Pennar Industries Limited (513228) Earnings Call Transcript & Summary

Perfect. Perfect. I will send it to IR department. My question is Aditya broadly is that, one is the U.S. business. I understand from the last communication to the that the U.S. business order book has been extremely good. I'd like to get some color in terms of how is the order book looking like into -- looking at maybe this calendar year? Are we going to get an INR 50 crore kind of a run rate by end of this year? Or whatever the run rate that you think we will be? So that is one. The second question is regarding the net debt, it has gone up to INR 500-odd crores, that as per the presentation. So just wanted to know our objective has been to reduce the cost of -- finance cost to 3.5% or lesser of the revenue. So what is that -- so if you can tell me what is the reason for this increase in net debt to INR 503 crores. And the third question is regarding the gross margin, we have been told that the pass-on of any increase in raw material is pretty much weekly. So what is the reason for the drop in the gross margin. Is it because of the lag effect and when it's going to, and at what level it's going to stabilize?

Let me break up the questions, sir. The first question was on the U.S. business, the traction we're seeing and what we expect. Now the next question was regarding our net debt and the corresponding interest cost as a percentage of gross sales and what we -- how we see that evolving. And your third question was on gross margin. So we'll take this up one by one. Our U.S. business is now comprised of our metal building sales there, which is carried out by [indiscernible]. Our tube sales -- CDW tube sales there, which was carried out by PGM and our hydraulic and engineering services sales. All 4 of these verticals are very well poised for growth. They have all grown over the last couple of quarters as well, and we expect further growth in this business. The order book that you speak of pertains to Ascent and it has gotten stronger since the last time the press note that we had sent out. The plant has just started operations. And we are very confident that it's -- all of these initiatives are contributing to our PBT very, very quickly. So I'm hesitant to provide the numbers to you, per se, but when you said INR 50 crore, did you mean I can you around that. Did you make INR 50 crores in terms of...

Particularly the Ascent business is only, I think, 6 months old. So are we going to see something around, say, INR 50 crores per month run rate going by, say, end of this calendar.

No. It would not be INR 50 crores per month for Ascent, Sir. I think in this calendar year, the number, the indicative -- broad indicative number you should look at is closer to about INR 15 crores to INR 20 crores per month. That is the number that you will see for Ascent alone. However, PGM, our CDW tube sales in the U.S., that itself will exceed another INR 7 crores. So you can add that to that. And our existing Hydraulics and Engineering services, which will also grow, will be close to another INR 7 crores. So overall, you can expect something approaching INR 30 crores per month plus in that business vertical over the next few quarters, and we will definitely achieve that in this financial year on a monthly run rate basis.

And I will assume all of them will be around 17% to 18% kind of EBITDA margin, right? That's what the typical pricing around?

Let me put it this way, sir. The overall for the blend because we have a different blend of things. But on the overall debt revenue number that I mentioned, you can assume a PBDT, which is after interest cost per PBDT, not EBITDA so much, but after interest costs also removed of around well above about 12% is what we can assume, above that itself.

That I got it. Yes Understood.

And now let's move to net debt. We have a net debt of INR 584 crores. And that is a high number. Our interest cost as a percentage of sales were 3.35% to gross. We intend to bring that down to 3%. Our debt, which is mostly short-term noncash debt and others, is a feature of our business. This is something that will increase as revenue increases. What's important is, as you said, the interest cost as a percentage of sales be controllable. So we are taping a number less than where we are right now. We are not efficient right now. We need to improve our efficiency a little bit more. But what you will see is this number being around 3%. And if it's around 3%, it is appropriate. In our view, it is an appropriate use of capital because it's mostly noncash. It is -- it include bank charges. It includes a lot of other finance costs, which are classified as interest, but effectively, their finance charges. So the 3% number is what you can take with you and that we will ensure is achieved, and if possible we need to need to optimize as well. The underlying story on this is if you look at the last 2 quarters, quarter-on-quarter, from the pandemic, our revenues improved. Our PBT continued to improve because Q4 was a very good quarter. Q1, I would define it as -- I mean, Q1 is always less than Q4. But from a pre-pandemic to now comparison, we are very well placed right now to both scale revenue and to scale profitability. I do believe that this year will be a very good year for us from a profit point of view. So with that backdrop in mind, I think net debt, since it is mostly -- the vast majority, 80% of it plus is noncash, current -- I mean, short-term debt, it should be seen in a viewpoint, it should be seen in relation to what the overall revenue number is doing or the overall percentage interest cost as a percentage of sales is doing. So on both of those, we will commit to you that they are going to be controlled. And most importantly, our target is to bring this 15% to 15.5% ROCE return on capital employed to 17%, 17.5%. So that would be our focus going forward. Gross margin for us, we are a blend of businesses, and we don't target gross margin. We target PBT, we target capital efficiency ROCE. So accordingly, sometimes in quarters, you do see some swings. This is not emblematic of anything wrong going or an erosion of our margin from our customers because some of our businesses have 30%, 40% gross margins. Some of them have only 12% or 13% gross margin. Gross margin being defined as margin after variable. But when you finally see it filter down to PBDT, since we target PBDT, we target PBT, you will see very good stability. So I think -- my request is that you hold us accountable for the bottom line for PBT and also capital efficiency. That would be the metric. On operating profits, there will be variations because of the nature of our business. Because in each of the products we sell, the revenue attribution shifts from one product line to another product line, then that does have an impact on that. So those are my answers, sir. And if you need clarity for any of this, we would...

Just -- that's where I was coming from. In terms of -- see, once we see a gross margin leap of 2.5%, that's a little bit scary for a company like ours and profit after tax is 2.5%. So that's why giving details about the individual businesses takes away those apprehensions that where are we really growing. Because if you see the gross margin of '19/'20, it is 40-odd percent coming out to 38-odd percent. I mean there is just 2% dip in gross margin...

We look at the numbers you're comparing, sir, but I would also request my CFOs to chime in on this. But if you're comparing the first quarter of this financial year, which is what the conference call is covering today, if you compare that to the fourth quarter, it's about 0.6% swing, which is very natural. Is that what you're comparing, the quarter 1, quarter...

I'm seeing this presentation, I don't know what is the slide number. The gross margin of quarter 1 of 38.5% versus 40.2% of Q1 FY '21 and 40.9% of FY '20, which is a likable year to compare FY '19/'20. So if you really look at 40.9 -- 40.2 versus 38.5%. That's where I'm coming from.

Sir, you have to look at that number in terms of Q1 to Q1 comparison. And in terms of Q1 comparison, we are at 38.81% versus 38, I think the margins that you are looking at gross profit margin percentage, it is 164 basis points that's there in the presentation. It also includes other income component integrate, which [indiscernible]. So if you can remove the other income component and then the number will be 0.61 sir.

The last question, if I may, if I can get 1 more question to be put. This is regarding the Railway business, there is a lot of government circulars around people coming and attending offices compulsorily. So is there any movement we are seeing in the Railways business of ours in terms of inquiries and stuff.

Railways continues to be a little bit of a black box. Our railways vertical continues to be a little bit of a black box. As I mentioned in the last 2 quarters, we are not able to give you any guidance on that right now. What I can tell you is that the business unit is profitable that we are planning for growth, but the Railway board-based ICF, MCF orders, we don't have a lot of clarity. In my view, they have not fully recovered from the pandemic themselves. So how that will evolve over the next few quarters, once they get clarity, then pass that on to us, and I'll be able to pass it on to you. But as of right now, the only thing I can commit to is that the business unit is stable, but obviously, nowhere near said it to us before. But frankly, neither our growth story nor a PBT depends very heavily on that business vertical right now. If that revenue comes back, that's fantastic. It will add -- it will be a big boost to us. But even if it doesn't, the numbers which we are committing to you, PBT growth quarter-on-quarter, capital efficiency growth quarter those will persist. But as of right now, railways alone, we are hard at work building a long-term strategy on that. But once that is crafted, I'll send it to you. Our existing revenue streams ICF, MCF, we honestly have no clarity right now.

This number INR 140 crores is pretty much static for a long time. I was just wondering, we are not getting orders as well as we are not building the pending orders. That's what I was -- my question was.

Good question, sir. So I assume you're saying INR 140 crores order book. So what's happening is, we are invoicing the same amount. We are booking the same amount, which is around INR 10 crores to INR 12 crores per month range almost. So it's not less than that. Well, it's not more than that also. So that's why it's more or less in that -- around that 140 number. But what I can tell you is that the business unit, the CEO of that, Mr. Dayasagar is someone with decades of experience in this industry. He is -- we are ramping up our export orders for that business. We will very soon give you more clarity, but there is reason to be optimistic. It may take us a little more time, maybe a quarter more, but I think we will be able to give you a lot of clarity on that. And -- but for now, right now, as it stands, you can expect sustainability on that from an order book point of view, revenue point of view. The sales are happening so the order book is not static because no sales are happening and no order booking is happening. It's static because the order booking and the revenue is matching.

Thanks, Aditya. Really appreciate your candid answer. And I will come back to your IR department on the [indiscernible]

We would appreciate that. Please do tell us the specific communication formats you want and we will absolutely do our best. Our goal is to communicate clearly and we will make sure that happens. Thank you so much for your questions.

[Operator Instructions] The next question is from the line of Venkat Subramanian Raman from Organic Capital.

Congratulations on good set of numbers. My questions [indiscernible] with you. Are profitable divisions are basically hydraulic, Railways, environment and currently the U.S. Many of these clearly have much superior margins. There are a whole set of other businesses which are probably pulling down ROCE, which is maybe what you're focused on. And it also poses the challenges that other shareholders are posting to you with this in terms of more disclosure, and all of that. I appreciate your service in terms of making it more complex in terms of how to [indiscernible]. My view had a little different from what others have. But my question is really, why is it that we're still looking at other businesses which are margin diluted.

So good. Thank you for your question, sir. So we -- what we try to encourage above all is sustainability. So -- and that sustainability should be in revenue and in margin protection. So you are right that some of our businesses are higher margin than others. But the basic metric we use when we look at whether we should be in a business or not is, we ask if we have a core capability of delivering value in that business. Do we have the physical assets? Do we have the manpower, the IP, the know-how in order to deliver value, and value should be a thing of margin. And that shouldn't be just for 1 quarter or 2 quarters, it should be over the medium term. So we do have verticals right now, and I'll name a few of them. For example, our Pre-Engineered building vertical, which are at lower-than-expected margins. But over the long term, we believe them to be strong contributors or they will be strong contributors. Unfortunately, for these kind of businesses which have a -- which have big engineering teams, which are structural engineers, project managers and others -- sometimes when there is a down cycle from a capital goods sector, they do tend to underperform. However, the question we ask ourselves is, what is the long-term viability? Will people still be making buildings 5 years from now, 6 years from now. If that is the case, then we go ahead and do it. If we feel the answer to that is no, and then we will either, A, not be able to deliver value for whatever reason; or B, the business itself will not be viable after a certain period of time, 4 years, 5 years, 6 years, then we exit that business. So we have made several of these choices in the past, and we will continue to make them. Our goal is, yes, capital efficiency, but also sustainability and the impact that we make. So that metric we will use. And what you said, which is that remove a low-margin business the ROCE increases is absolutely appropriate, and we are hard at work to ensure that happens. And the way that will play out as a consistent ROCE improvement, which if you look at the last 3, 4 quarters. I mean, if you go back 1 quarter, our trailing ROCE would have been very low. Now it is up to 15.5%, I think next quarter, you will see further improvement on this. So improving ROCE, improving PBT margins, improving capital efficiency is, which is effectively ROCE, of course.

Under the [indiscernible] and the context of these 2 things. One is actually 2 of the cash materials, the 2 things that are very material for -- from a of Pennar point of view is management bandwidth, which has involvement of your time and senior management time. And most of our businesses are capital hungry. So therefore, for us to ration it a little more meaningfully, I'm wondering whether we should be walking around with [indiscernible] and actually wanting to fuel on the divisions at the same pace.

Good points. I think those are definitely the 2 bottlenecks we have, management bandwidth and capital is obviously finite. Nothing deserves and nothing is infinite cap -- can be given infinite capital. We are absolutely doing what you're suggesting. It may just be moving at a pace that is slower than it should be. But our preference is to -- we see diversity of revenue or doing too many things is obviously bad. It prevents focus, it prevents specialization, it prevents value addition. But the way we see it is, we have to make these choices, not just seeing the current capital efficiency, working capital in that account, but what is the long-term viability of our business. What is the business we should be in Pennar? What is the business we should not be in? That is something you have to follow up. Your point is absolutely right in that. And we are making these decisions quarter-on-quarter. But we're doing not just using the metrics of current capital efficiency, current bottlenecks, but long-term sustainability and viability of businesses is what we will. For example, Railways is a very high-margin business. But as it turned out during pandemic times, Railways is not sustainable. Does that mean we're going to exit that business? Well, no, we should not do that because what -- I mean when we are sick, we are sick, but we will get better. So when this capital goods sector is constrained right now, it will get better over time. And I think we have to prefer Pennar to be a company that can sustainably deliver good returns on capital. And that means when you break the problem into pieces, all of our business units have to do the same. So you're right, we will reduce the business units we have. We will become better at communicating what each business unit is doing. I mean some of them are order book based. Some of them are just scheduled revenue base. But giving clarity to all of our stakeholders is critical and also being capital efficient has to be the metric we use. So the only thing I'm adding to that is long-term sustainability. I mean there are -- there is cyclicality for some of these businesses. So we have to be capital efficient, conscious of what where we are deploying our capital, and obviously, as you also said. But overall, I firmly believe we are crafting a set of businesses which are well poised to scale well in the future. And there will be 4 or 5 businesses. There won't be 10 businesses. So we are going to ensure that happens. Subramanianji or the operator, can you hear us?

Yes, sir, we can hear you. [Operator Instructions] We'll move to the next question, which is from the line of Vikram Suryavanshi from PhillipCapital.

Sir, just wanted to cross-check what I heard. Can you share the gross debt and cash balance number.

In terms of profit, as of consolidated 30th of June, we are at INR 591.63 crores.

Okay. And cash balance would be around?

Cash balance will be close to around INR 55 crores.

And next question is regarding this outlook on the business as well as this large kind of thing, the way government is promoting the renewable energy sources and Atmanirbhar Bharat particularly looking at this solar panel manufacturing also. So how that is shaping up in terms of opportunity for the solar business. And second, on your outlook and margin profile on PEBS lot.

So solar continues to do well for us. I think in our [ MMS ] business, though, the solar industry per se had a lull period with only 5 gigawatts overall in the country being implemented. We were able to maintain a substantial order book, and that continues. So from a broader perspective, we expect our solar revenue to be higher. And just plays into a little bit of what I was talking about in the last question, which is that solar was a business that was not doing well 2 years ago. It's doing well now, and I believe it is going to do well next year. So we need to evolve our framework, where we look at these as long-term opportunities, understand that there will be cyclicality sometimes in some of these business verticals. And then depending on the other business verticals to bear the load, so to speak, when there is cyclicality. If we do this, and we have -- I don't like using this word, but if we have that diversity in revenue streams, diversity in profitability, what it does do is ensure that we don't have a sudden crash in profitability. It ensures that our capital efficiency holds up because these are volatile industries. I mean, solar will have enough cycle, it will have a down cycle. Automotive will have an up cycle, will have a down cycle. I think we need to structure ourselves in a manner so that we can ensure that solar, will it be there 5 years from now? Yes, I believe so. I think solar is a long way to go. So we will continue to have our capabilities -- invest in our capabilities in this business. But as of right now, solar looks quite strong. And this year and next year, we are projecting growth. For PEB as well, a lot of the same argument stands. The capital goods sector has not been doing very, very well. But over the last 3, 4 months, there's been a fair amount of recovery. Our order books have been growing continuously in PAT over the last couple of months and the revenue has scaled up. The business unit is obviously profitable. I think with what we have our own projections for that business unit, I think quarter-on-quarter improvement will definitely be there. And whilst there is a broad-based recovery in Indian economy, which is not just the commodity, the company is doing well, but engineering, process industries, everyone doing a lot better, going in for expansion as they seem to be right now, then PEB will tick up. I don't see it in any way not ticking up. But even right now, it's profitable and focusing on improving revenue and growth in scale. And Q2, for the overall company and for PEB is far stronger than Q1. So...

And in terms of EBITDA margin for PEBs are we at a healthy level or are we still below like a sustainable level and there could be a recovery coming.

The EBITDA margin and the PBDT margin and even the PBT margin for PEBS will continue to grow. As of right now, it is in low single digits, the PBDT. We expect it to scale very soon. It is ultimately a scale impact. The gross margins are very healthy, high double digits. But once our order book continues to grow, once we convert a lot of that into revenue, then we'll take the higher PBDT numbers from a percentage point of view.

Ladies and gentlemen, as this was the last question for today, I would now like to hand the conference over to the management for closing comments.

Thank you to all our stakeholders. We have taken the feedback that we have received on this call. The questions cover steel prices, our U.S. investments and also our net debt and interest cost and whether -- how we improve capital efficiency, how we improve margins. I think a couple of the stakeholders also had requested that we change and improve the quality of our communication and clarity in our presentations, give more information. We will work with those stakeholders and others and ensure that all publicly available information is crafted in a way so that we can ensure better communication, better clarity so that you have the information you need to guide us for that as well. Thank you very much for your questions.

Thank you. On behalf of PhillipCapital India Private Limited, that concludes the conference call. Thank you for joining us, and you may now disconnect your lines.