It is raining IPOs in India and continuing with the rush, the IPO of Pennar Engineered Building Systems will open next week. The IPO of pre-engineered buildings (PEB) will remain open between 25 August and 27 August in a price band of INR170 – 178 per share. At the lower end of the price band, the IPO will mobilize INR151.77 crore. This can stretch to INR156.18 crore if investors feel generous (they are feeling generous this season) and bid at the higher end. The issue will be managed by Motilal Oswal Investment Advisors Private Limited, Axis Capital Limited and Karvy Investor Services Limited. 
This is one of the smallest IPOs to hit the market this year, missing the distinction to Shree Pushkar Chemicals & Fertilisers which is also opening on 25 August for subscription.
IPO Central scanned more than 450 pages of its red herring prospectus (RHP) to find out if it is good for subscription. But before the analysis, here is a quick snapshot of the IPO.
| IPO dates | 25 August 2015 – 27 August 2015 |
| Price band | INR170 – 178 per share |
| Issue size | INR151.77 crore – INR156.18 crore(Fresh issue – INR58 crore, OFS – 55.16 lakh shares) |
| Category allocation | QIB – 50%, NII – 15%, Retail – 35% |
| Lead managers | Motilal Oswal Investment Advisors Private Limited, Axis Capital Limited and Karvy Investor Services Limited |
| Minimum lot | 80 shares and in multiples thereafter |
| Minimum investment | INR13,600 – INR14,240 |
IPO structure
As with most other IPOs this year, the IPO will include an offer of sale (OFS) from existing shareholders. The issue will comprise a fresh issue of shares worth INR58 crore while 55.16 lakh shares will be sold by private equity player Zephyr Peacock and other investors. Zephyr Peacock plans to sell 50.1 lakh shares while Usha Ramani Potluri and Vikram Chachra will offload 2 lakh shares each. Usha Ramani Potluri is the wife of the company‘s managing director Potluri Venkateswara Rao. One lakh shares will be sold by Eight Finance Private Limited. Through its two funds, Zephyr Peacock holds 83.59 lakh shares or 27% in the company.
Use of funds – debt repayment, what else?
Pennar Engineered Building Systems plans to use IPO proceeds towards repayment and prepayment of working capital facilities and procurement of software and hardware for the expansion of design and engineering services. Out of the INR58 crore, INR34 crore will be used to lower interest costs by paying back loans. This would substantially reduce its working capital loans which stood at INR46.6 crore as on 12 August 2015. Another INR8 crore will be used to purchase software and hardware while the remaining funds will be used towards general corporate purposes.
Pennar Engineered Building Systems’ financial performance – margins steady but profits growing
Pennar Engineered Building Systems’ primary business is pre-engineered steel buildings, although it also manufactures solar module mounting structures, cold form buildings and structural steel products which are used for various manufacturing, warehousing, industrial, infrastructure and custom designed commercial buildings. Since starting operations in January 2010, the company’s revenues have grown quickly. This can be seen in the table below which highlights consistently growing top line and bottom line. It is worth highlighting here that being a subsidiary of Pennar Industries Limited has helped the company in growing revenues quickly. Although net margins have remained in the range of 4-5%, the growth in business has resulted in a straight line growth in profits as well.
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Pennar Engineered Building Systems’ consolidated financial performance (INR crore) |
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| FY 2011 | FY 2012 | FY 2013 | FY 2014 | FY 2015 | |
| Total revenues | 147.8 | 248.9 | 290.9 | 369.7 | 452.4 |
| Expenses | 138.9 | 233.2 | 268.6 | 340.9 | 418.9 |
| Restated profit after tax | 5.9 | 10.6 | 14.8 | 17.2 | 21.9 |
| Net margin (%) | 4.0 | 4.3 | 5.1 | 4.7 | 4.8 |
Source: Pennar Engineered Building Systems’ Red Herring Prospectus
Client concentration coming down but still quite high
This is an area of concern for investors as Pennar Engineered Building Systems has a high reliance on few customers which include the likes of Reliance Jio, MRF, Ultratech, Azure Power, and Larsen & Toubro. During FY 2015, the share of five largest clients in revenues from operations stood at 51.41%, showing an improvement from 53.69% in FY 2014. Apart from clients, the company has high reliance on a few raw material suppliers which include steel and paint suppliers.
While such high dependence on selected clients and suppliers is not healthy for most companies, there is no getting away from this reality that such businesses are inherently dependent on a few big clients. While the company is trying to expand its customer base, investors don’t seem to have other choice at the moment besides waiting.
Valuations – Novelty premium as no listed peers
There are no listed companies engaged in the similar business, investors in Pennar Engineered Building Systems enjoy something of a novelty. At the upper price band of INR178 per share, the company is valued at 25.07 times its FY2015 earnings while the P/E ratio comes down to 23.9 times at INR170 per share.
Although it is not mentioned in the prospectus, Everest Industries Limited is the closest competitor of Pennar Engineered Building Systems. Everest Industries Limited trades at a whopping P/E ratio of 60.
Valuations are evidently high as they have been in IPOs this year. However, Pennar Engineered Building Systems have some advantages. One of them is having Pennar Industries Limited as its parent. This has helped in getting big clients like Larsen & Toubro and Nuevosol Energy. Secondly, there are operational synergies between Pennar Engineered Building Systems and its parent.
Conclusion
There are ample opportunities in India’s growing PEB market and Pennar Engineered Building Systems is an excellent way to take a direct exposure to this niche. While investors have options of buying Everest Industries and even Pennar Industries, these are consolidated players and do not offer pure play exposure to the PEB market.
While valuations are slightly high, they are digestible as Pennar Engineered Building Systems operates in a rapidly growing industry. At the same time, its strong operational performance is visible in the above mentioned financial metrics.
Investors have lot of choices next week when IPOs of Navkar Corporation, Prabhat Dairy and Shree Pushkar Chemicals & Fertilisers open for subscription. [Tweet “Pennar Engineered Building Systems appears to be best of the lot so far.”] Readers can go through our analysis of these IPOs here and here.
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