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Pennar Industries Q3FY14 results update

February 7, 2014, Friday, 18:46 GMT | 13:46 EST | 00:16 IST | 02:46 SGT
Contributed by Nirmal Bang


Pennar Industries has reported result in-line our estimates where Net Sales shown marginal improvement and grew by 14.7% YoY and PAT was up by 7.8% YoY. EBITDA margin sequentially improved by meagre 10bps to 7.9%. Decline in EBIT margin in all the segments except tubes and jump in Other expenses as a % of sales puts pressure in the operating margin of the company. However YoY, the sales was marginally up by 2.5%, EBITDA margin down by 250bps and PAT down by 41.2% due to lower demand in the auto, engineering, railways and infrastructure sectors for the steel products. Pennar has high dependence of ?45% of sales in the steel products. To counter the high dependence of steel products, Pennar has launched new high margin products and has acquired new customers. Management is confident of improving EBITDA margin going forward as the contribution of the newer products increases (10% contribution in FY14E).
 
At CMP of Rs. 22, Pennar is trading at a P/E of 10.6x FY14E and 8.4x FY15E. On EV/EBITDA, Pennar is trading at 3.9x and 2.8x FY14E and FY15E respectively. We believe with the sequential improvement in EBITDA margin, steady performance in PEBS and positive initiatives by the management to launch high margin products and additions of new customers will improve the operational performance from FY15E onwards. The company is on track in terms of foraying into newer verticals and acquisition of new customers. Pennar has forayed into Hydraulic business (plant will commission from Chennai facility by mid March 2014), Warehousing solution, Solar projects and focus on launching water treatment projects, in addition to expanding tube capacity and change in product mix by increasing the contribution of railway coaches compared to wagons (with the high visibility in the demand for coach compared to wagons). The company had done revenue of Rs 16cr in Q3FY14 as compared to Rs 5.5cr in Q3FY13, which gives us confidence that the railway segment is improving (Q3 and Q4 being peak quarter). We opined that with an order book worth of Rs 58cr, Pennar can leverage this opportunity going forward. However, we feel that the positive initiatives will take some time to have a constructive impact on the profitability of the company in the immediate term. We have slightly tweaked our estimates for FY14E and FY15E to incorporate slower volumes and strain on EBITDA margin. We expect Net Sales down by 1.2% YoY FY14E and up by 11.6% FY15E. We maintain HOLD rating with a revised TP of Rs. 25 per share (EV/EBITDA 4x FY15E).
 
- Net Sales was up by 2.5% YoY to Rs. 273.2cr and by 14.7% QoQ. Except revenue growth in Tubes by 58.5% YoY, all other segment like Steel Products (-6.2% YoY), System & Projects (-36.1% YoY) and Industrial components (-18.2% YoY). In additon, PEBS and Pennar Environ also supported the net revenue growth by growing at 45% and 57.1% YoY respectively.
 
- Consolidated EBITDA declined by 22.5% YoY to Rs. 21.5cr and up by 15.3% QoQ. EBIDTA margin declined by 250bps YoY and up by 10bps QoQ to 7.9%.
 
- PAT margin stood at 2.3% in Q3FY14, 4.1% in Q3FY13 and 2.5% in Q2FY14.

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