Pennar Industries Q1 FY27 earnings call

Pennar Industries reported a moderate revenue growth of 3.58% year-on-year, reaching INR884.55 crores in Q1 FY27. Despite this, Profit Before Tax (PBT) saw a significant increase of 16.04% to INR46.8 crores, and EBITDA grew by 13.3% to INR106.8 crores. This profitability improvement was attributed to strong operating leverage, efficiency benefits, and a favorable product and project mix. Gross margins expanded from 42.56% to 43.85%, and contribution margins increased from 27.14% to 28.51%.

The company highlighted PEB India, PEB U.S., Boilers, BIW, and Engineering Services as key growth drivers. PEB India's order book reached a record INR1,008 crores, while PEB U.S. (Ascent) crossed USD 100 million in order backlog. The Boilers division also achieved its highest-ever order backlog at INR150.75 crores. Management expressed confidence in converting these strong order books into revenue, with expectations of double-digit growth in these segments from Q2 onwards.

PBT margin for the quarter stood at 5.38%, up from 4.77% last year, with PAT margin at 4.07%. The improvement in margins was driven by a shift towards higher-margin businesses like PEB U.S. and engineering services, which are growing faster. The company aims for a PBT margin of 7% over the next 2-3 years and targets a ROCE of 25%. Capital efficiency, measured by ROCE, was around 20%, and ROE was 12%.

While overall performance was strong, some segments faced challenges. The Hydraulics business experienced a slowdown in the U.S. due to tariffs and market uncertainty^🌐, with an order backlog of INR30 crores. PEB India also faced operational challenges impacting execution, but management stated these issues are resolved through a strengthened execution team. Employee expenses increased by 16% to INR107.32 crores, partly due to the Telco acquisition and the need to ramp up engineering and production staff to support the growing order backlog.

The company maintains a disciplined approach to capital allocation, aiming for a debt-to-equity ratio of around 0.7 by the end of the year. Promoters have infused INR20 crores out of a committed INR50 crores. Interest costs for the quarter were approximately 4.18%, partly attributable to the Telco acquisition. Management emphasized optimizing working capital to enhance cash generation and improve the working capital ratio, especially with increased raw material stocking in anticipation of revenue growth.

Legacy businesses, including steel, railways, and the original Pennar business, saw a revenue decline from INR450 crores to INR385 crores. These segments, which once comprised INR1,300 crores of annual revenue, are not receiving new capital deployment. However, management is exploring ways to realize value from these businesses, similar to their joint venture with Zetwerk for solar capabilities, rather than letting them go to zero. The focus remains on growth vectors while managing the decline in legacy segments.

Management highlighted its strong focus on human capital, with a seasoned team and recent senior-level additions from companies like IME, Hero Honda, and Wipro Hydraulics. The company's organizational structure is designed for future growth, with a lean and experienced team. This emphasis on human capital is seen as crucial for executing the growth strategy and achieving long-term objectives.