By Geetanjali Kedia
Pennar Engineered Building Systems is entering the primary market on Tuesday 25th August 2015, with a fresh issue of Rs. 58 crore and an offer for sale of 55.16 lakh equity shares of Rs. 10 each, worth Rs. 94-98 crore, mainly by Zephyr PE and minor portion by 3 others, all priced in the band of Rs. 170 to Rs. 178 per share. The total issue size is Rs. 152 crore to Rs. 156 crore, at the lower and upper price band respectively, which represents 26.16% and 25.83% of the post issue paid up share capital respectively. The issue will close on Thursday 27th August.
Hyderabad based Pennar Engineered Building Systems, 59.65% subsidiary of specialized steel maker Pennar Industries, provides custom designed pre-engineered steel building systems, solar module mounting structures and cold form structures, through its 90,000 MTPA capacity facility at Sadashivpet in Telangana. It relies heavily on a few customers, as top 5 customers (Reliance Jio, MRF, Ultratech Cement, Azure Power and L&T) contributed 51.4% to FY15 revenue and 53.7% to FY14 revenue, which restricts bargaining power and terms of sale. Company provides 20 year stability warranty for its pre-engineered buildings and defects could lead to significant support and repair costs. Since company has operational history of less than 6 years (commenced operations in Jan 2010), there have not been any such claims. But 20 years is a substantially high time period, and future claims could be material.
For FY15 total income grew 22% YoY to Rs.452 crore and net profit also surged 28% to Rs. 22 crore. However, what is surprising is that eight months ended 30 Nov 2014 accounted for only half of the revenue at Rs. 238 crore, while 4 months between Dec 2014 to Mar 2015 posted balance revenue of Rs. 214 crore, despite the business not being seasonal in nature. Skewness of net profit was sharper - of the FY15 net profit of Rs. 22 crore, only Rs. 4.2 crore (less than 20%) was earned in the first eight months, while Rs. 17.8 crore were earned in last 4 months of the fiscal, which is definitely alarming. If revenues and profits are so lumpy, one needs to be very cautious going ahead.
Since the business is very competitive with many domestic as well as international players, margins are also very cut-throat - EBITDA margins are in low double digits, while net margin near 5% or so. FY15 EBITDA stood at Rs. 49 crore, leading to EBITDA margin of 11%, while net margin stood at 4.9%. Hence, for growth, company has to solely rely on higher volumes. Order book, net of suspended work, as of 30-6-15, stands at Rs. 346 crore, which is only 77% of FY15 revenue.
Trade receivables have shown a sharp jump in FY15, with outstanding debtors as of Rs. 31-3-15 rising 87% YoY to Rs. 127 crore (as against only 22% rise in sales during the year), from Rs. 68 crore on 31-3-14. Sales days outstanding for debtors, which during 4 years from FY11 to FY14, moved in the range of 2 to 2.6 months, suddenly rose to 3.4 months as on 31-3-15. Even as per the DRHP, outstanding debtors as of 30-11-14 of Rs. 71 crore represented only 2.4 months of sales. Thus, four months between Dec 2014 to Mar 2015 have lead to unprecedented jump in debtors, again not a very encouraging trend.
Moreover, of the outstanding debtors of Rs. 127 crore, about a third or Rs. 42 crore are outstanding for over 6 months. Statement of Trade receivables on Pg 230 of the RHP mentions Rs. 3.55 crore worth of debtors to be doubtful, for which, it is mentioned that provision is created. However, Pg 235 of the same RHP depicting statement of other expenses shows provision for doubtful trade receivable at only Rs. 1.59 crore for FY15. Why the shortfall of Rs. 1.96 crore in creating the provision? Also, deducting retention money of Rs. 23 crore from outstanding debtors over 6 months, leads to debtors of over Rs. 15 crore outstanding for over 6 months, for which no provision is made. Given FY15 profit of Rs. 22 crore, Rs. 15 crore is a material sum.
EPS (diluted) for FY15 stood at Rs. 7.09, on equity of Rs. 27.67 crore, while net worth as of 31-3-15 stood at Rs. 128 crore. Due to conversion of compulsory convertible preference shares by PE investor Zephyr in July 2015, equity expanded to Rs. 31.02 crore. Promoters hold 69.13%, of which, 59.65% is held by Pennar Industries. Company will continue to remain a subsidiary of Pennar Industries as post-IPO, the latter will hold 53.98% in former. Zephyr’s stake will shrink from 26.96% to 9.76%.
Company’s debt position is comfortable. As of 31-3-15, on total debt of Rs. 41 crore, cash and equivalents were Rs. 32 crore. Fresh issue proceeds will retire working capital facility of Rs. 34 crore and procure engineering and design infrastructure worth Rs. 8 crore. Thus, the IPO looks structured for part-exit for the PE fund, which had acquired the shares at effective price of Rs. 58 during March to May 2013.
At the lower and upper end of the price band, shares are being issued at a PE multiple of 21x and 22x respectively, based on FY15 EPS. Taking a very optimistic view for FY16 with a repeat in EPS growth of 27% for FY16 even on the diluted equity of Rs. 34.27 crore, PE multiple turns out to 19x and 20x respectively, which is very high for a working capital intensive business coupled with lumpy revenues and thin margins. Parent Pennar Industries itself is ruling at a PE multiple of 17x, based on FY15 earnings. Company’s market cap will stand at Rs. 550 crore, post listing at Rs. 178.
Given the weak fundamentals coupled unattractive valuations, in addition to the historic turmoil being witnessed in the secondary markets, best to avoid this IPO.
Disclosure: Not applying in the IPO.