Pennar Industries Limited (513228) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 and H1 FY '21 Earnings Conference Call of Pennar Industries Limited, hosted by PhillipCapital (India) Pvt. Ltd. Kindly note, this conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions, expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] I'd now like to hand it over to Mr. Vikram Suryavanshi from PhillipCapital (India) Pvt. Ltd. Thank you, and over to you, sir.

Thank you, Margaret. Good morning, and very warm welcome to everyone, and wishing you all very happy Diwali. Thank you for being on the call of Pennar Industries. We are happy to have with us management from Pennar Industries today for question-and-answer session with the investment community. The management is represented by Mr. Aditya Rao, Vice Chairman and Managing Director; Mr. Shrikant Bhakkad, Vice President, Finance; and Jammulamadaka Srinivasa Prasad, CFO; along with Mr. Manoj and Mr. K.M. Sunil. Before we get started with the question-and-answer session, we'll have some opening comments from the management. Over to you, sir.

This is Aditya. A warm welcome to all our stakeholders to Pennar's Quarter 2 FY 2021 Investor Conference Call. I hope everyone is safe and well and are taking all necessary precautions during this period or during this pandemic. For the structure, I will first provide an overview on my comments on the second quarter performance. Our CFO will then provide details on major financial metrics. And after that, we can open up the call to questions from our investors. So to give you an overview of performance, in the second quarter, we saw marked improvement in our revenue compared to the first quarter. We recorded net sales of INR 390.44 crores in the second quarter compared to INR 166.19 crores in the first quarter. We had recorded a loss in the first quarter due to the lockdown and the resulting reduction in addressable market. It makes me very happy to report that we have reachieved profitability in this quarter with a net PBT of around INR 6.7 crores and cash profit of INR [ 12.85 ] crores. Our liquidity remains stable and is showing consistent improvement also over the last few months. We believe that these trends will continue over the next few months, and we project further growth and improvement in our revenue, PBT and capital efficiency over the next quarter. The majority of our revenue streams are not unprofitable in the third quarter in Q3, and we expect, as I mentioned last time, to reachieve our preplanned EBIT monthly PBT in this financial year itself in Q4. The second priority for us, as we mentioned in the previous call, is to ensure we invest in new addressable markets that will allow us to increase our potential revenue and profitability further. Consequently, over the past few months, we have invested in our U.S. revenue streams, effectively, buildings and tubes IOR, in our railways business unit and in our automotive BIW business. So we expect to commission CapEx of around INR 75 crores in this financial year in these initiatives, and we believe it's a combination of these 2 initiatives, which is recapturing our addressable market over the next few months, and investments in new addressable markets will allow us to exceed our [ prepandemic ] revenue and PBT before Q1 of the next financial year. Another initiative that is critical for us is a reduction in our working capital. The company is currently using working capital of around [ INR 430 crores ]. Though to stress on liquidity current assets, reducing our accounts receivable and inventory, we intend to get to about [ INR 420 crores ] while growing revenue by the end of this financial year. That would mean that our capital efficiency improves a lot from now until the end of this financial year. And we are working hard on reducing our inventory and our AR, and we are confident that we can sustain the improvements we have gotten over the past 6 months. In our last conference call, though, I had mentioned that we generally do not give out guidance. We indicated that we will achieve higher revenue and positive net profits. We have achieved these numbers as committed. For the third quarter in a similar way, I can tell you that we expect to increase revenue further and to improve our net PBT to around 1/3 of our prepandemic PBT. And our cash PBT percentage will be higher, of course. So in conclusion, I'm confident we are well placed to retain our profitability levels, improve our working capital and ensure that in the next financial year, which is FY '22, we have our highest revenue and PBT. And on that note, I will hand over to our CFO, Srinivasa, for an update on our quarter-to-quarter performance.

Good morning. I will brief you on the financial highlights. The net revenue, as stated, INR 390 crores compared to net revenue of INR 166.19 crores. We had EBITDA of INR 32.67 crores, while compared to the prepandemic of negative 13.27. And this would mean that the revenue, we have increased prior to pandemic enough by 135%, and prepandemic revenues, we have reached close to 65%. We are profitable now in this quarter. The additional thing that we would like to highlight is that we would make the investment in the new step-down subsidiary that we have set up, as Aditya mentioned, increasing the addressable market size. We've been investing close to around USD 3.5 million in our step-down subsidiary Ascent Buildings LLC. The company has the order book positioned as of now. The order book, as it stands, PEBS close to INR 279.8 crores; Enviro, INR 49 crores; and Railways Division, INR 249 crores. In terms of overall, the numbers area, the finance cost is INR 19.8 crores, and depreciation is around INR 12.18 crores. In terms of account receivable, we have INR 382 crores in terms of account receivable. Accounts payable, as we see, net of LC adjustments is INR 217 crores. And the inventories that we are on, INR 418 crores. So if you compare to the [ last year's ] numbers, have practically reduced, and over -- of close to around INR 15 crores have been collected from current assets on this. In terms of term loans, we are at 148.78 in terms of the term loan. And in terms of [ volume ], we are at INR 366 crores. So with this brief financial metrics, I hand over the call to Vikram for further questions and making the forum opens for any questions.

[Operator Instructions] The first question is from the line of [ Sujit Singh ] from [ Tinton Cap ] Consulting Private Limited.

Yes. I hope everybody is doing well and safe in the pandemic. I have a very short questions. So first would be what is the current outlook on the business we have in the railways?

Okay. The outlook we have on railways is that we are at about 40% of our prepandemic revenue, perhaps 50% right now in this quarter. We expect those numbers to trend up over the next couple of quarters. it would probably take us until next year for the railways revenue to get back to what it was. However, we are continuing to make investments to open up new addressable markets in railways.

Could you elaborate on what investments exactly?

Typically, our product profile in railways encompasses structural [ buildings ] and walls, sidewalls, roof assemblies under rail components. We are adding capabilities in robotic welding and robotic assembly, which would allow us to get into further components other than these, which are also structural in nature.

Okay. The second question would be on there was some approval for the sale of land in Patancheru. So what has been the status of that?

We have taken approval, and we have sold the land as we have entered into an agreement for sale. We need -- and obviously since all of our fixed assets are obviously -- there's a second charge from bankers on that because we do have a [ fee-back product ]. We're expecting an NOC from our bankers in the next few weeks. Once that is done, we have been informed by the buyer that the capital is ready, and we will transfer that, and we will complete the sale of the asset in terms of we will record it. So they are not recorded as saleable asset as yet. Auditor has told us that once the NOC from bankers has been given and the funds transferred, we'll be able to record then that transaction. So far, we only received an advance.

So our intention to utilize this fund is for what purpose?

Reduction of -- we don't have a lot of long-term debt, but we intend to use it to reduce it further. So we have about INR 110 crores of long-term debt. We intend to reduce that. That's it.

Okay. Great. One last question before I could go off. What is the current outlook on the solar business? I believe we can gain some momentum on that going on.

As of right now, the solar business looks quite strong. Our order books are at a record, even higher than they were in the last time we spoke. So last year was a bad year for solar for us, but this year turns out to be quite good. So we expect this trend to continue. And from a numbers point of view, I think we would have high double-digit growth in this year and next year in our solar revenues.

[Operator Instructions] The next question is from the line of [indiscernible], an individual investor.

Congratulations on a good set of performance. I just had one question here. A few days back, there was this news article about Pennar being [ driven ] by [ ED ] or relating to the [ Tekla situation ]. Can you shed some light on it? And is there any potential litigation for us that we'll be able to see, and throw some light on this?

Thank you for that question, sir. We received some questions from the areas you mentioned. And we have answered those questions to their satisfaction. We don't believe there is any litigation. We've been informed that there are no further questions for us. And we believe the matter is closed over there. This is relevant to some orders we've got in [ Tekla ], and they wanted -- had some questions for us in terms of the order process. We've given them everything. This is an online process. It is completely transparent. So -- but frankly, there wasn't that information -- that much information to give. But whatever they have been given, and it is our understanding that they're satisfied and the matter is closed.

[Operator Instructions] The next question is from the line of Tejas Mehta from Old Bridge Capital.

Yes. This is one question which I have now is, obviously, the revenue uptick is, in my view, not the [ segment uptick ] that you would like to have, given that most of the segments of other businesses have seen very, very strong reversal in this quarter, so just some understanding over there that why have we seen a lesser reversal than compared to the other industries as well? Because reform, we typically address [ related ] to the revival of several industries. So that is one question. Number two is what -- any guidance on the second half on this front from here on? And what would drive the growth in the second half?

Okay. On the first question, in terms of the recovery of our addressable markets, various business divisions, addressable markets recovered at different rates. However, the recovery is still underway. So as I mentioned on my brief introductory brief, we expect a full recovery by the end of this financial year only in all markets. But I think Q3 already has a reasonably high growth, double-digit growth -- high double-digit growth over Q2. And Q2 was 155% growth over Q1. So for the second half of the year, as I mentioned, while we say we don't give guidance, what I can definitely tell you is that both our revenue and profitability for PBT net cash profit are projecting pretty high growth rate for Q3, and Q4 will be higher as well. But at this point, I think what I would like to guide to is a complete recovery of our ability to generate a certain amount of PBT and also revenue by the end of this financial year, in Q4 sometime. That is what I can definitely guide to.

So is it safe to assume that Q3 may be at 80% of [indiscernible] run rate, and Q4, exit will be closer to 100%? So is that something that one can read from the guidance on Q4?

Let me clarify that a little bit more. So when I say we will recover our prepandemic, I mean on a monthly run rate basis, which is what we consider to be. So on an overall basis, Q4 will not be 100% of Q4 last year. But one thing to understand is Q4 last year was muted also, frankly. So PBT will definitely be -- I can assure you the PBT in Q4 will be higher than Q4 last year. But what I'm referring to is recovery to, let's say, January, right? December, January of PBT recovery impact on a monthly basis. Q4, yes, absolutely, you can take it to the band that our Q4 PBT will be higher than our -- in this year than in last financial year. Yes.

Right. And the drivers for the [ segments ] seems to be different, right? Because like you said, last year, railways was very strong, but railways this time is kind of muted for us. And I think solar has come into the back end so that was not there last year. So what would lead the growth in the second half?

We currently expect all of our business revenue verticals to grow, but I think the major growth, which is still in the -- which has not come and come in. So what we're expecting and what we are confident of is for PEBS to reach a lot of good, because PEBS is at 50% of what it was prepandemic. So we expect that to come in strongly. We expect our environment business to grow more. It is already around the same level it was there last year, but our order book recently had increased substantially. So we expect that business to grow. Railways, we will see moderate growth. I think it will be probably middle of next year before railways completely recovers. But we make a new growth in that in terms of our new revenue streams we open up in our railways, which can improve that a little bit. But old addressable market will take, I think, definitely more than 2 quarters but maybe not as much as 4 quarters, so somewhere in that time frame. The other businesses where we expect a lot of growth is our new BIW business. Our engineering services business has exceeded by a lot of prepandemic revenue as well. So that's one of -- and it's a high profit business as well. So that also, we expect to see significant growth. And our industrial components business also will exceed what we had last year. So pretty much all of our businesses will grow, but primarily driven by our PE business and environment business and our engineering services businesses, scaling up beyond what we have right now, beyond what we have right now.

Okay. Got it. And on the balance sheet side, got a couple of questions. One is the -- is this other financial liabilities in the current liabilities line, [ it was ] INR 2 crores. Can you just help us understand what the relevance is for the financial liability?

Other financial liabilities, Shrikant, if you can take this.

Other financial liabilities consist of 2 things. One was the current maturities of long-term borrowings we have. So INR 48 crores is comprising the fact. And then we have retention money payable, which is close to around INR 11 crores. And then to have the balance are very small amounts, and we have one sales tax deferment loan of close to around INR 4 crores there. These are the major component, others being small.

Right. So there is some sort of borrowing only, actually, which is the other financial liability. All of them elements.

Yes. The financial liabilities basically consist of any other form of payable, which is not either your trade payables or other things [indiscernible].

Right. So if you add your long-term borrowings, short-term borrowings and other financial liabilities, that's about INR 525 crores for this, right?

Yes. INR 516 crores has already come in terms of the total borrowing.

Correct. And is -- that was INR 475 crores in March. So we have increased by, I would say, about [ INR 60 crores ]. And our cash has dropped by about INR 35 crores, INR [ 27 ] crores. So we have total drawdown of close to INR 75 crores in this first half. This has all gone into the working capital, right?

Yes. Basically, if you see the cash flow statement has been given but being the half year. And if you see trade payables have come down, corresponding close to around INR 60 crores impact. And from the investing activities, you will have close -- the borrowed amount is close to around INR 40 crores there.

Yes. Got it. Got it. So basically, that's taken a toll on our investments, right? Because our investments is only about INR 9 crores in the first half, right, as per your cash flow statement?

Yes. Investments will happen -- because of the pandemic, we have not incurred any major capitalization amount. The amounts that have been invested are directed in working capital or in the form of advances. The capitalization and other things will come only in Q2 and Q3 -- sorry, Q3 and Q4.

And what is the outlook over there for the quarter, the second half now?

As Aditya said, the total outlay for the year is -- we are expecting is close to around INR 75 crores.

Okay. So second half for entire gains in your operating cash flow will all go towards advances, essentially, by and large. Right. Okay. And this CapEx was largely on the U.S. subsidiary? Or can you give me a split how much investment in U.S. subsidiary, how much in India?

It's -- U.S. is about 26 -- So it's about INR 26 crores in the U.S. The remaining is in India.

INR 26 crores in U.S. and remaining is in India.

Yes.

Okay. So basically, your debt level will not decline from here until the end of the year.

Debt level in terms of working capital, also, there will be reduction. And as you just pointed out, the financial liabilities, which are appearing, they have to be paid over a period of next 1 year. So close to around INR 48 crores. The repayment of term loans [ itself ] will be there. And with the steady -- with the increased growth also, as Aditya said at the beginning of the conference, we would like to maintain close to around INR 420 crores is what our overall working capital.

And then just one last question, sir. On the gross profit margin front, given the kind of scale momentum that we've seen across the board, I expected your gross margins to be much higher than what you have reported, especially through inventory gains. There has been some inventory gain, I agree, but I hoped that the inventory would have been -- the gains would have been much larger. Can you just give me some understanding over there?

I think the point that we are trying to drive is overall, if you see our inventory levels have come down. So we are just maintaining just-in-time inventory. So there are not too much inventory gains that happens at large for us. So that is one part of the question that you've asked. And then the second part of the question in terms of overall working capital, gross margin, gross -- sorry, the second is gross margin. Gross margins have slightly increased. So if you see, earlier, we were at 39.33%.

Yes, and it is 41% now.

Yes. Now it is 41%. So gross margins have slightly increased there.

There won't be a big jump in gross margin. Can you explain your thinking in terms of why gross margin would improve?

Because we are seeing steel prices jumping up from close to [ INR 30,000 ] to [ INR 32,000 ] to [ INR 42,000, INR 43,000 ]. So really, if you were working off of that kind of historical inventory, then you would have seen getting significant gains in our gross margin. So that was the question.

Okay. I see, I understand the question. No. The thing is that whatever inventory we have is typically backed up by our order book. And while steel prices have jumped, our order booking now, what we do, for that we will buy raw material now. So for the raw material, we already have inventory. We already had current asset we already had. That is relevant to the orders we had prior to that. So there wouldn't be a tremendous change in margins. However, in the third quarter, I think we will see substantial changes. We are seeing some positive. But again, the movement will be in the 100 to 150 basis point range from a gross margin point of view. It's not going to be much higher than that. So typically, we're at a pass-through. If steel prices increase, our procurement costs also increase. If steel prices decrease, then whatever inventory we have, we'll focus our order books, which it doesn't matter whether the price will go up or down.

Your inventory, there are about 70, 75 base, right?

I believe that's correct.

First in Indian market situations are going to be there. So we are going to take in one account as the average going to reserve. But our consistency is what the management there feels. So whatever inventory we are having, it is more or less back to with the order book. And the prices are being more or less the same peak. So whenever we are having increased price for that we will be getting increased customer also. So on inventory, we won't be, at any stage, losing the margin or gaining the margin to an extent [indiscernible] as will be not having that type of thing.

So one question on inventory, out of the [ INR 218 crores ] of inventory, how much would be finished inventory and how much would be raw material for you?

How much is what, sir? How much is...

How much would be finished goods and how much would be raw material?

I don't have the precise breakup, but we can get back to you on that. My sense of it is it would be about half and half, sir, but we'll get back to you on that.

Okay. Okay. And broadly, over the next -- I know it's very difficult to give a guidance here, but, say, by FY '22, where would you want to be on your balance sheet front?

Balance sheet front, we are -- our internal targets are to get to a certain cash -- include the cash-out the cycle, which effectively becomes your net working capital cycle from a number of days point of view. We target 60. My assumption is that we'll be somewhere around 70, 75 working capital days.

Right. And you would like to see lower debt levels, right?

Absolutely. I think our debt equity right now is about 0.7, and we would want that to be closer to 0.5.

[Operator Instructions] The next question is from the line of [indiscernible] from JNJ Holdings.

Sir, if you can just guide for CapEx for FY '21 and FY '22.

FY '21, we expect a top ceiling of INR 75 crores. That is what we think we will be commissioning. This typically, this is going into our U.S. projects and -- all but INR 26 crores. And the remaining is in our Indian projects, which is BIW, railways and industrial components division capacity expansion. That is the CapEx for this financial year. For the financial year after that, we haven't finalized our plans yet. But broadly speaking, if we make a full recovery, as we fully expect to, and get back to our prepandemic revenue profitability and are able to exceed it also, then we would look at something approaching INR 100 crores for our CapEx for next financial year. But again, this is a number that I request you allow us to get back to you on in Q4 where we will finalize our plans for the next financial year.

Sir, this land sale, what is the amount that we expect?

We would get about -- so we're selling about 5 acres of a total of 50 acres that we have. And we expect about INR 20 crores from this 5 acres, sir.

Okay. Sir, one question on the balance sheet front. Like your working capital days has gone up. And when I compare your March block to the September block, and your debt levels have also gone up. So I'm just -- if you can just throw some light on this.

2 things on that. In terms of working capital, overall, if you see, there is a reduction in terms of receivable as well as the reduction in terms of payables. In terms of receivables, it has decreased by most around [ INR 45 crores ] trade receivables, and inventories have decreased by INR 22 crores. But in terms of payables, it's close to around INR 61 crores is the decrease. So the increase -- the increased collection and the reduction in inventory was backed up with the trade payable. As you rightly think, there was also increase in terms of working capital in terms of borrowings. The borrowings at the new borrowings that we have started taking, these are vendable discounting schemes that we have been taking earlier. But last year, March, we stopped. Now we started on the vendable discounting. So the increase is on account of vendable discounting that we have taken at the end of the month, in September.

So what are your targets in terms of your net working capital days for FY '21 from the current levels?

We would look at about 60 days, but we're right now at around close to around -- we are at about 100. We expect to -- we're targeting 60, and there's been a consistent improvement. A lot of this really has to do with a low revenue base as well. So as the revenue goes up, those days come down dramatically. I think we can commit 75 days at the minimum.

For FY '21?

By the end of March '22 the next financial year, Yes. But we can report this number for the next quarter as well, and there will be obviously a number between [ 175 ].

Okay. So basically, is there any debt target that you have in mind in terms of FY '21, FY '22 from a balance sheet perspective? I'm just curious to know that.

I think it's critical for us to make sure that—

When I say that, I mean long term, short-term as well as your current maturities.

Yes. So if you include all of that, we're at about INR 520 crores. I see that number going down, not up in the next financial year.

And as we increase our turnover, I think the ratio that you would have to look at as an particular number of debt, I think if you can look at debt ratio number and how our interest cost is in comparison to our net sales. Those are the things that we internally monitor. We see -- we generally see the debt equity ratio should not increase drastically. And we're targeting somewhere from 0.67 to close to around 0.55 or 0.5 is what we want to end up.

[Operator Instructions] The next question is from the line of Vikram Suryavanshi from PhillipCapital.

Yes. Sir, you would give some idea about the PEBS revenue is almost like 50% of pre COVID. But can you just give slight more detail on how is the gross margin or the margins at EBITDA level in PEBS now? And is there no change in competitive landscape post COVID in overall PEBS market in India?

Thank you. So the gross margin is more or less the same. There hasn't been a massive difference in that. There may have been a reduction of 50 basis points -- 50 basis points, the gross margin-wise. The concern over the past 2, 3 months has been that capital goods sector hasn't recovered enough for a regular order booking to come back. I believe in the last couple of months, we've been able to address that somewhat. And I think in this month, especially, I think we're seeing a dramatic improvement. So I think the market is definitely coming back for PEBS. So on the back of that, we would say we're quite confident of at least moving that 50% of prepandemic revenue for PEBS, back up to something approaching 70%. I think that we can definitely commit to. And that happens, obviously, the impact on profitability also is quite substantial. So, yes.

Okay. And how is the development of this new capacity of railways and [ highways ] projects? So you can give some idea on that?

Sure. We have postponed the CapEx to next year, primarily because, as we have said, railways offtake from both ICF and CF has decreased for us. It's only at about, again, 40%, 50% of what it was. Now PEBS and Enviro, we expect a faster recovery. We believe for railway revenue to recapture, it may take a few more quarters -- a couple more quarters, perhaps. So accordingly, we have -- we adjusted the timing of that. Ideally, you would want to have this plant finished in this financial year, but I think we are going to be pushing into next year. The [indiscernible] project. But we are commissioning CapEx in Patancheru, especially in our robotic assembly unit. So that CapEx will go ahead because that is resulting immediate revenue increase once commissioned.

Right. And would it be possible to give in terms of revenue guidance or growth in Pennar Global or overall engineering services?

Both of those businesses are doing quite well. I think engineering services, in this financial year, if you would look at that revenue stream alone, I think we're looking at close to 25%, 30% growth. We expect that to continue because we are actually actively seeing no orders right now. So we will look to scale that up dramatically over the next few quarters. And for the rest of Pennar Global also, because of all these investments that are going in, our hope is that we add a fair amount of revenue to that. And once the project has been commissioned, we expect nothing less than $100 million over the next 2 years to come out of that. But obviously, that's -- it's a process that is complete investments. We have to build up the order book and then get the revenue in. So probably a year from now is when we will see extremely substantial amount coming in. But some amount of growth will definitely be there because it's a low base. Our total revenues in PGI is only about $11 million. So we expect that number will grow quite well. But our ultimate goal is to get to $100 million in the U.S.

The next question is a follow-up from the line of Tejas Mehta from Old Bridge Capital.