PENNAR ENGINEERED BUILDINGS SYSTEM

Hyderabad-based Pennar Engineered Building Systems (PEBS) is tapping the primary market with an initial public offer aggregating up to Rs 58 crore and an offer for sale of up to 55,16,141 equity shares of the company of face value of Rs 10 each by Zephyr Peacock India Fund III Limited, Zephyr Peacock India III Fund, Usha Ramani Potluri, Vikram Chachra and Eight Finance Private Limited at a price band of Rs 170- Rs 178.

At the upper end of the price band the total issue size will be of Rs 156 crore and company will be issuing 32.6 lakh new shares. The issue proceeds will be used for repayment of certain working capital facilities availed by the company, financing the procurement of infrastructure for the expansion of design and engineering services of the company, and for general corporate purposes.

Business and Financials

PEBS, a subsidiary of Pennar Industries, was incorporated in the year 2008 and started business in 2010. The company is engaged in the designing, manufacturing, supply and assembly of custom-designed building systems. PEBS’ products include pre-engineered buildings, solar module mounting structures, cold form buildings and structural steel products that are primarily used for various manufacturing, warehousing, industrial and custom-designed commercial buildings. Since the start of their operation the company has completed design, manufacturing, supply and assembly of 83,967 MT covering 18.58 lakh square meter area.

For FY15 the top five customers of the company constituted 51.41 per cent of the total revenue, which was down by 53.69 per cent for FY14. Out of current order book of Rs 346 crore that company had at the end of June 2015 (excluding Rs 10.24 crore where operations have been suspended due to factors beyond the company’s control), around 45 per cent comprises repeat orders from previous clients. This shows that the company enjoys long-term relationships with various clients. Currently the company has a good presence in the southern and western part of India and is looking to expand in the western part; however, till now nothing concrete has materialised. The management has revealed that the expansion will be funded by internal accruals.

The company has posted a CAGR of 32 per cent in its topline for the five-year period ending FY15, which was Rs 446.22 crore for FY15. The EBITDA and net profit in the same period has increased at a CAGR of 29 per cent and 39 per cent and were Rs 48.8 crore and Rs 21.9 crore for FY15 respectively. The company’s debt to equity ratio stood at 0.32x and is likely to come down after this issue. PEBS has strong return ratios and its return on net worth is 17.1 per cent for FY15.

Valuation

Coming down to the valuation of the company, in its upper price band the shares of PEBS are being offered at a current price to earnings ratio of 20.7 times on expanded equity. Since there is no other listed peer to compare, we tried to find out those companies that are growing at a similar pace and have similar revenue and return ratios. The ten companies that fit into our criteria are trading at a median PE of 18 times. In terms of market-cap (at higher price band) to sales the median is 1.1x of these companies compared to 1.35 for PEBS. Therefore, we believe that the issue is fairly valued and nothing much is left on the table. Hence, readers with long-term investment horizon can invest in the stock.