PENNAR ENGINEERED BUILDING SYSTEMS LIMITED BSE: Sector: Engineering Building Products

Transcription

1 4 th Nov 2016 PENNAR ENGINEERED BUILDING SYSTEMS LIMITED BSE: Sector: Engineering Building Products View - BUY CMP : Rs. 171 Target Price: Rs. 240 (In next 12 mths) BUSINESS BACKGROUND PEBSL, is a subsidiary of Pennar Industries (PIL) and is one of the leading custom-designed building systems solutions providers in India. PEBSL operations include: (i) Pre-engineered building systems, (ii) Design, supply and erection of solar module mounting structures, (iii) Design, manufacture, supply and assembly of commercial buildings, (iv)cold form structures, and (v) Design and engineering services. PEBSL caters to several sectors like manufacturing industries, warehouses, aircraft hangars, commercial buildings, high-rises, metro stations, stadiums and power plants, among others INVESTMENT HIGHLIGHTS Strong Q1FY17 Performance PEBS reported revenues for Q1FY17 were at Rs. 94 crs up 14% YoY, EBITDA at Rs crs, up 16.9% YoY, EBITDA Margin at 12% and a PAT at Rs crs up 14.9% YoY. In this quarter, PEBS has clocked repeat orders from Ultratech Cement, RCC Infraventures, Phoenix, Hetero, among others. Taken on a job work basis, this plant began production in May Orders in and around Madhya Pradesh, Gujarat and North India are being manufactured at this facility. For FY16 the company has recorded a topline of Rs crs from Rs 446 crs, a EBIDTA of Rs 65.1 crs from Rs crs while PAT is placed at Rs 32.1 crs from Rs 22 crs last year. KEY DATA FACE VALUE Rs DIVD YIELD % NA 52 WK HI/LOW 04/156 NSE CODE PENPEBS BSE CODE PENPEBS MARKET CAP RS 606 CRS SHAREHOLDING PATTERN PROMOTERS - 63% BANKS, MFs & DIIs - 18% FIIs - 3% PUBLIC - 16% KEY FUNDAMENTALS vscore: PEBSL enjoys vscore strong (Value Score) engineering is our proprietary design capability company rating system f YE FY16 FY17 FY18 PEBSL has established itself as a leading custom-designed building-systems solutions provider in its five years of operations with timely execution of more than 400 projects in sectors such as manufacturing, warehousing, and retail. PEBS has an in-house design and engineering team of 147 technical personnel who are all trained to handle complex custom designed building structures. PEBSL also benefits from its promoter, Pennar Industries, which has over 35 years of experience in manufacturing steel products with 600 customers and five manufacturing plants in Tamil Nadu and Maharashtra PEBSL has a robust order book as on date PEBSL has recently announced an order inflow of Rs 2.03bn in September including a 400,000 sq. ft. warehouse order for Amazon and 17 floor commercial complex at Hyderabad. Half of its orders are from repeat customers and it is seeing improvement in Assured order enquiry in solar, airports, warehousing, and high rises. Its Baroda facility, started in May 2016, is able to cater to Madhya Pradesh, Gujarat, and north India. The increase in production at this facility, along with a pick up in order AL inflow, will is focus likely to on drive expanding revenue. asset PEBS light can increase garment production segment at its Gujarat facility to 3,000 tonnes per month with marginal capex Rev Gr% EBIDTA Gr% PAT Gr% EPS Gr% Roe % Precise Roce % EPS (Rs) P/E (x) Advice

2 PEB (pre-engineered buildings) a high-growth market India s 2015 per-capita steel consumption is 60kg, significantly lower than the global average of 219kg. The PEB segment in India in construction is still in a nascent stage vs. advanced economies where it is highly favored due to its lower project costs and lower turnaround time. The Indian PEB market size has grown at a 14% CAGR in the past four years with an estimated size of Rs 63bn for FY15. Industrial segment (industrial sheds and manufacturing facilities) contributes to 71% of this followed by commercial (including warehouses and retail shops), which contributes 19%. With a growing economy and the development of ecommerce and agri-warehousing, demand for warehousing is expected to grow substantially. The investment in metro, aviation, solar, and auto sector along with new demand from housing and commercial high-rise buildings are positive for PEBS. PEBS likely to capitalize on a strong market opportunity with its wide product portfolio PEBS has a wide product portfolio with expertise in pre engineered buildings, structural and high rise steel buildings, solar module mounting structures, and design & engineering services. It has executed more than 750 projects in the past five years and is well placed to capture the growing market in India. PEBS estimates the industry size of the Indian PEB market at Rs 60bn and anticipates strong growth, considering market potential including: (1) Rs 250bn in the industrial segment for manufacturing plants and factory sheds over the next five years, (2) Rs 20bn per year from agri warehousing + increased market for commercial warehousing post GST, (3) Rs 55bn from commercial / high rise buildings over the next five years, and (4) Rs 50bn per annum from the solar industry. PEBS has received orders for single axis tracking from Hero Future for solar module mounting and the market is moving towards this type of tracking; therefore, PEBS is well positioned to rapidly scale up its solar business. It has also entered into rooftop solar orders, which have the advantage of double lock technology agreement with NCI group Inc, USA. PEBS to focus on value added design engineering PEBS is aggressively expanding into value added engineering design outsourcing by leveraging its design capabilities. It has licensed some of the latest and advanced software in CAD and Tekla technology and manufacturing. It has added two new clients and has increased manpower at its Vishakhapatnam office to provide engineering services to US based clients. It is at an advanced stage of acquiring a US based company for augmenting its engineering capabilities. Engineering services market is another big opportunity for PEBS going ahead Almost all players in Indian PEB (pre-engineered building) market provide end-to-end services (from design to erection) to their customers. Annual repair and maintenance works are also done by PEB suppliers in most cases. Most players are open to provide design as a standalone service, but the Indian market is still dominated by full- service contracts. However, there exists a potential for Indian PEB players to provide outsourcing service for PEB entities in the US and other advanced economies. Most Indian players have worked on an international design code (US, Europe) for fabrication in India. This familiarity with design codes and availability of skilled manpower can make PEB design service (engineering service) an attractive opportunity for Indian players. This market segment is in its inception phase with a couple of companies using their resources to deliver services to PEB players in the US. Indian PEB players also have an opportunity to extend this service to conventional RCC (reinforced cement concrete) and structural steel segments. This market is likely to be substantially larger than providing engineering service for PEB designing. With the design software in place, manpower costs are major cost driver for delivering engineering services. As a result, this service segment can add significant value to PEB players because the profitability can be much higher than that of other existing business segments. As per a NASSCOM (information technology body) report, Indian engineering and research and development outsourcing (ERO) market was estimated at US$15bn. The share of infrastructure segment was estimated at around 5% which indicates a market potential of US$0.7bn for ERO business in 2015.

3 ERO outsourcing in infrastructure sector primarily includes computer-aided designing (CAD) and drawing/drafting work. Over the years, it is expected to move to a higher level to include analysis and design. In order to tap this small but profitable market, Indian PEB players need to invest in training manpower and create a separate sales channel. Ability to break through with foreign customers remains a challenge. Pennar Engineered Building Systems (PEBSL) set up its ERO desk in FY14 and out of its 147 structural design engineers, 35 do work for US clients. To begin with, PEBSL started doing outsourcing work for NCI Group Inc, from which PEBSL availed technical know-how for supply of Double Lok roof system. As per the management, NCI garners revenue of more than US$1.5bn and out of this US$105mn (7%-8% of total sales) revenue is from design and engineering work, indicating the scope of outsourcing business for PEBSL going forward. Currently, PEBSL has three clients for ERO work. PEBSL is paid US$20-US$30 per wage hour, while a structural engineer costs Rs750,000 per annum. As a result, PEBSL enjoy over 50% operating margin in this division. PEBSL garnered Rs1 crs to Rs 2 crs revenue from ERO business in FY15 and aims 10% of consolidated EBITDA from this division in FY16. We expect revenue of Rs6 crs division in FY16. PEBSL is aiming at Rs100 crs revenue from this division in the next five years. PEBSL needs 500 structural engineers to achieve this goal from just 35 currently. It has aggressively started looking out for structural engineers to build this vertical. PEBSL is even open to acquisition of companies which offer a team of structural engineers. If PEBSL is able to achieve its goal, we believe investors in the company will have a call option to ride on ERO business opportunity, which alone can contribute Rs50 crs to the EBITDA in the next five years against consolidated EBITDA of Rs 65 crs in FY16. In such a case, this division alone will be worth more than Rs10bn. Currently, only Cyient and Mold Tek Technologies offer this service in India PEBS hence intends to focus on value added design engineering PEBS is aggressively expanding into value added engineering design outsourcing byleveraging its design capabilities. It has licensed some of the latest and advanced software in CAD and Tekla technology and manufacturing. It has added two new clients and has increased manpower at its Vishakhapatnam office to provide engineering services to USbased clients. It is at an advanced stage of acquiring a US based company for augmenting its engineering capabilities. Recent Business Developments The current order book stands at Rs. 456 crs. New Orders have come from Shapoorji & Pallonji, JBF Industries, HIL Ltd., AGI Glaspac, Musaddilal Properties, Tewari Warehouse, Vee Rubber, among others Repeat Orders: From Ultratech Cement, RCC Infraventures, Phoenix, Hetero, among others Multiple high-rise building orders received from customers like Reliance and Phoenix High-margin warehousing orders to be executed The engineering services business has scaled well in terms of number of hours, sales and billing per hour PEBS have also added two new clients in this division Significant additional manpower has been added at the Vishakhapatnam office to provide engineering services to US-based clients PEBS is likely to acquire a US-based company for augmenting its engineering capabilities PEBS has also taken over another plant on a job work basis and began production in May 2016 Orders in and around Madhya Pradesh, Gujarat and North India are being catered to at this facility

4 Solid financial performance Revenue growth and margin expansion to continue We estimate PEBS s earnings to witness a CAGR of 30% over FY16-18E. This will be driven by steady revenue growth (18-20% CAGR over FY16-18E) and a steady EBITDA margin expansion over the same period. We expect a significant improvement in both ROCE and ROE over the next 2 years as we expect the domestic market to grow at a healthy clip where there is good scope for margin improvement and revenue growth. Business Outlook & Stock Valuation On a rough cut basis, in FY17, Topline will see a steady rise wherein Topline is expected to touch Rs 565 crs. On the bottomline level we expect the company to record a PAT of Rs 41 crs in FY17E. Thus on a conservative basis, PEBS should record a EPS of Rs around Rs 12 for FY17E. For FY18E our expectation is that earnings traction for PEBS would continue to be strong wherein we expect a EPS of Rs 16 respectively. In a short span of just over five years since commencement of operations, PEBSL successfully established a track record of timely execution of more than 400 projects for various companies in sectors such as manufacturing, warehousing, retail etc. Its supply chain relationships, internal processes, network of sales offices and building contracts and integrated operations contribute significantly to enable the company to complete its projects efficiently and in a timely manner Also its ability to provide end-to-end solutions to its customers ranging from product conceptualisation, designing, manufacturing, testing, supplying and assembling, has made it the preferred pre-engineered building solution provider for some of its major customers with several large customers giving repeat orders from 17 customers including UltraTech Cement, Volvo India, India Cements and Larsen & Toubro Hence looking at PEBS s steady financial track record, strong product domain and dominant market share and strong promoters we expect the stock to get re rated in future. Hence we believe that the PEBS stock should be purchased at the current price for a price target of around Rs 240 over the next 12 months. FINANCIALS For the Year Ended March RsCrs FY15A FY16A FY17E FY18E Net Sales EBIDTA EBIDTA % Interest Depreciation Non Operational Other Income Profit Before Tax Profit After Tax Diluted EPS (Rs) Equity Capital Reserves Borrowings GrossBlock Investments Source Company Estimates

5 KEY CONCERNS Postponement in private and government capex can impact PEBS profitability Sharp increase in raw material prices and increased competition can also impact profitability. DISCLAIMERS AND DISCLOSURES, This Research Note is prepared by Avinash Gorakshakar, Research Analyst Registration no INH complying with the qualification and certification requirements under SEBI (Research Analyst) Regulations, 2014.I have been working in the Indian Capital markets for over 24 years and earlier worked with several leading domestic financial intermediaries. All of the views expressed in research reports issued by me reflect my personal views about the subject company or companies at the given point of time and I have not received/accepted any kind of compensation, directly or indirectly related to specific recommendations or views expressed in reports issued by me. My/our relative s does not at any point of time of issuing the reports have any material conflict of interest in the subject company neither of both of us will be engaged in market making activity for the subject company. The investment discussed or views expressed in reports issued by me may not be suitable for all investors. The user assumes the entire risk of any use made of this information. I/nor any person connected with my report, accepts any liability arising from the use of research document. The recipients of research document should rely on their own investigations and should consult their own advisors to determine merit and risks of such investments. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions including those involving futures, options and other derivatives as well as non-investment grade securities involve substantial risk and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals. Opinions expressed in research reports will be based on the current opinions as of the date appearing in research report. While I endeavor to update on a reasonable basis the information discussed in research reports, there may be regulatory, compliance, or other reasons that prevent both of us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. In so far as reports include current or historic information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed