Pennar Industries Limited (513228) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Pennar Industries Ltd Limited Q1 FY '26 Results Conference Call hosted by PhillipCapital India Limited. [Operator Instructions] This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Please note that this conference is being recorded. The management is represented by Mr. Aditya Rao, Vice Chairman and Managing Director; Mr. Shrikant Bhakkad; Chief Financial Officer; Mr. Manoj, Vice President, Corporate Planning; Mr. K.M. Sunil, Vice President, Investor Relations and Media Relations. Before we get started with the Q&A session, we will have opening remarks from the management. Now, I hand over the call to Mr. Aditya for opening comments. Over to you, sir.

Okay. Thanks. Good morning, and thank you for joining us for Pennar Industries Quarter 1 FY '26 Investor Conference Call, covering the quarter ended 30 June, 2026. We appreciate the opportunity to update you on our recent performance and provide insights on our strategic priorities for the year ahead. As an agenda overview, today's discussion, we will begin with a summary of our Q1 results, highlighting key performance metrics, which is revenue, profit before tax, working capital and major growth drivers. Following this overview, Mr. Shrikant Bhakkad will present a detailed financial analysis, and we will then open the floor for a Q&A session to address your questions. So the performance snapshot for the first quarter FY 2026, our revenue for the quarter increased by 15.3% to INR 845.67 crores, while our profit after tax grew by 21.06% to INR 31.96 crores. The key revenue growth drivers that we had was our PEB division, which achieved double-digit revenue growth. However, we had a significant labor supply constraint, which impacted our ability to meet our own internal targets -- our internal plan targets. These challenges have now been resolved, and that positions the BU for a very strong second quarter on the back of our improved capacity utilization. Raebareli has now been commissioned and has quickly gained capacity utilization and our labor issues, which we faced in the first quarter are behind us. In spite of that, the PEB division has grown in revenue and profitability. And with the new capacity now firing on all cylinders, we expect very good things from this business unit over the next few quarters. Ascent is the next business unit, has delivered double-digit growth in revenue and profitability. Our order backlog also has now expanded to $54 million, and we expect this growth momentum will continue. So, very strong growth in the last quarter and quarter 2 as well, we expect good growth. For the rest of the fiscal year on the back of a strong order backlog, we're quite confident that this business will continue to do well. Body-in-White has secured new clients. We had mentioned last time that we now have -- other than Stellantis, we have Hyundai, we have Sears Automotive, we have TIVOLT, Ashok Leyland, and there are several others also that are coming in. So, with our new ongoing capacity expansions coming in, the contribution to revenue for this business in the coming quarters will be quite strong. So, Q1 was good and Q2 again will be exceptionally strong. We expect, on a sequential basis, our Q2 to be far stronger than Q1. Our Q1 itself was growth, 15%, but Q2, we expect will do a lot better. Engineering services, structural engineering, again, grew quite well. BIM has been a little bit of a laggard, but we have, as I had mentioned in my previous call to you, we have expanded our new business development and our sales capabilities in the U.S., and we expect that, that will ensure that this business continues to grow. As I previously guided, we project very healthy double-digit growth in revenue and profitability for this business unit in this fiscal. Hydraulics has performed well in Q1, and is expected to maintain momentum in Q2. However, it's important to talk about this. The new U.S. tariff changes do present a challenge. The initial 25% tariff impact was manageable without any major impact on our operating margins. But the upcoming 50% tariff, which is set to be effective August 27, well, it makes the cost structure not really viable. So, it could affect our U.S. sales. Our mitigation plans are in place, and we are redirecting volumes to Europe, Canada, Australia and New Zealand. I do want to guide that this revenue stream represents about 2.2% of Pennar's entire revenue. So we do not, on an overall basis, expect a significant impact. However, out of all of our revenue streams, this is the one revenue stream, which is exported from India to the U.S. and is exposed to the 50% tariff. And in the event the tariff turns out to be a long-term tax structure, then we will have to mitigate this by moving our revenue streams to other geographies, which we are already working hard to build our order books. Moving now to boilers and process equipment. Order backlog has grown strongly to INR 110 crores, with further additions expected. The CEO of that business is very positive for scaling revenue by high double-digit numbers in this quarter, Q2. And for the remainder of the fiscal year as well, we expect to do well. Our PBT margin for the first quarter stands at 4.75%. Again, the impact of our -- the labor issues that we had in our revenue being not what we were expecting initially has resulted in some amount of margin contraction here, but a very, very temporary issue pertaining to about a month or 2 months. We absolutely expect our margins to improve well once our portfolio mix shift to higher-margin businesses continues. So Q2, we expect that we go back on to our PBT growth path. But this quarter, we are at 4.75%. Capital efficiency standpoint, ROCE is at 22.3%. Now in relation to ROCE, we've always used a definition of EBIT divided by capital employed. We've been in touch with some of you. We've been talking to our investors and discussing this internally. Now the definition we have used as capital employed is total assets minus current liabilities. We are evaluating post some of our discussions, moving our ROCE definition to include short-term borrowings as well. We will have more on that for you by the next -- we will take a firm call on this once we understand what most of our investors are comfortable with and what is typically done. And we will then parallelly report the older ROCE numbers and the newer ROCE, including short-term capital as well. And we will take a call on this by the next investor conference call. Our ROE, of course, will remain unchanged calculation-wise, and it's at 12.12% for the quarter annualized, and we project improvements on this in the course of this financial year. Working capital days currently stands at 76. This is higher than planned, again, the same labor issue that I had mentioned. The amount of revenue that we had to produce is quite substantial, close to about INR 100 crores. So while it is at 76, our confidence that we'll be able to reduce this number and continue in our working capital reduction plan is extremely high. And with PEB and other segments already having rebounded strongly in Q2, we anticipate very meaningful improvements in the next -- when we come to you with our September numbers. So working capital efficiency trend continues. This concludes my update on our Q1 performance. I will now hand this over to our CFO, Mr. Shrikant Bhakkad, for his comments and a deeper dive into the financials. Thank you so much.

Thanks, Aditya. Welcome to the shareholders and investors for the first quarter FY '26 earnings call. Total revenue for the period is INR 845.67 crores from INR 733.45 crores, up by INR 112.2 crores, which is overall 15.3% increase in terms of total net revenue from the operations. In terms of EBITDA, it has increased from INR 79.01 crores to INR 94.12 crores, up by 19.12%. In terms of percentage, it has increased from 10.77% to 11.13%. PBT has increased by 13.35% from 35.43% to 40.16%. PAT has increased by 21.6% to -- now it is up at 3.78%, up by 18 basis points, and the overall number is at INR 31.96 crores. Deep diving into the key metrics numbers that I've indicated above. Revenue from our customers -- custom design building solutions has increased by 25%. It's a strong revenue that has come from U.S. as well as India. Both our India and the U.S. PEB operations have significantly increased the revenue and both have contributed to the growth of the revenue in this quarter. Our Raebareli is fully functional, and we have started yielding the growth and we are poised to even higher growth as we speak. We had our U.S. operations from PEB also growing well. And the order book now stands at USD 54 million and India PEB order book close to INR 855 crores. The next line item, employee benefit expenses has increased by INR 6.52 crores on account of increments in wage revisions and the new additional plant and facilities that have come up in the current year, stand-alone by INR 7.33 crores and the increase in Ascent Buildings by INR 9.19 crores. Moving on from there to the finance costs. Overall finance cost increased by INR 8.1 crores, which comes predominantly from stand-alone financials. It is on account of increased additional revenue that we have planned and increase in the CapEx of Raebareli. The overall finance costs as a percentage is 4.16%, while we have guided you to 4%. These are due to the delayed dispatches that we had at Raebareli plant and due to the lower revenue, which are now behind us. We have guided you to 4% as our net revenue cost, 1% predominantly from long term and 3% from our working capital. While the long term is in control, the working capital is high and we are hard at work to reduce our inventory as we go by. And the finance costs, you should expect this to come down in the next 2 quarters. Working capital utilization is the metrics that we are trying to look. And as we grow our revenue, the working capital will automatically reduce. We are confident and we'll get back in the next 2 quarters. Depreciation and amortization, the overall increase is at INR 2.28 crores, which includes stand-alone at INR 1.7 crores on account of Raebareli and other CapEx-es that we had and INR 58 lakhs on account of subsidiaries capitalization. Other expenses increased by INR 37 crores. The variance is predominantly account of -- in stand-alone by INR 26 crores, which comes through higher erection expenses, subcontract expense and spare consumables. In subsidiaries, the increase in other expenses by INR 11 crores, which is predominantly due to legal and professional expenses and a lot of one-time related costs for our acquisition-related expenses. We expect this to moderate in Q2 as well as Q3, and this would not repeat. Tax is lower due to the credit that we have received on the tax relating to earlier years. The provision of INR 1.75 crores is reversed as a result of the PAT is higher than the PBT. We continue to guide the tax at 25% -- between 25% to 26%, keeping the U.S. federal and corporate tax into account. Overall, this has been a good quarter from the revenue standpoint, with PEB contributing significant growth in India as well as the U.S. And we are at better margins in terms of PAT and [ PAT ]. With this, I hand over the call for the investor community questions and answers.

[Operator Instructions] The first question is from the line of [ Nitin Jain ] from [ Fair Value ].

Congratulations on the good set. And sorry, I joined the call a little late. So maybe you might have mentioned some of the information. But what is the order book status for PEB India and U.S. as of 30th June?

As of 30th June, our order backlog in PEB is about INR 800 crores, and the U.S. is about USD 54 million. Now both of these are dynamic. And in the last couple of weeks, we've actually had reasonably large order booking in both business units. So, we will get you those numbers. There's a press note we'll release and we'll get you that. But we'll book in excess of INR 200 crores some orders in the next few weeks. So, there's an upward trend to both numbers.

That's great. And there is a significant jump in other expenses this quarter. So if you could provide the breakup here and why it has jumped so much? I mean, is it related to the labor issues that we face? And how do we see it going forward more importantly?

While I have explained in my -- in the initial press note, but I'm just explaining it again. The total increase is INR 37.13 crores at consolidated level. And in stand-alone, it has increased by INR 26.13 crores. This is on account of higher erection expenses, subcontract expense and store and spare consumables that we had detailed. The balance INR 11 crores increase is coming from our subsidiaries, which is on account of legal and professional expenses, which are related to acquisition and other consumer-related expenses that we had during the year. We expect this to moderate in Q3 as significant one-time costs are there related to acquisition and one-time investments that we are doing.

Right. So just to clarify, the increase in contract expenses, was it related to the labor issues and should we assume that is one-time or?

No. There will be no consistent -- or there's no increase, permanent increase or even a sustained medium-term increase in our labor costs. It was more a supply issue rather than a pricing issue. Yes, temporarily, there's been a little bit of an increase, but I think it's already moderated as of this quarter. The impact of our inability to get our labor in has been a loss of revenue and a loss of profit for that revenue stream and it was a substantial number, but that's all -- was resolved in the month of June itself. So come Q2, neither is there a cost increase, which is medium term or permanent. And also, there's no more revenue loss because of that regard function.

Sure. And just my last question. What is the total percentage of revenue we see being impacted by the U.S. tariffs? And what kind of workarounds do we have available with us?

The vast majority of the impact is coming in the hydraulics business. As I mentioned, the initial 25% was something that was -- we had priced in some sense, and there wasn't really an issue. Our hope is that there is some moderation in the 50%, perhaps with whatever is underway geopolitically, above my paygrade to comment on that. But if we can see that 50% drop on 25%, then there is 0 impact. But even if the 50% sustains, significant steps have already been taken. This affects about 2.2% of our revenue. So it's not a massive number to begin with. But even that, I mean, the tariff situation is not going to impact our planning for this year, our targets for this year and frankly, not even for Q2. There's more than enough revenue buffers underway. So, we are quite well prepared for an extremely strong Q2, and we do not see this affecting our revenue. For hydraulics itself, in the second quarter, there may be a moderate impact. But overall, we do not see any impact on our revenue and profitability due to these tariffs.

Great. So just to clarify, the impact would be limited to hydraulics business and that is approximately 2% of our overall revenue, right?

The hydraulics U.S. business, which is about 2%. That is correct.

The next question is from the line of Subhankar Gupta from Equitree Capital.

Two questions from my end. So, first is that you said the CDBS business is growing by 25% and overall growth of revenues at 15%. And assuming a 50-50 split between the 2 would mean that design engineering is at 5% growth for this quarter. Is that correct?

Yes.

Yes, broadly.

Yes, that is broadly correct.

Got it. So what exactly is hindering that growth barring the labor issues, which you mentioned? And how do we plan to revamp that?

So the growth on that was just -- are you talking about engineering services.

Which is like the ICD, tubes, right.

So, those revenue streams are not projected to grow at a very fast clip. So they would be -- they would continue to grow, of course, but at an organic rate. There's no CapEx going into those business units. But the growth vectors that we have, which are pre-engineered buildings, which are Body-in-White, which includes our process engineering and boilers division and our engineering services business, there is no bottleneck for them to grow from an addressable market standpoint. They all have large addressable markets. But for the short-term impacts, which we had from a labor perspective, the growth wasn't as high as we expected it to be. But in Q2, we have seen a lot of that getting addressed. Over Q3 and Q4, as our new BD kicks in, I think in engineering services also, structural engineering, we are projecting quite strong growth, high double digit and BIM also should follow. So overall, we expect, as I said, double-digit growth in each of these business units. And as they go up, they will take our margins up and they will take our profitability up as well.

Got it. That's helpful. And the second question actually was on the labor issue itself. So, I think somewhere I heard that you mentioned it was inability to get in the labor that has been the issue. So if that's the case, will that not be a roadblock for further growth as well? And how do we plan to address that?

So the specific issue was a timing issue. Typically, I mean, just to give you a little bit of background because I think it's an important factor. I think we have lost close to INR 100 crores in revenue in Q1 because of that. So let me explain it a little bit as best as I can. So typically, we have -- many of our factories, we have about 13 factories now. We have a mix of in-house full labor and we have contract labor. So what happened in the first quarter is, which typically happens every year, there is a little bit of migration because of the wedding season. There's seasonality to it where that labor moves back into UP, Bihar and other states. Typically, we only source from those 2 states. We have not done Orissa. We have not done West Bengal. We've also not developed other avenues that we had in terms of sourcing other contract labor as well, where we can engage with other agencies. We had not needed to because we just assumed that this is something that is cyclical and it goes away and it is accounted in April. So typically, April, they move out and they come back by end of April, early May. What happened in this quarter is that they did not come back in early May because it coincided with some other wedding season. And it is something that other industries, which are similarly structured has also faced. And the labor came back only mid-June. So that in the industries where we have, especially in assembly, fabrication, where there's -- it's very difficult to automate those business units, PEB is one of them. We had a significant underperformance on revenue. So, we had brought in the raw material. We had brought in the assets -- current assets that we needed. And the surprise was that we could not get the labor in place. To fix the situation by going and engaging with other agencies, looking at other, took us about a month. So it is a month of reduced performance, which impacted us. We are now wiser to this. To your question, how do we know this won't happen again? How do we know this won't impact our future growth? We have -- it was -- we'll make no excuse, it was a miss. We should have known about this. We should have planned for this earlier, but we have now put in place process so that the accessible labor pool for us is much wider than it was by a factor of 2 or 3, frankly. So, we've seen it get corrected immediately in Q2. And typically, at the end of this quarter as well, there's Ganesh Chaturthi, there's other things, and there tends to be a slowdown on that, too. What we have found is that with this addition, we're able to overcome those issues as well. So all in all, I'm quite confident that labor will not be a bottleneck. We're not going to come back to you in Q2 or this time next year as well and tell you that again, we had an issue on labor through a mixture of 3, 4 different things. I won't get into full detail on it, but there's multiple things we have undertaken, and this issue is now in the rearview mirror. And it was one bad month, which impacted the quarter. We were able to grow, but we have done -- we've done well, but we would have done a lot better if we had -- if we didn't have that. And as of Q2, I think Q1 to Q2 sequentially also, I think it's important for us to guide to a substantially higher number. Sequentially also, we are looking at very, very healthy growth in revenue and profitability.

That's very fair. If you could just probably share 1 or 2 things, which you have done like differently to sort this in very brief would also help?

I'm sorry. Could you say that again, sir?

I'm saying that if you could just share in brief what strategic steps we have taken in brief, that will help. No more details.

It's a combination of reducing our reliance by increasing automation in our end plate and our detail lines. It has included expanding our labor base to include West Bengal and Orissa. We've also tied up with -- we typically used to use 2 or 3 contractors. We have now expanded that to a much larger number. These are some of the things that we have done, which has addressed this.

The next question is from the line of Mayank Agarwal from Scientific Investing.

My question is on debt on books. As the businesses are like working capital heavy, so some debt is expected on book. But if you look at debt as a percent of enterprise value, it is around 23%. So how do you view this? And are there any plans to reduce it over the next few years?

I'm sorry, the voice was...

The question was basically on why your working capital is high and how do you plan to control our working capital to a broader number? If I understand your question, you're basically asking...

No, no. Actually, my question was regarding like if we look at our debt as a percent of enterprise value, it is around 23%. So, like how do you view this? And are there any plans to reduce it over the few years? Like I know it's a working capital heavy business, but as a percent of enterprise value I'm asking, right?

I think this -- a good question. So in this quarter, because of -- we anticipated higher revenue, so we expand our current assets accordingly. When we did not have the revenue that we expected, the percentage of our working capital as a proportion of our revenue went up. Already corrected, and I agree the number that you guided to is -- and as Shrikant also has mentioned, we're at 4.12%. By no means is that a number that we're comfortable with. And by -- we can commit to you that, that is definitely not a number that you're going to see next quarter. You will see it get below that to 3.xx, and we will maintain it at that. However, the use of our current assets and specifically our working capital, we are right now at about 76 days. We believe that the long-term potential steady state, that is about 60 days. That's the nature of the business, as you had mentioned. And we also give -- take far lower advances than some of our customers. It's a lower level of risk for us as well because it is free cash flow. We don't have to carry contingent liabilities on our balance sheet. It's a model we are comfortable with. And I think I would guide you to longer term 60 days. But in Q2, which is a balance sheet quarter, you are going to see substantial improvements on that 76 days of working capital. But we agree with you that it is high and that 4.12% is high, yes.

So just a follow-up on this, like so going forward, as a debt, as a percent of the enterprise value should [indiscernible] apart from, let's say, the working capital requirements and everything, right?

As a percentage of enterprise value?

Yes. Debt as a percent of enterprise value, which is around 23% right now.

So we with the metric we use, which we had guided to before is we look at our interest cost as a percentage. Our cost of capital is about 10%. We are A-rated on our long-term A1 in terms of our short term. There's adequate current asset cover and obviously, other asset cover. So, we are comfortable with this 3.xx number. We will be under 4 for sure, but that's how we measure ourselves with these inventory ups and downs. So, I think breaching the 4% number is something that we see as a Lakshmana Rekha. We don't want to do that. But as long as it's in that 3.5%, 3.7% range, we are okay. So, that's the metric that we use, and it's something we have found to be quite sustainable. Slowly over time as the working capital number of days goes down, then you will see that moderate further. But you're not going to see us be at 2%, 2.5%. I mean, there is a long-term and a short-term component to this. We have aggressive growth plans. Each of our 5 business verticals is something we expect to dramatically increase the size of the company. All of that will come with keeping our debt equity at the 0.7, 0.6 number, keeping our overall interest cost as a percentage of revenue at the 3.xx number is the way we intend to manage this company. And we found it to be good. And we talk to our rating agencies as well and they say they're fine with that as well. So, we're working hard on a rating upgrade to A+. And our understanding is our model works.

The next question is from the line of Yashovardhan Banka from Tiger Assets.

Am I audible?

Yes, please.

So, I just wanted to understand where on the PEB part, where exactly are we facing maximum demand from like what industries if you could just specify?

Most of it is manufacturing industries. There's a little bit of pick and choose on this. Right now, we are going heavy on manufacturing and capital. We were warehousing about 2 years ago. So, it's a very versatile kind of construction platform. So, you can pretty much make anything with it. But right now, some of our orders, we have a press note out for you. But some of the orders we have received, we have received a INR 200 crores order from JSW. We've received from Tata Electronics. We performed in excess of INR 100 crores, INR 150 crores, I think, INR 157 crores. So, Reliance has been in excess of INR 300 crores. So the vast majority of our revenue is manufacturing and engineering companies.

Understood. Understood.

Just so you're aware, the volatility was quite high. We are also building warehouses. We just got -- we have an order from Rainbow Hospitals for their 2 hospital towers, which are coming -- which is coming up in Gurgaon, which we expect to finish very soon as well. So, we're not curtailed by any -- any non-residential construction can be -- we can cater to, but we are focusing right now on manufacturing.

Understood. Sir, what is the mix of PEB as a part of our revenue?

If you include our India and U.S. revenue, about 40% of our overall revenue for the company is metal buildings and pre-engineered buildings and high-rise buildings.

Understood. And any utilization levels for the Raebareli plant?

Could you say it again?

For the Raebareli plant, any utilization levels for this year?

We are at 65%. I think in the next quarter, we hit 70%. Our goal is to hit 80% by the end of this year. We're quite comfortable that we'll be able to do that. The order book isn't a problem. Equipment commissioning, CapEx isn't a problem. I think we put a good team in there as well. We're expanding a team further in the next month or 2. Output has strongly grown and it is a profitable factory now. And we're quite confident that it will be a strong driver for our PEB revenue in this fiscal. In fact, from next quarter onwards, but I think you'll be -- you will see strong growth in this business in both Raebareli and the PEB India vertical and frankly, the entire PV vertical in the next -- in Q2.

Understood. Just one last question. So any internal growth targets for short to midterm?

Could you say that again, sir, internal growth for...?

Growth targets for short to midterm?