Pennar Industries Limited (513228) Earnings Call Transcript & Summary

Okay. So you're saying right now? In last one month, is it?

Last 2, 3 -- in the last 2 months, the price increase in base for rate of steel, which is what we'll talk about, has been in excess of...

10%.

10%. Between 10% to 15%.

Sir, I understand. So in the current quarter, I believe the prices in India have gone up. I understand that. But over the last 3 weeks or so there has been a dip given the rate in [indiscernible], metals, copper and the steel and everything else, along with crude, and so is there any visibility? Or do you think will that translate into price in India would be coming down as well? Or that does not have any impact on prices in India? I mean how does this work? How does the steel vertical mix go? In case the price differential could come down, is there a case for the near term and for you to benefit in any way or it does not get very much?

So I'll try to answer that as best as I can. I'll also request Mr. P. Rao to chime in after that. If I understand your question, you're saying that raw material prices have fallen in the recent past, in the last 3 weeks, in steel. We have not seen this decline, quite frankly. But we don't take a cost on raw material steel prices. We book orders and we cover our costs to make sure that we can ensure that there's no margin shock due to increase in prices. And we also don't tend to target price decreases. So for us, it's a pass-through, and we have to pass our price increases or decreases also, quite frankly, to our customers of the time. So we don't -- it's a commodity, it floats. It's very difficult for us to estimate it. And we don't have any hedge and we don't have any other crutch against that. Our standard business plan is that we -- when we see a price increase, we pass it on and when we see a price decrease, we pass it on. And the temporary margin impacts because of volatility on Pennar Industries. We don't plan for it in any sense of the word, I can't say. Sir, would you want to comment further on this?

Yes. Actually, raw material price increase has been there in the last, at least 2 to 3 months, fixture of 10% to 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 thing is very less actually. We book the job at the current price but we order the material on the same day, whereas in the PEBS, there are contracts spanning from 3 to 6 months. So there is the risk of price increase, but what we do now, we maintain a healthy inventory and expecting some price increase in our re-maintenance and good inventory, but then some of the customers, they have price escalation clause also present basically because [ we quote our ] jobs from J-Mark where there is a price disclosure clause. So we -- where the customer has not paid advance, then decide they are not ready, then we have to pass on to the customers. And we are successful in passing on to the customers.

Next question is from the line of Venkat Subramanian from Organic Capital.

In a previous con call, we spoke about our positioning in Enviro and the environment, as you said, had close to what Ion Exchange's EBITDA. Can we grow from linage in terms of our qualitative position and quantitatively where we can get? Because people like Ion Exchange have right return and things like [indiscernible] and then a lot of value added in there, where are we? Can you talk a little bit more on that?

Sir, I apologize. I wasn't able to understand your question clearly, you said about the environment is this. Could you repeat your question? I apologize.

Sure. Now in a previous con call, we said our positioning is comparable to that of Ion Exchange?

Position in comparison to Ion Exchange?

Ion Exchange. Okay. Okay. Go ahead, sir, please. Yes. Okay.

Compared to Ion Exchange have different segments which - where some of the operators are very value-accretive. They are nice compared to Pennar EBITDA. How are we comparable? Can you talk about our business qualitatively, you think?

Okay. So Ion Exchange revenue streams lie in additives, which includes chemicals, resins. They also -- the second business division they have is projects, which is to execute EPC projects in the water side. And third, they have -- okay. Sorry, I'm being told that I should talk more about ourselves. So we -- in Pennar Enviro, we have our review -- our business divisions are in additives, which overlaps with Ion Exchange's 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 standardized frac-mounted, containerized treatment plants in the T-cell, 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 and we command is quite similar. But they have a lot more scale, and we are in the process of building that scale. So I assume Ion Exchange at INR 1,000 crores is much bigger than our business for those verticals, which is a little bit behind, INR 150 crores. But we are optimistic that over the next couple of years, we should be able to scale these verticals up. So a direct consequence of being able to increase our additives revenue, which is very -- which has a very good margin profile. And also our specialized T-cell and ETP plants, where we have technological capabilities, design capabilities, engineering capabilities, which are quite good. Yes, I think...

Yes. That was very helpful. What kind of visibility do we have? Is that -- do we have probably good growth that you are able to materialize right now? But where can we get the fill in the next 2 or 3 years?

I would say, any -- in the water space and in this space, any order that Ion Exchange and Thermax can quote on, we would want to quote on, which is basically saying we want their addressable market. So their addressable market is close to INR 4,000 crores in India and in other geographies, which we would also want to be present in. So you see that as addressable market, then I think a market share of 10% is what we think is good. We don't want to be #1 in that business. We don't want to necessarily be #2 in that business. What we want to be is a strong capitalization player. So that, I would suggest, means over the next 2 years, we can definitely take the INR 100 crores to a much higher number.

The next question is from the line of Lalaram Singh from Vibrant Securities.

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 it looks like we have not yet done that. We are showing 2 broad buckets, which doesn't 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 better analyze the numbers?

Fair criticism. I think you're right. We actually did have come to the new attribution, which is basically, as I discussed last time, it's metal products, projects and engineering services. Those are the 3 verticals where everything we do fits into those 3 verticals. The addressable market we function is -- function in, then it becomes effectively engineering and environment. We have presented that to the Board, the Board has approved it. But unfortunately, for us to give it to you, we also need a stat auditors to sign-off on it because of the revenue attribution. The [indiscernible] has assigned all of our revenue, profitability, fixed cost, balance sheet numbers such as capital allocation, everything has been done, we have that. We will -- I think on behalf of the management team, I would like to commit that next quarter, we will definitely give you as for that breakup. So it'll be 3 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 profitability -- revenue and profitability for those business as well. The 3 verticals will be: products, engineered metal products, which is -- which will cover railways, which will cover our building materials as well. Projects, which will cover pre-engineered systems, and also water treatment and solar projects. And our engineering services business, which will include a structural engineering and our BIM and others. So I'm confident that will add a lot of clarity in terms of understanding our businesses and verticals and where they're headed, as opposed to talking about 8 P&Ls, which is what we have to do right now. If we go -- and if we have to give you an idea of what we are doing. But you're right, I think we are a little delayed. We are ready from an overall management point of view, but we need stat auditor's sign-off, which is imminent, which will happen. Next conference call, please take us on record committing that we will get this to you for next conference call onwards. The Board has already approved the new attribution.

We wait for the new disclosures. Secondly, in this quarter, can you share the cash flow from operations and CapEx figure for this quarter?

Yes. Just give us a minute. Well, the overall number for the quarter -- for 9 months, it is cash flow -- cash profit after the working capital changes, it is INR 36.53 crores.

INR 36.53 crores for 9 months?

Yes.

And for this quarter, do we have the number?

Quarter, I don't have the number ready with me.

So with INR 36 crores of cash from operations, then effectively after interest cost and all, we are in negative, right? And even CapEx?

This I'm telling after reduction of CapEx only. After interest, we are in negative.

Sir, so this is effectively after CapEx?

Yes.

And CapEx was around INR 38 crores, right? 9 months?

Yes.

Understood. Also, can you share what is happening with the joint venture with Enertech for I think a JV, which was supposed to cater different industries?

I think we have created a joint venture about 1.5 years ago. I think the order book for that has grown substantially. Can we give order book for it? So we have INR 60 crore approximate order book on that direct Enertech Pennar Industry.

Okay. So about INR 60 crores, INR 60.5 crores order book in Enertech and their revenue starts in that in the Q4 onwards, right?

We -- I think you should see that business unit, this subsidiary, doing quite well from a revenue point of view over the next -- in Q4, Q1, Q2, I think it should start scaling up. But it looks -- it's profitable, and it looks like we are getting some good traction on that.

So this is catering to the Indian markets?

The order book is entirely in the defense sector and yes.

And can you throw some light on the kind of products which we are doing there because defense is a very wide term?

I can't tell you all the products. We can say it includes Enertech'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'm at liberty to disclose that. But we're with the certified military engineering services vendor and it's doing quite well. But the order book is strong in there.

Okay. And overall, our ROE still is around 10%. So can you throw some light on the efforts which we are taking to increase this return-ratio profile?

Our ROE target, as explicitly mentioned in our strategy plan, is to get above 15% over the next 2 years. We will do that through a combination of revenue increase and also our margin. We're focusing a lot on margin growth now. So the Board has also said that we will specifically prioritize revenue, which is more than 15% in margin. So over the next couple of quarters -- I mean, 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 do -- what I 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 about 15% ROE over the next few quarters, and we are -- we will give you quarterly updates on where we are on an ROCE and ROE from now on.

We expect to gain further margin expansion, a very good, strong cash flow generation and very profitable growth with our customers. And these [indiscernible] are supported by our ongoing cost initiatives, acquisition synergies, and we have a very disciplined capital allocation strategy also. So with that, I'm sure that quickly our ROE will increase.

Okay. 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, at a -- as a percentage of revenues?

No. We have to reduce it. The vast majority of this interest cost is current as with working capital. And again, in working capital, the majority is noncash. While our business model is -- doesn't matter how much money we have, we have to have this -- we have to give LCs for raw material, we have to give BGs for our customers, so that will continue. But it can be controlled to a certain percentage of revenue. Our current controls are that they're at 3.3% of gross sales. Clearly, we have exceeded that in this quarter. But in these 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 a 3.3% effective of interest cost. So that is our control and that we will. I think, I request the CFOs to comment on this.

Yes. We are clearly following on the interest cost but now it has gone up because of the LCs and the vendable discounting, which we have done. And also, last quarter to this quarter comparison, if you do, we are a little higher in terms of term loans, so that is also another point. And we've capitalized certain interest costs earlier, which now having -- the access is being capitalized, now we have to charge-off. But overall, control, as been said, as gross sales, we will keep 3.3% as our target and try to achieve that number by year-end or in the coming quarters.

Okay. And do we use supplier's credit because our payable days look very high. And as far as I know, steel companies don't give some of the credit period.

We have [ healthy ] predominantly with all these singular suppliers. Other than steel suppliers for MSME vendors and other things, we have started using the supplier candidate, only for MSME vendors. So when we use LC, we don't net off from our accounts table, that's what our accounts table looks like. But in actual fact, since it's in our working capital, we have already paid for it. We are paying an interest cost also for it. So it's, in a sense, double-counted. But if you look at our non-LC-covered accounts payable, then it is less than -- it's about 20 days for the entire company. What is that a number? It can go 15 -- 15 to 20 days.

About 15 to 20 days. So not very high, which is not necessarily a good thing, but it's not very high.

Got it. Got it. And one last question is, have we seen any jump in our cost of debt with the -- in the light of recent scenario in the credit market?

No. There is no increase in terms of -- overall in terms of percentage or LVR . In fact, it is 5 basis points that has come down.

And on the customer side, have you seen any challenges with collection of money?

Our accounts receivables is higher a little bit. I mean in number of waivers, 2 days it was higher but for a...

But is there anything alarming? Anything alarming, which you see?

No, no. There's nothing alarming that we want to communicate right now. Nothing.

And as a percentage of overall sales, how much would the government's sales for us as a private versus government, overall company consolidated?

We have 0, I think. Zero I would say, let us -- it will be a very, very low number if it exists, but it's so low that we don't even really -- now we're obviously excluding PSUs from this, some PSUs are together [indiscernible] our best customers. But government-government, state government, central government is 0.

It's 0.

Yes. Zero. 100% is private or PSUs.

And Aditya, what is happening in the retail business, which was very positive some time back?

I am not in an [indiscernible]. I apologize. I think it's -- I think some of the costs we'll take work out well. Some of the costs we'll take, they don't work out so well. We're not comfortable -- I mean it's -- 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 INR 100 crores, INR 200 crores, INR 300 crores. I think we'll be somewhere between INR 50 crores to INR 100 crores, and that's it. I don't think that it'll earn a lot of capital into that business anymore. It's just what we are seeing, we're not really liking. It takes a tremendous amount of energy and -- to maintain that and to scale those verticals. So while we will grow it over time, I think there's -- I don't -- right now, I don't think we see -- we don't see it increasing its attribution in our revenue or profitability by a law. So we see where it is, and we'll try to grow it conservatively. But I think it's a fair point to say that what our expectations were for it, for it to become a multi-hundred-crore business is not going to happen. We're not...

But we don't plan to shut it down?

No. I won't say we are shutting it down. I think what's -- we will -- we are looking at reducing the number of outlets that we have, which is -- we have about 20. We'll reduce that by a certain percentage. But what is there is reasonably robust. That we will continue to grow. We will look at perhaps, I think, a little bit of 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, that -- but I don't think we're seeing that.

[Operator Instructions] We take the next question from the line of [ Lokesh Bahel, Digital Investor. ]

Sir, most of my questions have been answered. They were pertaining to high cost of debt only. Sir, I just want to know, we said that our gross debt is somewhere around INR 445 crores and net debt is INR 415 crores. Is this -- the figure of INR 30 crores is cash, right?

In terms of investments, where we're at, overall, we have the number.

Debt is INR 415 crores right now.

INR 440 crores was March. INR 415 crores is now?

Yes.

What he said was, INR 440 crores was debt and INR 415 crores being debt is wrong.

No, no.

Yes. Okay. See, totally earlier, the March numbers that we have, it was like INR 445 crores. Now it is INR 450 crores. Overall, there is a decrease in terms of debt by INR 30 crores, what paid overall. And net debt, if you say, another INR 40 crores reduction from INR 415 crores, so which is like INR 375 crores.

Fine. So it's with the figure of approximately INR 30 crores to INR 40 crores of cash that we have, right?

Yes. It is in the form of -- mostly in the form of mutual funds in the treasury and in the FX deposits.

Fine. But sir, just one thing more. What is this INR 30 crore? Because we are doing buybacks also. And there you said that we have completed 30% of your buyback. So total buybacks for a year is INR 40 crores. So if you take 30% down, it is INR 12 crores. So we are supposed to do buyback of INR 28 crores more, right? So this INR 30 crores, is it inclusive of the INR 28 crores or that is [indiscernible]?

INR 10 crores out of that has been earmarked for buyback, which is separately from INR 40 crores.

Okay. That is separate from this, right?

Yes. But it is only INR 10 crores, which is earmarked and kept in the form of fixed deposits, would be the issue the -- to the buyback.

Okay. I didn't understand this properly. So there is no overlap? Basically this INR 40 crores is not -- does not include those INR 28 crores of remaining buyback, right? That is what I'm saying.

Yes.

Okay. Okay. And sir, apart from this, like you said that in future [indiscernible] sir, you said that our finance cost has exceeded that 3.3% of our sales, which is our target. But sir, you want to reduce it, that is fine. But how do we reduce it if you're seeing like INR 445 crores -- INR 450 crores is our gross debt. And we are seeing quarterly around INR 22 crores to INR 23 crores as finance costs, if I do simply like a simple arithmetic, then it comes around 20% of the total, you can say, debt. Isn't it very high in terms of industry standards?

Yes. To answer your questions, how do we plan to reduce? We're doing through a combination of reducing in terms of working capital. So if you see overall working capital, this quarter also, we are almost flat. We've not increased in terms of...

Question is, why is your cost of capital 20%?

Cost of capital. The finance cost includes the fund-based and nonfund-based cost. Take only the fund-based cost that -- it is hardly some 11%, 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 carries up to the total finance cost.

Okay. And sir, are we satisfied with the kind of buyback we are doing? Because the purpose was like, it will then boost your share price. So I just want to know your opinion on it because share price is more or less moving around the same thing as far -- since we have started the buyback?

Yes. I think the purpose of the buyback, I think, is, as far as the Board is concerned, is that at the current PE multiple, which is substantially less than 10, it's actually less than 5 right now. I think it is -- and we believe that our profitability is -- our EPS is sustainable and can grow over the next -- over the near term. So clearly, there is an opportunity here is what the Board has decided and that is a rational. So we'll go ahead and complete the buyback. Now obviously, the lower the price at which we complete the buyback, the better for the company from a one point of view. So I have no comment, per se, on what the share price is and whether we're happy about it. But I think the range in which we want to buy, and the range is pretty broad, and as long as in that range, we'll continue buying. There's still substantial amount of buyback that still has to come through. So we will go ahead and complete it. And over time, I think with actions such as -- this corporate action such as this and continued robust performance, I'm sure it will come up and in -- it may be under-valued 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 inflection point sooner rather than later, in my opinion. So my answer is, sir, is that we will stay the course and continue performing and continuing these corporate actions. That's our current strategy.

We take the last question from the line of Lalaram Singh from Vibrant Securities.

I think you said that we have kept aside INR 10 crores for the buyback. And if you exclude that amount, we still have INR 40 crores of cash. Is it correct?

Yes.

And overall buyback amount was INR 40 crores, out of which we have already used up INR 12 crores. Is it correct?

Yes.

A bit more than that but, yes.

INR 12 crores. Then we have we have -- so INR 22 crores is that. And there is a deficit of INR 18 crores. So -- and we have a cash of INR 40 crores and I am sure we'll need that in our normal business operations. So do you foresee that we would be using the entire committed INR 40 crores? Or we may also stop the buyback in between?

No. I think we are -- legally we have to spend a certain amount, which is a certain amount. But ultimately, I think the Board has taken a decision to complete the buyback completely, and that's our intention. Right now, unless the share price goes above the price which we've indicated, and we've indicated a pretty broad range, I don't think there's any danger of us cutting the buyback short. In answer to your question, yes, the INR 40 crores, I want to stress, is not involved in the operations of the company right now, as our joint CFO mentioned. It is involved -- it is there in mutual funds and other investments and, of course, some cash amenities as well, I would assume but that is not involved in the business of the company. I would like to stress that we remain a company which generates, from a cash flow point of view, close to INR 7 crores, INR 8 crores every month. So we have another 3 months, 4 months left for the buyback period. So even if we wanted to -- I'm saying we retain the ability to not touch that INR 40 crores and still complete the buyback.

Yes. I understand that. But given our working-capital-intensive business and the growth, which we are anyway aiming for, we might have to redeploy the capital in supporting that growth. And that was why I was...

No, sir. It's impossible. Most of our -- the vast majority of our debt is working capital debt. And that debt is noncash mostly. It doesn't matter how much, I could have INR 10,000 crores in my bank account, I'd still have to give an LC. I will still have an interest cost. I will still have that. So there's no way around that. I will still have to give a BG. I will still have to give ABGs, performance bank guarantees and others, which will have finance costs. So there is no way for me to replace our -- replace these financial instruments with cash we have on hand. So this is -- they are 2 different things. So we can't...

No, no, sir. Absolutely. No, I understand that. My only point was, given the nature of our business, we need a significant amount of capital at a -- in a not maybe fixed capital, but capital to support the growth. So given -- even if it is non fund based, it is still an interest cost. And our interest coverage is now almost I think, 2x, right? [indiscernible] so it is not a very big buffer as such. So the immediate discomfort that we are using the cash to buy back, instead of just keeping that as a buffer for any actually event, which may be unfortunate in the business scenario, that's the only point I was trying to understand. How do we think on that part?

My opinion, sir, the way we look at that is, we evaluate risk in terms of -- basically, you're talking about a potential cash flow risk for which we should have a buffer. We retain substantial current assets. Our quick assets are positive by INR 270 crores -- and more than INR 200 crores, but will have the exact number here. 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 used limits, which we can use. And I would reiterate that even if we were to stop, not do the buyback, it wouldn't functionally improve this situation at all because my having INR 40 crores, FD, mutual fund investments, which I'm 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. So -- and that is what -- where our debt is, right? If you look at our total debt of INR 440 crores, I'm not even talking about net debt. I'm talking about overall debt also. INR 300 crores plus of that is noncash. So I don't think we have an issue here, frankly.

I would like to add one point here. You said that we generate -- we're a cash-positive, cash-generating company. And one of the metrics which people -- real cash is dividends, which a company gives, right? CFO [indiscernible] is positive, but dividend which is coming to our bank account actually tells us that the group is generating 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?

The Board has reviewed dividend versus buyback and chosen buyback as the preferred option. And that's it. And the Board will obviously review this decision on a time-to-time basis. I think there's been some changes in the dividend distribution tax also which may or may not make it more viable, but these -- as these numbers change, as our cash-generation improves, I think, the Board will review this. And this decision will be taken at the Board level on a periodic basis. But as of right now, obviously, we have a buyback ongoing. And we don't have a dividend policy, which the Board has authorized me to discuss with our stakeholders. So right now, that's where it is.

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.

We thank the management of Pennar Industries for giving us an opportunity to host the call and taking time out for interacting with the investors. Thank you all for being on the call.

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.