Stock Review: Pennar Industries

 

Pennar Industries has created a de-risked business model by catering to various industries which helps it mitigate downturn risks

 

PENNAR Industries manufactures a variety of products for automobile, railways, white goods and infrastructure sectors using various grades of steel and stainless steel. It has six manufacturing plants in Patancheru, Sadashivpet and Isnapur, Chennai, Tarapur and Hosur with a total capacity of 275,000 tonne per annum. Through its subsidiary Pennar Engineered Building Systems in Andhra Pradesh, where it has a manufacturing facility, it designs, manufactures and erects pre-fabricated structures to capitalise on growing opportunities in construction sector. Its product offering includes open-span built-up sections, purlins, roofing and wall panels for warehouses, commercial centres, multistoried buildings, aircraft hangars and stadiums.

GROWTH DRIVERS:

From a producer of coldrolled steel strips, Pennar Industries has, over the years, evolved into an engineering and special construction products manufacturer. It has created a de-risked business model for itself by catering to various industries, which helps it mitigate from a downturn in any single user industry.

   PIL has been decreasing its focus on CRSS products as 50% of its revenue was coming from CRSS products in FY06. These products now contribute 13% to the topline, while 33% comes from the railway division and the rest from building, electric, engineering and white goods.

   The concept of third-party prefabricated structures is fairly new in India, but is gaining importance due to cost and time efficiencies. At present, there are very few dominant players in this space such as Kirby, Zameel Steel and Tata Bluescope. Pennar Industries is a relatively new player in this industry, but with a fastgrowing order book from clients such as UltraTech Cement, Bombay Rayon and JSW Steel, the company plans to more than triple its capacity to 100,000 TPA over the next two years, enabling it to increase its market share.

FINANCIALS:

The company's net sales have been growing at 29% over past five years, when compounded annually. Despite higher input costs, Pennar Industries has been able to maintain its operating profit margins between 12% and 14% over the past eight quarters. It has been steadily generating cash from its activities over the past few years and has a debt-equity ratio of 1.03 times, which is justified considering its expansion plans.

VALUATIONS:

The stock gives a return-on-capital of 27.2% and a returnon-equity of 28.05%. For the past two years, the company has been paying dividends, with a dividend yield of 2.9%. At 44, the stock trades at 7 times its 12-month trailing price-earnings ratio and is fairly valued.

   inant players in this space such as Kirby, Zameel Steel and Tata Bluescope. Pennar Industries is a relatively new player in this industry, but with a fast-growing order book from clients such as UltraTech Cement, Bombay Rayon and JSW Steel, the company plans to more than triple its capacity to 100,000 TPA over the next two years, enabling it to increase its market share.

FINANCIALS:

The company's net sales have been growing at 29% over past five years, when compounded annually. Despite higher input costs, Pennar Industries has been able to maintain its operating profit margins between 12% and 14% over the past eight quarters. It has been steadily generating cash from its activities over the past few years and has a debt-equity ratio of 1.03 times, which is justified considering its expansion plans.

VALUATIONS:

The stock gives a return-on-capital of 27.2% and a returnon-equity of 28.05%. For the past two years, the company has been paying dividends, with a dividend yield of 2.9%. At 44, the stock trades at 7 times its 12-month trailing price-earnings ratio and is fairly valued.