Stock Idea: Pennar Industries

pennar industires [BSE:513228]

CMp: 37.50 | tp: 54 |duration: 12 months                                               June 13, 2010

company

Pennar is into manufacturing Cold Rolled Steel Strips, Precision Tubes, Cold Rolled Formed Sections, Electro Static Precipitators, Profiles, Railway Wagons and Coach Components, Press Steel Components and Road Safety Systems.

More recently Pennar also got into the domain of Pre-Engineered building systems.  It has setup a subsidiary PEBS (www.pebspennar.in) and has set up a manufacturing facility at Sadashivpet, near Hyderabad that designs, manufactures and erects pre-engineered steel buildings.  Pennar also has forged a technical collaboration with NCI Group - one of the global leaders in the Pre-engineered Steel Buildings Industry. 

COMPANY DATA

Share Data

Market Cap (Rs)	457.59 Cr
Issued Shares (mn)	123.3
52 wk High/Low	44.10/21.10

Valuation Ratios

To 31 Mar	FY09	FY10	FY11E
Gross Sales (Rs in Cr)	730.52	796.96	976.32
EPS (Rs)	3.01	4.1	6
+/- %	24.89	36	46
P/E (x) (Industry P/E 7.09)	11.2	9.1 (current)	6.25
P/B V (x)	2.2	2.29 (current)	-
Dividend/Yield (%)	3.0	3.3 (current)	-

positives

1.       Pennar railway division

a.        Has clocked good growth over the past few years and started to contribute a bigger percentage to the company’s revenues.  Its percentage contribution has consistently increased from 8, 11 to 24% in FY07,08 & 09 respectively.  Company chairman, Nrupendra Rao tells that It’s expected to contribute 250 crores for FY10, which translates roughly into 31% contribution to the total revenue. 

b.       The Indian railways has plan to modernize and expand railway facilities with “Diamond rail corridors” and logistics hubs for dedicated freight corridors.   Rail ministry has a target of purchasing 18000 wagons (news here), presenting an opportunity for Pennar.

c.        New metro lines in cities like Bangalore, Hyderabad, Delhi also is an opportunity for Pennar to supply rail parts.

2.       Pennar PEBS

a.        Pre-Engineered Buildings (PEB) segment is in the nascent stage of inception in India.  Its generally an accepted fact that PEB technology reduces the time taken to build a facility using conventional methods by 30%.  Currently Tata-Bluescope is the market leader in this segment.  But with implementation of PEB methods still in the early stages in India, there is a huge opportunity for the early movers and Pennar PEBS is well positioned to grab market share.

b.       PEB also has a technical collaboration with NCI Group - one of the global leaders in the Pre-engineered Steel Buildings Industry and that can also provide an edge in the nascent PEB market in India.

c.        Pennar PEBS has set up a manufacturing facility at Sadashivpet, near Hyderabad with an initial capacity of 30000 tons and a plan to establish another 30000tons in 3-4 years.  This facility is currently operational with an initial order book of Rs.80 crores and will start showing up in the revenues of FY11.  According to Nrupendra Rao, PEB may contribute 15% of revenues for FY11 and around 33% by FY14-15. 

 

concerns

Apart from the general economic recession concerns, the following are the specific concerns:

1.       Global pricing pressure on input raw materials for the steel industry.

2.       The effectiveness of railways in executing their expansion/modernizing plans per schedule.

3.       Though minor, PEBS facility is in Medak in Telengana region of Andhra Pradesh.  Disturbances in creation of Telengana region can be a problem disturbing the delivery schedule.

4.       Ability to deal with bigger competitors like Tata Bluescope, Kirby, Everest, Reliance-Mammut etc

valuations

As per Nrupendra Rao in an interview with CNBC TV18 (Interview here), the following are inferred

1.       Top line growth of atleast 20% for FY11.

2.       Long term debts as low as 20 crores.

Pennar is into various industries like railways, steel, PEB etc.  Hence comparing itself to peers in each of the domains, we arrive at a combined PE of 9.  It is currently trading at PE of 6.2x and EPS of 6x on FY11 estimated earnings.  Hence I recommend a BUY in this scrip with a target price of Rs.54 with a 12 month time frame. That is a 44% increase from the CMP

disclaimer

I am a newbie into equity research.  This blog is to start posting my research reports on various stocks.  The information and views presented in this report are prepared by me.  The information is based on my analysis and on sources available on the public domain.  Investors are requested to use this report as guidance and the final decision to be made by the investors themselves.  I will not be responsible for any loss incurred by the investor based on this report.