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Pennar Industries-3QFY12 Con-call Highlights Feb 12

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					                                                                                                                       Institutional Equities


                                                 Pennar Industries
                                                                                                                                    1 February 2012

                             Reuters: PENN.BO; Bloomberg: PSL IN
                             We had organised a conference call for our clients with the management of                               Not Rated
                             Pennar Industries on 1 February 2012 regarding the company’s 3QFY12
                             performance. Following are the key takeaways:                                                           Sector: Engineering
                             Heavy engineering division bears the brunt of slowdown: The heavy                                       CMP: Rs34
                             engineering division witnessed a decline in sales for the second straight quarter,
3QFY12 Con-call Highlights




                             with its net sales at Rs128mn, down 69% QoQ and 83% YoY. The management                                 Jignesh Kamani
                             has attributed delay in securing orders from Indian Railways and the slowdown in                        jignesh.kamani@nirmalbang.com
                             the capital goods sector for decline in sales, but is hopeful of this division bouncing                 +91-22-3926 8239
                             back in FY13.
                                                                                                                                     Saiprasad Prabhu
                             Lower EBITDA margin hurts profitability: The consolidated margin of the                                 saiprasad.prabhu@nirmalbang.com
                             company fell by 130bps to 11.2% in 3QFY12. The heavy engineering division’s                             +91-22-3926 8172
                             EBITDA margin dropping by 210bps to 18.8% for the quarter was the main reason
                             behind the fall in overall EBITDA. Employee costs, as a percentage of sales, rising
                             by 50bps to 4.4% is cause for concern apart from falling revenue. Engineering and
                             cold-rolled steel division’s performance showed some respite, posting a rise in
                             margins by 50bps to 11.2% The company has ventured into solar structure
                             fabrication to make up for the fall in sales of other divisions, but changing sales
                             mix in consolidated sales would lead to a further fall in margins in the near term.
                             Arm PEBSL maintains its growth trajectory: A key positive for the company is
                             its subsidiary Pennar Engineered Building Systems (PEBSL) maintaining net sales
                             growth of 8.1% QoQ and 74.5% YoY at Rs616mn for 3QFY12, which is expected
                             to rise at a fast pace compared to other divisions. However, its margins are under
                             pressure because of increased competition from peers. The management is
                             confident of maintaining its high growth trajectory and said it would opt for a higher
                             top-line to make up for the decline in margins. The order book of PEBSL stood at
                             Rs2,180mn and the management has given FY12 revenue guidance of
                             Rs2,650mn for this arm. Capacity expansion of 30,000tpa was completed in
                             3QFY12 and as a result its current capacity stands at 60,000tpa. The management
                             has indicated another round of capex in FY13 and is also exploring expansion
                             prospects in North India. It expects Rs3bn revenue in FY13 from PEBSL.
                             Y/E March (Rsmn)                                3QFY11         2QFY12      3QFY12        YoY (%)       QoQ (%)        9MY11    9MY12     YoY (%)
                             Net sales                                         3,231          3,060       2,890         (10.5)         (5.6)        8,976    9,270         3.3
                             Net raw material & finished goods purchase        2,216          1,999       1,860         (16.1)         (7.0)        6,167    6,135       (0.5)
                             % of sales                                         68.6           65.3        64.3                                      68.7     66.2
                             Employee expenses                                     97           120         127            30.4              5.5      278      367       32.3
                             % of sales                                           3.0            3.9         4.4                                      3.1       4.0
                             Other expenses                                      538            571         593            10.3              3.9    1,440    1,687       17.1
                             % of sales                                         16.6           18.6        20.5                                      16.0     18.2
                             Total expenditure                                 2,850          2,690       2,580           (9.5)         (4.1)       7,885    8,190         3.9
                             Operating profit                                    380            370         311          (18.3)        (16.2)       1,091    1,080       (1.0)
                             OPM (%)                                            11.8           12.1        10.7                                      12.2     11.7
                             Interest                                              33             59          64           93.2           8.4         119      167       40.4
                             PBDT                                                347            312         247          (28.9)        (20.8)         972      913       (6.0)
                             Depreciation                                          34             38          45           31.7          17.6          98      121       23.3
                             Other income                                           1             10          11       1,257.0            8.3           4        25     627.9
                             PBT                                                 314            284         213          (32.2)        (24.9)         877      818       (6.8)
                             Tax                                                 113            101           70         (37.6)        (30.4)         318      292       (8.1)
                             Effective tax rate (%)                             35.9           35.6        33.0                                      36.2     35.8
                             Profit after tax                                    201            183         143          (29.2)        (21.9)         559      525       (6.0)
                             Minority interest                                      5              6           8           69.7          34.8          11        19      81.2
                             Reported PAT                                        197            177         135          (31.5)        (23.8)         548      506       (7.8)
                             Source: Company, Nirmal Bang Institutional Equities Research
                                                                           Please refer to the disclaimer towards the end of the document.
                                                                       Institutional Equities
    Exhibit 1: Financial summary
    Y/E Mar (Rsmn)                        FY07                 FY08           FY09               FY10                 FY11
    Net sales                             3,336                5,602          6,533              8,250              12,510
    EBITDA                                  369                  689            805              1,109               1,496
    Adjusted net profit                     149                  308            381                498                 756
    EPS (Rs)                                 1.4                 2.1             2.6                4.1                6.1
    EPS growth (%)                         (0.4)                 0.6             0.2                0.5                0.5
    EBITDA margin (%)                      11.1                 12.3           12.3               13.4                12.0
    PE ratio (x)                           25.1                 15.9           12.9                 8.3                5.5
    Price/sales (x)                          1.1                 0.9             0.7                0.5                0.3
    Price/book (x)                           3.4                 2.6             2.5                1.9                1.5
    EV/EBITDA (x)                          14.9                  8.7             7.6                5.3                3.9
    RoCE (%)                               11.5                 20.3           22.8               26.5                30.9
    RoE (%)                                14.8                 20.7           19.7               24.1                30.7
    Source: Company, Nirmal Bang Institutional Equities Research

    Other highlights:
         Pennar Industries has managed to get military engineering certification and as a result its defence segment has
         won four orders. The management expects this segment to do well in future.

         To make up for decline in revenue, the company has ventured into solar structure business, undertaking fabrication
         and structural designing for solar panels. The management has given guidance of operating margin at 15-16% for
         this segment. This segment, which had posted a turnover of Rs390mn in 3QFY12, registered a turnover of
         Rs1,050mn in January 2012 and the management is bullish about 4QFY12 as well as FY13 turnover.

         Indian Railways is expected to place an order for 18,000 wagons per year, but till date it has placed orders for
         13,000 wagons. As a result, the management expects its revenue to pick up in 4QFY12/FY13. The company has
         also received some orders from Bharat Earth Movers for metro coaches and it expects more such orders.

         The management has given FY13 capital expenditure guidance of Rs450mn for Pennar Industries and Rs100mn
         for its arm PEBSL.




2                                                                                                  Pennar Industries
                                                                                                               Institutional Equities
Disclaimer
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BUY > 15%

HOLD 0-15%

SELL < 0%

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Team Details:

Name                                                                 Email Id                                                                                 Direct Line

Rahul Arora                     CEO                                  rahul.arora@nirmalbang.com                                                  +91 22 3926 8098 / 99

Hemindra Hazari                 Head of Research                     hemindra.hazari@nirmalbang.com                                                 +91 22 3926 8017 / 18

Sales and Dealing:

Neha Grover                     AVP Sales                            neha.grover@nirmalbang.com                                                        +91 22 3926 8093

Ravi Jagtiani                   Dealing Desk                         ravi.jagtiani@nirmalbang.com                               +91 22 3926 8230, +91 22 6636 8833

Sudhindar Rao                   Dealing Desk                         sudhindar.rao@nirmalbang.com                               +91 22 3926 8229, +91 22 6636 8832

Pradeep Kasat                   Dealing Desk                         pradeep.kasat@nirmalbang.com                        +91 22 3926 8100/8101, +91 22 6636 8831

Michael Pillai                  Dealing Desk                         michael.pillai@nirmalbang.com                       +91 22 3926 8102/8103, +91 22 6636 8830




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                                                                         Fax. : 022 3926 8010




                 3                                                                                                                                Pennar Industries

				
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