Pennar Industries Limited (513228) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Pennar Industries Q3 FY '23 Earnings Conference Call hosted by PhillipCapital (India) Private Limited. This conference call may contain forward-looking statements about the company, which are based on beliefs, opinions and expectations of the company as on the date of this call. These statements are not a guarantee of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vikram from PhillipCapital (India) Private Limited. Thank you, and over to you, sir.

Thank you, Seema. Good morning, and very warm welcome to everyone. Thank you for being on the call of Pennar Industries Limited. We are happy to have with us the management of Pennar Industries 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; Mr. J. Krishna Prasad, Chief Financial Officer; Mr. Manoj, Head Corporate Affair; and Mr. K.M. Sunil. Before we start with the question-and-answer session, we'll have opening comments from the management. Now I hand over the call to Mr. Aditya for opening comments. Over to you, sir.

Thank you, Vikram. Moderators, thank you again. A warm welcome to all our stakeholders. Thank you for your presence today on Pennar Industries Quarter 3 FY 2023 Financial Results. The conference call will follow our usual structure. First, I will start with my commentary on our financial results, covering our profitability, our liquidity and our growth. Following this, our CFO, Mr. Shrikant Bhakkad; and Mr. Krishna Prasad will present their overview. And after this, we'll open up the call for questions. So an overview for the third quarter. We recorded net sales of INR 692 crores. Our PBT was INR 27.54 crores. This represents growth of 97% over the comparable quarter the previous year. We saw some moderation in our revenue on a sequential quarter basis, Q2 to Q3. This was due to low margin revenue being remotely placed by higher-margin revenue streams. We are confident we'll achieve our financial year targets and scale our PBT further in the fourth quarter. We will close the year strongly with our best-ever operational PBT. Our Q3 PBT of INR 27.54 crores with a margin of 3.98%. We expect further improvements in our PBT as we scale our higher-margin deals at the expense of our lower-margin business units. We generated a cash PAT of INR 37.41 crores, which was at a margin of 5.4%, and we're continuing to work on scaling our margins and our PBT value. That covers our profitability. Liquidity and capital efficiency, so we cover our working capital days and our ROCE. We're currently at 77 days working capital and expect to reach 75 days by the end of this financial year. Our annualized growth for Q2 -- or Q3, I'm sorry, was 19%, and we expect to reach 20% ROCE by the end of this financial year on an annualized quarter basis. It will not be 20% for the year, but 20% in the quarter -- annualized quarter, fourth quarter. That completes our liquidity and capital efficiency discussion. On our growth drivers. For the next few quarters, we expect a Body in White business, our Pre-Engineered Building business, both in India and the U.S. and our Engineering Services business to grow. We're also working on our expansion of our module project, which will be commissioned in the next financial year and will substantially grow our revenue and PBT. I'm thankful to all of you for your time and attention today. We will continue to focus on profitability, growth, liquidity and capital efficiency. I would like to hand over the call to our CFOs for their comments. Shrikant?

Welcome to the shareholders for the third quarter financial results, for the quarter and the 9 months ended FY '23. The key metrics I would like to just inform you. In terms of revenue, we have increased from INR 532.97 crores to INR 692.22 crores with a growth of about 30%. EBITDA has increased INR 46.9 crore to INR 66 crores, about 40% increase in terms of percentage. It has increased from 9.53% to 8.81%. The PBT has increased from 14.13% to INR 27.54 crores. And in terms of PAT, it has increased from 10.71 to 21.11. The increase predominantly in terms of revenue if you compare the Q3 versus the Q3, it's predominantly on account of the geographical expansion, which we have done in U.S., so a chunk of the revenue is coming from that; and also in India, the increase in the BI business and the expansion in the higher profit-making businesses in terms of steel BUs. We are happy to inform the shareholders that we have crossed last year's annual PAT of INR 42 crores, what we have. And currently, we have for the 9 months ended, we are at INR 52 crores, which has helped us up by more than 20% if we compare year with a 9 months basis also. With this, we'll like to hand over the call to the moderator.

[Operator Instructions] We take our first question from the line of Anika Mittal from Nvest Research.

Sir, my first question, can you please spend a few minutes on competitive landscape for the industry you are operating in, along with your competitive advantage which shall enable you to take the maximum order from the upcoming opportunities, which is coming from the recent budget announced by FM ?

So the competitive landscape in many of our businesses is that they are dominated by mature large players. Very few of our businesses consist of competition -- competitive intensity where it's very fragmented. So it would be difficult for me to answer the question across the entirety of our revenue streams because we have, as you may be aware, about 9 business units within the company. But I can say for the larger revenue streams, our competition are all -- I mean, in India, we compete with Kirby, we compete with Thermax, we compete with Tube Investments. And in the U.S., we compete with Cornerstone, which is a multibillion dollar firm, and we compete with Whirlwind and others. It's a complex relationship. A lot of our competitors are also our customers because we supply to Thermax. We have good relationships with them as well. So typically, we tend to get into industries which are mature, which can scale, and which have presence of large, well-structured corporates. So the competitive intensity doesn't rise to the level where you have to compromise on margins to good revenue. I will try to get a better answer to you later, but in the interest of time, I think does that broadly answer your question?

Okay. And sir, second thing is for FY '22 end, as per our annual report, your capital employed is INR 915 crore. That is basically the total of equity and your noncurrent liability. And earlier, you have guided for 20% ROCE, right? So would that to be true, you must generate EBIT of INR 185 crore kind of EBIT and EBITDA of around INR 250 crore, right? And for 9 months, EBITDA, it is INR 150 crore. So do you think we will achieve INR 100 crore EBITDA in quarter 4 to that guidance to be hold true?

So if you look at the capital employed right now, that number is...

Close to INR 900 crores.

It is INR 900 crores. So if you take our EBIT for the year, I think right now, we would end up at -- I mean, the 19%, 20% was on a quarter basis. For the year, we may be slightly below that because of Q1 and Q2 we were not at 19% or 20%. But we will not be giving an EBIT projection for the financial year, but you can assume improvements on Q3. So I'm quite confident that even if we don't touch 19%, 20%, we'll be close to it for the whole year. For the quarter, as I mentioned in my initial comments, we will be about 20% divided by 4, so we will be about 5% return on capital employed. Shrikant if you...

Yes. For 9 months ended FY '23, we've already reached EBITDA of INR 183.86 crores.

Depreciation...

And then -- depreciation if you add, it is close to around INR 47 crores. So we -- more or less, we should be that, is our view.

Previously, but it will not be a substantial difference what we will have.

Can we achieve the level of the 17%, 18% kind of more 20% on an overall year basis?

17%, 18%, EBITDA level, we'll have close to around 9 -- presently we're at 9.5.

No, no. He is asking about ROCE.

ROCE, 19%. We'll reach to 20%. Our target is to reach 20%, but...

To reach to 20%, you have to [Indiscernible] INR 100 crore in quarter 4, so that's why I'm asking. That's really a surprising number.

INR 900 crores, you added INR 180 crores in EBIT, right? So our EBIT right now is not INR 90 crores. I'm confused why you would say we need to do INR 100 crores in...

No. Actually, I was talking in terms of EBITDA.

EBITDA is already INR 180 crores.

Yes, I think you may be looking at the wrong number. EBITDA for the year -- for 9 months is not what you're saying.

I think quarter number or for the 9 months ended. 9 months ended number is already at INR 183.

That's what we're trying to say. It's already at INR 183 crores. So...

Actually, I think there is some confusion. See, your EBITDA is -- your capital employed is INR 920 crores kind of, right? And to do an ROCE of 20%, you must do the EBIT of INR 184 crores -- EBIT of INR 184 crores, right?

Yes.

Right. And what is your 9-month EBIT?

100 and -- let me tell you....

EBIT, if you remove EBITDA and depreciation. 140 is the EBIT.

That's what I'm asking. Will you do that kind of remaining EBITDA, INR 184 crore?

Yeah, yeah. That is only 46, no? It's not INR 100 crores. Where is the INR 100 crore number coming from?

That was the EBITDA thing. If you add back the depreciation to EBIT...

I would assure you we will hit 20% ROCE for the year. Okay, let's move forward okay. Any further questions, sir?

Yes, sir. Your revenues from outside India rose from INR 44 crore in 2021 to [INR 72 crore in] 2022. So my question is what is this number in the first 9 months, basically your outside India business number in the terms of top line for first 9 months?

Outside India -- in India versus outside India, the difference between the standalone and the consolidated. So INR 160 crores is the difference for the quarter-on-quarter, if you take. That's predominantly INR 536 crores versus INR 692 crores, so INR 536 crores is the India business and INR 692 crores is including the U.S. business. So close to INR 160 crores is the entire difference that comes from that.

And second thing is, sir, what is driving this growth? I mean, how sustainable this is? Because I'm asking this because considering the macro headwinds going on in Europe and U.S. base, I'm not getting how we are able to deliver this fantastic numbers. So kindly give some color on that.

At this point, our U.S. revenue -- I mean, our international revenue seems to be quite robust. The reason why we are saying that these are order books are growing. There is, as you -- I think you mentioned, there is talk of recession, but we are not seeing any sign of that in the markets that we are present in. Maybe in the tech sector, but at least outside the tech sector, we have not seen -- at least for our addressable markets, we've not seen any decrease. In fact, our order books have gone up in January. And I am not hearing any talk of a decline in our revenue from our international businesses or a decline in the margins.

And sir, on the capacity front, what is our total capacity and capacity utilization across the different verticals? And are we considering any further capacity expansion or CapEx plans going forward?

So capacity utilization, again, we are a little diversified. So we -- I can give you an overall number, which may not make much -- I would not -- I would ask you not to scale that number across the company. It's around 60%, 65%. But in several of our businesses, we are at capacity and we are adding capacity that would include our PEB, it will include India, it will include PEB in the U.S., it will include our module plant. And in some, we are under capacity, specifically in our steel BU and our older revenue streams, so yes.

Any CapEx expansion plans, sir? Expansion plans in any of the verticals you are considering?

Yes, we will be scaling our Body in White capacity over the next quarter, our Pre-Engineered Building capacity in India and in the U.S. as well. And we will also be increasing our module capacity. Those are -- from our Engineering Services business, yes, we are building a larger delivery team in India as well. So we will need to...

What kind of the CapEx amount you will...

[Operator Instructions] We take the next question from the line of Deepak Poddar from Sapphire Capital.

Sir, first I just wanted to understand on the demand scenario, the demand environment both in India as well as the international division. I mean, how do you see the traction in that demand or any kind of slowdown that you're seeing because of the global scenario? Some flavor -- or because of the inflation scenario, some flavor on that would be very helpful, sir.

Thank you. So we are primarily present in the automotive sector, the building and infrastructure sector, railways and aerospace and in the energy sectors. Taken together, that's a big chunk of the gross fixed capital formation in India, and quite frankly in any country. As I mentioned on my call, we don't see any problems in the U.S. We don't see any problems in Europe. I think while there has been talk of recessions and soft landings, from what I am seeing from an order book point of view, I'm not seeing a reduction in demand as of right now, which means we will be -- in our view, we will be able to sustain our revenue and profitability for the near term. We don't see any problem there. In India also with the exception of some sectors, such as railways, for example, a lot of -- we are hearing a lot about railway budget, but I am not seeing much traction on the ground as far as orders to us are concerned. So in that we are seeing some moderation in railways. It doesn't comprise -- from a profitability point of view, it's comprised of less than 5%. So it's not a big deal, so to say. But I don't have clarity on the railway business units revenue and profitability in the near term. Hopefully, that changes. Our order books are quite strong, but that's not translating into revenue in railways. In India, the Pre-Engineered Building sector is now at its record peak in terms of order book. In fact, we're adding capacity as quickly as we can. And as you may be aware, Pre-Engineered Buildings captures basically any process industry, any warehousing, logistics, any manufacturing industries, the end use of this. Any nonresidential construction uses pre-engineered building. So we are not seeing a reduction there. Large order books here in India and in the U.S. So from a demand side, I'm not seeing a reduction in that business unit. Solar also is doing reasonably well for us. Profitability is increasing and improving. And we believe that -- this is not only us, I think all solar players are expanding their capacity. In fact, we would be a medium-sized player in this field. We would not be one of the larger players in this field. But not across our major verticals, whether that be automotive or infrastructure or building construction, railways, we are not seeing -- I'm not seeing a reduction. Was I audible? Or...

Yes, yes, I understood. Sir, second question is in terms of the profitability. You mentioned that our second half profit of [Indiscernible] in the first half. Sir, we are holding on to it?

Could you repeat that, the second part? The second half, sorry, I couldn't make out what you said.

Our second half PAT would be double of first half PAT. So are we holding on to that?

I'm not sure I said exactly that, but let me do the math, give me a few seconds. Our PAT in the first half was?

Around INR 30 crores, PAT was what we reported in the first half. And I think be aware of the view that second half it will be 2x of what we have reported in the first half.

Yes. For the 9 months, it is INR 51.58 in terms of PAT. And the quarter that we reported earlier quarter was 16.

What is the first and second, Q1 and Q2?

Q1 and Q2, INR 35 crores.

[Indiscernible] round about INR 30 crores, first half.

Yes, INR 30 crores or something. So I think we'll be close to that, if not entirely that. But I would really not like to give guidance on this. What I would prefer to say is that we will -- Q4 will be stronger than Q3, that we have picture of. So we have done the prices and profitable. [Indiscernible] those are just numbers. I don't think we should...

Fair enough. I understand. And sir, anything on FY '24, any flavors that you can provide? I mean, in terms of even the top line thing and how do we see the margins now we have a coming to year-end?

Again, I will not give guidance, but I can say FY '24 will be better than FY '23, that much I can say. And we are hard at work to improve our profitability and our capital efficiency. And we will report to you quarter-on-quarter exactly what goes on. But as of right now, I would like to only comment that Q4 -- FY '24 will be better than FY '23.

We take the next question from the line of Mr. Dev from Astute Investments.

So most of my questions are around your pre-engineered building division. So before I move on to fundamental question, I just had one bookkeeping question. So I just wanted to check with you that. So in your segmental data, you report 2 divisions. One is diversified engineering and second is custom design building. So my understanding is this custom design building is entirely your Pre-Engineered Business. Am I correct?

Yes, it is. But it may also include engineering services a little bit, or no?

Yes. very small part of it.

Broadly speaking, yes, you're 90%, 95% right.

90% of that -- not entirely 100%, 90% of that.

Okay, sure, sir. So sir, now I move on to the fundamental questions. So my first question is, I mean, if I look at your revenue growth, the margins which you have been doing in the pre-engineered building is much better as compared to the 9 months of FY '22. So if you can give a broad understanding, and this has been written across the industry, all the players are reporting very good numbers. So what is changing in the industry and what is leading to your this kind of growth in revenues and improvement in margins, if you can elaborate on that? .

You're speaking specifically to the pre-engineered building business, sir?

Yes.

Yes. So I think there's -- I mean, I think the gross fixed capital formation story is increasing. I think the Indian government, if you see in the budget, government CapEx is increasing, which means -- we don't deal with the government directly, but it filters down to private sector CapEx ultimately. So whether it's warehousing, whether it's manufacturing plants, whether it's airports, there's a tremendous amount of new orders that are coming on, the new capacity that is coming on. I can't name names, but the quarter has been characterized by, I would say, 3 or 4 very large orders. Currently, in our order book, 40%, 50% is only 2 or 3 players in PEB. That's both a risk and also a good thing in terms of it gives you tremendous ability to cater and make sure revenue goes to those players. And on the other side, of course, the risk of having if not majority, a big chunk of your order book coming from only a few players. But in my opinion, all pre-engineered building companies are doing well right now because a lot of people in the process industries, warehousing and manufacturing are expanding capacity. I think that's the reason why everyone-s order books are right now full.

Okay, sir. And sir, in the past, this industry has faced an issue of raw material price volatility. So I think FY '18, you had done almost 14% EBIT and then it has come down to almost 6% margins. So how are you plan -- trying to change this volatility in margins? And do you think in the future, the margins will be much more stable? Or this kind of volatility will continue because of the volatile raw material prices?

I think we had a pass-through, and we've learned the way to manage these -- for these risks now. So obviously, with our risk management every quarter, there's 4 risks we cover. One of the risks is raw material price escalations, which can be dangerous for our margins. But effectively, the combination of us booking raw material in advance, quarterly rate contracts, which allow us some time to see a cost increase and then have them to pass that on to our customers and ultimately price escalation contracts terms for raw material price escalation terms in our contracts, we'll make sure that we don't have an issue. Worst case scenario, we will have to go back to our customers and renegotiate if that happens, but that's extremely rare. So the combination is 4 or 5 things. I don't believe we will have an issue as far as raw material price variability potentially impacting margins is concerned. And that has been the case for the last 8 quarters, I think, in my opinion. So I think we understood how to deal with it, very, very precipitous rises and falls, obviously, changes the equation a little bit, but I don't think that's what we're expecting right now.

So sir, 2 related questions to this again. So one, if you can share a number that how much of the order book currently is the contracts which you have signed, the recent one on what percentage of those have contract for price pass-ons to the customers. If you can share that number. And second, also based on your explanation, do you think that this 9% margin, which you have done on a 9-month basis, do you think you will be at least able to sustain this margin, if not improve? So these are the 2 related questions.

No, no. So what is 9%.

So based on the segmental [Indiscernible], 9% is your [Indiscernible] for the pre-engineered building divisions on a 9-month basis. .

Okay, okay. Yes, that is also our U.S. business, is higher margin. I think we can safely say that will persist. I don't see an issue there. As to your question on what percentage of our order book we have price escalation for, I don't have -- it's a good question. I don't exactly have the answer right now. I'll get back to you on this.

Okay. And sir, one last question from my [Indiscernible]. So you have said that you have almost INR 800 crores of order book now for your pre-engineered building business. What kind of....

Your audio is breaking, sir.

I assume you have INR 800 crores of order book for your pre-engineered building division. So if you can share what kind of time lines are usually there for order book to get converted to revenue.

Typically, they convert to about 6 to 8 months. I don't think it's much more than that. Now again, this is a blend, some convert in 3 months itself. But the vast majority of it, I think, converts quickly. Was that your question, sir?

Sure, sir. That answers my question.

We take the next question from the line of Mr. Vikram from Niveshaay Investment Advisors.

Sir, what is current order book from Solar business?

Sorry, could you repeat that question?

What is current order book from solar business?

Current order book of solar. It's about INR 800 crores.

And was this -- what was contribution in last quarter revenue?

Revenue from solar last quarter would have been about -- it would be about -- we don't have an exact breakup for that because it shifts in the huge part of our BU. But say, around INR 70 crores, INR 75 crores.

INR 70 crores to INR 75 crores. And what was the margin?

Margin, we don't report segmental PBT. But we have a base where less than a certain percentage of operating profit. We don't -- each business is a different number. So specifically to that business, we will not be able to give you margins.

We take our next question from the line of Mr. Dilip Sao, an individual investor.

Congratulations. Very good set of numbers all round. You just talked about solar business pending INR 800 crores. Where does it sit? Does it sit in pre-engineered building projects? Or is it somewhere else?

It doesn't sit in PEB. We don't -- as I said, for PEB, we do provide a segmental breakup. Solar, [Indiscernible] main company revenue is part of that. It's INR 800 crore order book, not revenue.

Yes. So I was just wondering if you have pre-engineered building India, U.S. together is INR 1,200 crores, and you have a solar business of INR 800 crores and your run rate order booking in products is about INR 350 crores, INR 400 crores, they are regular businesses. So as we speak, starting 1st of January, we are talking about INR 2,400-odd crores of pending orders for the quarter. Some of them will not get billed in this quarter, but..

Yes. So your question, sir, is?

Sir, my question is, is it -- am I getting the numbers correct, that solar business is INR 800 crores.

Broadly.

Engineering business, U.S. and India is INR 1,200 crores, plus regular business in the Components and Products business, which are just run rate businesses.

So yes. [Indiscernible] 40 million to 45 million in terms of an order book.

INR 440 crores in expense, INR 760 crores in India pre-engineered.

Yes. PEB is about, as we said, about INR 800 crores. Railways is about INR 156 crores, and Solar is about INR 800 crores. So yes, so the math is approximately right, yes.

So around INR 2,000 crores. So the solar business that we picked up in September, we discussed that it will get built in 6 months from September, which is basically March end. That is not happening, right? Because we are just hardly build anything INR 700 crores, maybe out of INR 1,100 crores.

No, we haven't built that. Partly, the reason is because there are delays from our customers on execution on that. I will not name the customer, but they are a large PSU and they have not -- I think the land acquisition...

The press release you have come up with, which say that INR 1,100 crores will get billed in 6 months, that will get delayed to Q1 next year, right?

At this point, I can't give you a lot of clarity on exactly when those specific orders will pass out, but I do have every confidence that those will pass out.

And even not partly because it's a turnkey project. So you won't even build partially or you won't recognize the revenue at least?

I'm not saying we won't, but at this point, I can't commit to exact value is what I'm saying.