderator:
Thank you. The next question is from the line of Shubhakar Ojha from SKS Capital. Please go
ahead.
Shubhakar Ojha:
Two questions: One, can you give some outlook on your margin? So, I think what is the benefit
of lower steel prices, what is the scenario so far in the current quarter? And second, is how much
buyback has already been completed?
Aditya Rao:
Raw material prices in the last three months have increased substantially. However, we have
been able to pass on the vast majority of that, and we also hold substantial inventory which
allows us to cushion the impact that this has. So, we do not project a very large operating profit
contribution, percentage decline on the basis because of raw material price increases for
ourselves. That being said, I think the order booking we are doing now, as there is a slight impact
from the point of view, perhaps more of the market is a little duller rather than material price.
But overall, I do not think these are very substantial numbers; I do not think the difference would
even be 20, 30 basis points from an operating profit percentage point of view for Q4 also. For
the buyback question, we have completed about 30% of the buyback, and we intend to complete
the remaining 70% over the next three to four months.
Moderator:
Thank you. The next question is from the line of Vikram Suryavanshi from PhillipCapital. Please
go ahead.
Vikram Suryavanshi:
Can you share what was the CAPEX for this quarter or nine months and how is the outlook for
full-year and next year?
Management:
Total CAPEX for the current year is around Rs.68.5 crores, out of that already we spent around
Rs.38.8 crores as of now.
Vikram Suryavanshi:
And next year would be a similar number or how is the…?
Management:
Right now we will guide you to a number which is around that, but we have substantial
investments which have pushed back, but right now you can assume a similar number for next
year, but we will probably be revising it soon.
Aditya Rao:
And this acquisition what we have done, is it under Pennar Industries or Pennar Global, how is
that structure, will it be part of a design engineering business?
Aditya Rao:
The acquisition is of an Indian company called One works BIM which is going to add to our
revenue from Europe mostly. So, it is not under the Pennar Group.
Moderator:
Thank you. The next question is from the line of Lala Ram Singh from Vibrant Securities. Please
go ahead.
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Pennar Industries Limited February 12, 2020
Lala Ram Singh:
My first question is that the revenue degrowth has been more than 16% in your diversified
engineering business segment. Can you help me the key segments within diversified and their
growth rates, for example, railways, tubes, industrial?
Aditya Rao:
We will not be giving individual vertical wise revenue because we have reported segmental
revenue as per our compliance requirements, but what I can tell you is that the decline in revenue
has primarily been in our Tubes vertical and in the Steel Tubes. Declines are more than 30%,
and that has contributed to an overall decline in revenue of about 6%. We expect these verticals
to come back. They have already come back a little bit in Q4, I would say about after damage
has been reversed, but for a complete reversal and getting back to growth that may take time.
Primarily the automotive sector where tubes got heavily impacted is one sector which has
resulted in the revenue fall and the process engineering sector; the solar sector also
underperformed quite badly in Q3.
Lala Ram Singh:
So Tubes and Steel have degrown by more than 30%. Is that what you said?
Aditya Rao:
Yes, the number is that the revenues and operating profit decline; consequently, fixed cost not
declined by that much, those businesses had a huge impact on their profitability. The other
business excelled but overall, the damage because of these two business verticals, was too high.
Lala Ram Singh:
So, Railways and the Hydraulic business has grown in this quarter also?
Aditya Rao:
Railways has grown, industry components have grown, Pre Engineered buildings has grown,
Pennar Enviro has grown. The only thing that has not grown is Steel and Tubes, but they have
declined badly. So, that is the reason; they declined by 35%, 36% each.
Lala Ram Singh:
Second question is on the second segment, which we call as Custom Design Building, in that we
have seen a 12% revenue growth, but our EBITDA has more than doubled which is because of
our margins have come back to around 10% compared to 5.6%. So, can you help us understand
the drivers of this improvement in margins?
P.V. Rao:
See, the order book is good in the current financial year and warehousing sector especially
because of the boom in eCommerce business and introduction of GST has started getting more
jobs in warehousing and Engineering Services growing up, we added a few new customers also
in the US, and Solar also started improving a lot, and the fixed cost is constant, that is the reason
why the increase in revenue will directly fall under the profit. So, order book also currently is
Rs.455 crores, we are bullish about perhaps in the time to come the next financial year.
Management:
But I think the order book was always not an issue for us. Margins were…
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Pennar Industries Limited February 12, 2020
P.V. Rao:
There was a problem in the order book in the last year. The last quarter it was less, it was Rs.355
crores, now it is again gone back to Rs.455 crores.
Lala Ram Singh:
But if you exclude this quarter for the last six quarters, our margins were less than 8%. So it is
not a one-quarter phenomenon, and 11% is…
P.V. Rao:
There is a mix of products what we have in our services. So in the services sector, the revenue
increase and the profitability increase, has resulted in an overall increase in profitability. Solar
has declined, compensated by a higher margin in Engineering Services.
Lala Ram Singh:
The engineering where we support our global clients in designing, is that what do you mean?
P.V. Rao:
Yes, design engineering, both.
Aditya Rao:
Significantly increased. So there the margins are high. That is why whatever some setbacks in
solar and all, has got compensated with the increase in margins in Engineering Services.
Lala Ram Singh:
Going forward, how would you want to comment on the margins in this segment?
Aditya Rao:
I think it will be the same; roughly about 8% to 10% we are expecting.
Lala Ram Singh:
And the acquisition which we have done, how is it different from our Engineering Services
business?
P.V. Rao:
Engineering Services is designed and detailed using software tools like Tecla, MBS, Autocad
and all, whereas this is nothing, but it gives 3D digital building information modelling. If you
are constructing a building, by doing beam designs and all, so we will be able to know what is
polling and all because there will be civil works, electrical works, mechanical works, air-
conditioning, everything. So, all will be mapped together to see if there is any polling happening
within the building. And that is useful for even procurement, that is useful for project
management. It is a very good tool. Nowadays, many of the customers in the US and Europe are
preferring beam model for their projects.
Lala Ram Singh:
So, this is relevant for commercial, industrial and also residential projects?
P.V. Rao:
Yes, any building projects.
Lala Ram Singh:
And how many employees are there in the organisation which we require as of now?
P.V. Rao:
We have around 100 people as of now.
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Pennar Industries Limited February 12, 2020
Lala Ram Singh:
What is our plan with that organisation want to? It will be done independently as a separate
company or…
P.V. Rao:
Business unit within Pennar Industries.
Lala Ram Singh:
Yes, how will be the change in the way the company is run – we will be involved, or it will be
an independent team, I want to know that?
P.V. Rao:
Management is Pennar Industries only. The existing employees will continue to stay there.
Lala Ram Singh:
The owners of the company are fully exited, or they will also be operating?
P.V. Rao:
They have an earn-out also for some period I believe.
Moderator:
Thank you. The next question is from the line of Vaibhav Gogate from Ashmore. Please go
ahead.
Vaibhav Gogate:
You are undertaking a few business development activities in Raebareli for Railways and PEBS
businesses. How are things proceeding over there, from when can we start expecting revenues
from there?
Aditya Rao:
Yes, next financial year, which is FY’21, Q2 is when you can expect to see revenues coming in
from Raebareli.
Vaibhav Gogate:
As far as Tubes is concerned, you are undertaking expansion into wider diameter tubes. So where
have the things gone on that front?
Aditya Rao:
We currently do not have a date for you on that, but the project is underway. We will guide you
towards the completion date for that project in the next conference call. I will write this down,
but right now, I do not have a date for you.
Vaibhav Gogate:
Incrementally, the outlook on Tubes getting better?
Aditya Rao:
Yes, right now, Q4 is better than Q3 by almost 20%.
Vaibhav Gogate:
So initially we have guided for CAPEX of upwards of Rs.120 crores, and now I guess the
CAPEX has been reduced to Rs.68 crores. So what were the reasons why you decided to cut
back on CAPEX?
Aditya Rao:
Substantial amount of the CAPEX was in business verticals which saw an addressable market
decline. So, perhaps it is the wrong decision to take, but it is the necessary decision for us to take
right now because we want to be more conservative in terms of our cash flows. So, we are
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Pennar Industries Limited February 12, 2020
reviewing all of our CAPEX projects again making sure that it will result in an increase in the
addressable market which leads to increase in quote activity which leads to increase in revenue
and profitability. So we are reviewing that which is why I said we would revise that number
soon, but as of right now, we are only investing in projects which we are extremely sure will
result in revenue profit growth. So, if there is an element of uncertainty because of the recent
issues with the Indian credit market automotive sector, process engineering sectors, then we
want to review that against. So that is the reason why we have pushed a lot of projects a little
further. So, I would not call them as cancelled projects, but we are deliberating further before
we green-light further CAPEX in businesses which have seen a large addressable market decline.
That is the reason why we have revised that number 120 to 68 because that is what we are sure
of now. It may go back up once we complete analysis and decide that yes, investing in these
assets will result in revenue and profit growth.
Vaibhav Gogate:
Last year, Q4 was a very good quarter. And if we look at this year, the outlook is not so great.
So what sort of Q4 can we expect?
Aditya Rao:
You should expect Q4 where our profit will be lesser than what it was in Q4 last year. That I can
say. The reason for that is because as I had said, these markets which took a huge hit in Q3 are
in the process of recovering. Our Q4 profitability will be better than Q3, that I think we can tell
you, but the numbers are not going to be what they were in Q4 last year. We will leave it at that
point of view, but you should expect a decline from Q4 last year, Q3 to Q4 you can expect
growth.
Moderator:
Thank you. The next question is from the line of Ashwin Reddy from Samata Investment. Please
go ahead.
Ashwin Reddy:
Can you explain what proportion of your overall revenues, are you in a position to pass on the
raw material price increases or decreases, on what proportion is fixed, so how does that work?
Aditya Rao:
Price increases on 100% of our revenue streams have to be pass-through because they are a value
add, right, I mean, our operating profits range from 12%, 13% 14% all the way up to 40%. So,
margin ones we can cushion a little bit but others we have to pass through nearly. The answer is
100%.
Ashwin Reddy:
The reason I ask is because of late the global prices of steel have been coming down, prices of
metal have been coming down in the last one month or because of the corona issue and all?
Management:
There is a steep increase in revenue.
Aditya Rao:
Absolute reverse. The price has been increasing a lot, and we have passed that increase.
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Pennar Industries Limited February 12, 2020
Ashwin Reddy:
Right now, you are saying in the last month.
Aditya Rao:
In the last two months, the price increase in base rates deal, which is what we talk about, has
been in excess of between 10%.
Ashwin Reddy:
In Q3, I believe the prices in India have gone up, I understand that. But of late in the last three
weeks or so, there has been a dip globally, right, prices of metals, copper, steel and everything
else along with crude. So is there any visibility or do you think would that translate to coming
down as well or that does not have impact in India, how does this work, how does the steel
industry dynamics work in case the prices come down, is there a case for them to come down in
India as well and for you to benefit in any way?
Aditya Rao:
So I will try to answer as best as I can and also request Mr PV Rao to chime in after that. If I
understand your question, you are saying the raw material prices have fallen in the recent past
in the last three weeks in steel. We have not seen this decline quite frankly. But we do not take
a call on raw material steel prices. We book orders, and we cover our costs to make sure that we
can ensure that there is no margin shock due to an increase in prices, and we also do not try to
target price increases. So for us, it is a pass-through, and we have to pass on price increases or
decreases also, quite frankly to our customers. That is a commodity explode. So it is very
difficult for us to estimate it and we do not have any hedge, we do not have any arbitrage against
that. Our standard business plan is that when we see a price increase, we pass it on. When we
see a price decrease, we pass it on. And while there may be temporary margin impacts because
of volatility often, we do not plan for it in any sense of the word, I cannot say.
P.V. Rao:
Actually, raw material price increase has been there in the last three months to the tune of 15%
If you look at different products what we have, if you look at Pennar Industries products, these
products we book the jobs, the second time is very less, we book the job at a current price, or we
order the material on the same day, whereas in the PEPS, we have contracts signing from three
to six months. So, there is a risk of price increase, but what we do normally is that we maintain
a healthy inventory and expecting some price increase and we maintain some good inventory
and then some of our customers we have price escalation clause also, for example, recently we
got Goa airport job from GMR, where there is a price escalation clause. So where the customer
has not paid an advance, where the site is not ready, there we have to pass on to the customers,
and we are successful in passing on to the customers.
Moderator:
Thank you. The next question is from the line of Venkat Subhramanyam from Organic Capital.
Please go ahead.
Venkat Subhramanyam:
In the previous concall, we said our positioning is comparable to that of Ion Exchange.
Companies like Ion Exchange have different segments where some of their offerings are very
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value-accretive, they have chemicals, etc., How are we comparable, can you talk about our
business qualitatively?
Pennar Industries Limited February 12, 2020
Aditya Rao:
So Ion Exchange revenue streams lie in additives which includes chemicals, resins. The second
business division they have projects, which is executing PC projects in the waterside…In Pennar
Enviro, we have our review; our business divisions are in additives which overlaps with Ion
Exchange business. We also have our projects business, which is water projects and water
engineering and we have standard plants and other businesses where we make standardised rack-
mounted, containerised pigment plants in the desal, ETP and STP space. We also have
capabilities in process engineering, which is not there in Ion Exchange’s product profile, but
overall the technology set that both they command we command is quite similar, but they have
a lot more scale, and we are in the process of building a scale. So, I assume Ion Exchange at
Rs.1,000 crores is much bigger than our business for those verticals which are a little between
Rs.100 and Rs.150 crores. But we are optimistic that over the next couple of years we should be
able to scale these verticals up through a direct consequence of being able to increase our
additives revenue which has a very good margin profile and also our specialised steel and ETP
plants where we have technological capabilities, design capabilities, engineering capabilities
which are quite good.
Venkat Subhramanyam: What kind of visibility do we have? We have probably good growth that you can realise now.
Where can we get let us say in the next two or three years?
Aditya Rao:
I would say in the water space and space any order that Ion Exchange and Thermax can quote
on, we would want to quote on which is saying we want their addressable market. So, their
addressable market is close to Rs.4,000 crores in India and in other geographies which we would
also want to be present in. So, we see that as the addressable market, then I think a market share
of 10% is what we think is good. We do not want to be number one in that business; we do not
want to be number two in that business necessarily. What we want to be the strong capital-
efficient player so that I would suggest means over the next few years we can take the Rs.100
crores to a much higher number.
Moderator:
Thank you. The next question is from the line of Lala Ram Singh from Vibrant Securities. Please
go ahead.
Lala Ram Singh:
Post the merger of the different entities, we had said that we will relook at our different business
segments and also the way we report so to make it easy for investors but looks like we have not
yet done that, we are still showing Rs.2 crores buckets which does not give much understanding
of how each business is moving because we have like effectively more than 30 different product
segments. So, do you want to comment on how you want to present your financial information
going forward for the investors to analyse the numbers better?
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Aditya Rao:
Fair criticism, I think you are right, we did have the new attribution which is basically as I
Pennar Industries Limited February 12, 2020
discussed last time, it is metal products, projects and engineering services. Those are the three
verticals where everything we do, fits into those three verticals. The addressable market we
function in then becomes effectively engineering and environment. We have presented to the
board. The board has approved it, but unfortunately for us to give it to you, we also need a stat
auditor to sign off on it because of the revenue attribution. We have assigned all of our revenue,
profitability, fixed cost, balance sheet numbers such as capital allocation; everything has been
done, we have that. I think on behalf of the management team I would like to commit that next
quarter we will give you as per that breakup. So it will be three business verticals which together
will be covering 100% of our revenue. We will give you an addressable market for each vertical;
we will give you an idea of what our core capabilities for each are and definitely capital
employed and revenue and profitability for those businesses as well. The three verticals will be
products, engineered, metal products, which will cover railways, which will cover our building
materials, projects which will cover engineered systems and also water treatment and solar
projects and our engineering services business which will include structural engineering and our
So I am confident that will add a lot of clarity in terms of understanding of businesses and
verticals where they are headed as opposed to talking about eight P&Ls which is what we have
to do right now if we have to give you an idea of how we are doing. But you are right; I think
we are a little delayed. We are ready from an overall management point of view, but we need a
Stat Auditor Sign-Off which is imminent, which will happen. In the next conference call, please
take us on record committing that we will get this to you. The board has already approved the
new attribution.
Lala Ram Singh:
We will wait for the new disclosures. Secondly, in this quarter, can you share the cash flow from
operations and CAPEX figure for this quarter?
Aditya Rao:
The overall number for the quarter for nine months of cash profit after the working capital
changes are 36.53.
Lala Ram Singh:
And for this quarter, do we have the number?
Aditya Rao:
Quarter, I do not have the number ready
Lala Ram Singh:
So, with Rs.36 crores of cash from operations, then effectively the interest cost and all we had a
negative right and even CAPEX?
Aditya Rao:
This I am telling after reduction of CAPEX only.
Lala Ram Singh:
And CAPEX was around Rs.38 crores for nine months, right?
Aditya Rao:
Yes.
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Pennar Industries Limited February 12, 2020
Lala Ram Singh:
Also, can you share what is happening with the joint venture with NLTech JV which was
supposed to cater defence industry?
Aditya Rao:
I think we have we created the joint venture about a year and a half ago. I think the order book
for that has grown substantially. So, we have Rs.60 crores, Rs.60.5 crores approximate order
book in NLTech and the revenue starts in that in the Q4 onwards. I think you should see that
business unit, their subsidiary doing quite well from a revenue point of view. In Q4, Q1 FY’20,
Q2, I think it should start scaling up, but it is profitable, and it looks like we are getting some
good traction on that.
Lala Ram Singh:
So, this is catering to Indian markets?
Aditya Rao:
The order book is entirely in the defence sector in India
Lala Ram Singh:
And can you throw some light on the kind of products which we are doing there because the
defence is a very …?
Aditya Rao:
Customers, I cannot tell you, products we can say, it includes NLTech’s current product profile
which includes defense shelters, it includes certain integrated products for the defense industry
on a scanning point of view and other things which quite frankly I have to check if I am at liberty
to disclose that, but it is certified military engineering services vendor, and it is doing quite well,
but the order book is strong.
Lala Ram Singh:
Overall our ROE still is at around 10%. So, can you throw some light on the efforts which we
are taking to increase this return ratio profile?
Aditya Rao:
Our ROE target, as explicitly mentioned in our strategic plan, is to get above 15% over the next
two years. We will do that through a combination of revenue increase and also our margin; we
are focusing a lot on margin growth now. So, the board has also said that we will specifically
prioritise revenue which is more than 15% in margin. Q3 was a little bit of a surprise because of
the addressable market shock, but over the medium term, we are quite confident that will not
affect anything. So what we would say, we intend to do is over the next few quarters increase
the revenue proportion from higher-margin products which tends to have a result in our ROCE
going up and ROCE going up as long as your capital is being used properly, will result in ROE
going up as well. So we are targeting about 20% ROCE and above 15% ROE over the next few
quarters and we will give you quarterly updates on where we are on our ROCE and ROE basis
from now on.
P.V. Rao:
We expect to gain further margin expansion, deliver strong cash flow generation and drive
profitable growth with our customers. And these lists are supported by our ongoing cost
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initiatives, acquisition synergies, and we have a very disciplined capital allocation strategy also.
So with that, ensure that our ROE will increase.
Pennar Industries Limited February 12, 2020
Lala Ram Singh:
Also, can you tell us how we are planning to reduce the finance cost line item, or do you think
that it will remain at these levels as a percentage of revenues?
Aditya Rao:
We have to reduce it. The vast majority of this interest is working capital, and again in working
capital, the majority is non-cash, while our business model does not matter how much money
we have, we have to have this, we have to give LCs for raw material, we have to give biggies
for our customers. So that will continue. But it can be controlled to a certain percentage of
revenue. Our current controls are that they are at 3.3% of gross sales. We have exceeded that in
this quarter. But IND AS adjustments, everything aside, I think our long term goal is to reduce
our working capital enough to ensure we can meet this 3.3%. So our goal is 3.3%, and the way
we do that is by either reducing our current assets or by increasing our accounts payable enough
or quite frankly the combination of both of those has to yield 3.3% effective interest cost. So
that is our control, and I request CFO to comment on this.
P.V. Rao:
We are closely following the interest cost. The first month, it has gone up because of the LCs
and the band of discounting which we have done. And also last quarter to this quarter comparison
if you do, we have little higher in terms of term loans. So that is also another point. And we have
capitalised certain interest cost earlier which now having the assets being capitalised; now we
have to charge up. But overall control as being said, like gross sales, we will keep 3.3% as our
target and try to achieve that number by year-end or in the coming quarters.
Lala Ram Singh:
Do we use suppliers credit because of payable days look very high, and as far as I know, steel
companies do not give so much of credit period.
Aditya Rao:
We have LCs predominantly with all the steel suppliers. Other than steel suppliers, we have
started using the supplier credit only for MSME vendors. So when we use LCs, we do not net
off from our accounts payable. That is why accounts payable look high. But in actual fact, since
it is in our working capital, we have already paid for it, we are paying an interest cost also for it.
So it is in a sense double-counted, but if we look at our non-LC covered accounts payable, then
it is about 15-20-days for the entire company, not very high, which is not necessarily a good
thing.
Lala Ram Singh:
Have we seen any jump in our cost of debt the light of recent scenario in the credit markets?
P.V. Rao:
No, there is no increase overall in terms of percentage where we are. It is five basis points come
down
Lala Ram Singh:
And on the customer side, have we seen any challenges with a collection of money?
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P.V. Rao:
Our accounts receivable is higher a little bit, in a number of days two days it is higher.
Pennar Industries Limited February 12, 2020
Lala Ram Singh:
But anything alarming which you feel?
Aditya Rao:
Nothing that we want to communicate right now.
Lala Ram Singh:
And as a percentage of overall sales, how much would the government sales for us, private
versus government overall company consol?
Aditya Rao:
Zero, I would say. Let us correct. It will be a very very low number if it exists, but it is so low
that we do not even really… Now we are excluding PSUs from this, PSUs are some of our best
customers, but the state government, the central government is near zero, 100% is private or
PSUs.
Lala Ram Singh:
Aditya, what is happening in the retail business which was very positive some time back?
Aditya Rao:
I think some of the calls we work out well, some of the calls do not work out so well. We are
not comfortable. It still exists as a business. We expect it to do about the same revenue that we
had. But of course, the overall plans for us were to make it Rs.100, Rs.200, Rs.300 crores. I think
it will be somewhere between Rs.50 to Rs.100 crores. I do not think we are deploying a lot of
capital into that business anymore. What we are seeing, we are not liking. It takes a tremendous
amount of energy to maintain that and to scale those verticals. So, while we will grow it over
time, right now we do not see it increasing its attribution in our revenue or profitability by a lot.
So it will stay where it is, and we will try to grow it conservatively. But I think it is a fair point
to say that what our expectations were for it to become a multi-hundred crores business, it is not
going to happen.
Lala Ram Singh:
We do not plan to shut it down?
Aditya Rao:
No-no, I would not say we are shutting it down. We are looking at reducing the number of outlets
that we have which is we have about 20; we will reduce that by a certain percentage. But what
is it is reasonably robust. That we will continue to grow, we will look at perhaps adding a little
bit to the product profile over there, other products that we make, which we can sell, perhaps
solar kits perhaps and others but we will not be shutting it down, I do not think we see that.
Moderator:
Thank you. The next question is from the line of Lokesh Behl, individual investor Please go
ahead.
Lokesh Behl:
You said that our gross debt is somewhere around Rs.445 crores and net debt is Rs.415 crores.
Is the figure of Rs.30 crores as cash, right?
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Pennar Industries Limited February 12, 2020
Aditya Rao:
Earlier the March numbers where we have, it was like Rs.445 crores, now it is Rs.450 crores.
So overall there is a decrease in terms of debt by Rs.30 crores and net debt if you see another
Rs.40 crores reduction from Rs.415 crores, so which is like Rs.375 crores.
Lokesh Behl:
It gives a figure of approximately Rs.30 crores to Rs.40 crores of cash what we have, right?
Aditya Rao:
It is mostly in the form of mutual funds in the treasury and fixed deposits.
Lokesh Behl:
I want to know whether this Rs.30 crores because we are doing buyback also and there we said
that we had completed 30% of a buyback. So the total buyback size was Rs.40 crores. So if I
take 30% out which is Rs.12 crores, we are supposed to do a buyback of Rs.28 crores more,
right?. This Rs.30 crores are inclusive of that Rs.28 crores or that is earmarked somewhere else
or some escrow account?
P.V. Rao:
Rs.10 crores out of that has been earmarked for buyback which is separately from Rs.40 crores.
Lokesh Behl:
That is separate from this, right?
P.V. Rao:
That is only Rs.10 crores which is earmarked and kept in the form of fixed deposits to do the
buyback.
Lokesh Behl:
I did not understand this properly. So there is no overlap. Basically, this Rs.40 crores does not
include those Rs.28 crores or remaining buyback, right, that is the understanding?
Aditya Rao:
Yes.
Lokesh Behl:
You said that our finance cost exceeds that 3.3% of our sale, which is our target. We want to
reduce it, that is fine. But how do we reduce it? If I see like Rs.450 crores is our gross debt, and
we are paying quarterly around Rs.22-23 crores as a finance cost. If I do simple arithmetic, then
it comes around 20% of the total debt. Is it not very high if I look into the industry standard?
Management:
To answer your question, “how do we plan to reduce,” we are doing through a combination of
reducing terms of working capital. So, if you see overall working capital, this quarter also we
are almost flat, we have not increased in terms of…
Aditya Rao:
Question is why is your cost of capital increased?
P.V. Rao:
The finance cost includes the fund based and non-fund base costs. Take the only fund based cost.
It is hardly less than 11%. Non-fund cost, which is like LC cost and bank guarantees cost that
gets added in the finance cost, which does not appear as a borrowing, but it adds up to the total
finance cost.
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Pennar Industries Limited February 12, 2020
Lokesh Behl:
Are we satisfied with the kind of buybacks we are doing because the purpose was it would give
a boost to our share price. So, I want to know your opinion on this because the share price is
more or less hovering around the same thing since we started the buyback?
Aditya Rao:
I think the purpose of the buyback, as far as the board is concerned is that at the current PE
multiple, which is substantially less than 10, it is less than five right now, and we believe that
our EPS is sustainable and can grow over the near-term. So clearly, there is an opportunity here
is what the board has decided, and that is the rationale. So we will go ahead and complete the
buyback. Now, obviously, the lower the price at which we complete the buyback, better for the
company from amount point of view. So I have no comment per se on what the share prices and
whether we are happy about it, but I think that the range in which we want to buy and the range
is pretty broad, and as long as in that range we will continue buying. There is still a substantial
amount of the buyback still has to come through. So we will go ahead and complete it, and over
time I think with actions such as the corporate actions and continue the robust performance, I
am sure it will come up. We may be undervalued for a few quarters or something, but ultimately
if our performance continues to scale, and if not, we continue to use corporate actions such as
this. There will be an inflexion point sooner rather than later, in my opinion. So my answer is
that we will stay the course and continue performing and continuing these corporate actions.
That is our current strategy.
Moderator:
Thank you. We take the last question from the line of Lal Ram Singh from Vibrant Securities.
Please go ahead.
Lala Ram Singh:
I think you said that we had kept aside Rs.10 crores for the buyback. And if you exclude that
amount, we still have Rs.40 crores of cash. Is it correct?
Aditya Rao:
Yes.
Lala Ram Singh:
And overall buyback amount was Rs.40 crores, out of which we have already used up Rs.12
crores, is it correct?
Aditya Rao:
More than that, but yes.
Lala Ram Singh:
Rs.12 crores, Rs.10 crores we have, so Rs.22 crores are that, and there is a deficit of Rs.18 crores,
and we have cash of Rs.40 crores, and I am sure we need that in our normal business operations.
So, do you foresee that you will be using the entire committed Rs.40 crores or we may also stop
the buyback in between?
Aditya Rao:
No, I think legally, we have to spend a certain amount, but ultimately I think the board has taken
a decision to complete the buyback and that is our intention right now. Unless the share price
goes above the price which we had indicated, we indicated a pretty broad range. I do not think
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Pennar Industries Limited February 12, 2020
there is any danger of us cutting the buyback short. In answer to your question, yes, the Rs.40
crores I want to stress is not involved in the operations of the company right now. As our joint
CFO mentioned, it is there in mutual funds and other investments, and of course, some cash and
FDs as well I would assume, but that is not involved in the business of the company. I want to
stress that we remain a company which generates from a cash flow point of view close to 7, 8
crores every month. So we have another three months, four months left for the buyback period.
I am saying we retain the ability not to touch that Rs.40 crore and still complete the buyback.
Lala Ram Singh:
Yes, I understand that, but given our working capital-intensive business and growth which we
are anyways aiming for, we might have to redeploy the capital in supporting that growth, and
that is why I was…?
Aditya Rao:
Vast majority of our debt is working capital debt, and that debt is non-cash mostly. It does not
matter how much I have, $10,000 in my bank account; I still have to give an LC; I will still have
an interest cost; I will still have that. So there is no way around that. I will still have to give a
BG; I will still have to give BGs performance bank guarantees and others, which will have
finance costs. So, there is no way for me to replace these financial instruments with cash we
have on hand. They are two different things.
Lala Ram Singh:
No, I understand that. My only point was given the nature of our business, we need a significant
amount of capital, not maybe fixed capital, but working capital to support the growth. Even if it
is non-fund based, it is still an interest cost, and our interest coverage is now almost I think 2x,
right, Rs.160 crores EBIT and Rs.80 crores, so it is not a very big buffer as such. So, there may
be a discomfort that we are using the cash to buy back instead of just keeping it as a buffer for
any events which may be unforeseen in the business scenario. That is the only point I was trying
to understand how we think on that part.
Aditya Rao:
Basically, you are talking about a potential cash flow risk for which we should have a buffer.
We retain substantial current assets. Our quick assets are positive more than Rs.200 crores. So,
the possibility of us running out of cash and thus not being able to sustain operations is very-
very minute. We have substantial capabilities, assets and use limits which we can use. And I
would reiterate that even if we were not to do the buyback, it would not functionally improve
the situation at all because my having 40 crores FD or mutual fund investments which I am not
spending on a buyback or not spending on other things, does not materially change our ability
to give LCs and BGs which are independent of those limits, that is where our debt is. If you look
at our total debt of Rs. Crores, I am not even talking about net debt, I am talking about overall
debt also, Rs.300 crores plus of that is non-cash. So, I do not think we have an issue
Lala Ram Singh:
I would like to add one point here. You said we are a positive cash-generating company and one
of the metrics, the real cash is dividends, which the company gives right? CFO may remain
positive, dividend which is coming to a bank account tells us that this business is generating
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cash. So, do you want to comment on our dividend policy also going forward to reinstate the
fact that we are a cash-generating business?
Pennar Industries Limited February 12, 2020
Aditya Rao:
The board has reviewed dividend versus buyback and chosen buyback as the preferred option.
And that is it, and the board review this decision on a time-to-time. I think there have been some
changes in the dividend distribution tax also. Mayor may not make it more viable. But as these
numbers change, as our cash generation improve, I think the board will review this, and this
decision will be taken at the board level periodically, but as of right now we have a buyback
ongoing, and we do not have a dividend policy which the board has authorised me to discuss
with our stakeholders. So right now, that is where it is.
Moderator:
Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand
the conference over to Mr. Vikram Suryavanshi for closing comments. Over to you.
Vikram Suryavanshi:
We thank the management of Pennar Industries for allowing us to host the call and taking time
out for interaction with the investors. Thank you all for being on the call.
Moderator:
Thank you. Ladies and gentlemen, on behalf of PhillipCapital (India) Private Limited, we
conclude today’s conference. Thank you all for joining. You may now disconnect your lines.
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