Strong Order book across verticals

Pennar Industries is an engineering company engaged in providing engineered products and services. The business of Pennar Industries is divided into four strategic units- steel products (40.58 per cent), systems and projects (35 per cent), tubes (17 per cent) and industrial components (7.33 per cent).

We see that to protect steel sector, government raised MIP and safeguard duty on raw steel. This has led to subdued margins in Q1FY17 for steel segment which the company management believes will be ironed out due to its firm procurement policies.

Within systems and projects unit, railways and solar looks like high potential areas. It has grown 50.53 per cent during FY15-16. It has been getting orders from clients like BEML, HEI, ICF, MCF and Texmaco etc which propelled revenue growth in railways related business. Order book to sales of 1.02 provides strong revenue visibility. Also, government’s plan to spend Rs 1.21 lakh crore as capex on Indian Railways and metro projects will benefit the company.

Within tube segment, PIL plans to expand capacity by 25 per cent which will be operational by end of H2Y17. This segment has high exposure to auto sector which has been growing in double digits. We see that growth momentum of Q1FY17 will continue further in FY17.

PIL has two subsidiaries- Pennar Engineered Building Systems (PEBS) and Pennar Enviro. PEBS’s robust order book of Rs 410 crore gives guidance of strong revenue growth in FY17.

Pennar Enviro subsidiary caters to waste management and water management. Due to high impetus from government, we see that the company has strong order book of Rs 300 crore. We see that the company has been lesser focused on improving performance of this segment. PIL’s Enviro business is growing rapidly and reached to Rs 100 crore from Rs 3 crore over a span of just three years.

The company has one manufacturing plant in Telangana. PIL can benefit from Government of Telangana’s programmes of Industrial Heath Clinic.  

On financial front, the company is riding on growth trajectory since 2014 at CAGR 4 per cent due to government favoured new policies. This led to PIL’s EBITDA and PAT grew by 15 per cent and 17 per cent CAGR over last three years.

In Q1FY17, its topline grew by 12 per cent to Rs 306 crore on YoY basis in Q1FY17. EBITDA and PAT rose by 39 per cent and 27 per cent in Q1FY17 on yearly basis. EBITDA and PAT margin also expanded by 221 and 38 bps points respectively in Q1FY17 vs Q1FY16.

PIL has healthy D/E of 0.54. ROCE reached to 19.91 per cent in FY16 from 15.14 per cent in FY14. EPS of the company also grew by 14 per cent CAGR over FY14-16. PIL looks attractive; with TTM EPS of 3.79 trading at TTM P/E of 12.11x and P/B of 1.10x. So we recommend our investors toBUY this scrip.