Capacity expansion by Interach with my estimated growth of 18 to 24% in revenue, approx .1800 cr. order book with possibility of Operating leverage visible in next two years, It will be interesting to see who will lead this small sector.
TAM itself is expected to increase with increase manufacturing activity.
Source: Moneycontrol
Disclosure: Invested.
PEB is an undifferentiated, 5-10 rs/kg spread business in India. Client is not going to pay you for âqualityâ when everyone, at least all top players (which are quite many) deliver steel-framed buildings with same quality and efficiency. For e.g. Interarch did 1450 cr revenue on 135000 MT utilized capacity in FY25 (~110 rs/kg finished product). All top PEB players are doing business in this range given largely commoditized nature of the product. If you bid for a job quoting 1000 MT (11 cr) and the lowest bidder quotes 900 MT (10 cr), client will almost always choose the latter, regardless of whether you call yourself Mercedes or Maruti. So there is a race to the bottom which encourages unsafe âoptimizationâ techniques. Companies shave steel tonnage to undercut rivals and quite often, compromise with structural integrity. Its funny and scary at the same time: an industrywide practice is to selectively apply American design standards to Indian projects when it results in lighter sections (lower tonnage) and ignore critical provisions that would require more steel, despite vastly different load conditions (e.g. wind, seismic) in India vs US.
Many PEB structures collapse during erection stage due to:
a) Incompetent design by unqualified engineers/BIM detailers.
b) Subpar fabrication standards
c) Inept erection procedures by under-trained site crew
Here is an example of a PEB collapse during installation:
Granted, top tier PEB companies maintain better controls and such instances are rare but quality of design & fabrication in PEB, in general is still quite poor in my view.
Second is reliance on HR steel coil prices which is about 3/4th of the fixed cost generally.
HR steel coil prices currently are ~50-55 rs/kg ex-mill, 20-25% below 2021-22 peak of 65-70 rs/kg. Processing cost (cutting, fabrication, painting/galvanization) and wastage (~5%) elevate the cost up to 65-70 rs/kg as of today.
Then youâve power, freight, erection and other overheads adding 20 rs/kg.
Employee cost is about 10 rs/kg.
This makes a spread of ~10 rs/kg i.e. ~10% operating profit, at a time when HRC prices, adjusted for inflation are at pre-Covid levels after a massive energy price shock. They chose IPO timing wisely ;)
Outlook for HRC prices appears to be stable in near to medium term but what happens when HRC prices go up? Orders are generally at fixed cost but most PEB companies nowadays are putting in their contract that theyâll bear 5-10% of steel price fluctuation and pass rest to the client. As steel prices rise, PEB contractorâs margins erode, then order volumes may also decline. But capacities are high fixed cost in nature so companies may have to undercut the prices further to get the job and keep the plants running. In essence, a typical price taker industry. Some may find it surprising that Interarch was selling finished PEB at 100 rs/kg a decade ago (HRC prices adjusted for inflation were similar to where they are today).
Having said that, Interarch remains the best business in this space. Management is prudent and follows âfix it at any costâ approach. Key-man risk remains as the next generation lacks the technical depth of Arvind Nanda and Gautam Suri.
Separately, I was surprised with 13% margins from M&B engineering given how tight unit economics are. Turns out, they are indeed doing small 2000-5000 sq mtr warehouses in USA under technical collaboration with Varco Pruden. Again, these are very small projects, they can command higher spreads but unlikely to move the needle significantly in my view.
P.S: I have no intention to criticize the industry without reason. I am a structural engineer by profession and understand a bit about steel structures. I also happen to know structural engineers working in PEB industry. If you ever visit Helsinki, check out the T2 terminal, which is 100% steel structure. I designed that back in 2020 
Nice contrarian view would like to apolize if i seem to be very citicizing but here is my view.
âItâs a strange but true thing that the people who know an industry best are often the most afraid to invest in it. Think of it like this: a great car mechanic knows every single thing that can break in a car, so when they look at a new model, they donât just see a cool vehicle; they see a hundred potential problems. In the same way, a software engineer knows how easily a project can fail, so theyâre hesitant to buy tech stocks. A builder who deals with constant delays and problems wonât be excited about real estate investments. And a doctor who sees the long, expensive, and risky process of creating a new drug will be very skeptical of healthcare stocks. They know too much about all the things that can go wrong, which makes them overly cautious, while an outsider just sees the potential for growth.
Sample i am into hospitality and real estate and i find very hard to invest into hotels or realty stocks
Thank you. Itâs always insightful to learn from people directly working in the industry.
From my understanding through concalls, presentations, etc., the order flow works in the following way:
A large portion of business comes from repeat orders, where prior experience and trust matter more than cost.
For new or first-time projects, the process usually starts with initial discussions, followed by cost estimations which are refined as the work progresses. In one call the founder of Interarch highlighted, providing accurate cost estimation and design is a key part of their role. PEB co may incur loss for wrong design which escalates estimation.
Client companies prioritize quality over just cost savings, since the structures are critical for them. Specifically for Interarch, the bigger challenge lies in managing supply rather than demand, which gives them the flexibility to let go of low-margin clients when needed.
Above âpoints indicate more value-driven than simply competing on price per kg. My pov.
Disc: Invested and views are biased
Yes, itâs true that PEB players get a significant share of repeat orders. In fact, if a client is keen to work with you, they may even disclose that your quote is x% higher than L1. This gives you a chance to rework the numbers, present an âoptimizedâ cost estimate and still win the project. In any business, trust matters. Itâs even more critical in PEB because clients are relying on you to design and deliver a safe structure. But no one will willingly pay a 10-15% premium on project costs, no matter how much they trust you.
Look at common clients that top PEB players have served over time, you will find an overlap. Reason is, large industrial clients have simultaneous projects going on across different geographies, and they canât rely on a single vendor. They might need to -
a) diversify suppliers to optimize pricing
b) manage capacity constraints
c) reduce supply risk
d) leverage regional or sometimes technical strengths (some may have strong presence in a state, some may have a better experience of executing certain type of projects).
So it would be wrong to say itâs not a price sensitive industry, yes it requires technical know-how and execution capabilities but itâs ubiquitous among top players. Interarch recently won the largest ever PEB order of 30000 MT for 300 cr (Phenix says it has done 275 cr, I am sure Kirby has executed much bigger projects). Thatâs 100 rs/kg. Now, you know the cost structure. Do the math on how much theyâre making on this one.
Thank you for your comments. This is also a reason why i donât understand the margins of M&B Engineering and their commentary. Time shall show the true colors.
