Forward looking Statement
In this annual report we have disclosed forward- looking information to enableinvestors to comprehend our prospects and take informed investment decisions. This reportand other statements written and oral that we periodically make containforward-looking statements that set out anticipated results based on the management'splans and assumptions.
We have tried wherever possible to identify such statements by using words such asanticipates' estimates' expects' projects' intends'plans' believes' and words of similar substance in connection with anydiscussion on future performance.
We cannot guarantee that these forward- looking statements will be realised althoughwe believe we have been prudent in assumptions. The achievement of results is subject torisks uncertainties and even inaccurate assumptions.
Should known or unknown risks or uncertainties materialise or should underlyingassumptions prove inaccurate actual results could vary materially from those anticipatedestimated or projected.
We undertake no obligation to publicly update any forward-looking statements whetheras a result of new information future events or otherwise.
ABILITY COMBINED WITH INTENT: PENNAR'S GLORIOUS
Every year the Chairman's Address in the Annual Report for Pennar Industries providesme an opportunity to address you with the purpose of providing my views of the company'sperformance for the financial year and also to update you on the progress made on our goalof building a strong engineering company. As in previous years the structure of thisaddress will be to first provide an overview of the financial performance of the companyfor the year.
I will be writing on each Business Units (BUs) specific performance focusing on the BUsthat are well poised for growth and are expected to contribute a growing share of theconsolidated company's revenue. The final part of the address will be dedicated towardsaddressing our Vision to evolve into a strong diversified engineering company and ourexpected growth trajectory for the next few years.
We achieved our highest ever sales and our highest ever operating profit in theconsolidated entity Pennar Industries during the financial year 2016-2017. We achievedGross Sales of Rs.171825 lakhs and EBIDTA of Rs.17422 lakhs.
Our EBIDTA margin for the year was 11.24%. We achieved a net profit of Rs.4665 lakhsduring the financial year.
The revenue and profitability numbers consolidate the performance of four BUs and threesubsidiaries. Pennar Industries as a standalone entity consists of the following BUs:
Systems and Projects
Railways and Solar MMS Components
General Engineering and Automotive Components
Electro Resistance Welded and Cold Drawn Welded Tubes
Cold Rolled Steel Strips and Formed Sections
Pennar Industries also has three subsidiaries:
Pennar Engineered Building Systems Limited (PEBS)
Custom Designed Building Systems and Solar MMS Systems
Pennar Enviro Limited (PEL)
Process Engineering Plants and Specialty Additives Manufacture
Pennar Renewables Private Limited (PRPL)
Solar Power Plant Assets (28MW)
Systems and Projects is the second largest business unit (after PEBS) in theconsolidated entity for the financial year in terms of revenue and profitability. Thedivision comprises the railways and the solar business verticals. Both these verticalshave had very high growth in the past year. We expect similar growth levels to continuewhich could potentially make Systems and Projects the largest Business Unit soon.
The order book for the Railways vertical is expected to grow aggressively. We areexpanding capacity at our Chennai and Hyderabad facility to cater to this increase. Thecapacity increase includes new capabilities in laser welding and cutting expanding ourstretch forming capabilities and to setup up a SS tube production line for railwayinteriors.
The Solar vertical has enjoyed high growth as India's grid connected solar powercapacity grows. Around 7000MW of solar capacity was added to India's energy grid in thefinancial year. We provide Module Mounting System (MMS) components to our customers whoare primarily Solar EPC players. With new capacity added at our Patancheru and Isnapurplants we expect this vertical to continue having strong growth. The implementation of GSThowever has removed one specific advantage that Pennar had in terms of an ability to passon MODVAT excise credit on the sale of MMS. Prior to the implementation of GST the exciseduty levied on Solar MMS products was zero and the current GST applicable rate is 18% onboth our input and output this negating the advantage that we had in solar MMS sales.Nevertheless I believe our strong manufacturing capabilities and our ability to deliverscale in solar MMS component supplies will ensure that our revenues from this verticalwill continue to scale.
Our Tubes division provides precision engineered ERW and CDW tubes to a largely Indiabased customer base. The division has succeeded in constantly adding new capacity andscaling revenue. For the last financial year the division recorded revenues of Rs. 15518Lakhs a growth of 8.39% . We intend to continue building capacity in this vertical in ERWas well as downstream CDW tonnage capacity. The company has also picked up internationalbusiness from Salem steel and others in tubes. In the next financial year we will commenceproduction on our new stainless steel tube line which will allow us to further grow ouraddressable market size. A combination of capacity expansion in ERW and CDW investmentsin stainless steel tube making capacity and targeting international markets for tubescustomers will allow us to grow this BU at double digit rates over the next few years.
The Industrial Components BU services the automotive and general engineering sectors.We manufacture a range of pressed components and hydraulic systems for our customers inthis business unit. While the BU has not seen much growth in the past financial year weare hopeful that the hydraulics business vertical will allow us to bring in higher growthin this vertical.
The Steel Business unit comprises our cold rolling and roll forming operations. This isthe legacy business of the company. During the financial year we added special grade coldrolling as a strong capability. In the current financial year this additional capacitiesand other operating efficiencies will result in substantial improvements in revenue andprofitability. Thus we are able to project that after a long impasse the Steel BU willshow strong growth going forward.
Pennar Engineered Building Systems (PEBS) is a subsidiary of Pennar Industries engagedwith providing custom designed building solutions to our customers in India and the US.The subsidiary has been one of our most successful initiatives since its inception and hasquickly grown to achieve gross revenue of Rs.54761 lakhs representing 32% of PennarIndustries' consolidated revenue. The company has commenced operations in Baroda in thepast financial year and has also rapidly expanded our structural engineering servicesvertical which services metal building and structural fabrication companies in the US andother geographies. With GST implementation sectors such as warehousing buildingconstruction and the capital goods sectors are expected to grow strongly over the next fewyears and PEBS has cohesive capabilities to take advantage of these opportunities. Thecompany's profitability for the financial year ending March 2017 has however declinedsubstantially even with substantial growth in revenue primarily due to a large increase involatility in steel prices over the second half of the last financial year. We expect someof this volatility in prices with the consequent effect on our margins topersist in this financial year. However the subsidiary has a strong order book very lowleverage and new growth initiatives that will ensure growth in the next few financialyears.
Pennar Enviro the second subsidiary I will be covering provides water treatmentnuclear power fertilizer plants and other process industry solutions including designprocurement manufacturing and site execution. The company has grown rapidly over the pastfew years and recorded gross revenue of Rs.11528 lakhs for the financial year. Withstrong references in a range of technologies including desalination effluent treatmentand recycling demineralization and instrumentation PEL is well placed to continue to growrevenue and profitability over the next few years.
In the last financial year we completed the execution and capitalization of our newestsubsidiary Pennar Renewables Private Ltd. The company operates 28MW of solar power plantcapacity in the state of Telangana at a PPA of Rs.6.45. In spite of being operationallyefficient the plants however represent a substantial investment from Pennar. The board ofPennar Industries after consultation has decided to offload these assets as the IRR forthe project while attractive and as per industry norms is lower than theCAPEX initiatives that PIL has. Consequently we plan to sell the subsidiary in the comingfinancial year and we expect a substantial capital gain from this sale.
Our vision at Pennar is to continually invest in capability and capacity expansions. Weconstantly evaluate our addressable markets for growth opportunities and once we reachmarket share of around 10% in any vertical we look at potential avenues for increasingaddressable market size. These investments have to meet certain boundary conditions we setup such as an ROCE of over 20% and an EBIDTA margin that is above 10% at a minimum. Oncethese conditions are achieved we focus on investing and quickly implementing theseprojects and focus on making the projects breakeven and deliver payback as soon aspossible.
As per this paradigm we have identified several projects in this financial year thatwill when implemented deliver rapid double digit growth in our overall revenue andprofitability. In this financial year we look at completion of the following projects:
Tubes ERW and CDW Expansion.
Hot dip galvanising and strip galvanizing.
Heavy fabrication facilities.
Light guage building system.
Since all these projects are at an EBIDTA margin that is higher than our currentmargins they will once implemented also boost the overall margin of thecompany.
Pennar Industries is a diversified engineering firm that has a large addressablemarket. Our vast reach across sectors and our low debt levels combined with our abilityand intent to invest and grow our addressable market will show dramatic returns over thenext few years. I am glad to have had your backing over the past few years and lookforward to your continued assistance and support as we look to implement our growthstrategy.
MR. NRUPENDER RAO