Pennar Industries Limited


(Ajay) #41

Here is the link to the concall transcript. Surprisingly the promoters did not join the call this time, and instead it was the CFO who addressed the call. He was quite evasive when asked about PEBS, Pennar Enviro and claimed that he did not have access to their financials.

Anyway, I will let you read the transcript and decide for yourself:
http://www.pennarindia.com/pdf/Unclaimed%20and%20Unpaid%20Dividends/Q4-FY2018-Results-Conference-Call.pdf

Disc: Invested


(Rohit Balakrishnan) #42

My friend and colleague @armchairinvest_ has written a post on Pennar Industries. I am attaching the same here. Company Analysis - Pennar Industries.pdf (840.4 KB)

We believe that there is a arbitrage available in PIL’s listed subsidiary Pennar Engineered Building Systems (PEBS) at the moment, should the proposed merger go through.

Discl:Invested and thus an interested party in PEBS.

VRDDHI CAPITAL
SEBI Registred Investment Advisor
SEBI Registration No - INA100008832


(deeps2884) #43

Hi - merger going through is the biggest risk as promoters have decided not to vote.


(Rajat Setiya) #44

hi there, can you please elaborate more on why do you think so?


(deeps2884) #45

The promoters of Pennar have clearly clarified in the con call that promoters even though they are in favour of merger would be abstaining from the vote. Hence Voting would be predominantly done by Institutional investors who would not agree to the same as current merger ratio is not in their favour.


(chiragp) #46

Hi Rajat , that’s a really well written piece on pennar industries. IMO , you really don’t need to worry regarding the merger - it will sail through. I think it’s a 101% given.

Pebs shareholders are getting to be part of an expanding pennar industries which I think will witness massive growth in the coming years. They will be basically be de-risking themselves from being part of just the pre engineered buildings business.

Pennar industries shareholders on the other hand will also vote in favour as they believe that pebs has immense potential to scale up and deliver growth. To me pebs is a dark horse in the pack. Pebs has basically suffered due to RM fluctuations as you have rightly mentioned but that should be sorted in the next 12-18 months

Moreover I even feel that pennar enviro will witness robust growth going forward . They have managed to scale up that business within a short span. With the merger going through shareholders of both entities will benefit from being a pet of enviro also

However , this company is all about operating leverage . If they manage to scale up the business in a few years and touch revenues of 5000+ cr keeping the ebitda & interest to sales (3-3.5%) then I feel we will have a big winner.

A big buyback from the promoters is definately on the cards after the merger goes through .

Rajat , what is the source regarding the vale of land with the company (3000 million), is that value 100% accurate ?

Would like your thoughts on all of the above . Thanks


(chiragp) #47

Rajat . Another point that I would like you to throw some light upon .

This arbitrage that is present at the moment Of 40%. Do you feel it can sustain till the news ? In my experience this arbitrage gap has to close , either pennar industries corrects or pebs rises. I really can’t figure what will happen.

A similar arbitrage was present when the capital
First idfc bank merger was announced but eventually the arbitrage margin closed out and as of today it is even.


(deeps2884) #48

@ Chiragp - I think that is a very bold prediction with promoters of Pennar clearly declaring that they would abstain from the voting it is anybody’s call. If promoters were voting I had no doubt it would have gone through but Pennar is not so widely held by FPI & big Mutual Funds like IDFC Bank & Capital First.
With the ratio not in favour of Pennar Industries shareholders currently they may not be inclined to vote in favour of the merger.
Even I have no doubt the merger would be good for the shareholders in the long run.


(chiragp) #49

@deeps2884 look at this way . By voting is favour the pebs shareholders are getting to be a part of a much bigger entity with promising growth. They are completely de risking their themselves from one business which may or may not perform . Logic and common sense tells me that ultimately the vote will go through but I may be wrong


(chiragp) #50

If they don’t vote they will be the biggest losers according to me


(deeps2884) #51

I have no doubt merger is beneficial… but humans don’t act rationality…


(chiragp) #52

Completely agree with yours views.

There is also a holding company discount that pennar industries faces due to the structure of the holdings of the subsidiaries. What is your view regarding that ?


(vignesh) #53

Am not sure if any buyback is feasible as the cashflow from operations for the past 2 years looks negative. Not sure of the land asset for sale which could be monetized.


(deeps2884) #54

i think more than a holding company discount… Pennar suffers from being bracketed as commodity company and thus a cyclical company with low P/E ascribed to it (roughly 7x to 10x)… but i don’t think its a pure play steel (commodity) company anymore… it’s an engineering company - a lot of new revenue streams have been added during the last 5 to 10 years and company has scaled up quite fast… Wagons, PEBS and envirno have been scaled up quite rapidly… and I am sure market would soon realize the same in medium term and start ascribing a 15x multiple which engineering companies get… once that happens you would have a nice multibagger on our hands…


(Rajat Setiya) #55

thanks.

i believe, merger makes sense from long term perspective.

  1. PEBS intrinsic value is much higher than current market cap. once merged, holding co discount will go away benefiting shareholders of parent
  2. merged entity will have lower admin costs vs sum of two entities today

Possibility of merger not going through cant be denied though.

best
Rajat


(Rajat Setiya) #56

Thanks Chirag.

  1. after many years for the first time, business momentum in standalone business is very strong.

  2. PEBS also suffered because of negative operating leverage over last 2 years because of flat sales. Now they are sitting on highest ever order book so operating leverage shall play out.

  3. buyback - cant say much. but management had indicated that 3-4 quarters back in the concall

  4. land value - number came out from discussions with employees during the plants visit. Right now that plant is running at almost full capacity. But since it falls within city limits, company will have to shut the plant and move the operations to newly built plant whenever guidelines for evacuation come.

  5. i feel arbitrage gap shall close substantially once shareholder approval comes.

best
Rajat


(Rajat Setiya) #57

Vignesh,

cash flows are negative, largely because of rising inventory (PEBS has higher adverse impact here). Once steel prices settle, inventory levels shall come down.

During bad phase of 2012-2107, pennar generated positive cash flows at consolidated levels.


(chiragp) #58

@armchairinvest_

Thanks Rajat for the valuable feedback . Appreciate it .

  1. whatever the outcome of the merger may be , are you a believer that there is deep value in pennar industries if one were to invest for 3-5 year horizon considering the entire business mix has evolved for the last many years ?

  2. if the merger were to through and the arbitration gap available presently were to close in your view on what would be the implication on the price of pennar industries ?

Thanks
Chirag


(deeps2884) #59

I feel the best way to play out Pennar is via PEBS at current price. If the merger goes through you are getting Pennar at ~Rs.30 per share and I expect EPS conservatively in 3 years to be ~Rs.10 per share. So even at a conservative P/E of 10 - Pennar should quote a price of Rs.100 per share (3x return) and at P/E of 15 (which i feel ideally it should trade at) it should quote at Rs.150 per share


(chiragp) #60

nclt application has been filed