Investors’ experience with Pennar Aluminium and Pennar Paterson is enough to read the writing on the wall.
Presenting a majority public-owned (64%) listed company as promoter, thereby conveniently hiding the unsavory track of group’s past public floats, may help to lure some gullible investors. But, the post-issue plight of Pennar group companies thoroughly exposes the credibility of the promoters.
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OFFER AT A GLANCE |
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Name |
Pennar Engineered Building Systems Ltd |
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Public Offer |
Fresh issue of 32.58 lakh to 34.12 lakh shares of Rs 10 each and Offer for Sale of 55.16 lakh shares from five non-promoter shareholders. |
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Offer % on Total Equity |
25.93% to 25.60% |
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Post-IPO Promoter Stake |
62.28% to 62.56% |
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Offer Price |
Between Rs 170 and Rs 178 |
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Offer Amount |
Rs 152 cr to Rs 156 cr |
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Application Quantity |
80 & Multiples of 80 |
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Bid/Offer Opens |
August 25, 2015 |
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Bid/Offer Closes |
August 27, 2015 |
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Listing |
BSE and NSE |
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IPO Rating |
Nil |
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Book Running Lead Managers |
Motilal Oswal, Axis Capital & Karvy Investor |
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Registrars |
Karvy Computershare |
The IPO
The IPO, valued at more than Rs 150 cr, consists of two components – fresh issue of Rs 58 cr from the company and offer for sale of 55.16 lakh shares from five existing non-promoter shareholders. The IPO is being made with a price band of Rs 170-178. Investors should apply for a minimum of 80 shares and multiples of 80 thereafter. Motilal Oswal Investment Advisors, Axis Capital and Karvy Investor Services have been appointed as Book Running Lead Managers to the issue while Motila Oswal Securities and B N Rathi Securities are acting as syndicate members.
IPO Object
Of the fresh issue proceeds, the company proposes to make repayment of working capital borrowings to the extent of Rs 34 cr and fund the procurement of infrastructure including software and hardware for the expansion of design and engineering services to the tune of Rs 8 cr. The balance amount, net of issue expenses, is earmarked for general corporate purpose.
Lineage
The 2008-registered Pennar Engineered Building Systems (PEBS) was promoted by Pennar Industries (PIL) – the flagship company of the Hyderabad-based Pennar group. PIL currently holds 1.85 cr shares, constituting 59.65% of the pre-issue paid-up capital of PEBS. Forty-year old PIL (incorporated in 1975), which went public in 1988, is currently having a market cap of about Rs 600 cr. Its Rs 5 paid-up share is quoting around Rs 50. Nonetheless, the present valuation of PIL is more influenced by PEBS’ IPO valuation than PIL’s own credentials.
After going through an extremely bad phase for a long period PIL joined the dividend list in 2009. But, in 2014, it once again went out of the dividend list. For the fiscal 2015, PIL reported a standalone turnover of over Rs 950 cr and net profit of Rs 21 cr on an equity capital of Rs 60 cr yet, no dividend was proposed. Besides the promoter company, PEBS offer document presents Pennar Enviro Ltd as their only group company within the meaning of `group companies’ under the SEBI ICDR Regulations. This company posted a massive top line of Rs 2737 cr in FY15 on mega equity of Rs 837 cr but, its bottom line was worth only Rs 11 lakh!
PEBS Track Record
PEB is reportedly one of the leading custom designed building systems solutions providers in India. The company’s products and services include pre-engineered buildings, design and engineering services, solar module mounting structures, cold form buildings and structural steel products which are widely used for various manufacturing/ warehousing/industrial infrastructure and custom designed commercial buildings. Since commencement of business in January 2010 the company claims to have completed design, manufacturing, supply and assembly of 83,967 MT covering 18.58 lakh sqm pre-engineered buildings in various sectors.
The company’s turnover has steadily increased from Rs 147 cr in FY11 to Rs 450 cr in FY15. Net profit has grown from Rs 6 cr to Rs 22 cr during this period. The company has netted positive cash flows from operations for all the five years. Nonetheless, the company’s operating margin has been woefully low at about 10%.
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PENNAR ENGINEERED BUILDING’s FINANCIAL TRACK |
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(Amount in lakh) |
Mar-15 |
Mar-14 |
Mar-13 |
Mar-12 |
Mar-11 |
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Net Operating Revenue |
45029 |
36695 |
29005 |
24855 |
14748 |
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Other Income |
207 |
280 |
92 |
36 |
31 |
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Gross Income |
45236 |
36975 |
29096 |
24891 |
14779 |
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Operating Profit |
4888 |
3983 |
3698 |
2952 |
1768 |
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Operating Margin % |
10.4 |
10.1 |
12.4 |
11.7 |
11.8 |
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Interest |
967 |
770 |
1154 |
1095 |
679 |
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Depreciation |
585 |
335 |
309 |
288 |
201 |
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Tax |
1139 |
1156 |
759 |
511 |
302 |
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Net Profit |
2198 |
1722 |
1476 |
1058 |
587 |
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Net Oper. Cash Flow |
240 |
1901 |
3375 |
1366 |
360 |
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Networth |
12850 |
10663 |
7039 |
4168 |
3110 |
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Equity Cap |
3071 |
3047 |
2749 |
2500 |
2500 |
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Reserves |
9779 |
7616 |
4290 |
1668 |
610 |
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Net Block |
6530 |
6863 |
6003 |
4935 |
4847 |
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Long Term Borrowing |
11 |
15 |
0 |
367 |
9 |
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Short Term Borrowing |
4042 |
3446 |
4944 |
4773 |
5098 |
Valuation
The IPO price band (Rs 170-178) puts a market cap of Rs 585-610 cr for PEBS which discounts the company’s last earnings more than 26 times. For a fabrication business with thin operating margin, such valuations are too steep, especially under the current uncertainty in stock market. It is worth noting here the cost of the selling shareholders (private equity funds), who invested in the company two years ago, is only Rs 58.17 a share. Hence, given the reputation of the Pennar group, the private equity funds may dump their residual holding in the market once their lock-in period lapses.
Pennar’s Past
The Pennar group and the investment bankers present PEBS in such a manner that the promoters’ unsavory past need not be revealed. For those who are new to the Indian capital market, PEBS is the fifth public issue of the Pennar group. In fact, it all started with PEBs’ promoter. Previously known as Pennar Steels, Pennar’s flagship went public in 1988 with a small issue of Rs 1.32 cr when market was booming. Once again, the market started booming in early nineties and Pennar steel made rights issues in 1991 and 1993 to collect Rs 14.43 cr and Rs 10.34 cr respectively.
Having successfully tapped more than Rs 24 cr under Pennar Steel, the promoters’ attention turned to Pennar Aluminium Company (PACL). This company went public with much fanfare in February 1993 and successfully mopped up Rs 56.50 cr. Technical collaboration with Pechiney of France; Export marketing tie-up with MG Aluminium Ltd – an associate of Daimler Benz, Germany; Promoter companies Pennar Steels and Pennar Paterson Securities making profits from the first year of operations, etc., etc. were some of the slogans that made PACL’s public issue a grand success. Following PACL, Pennar Paterson Securities Ltd (PPSL) floated Rs 7.5 cr public issue in October 1993. Two years later, in 1995, when the Indian primary market was witnessing an unprecedented boom, PPSL once again entered the market, this time for a bigger amount of Rs 22.50 cr.
Come post-public issues, the promoters began to show their color. Group companies’ performance started deteriorating, stock prices moved southwards and promoter stake was diluted. Pennar Steel changed its name to Pennar Industries in 1998. The mismatch between the company’s pre-issue promises and post-issue performance was such that the share could not find buyers even at Rs 2 (paid-up was Rs 10 that time). The stock started moving up only after the promoters engineered a restructuring within the group.
While PIL was revived, the promoters chose to abandon PACL! Today, the company has no promoter to back it! How did the promoters offload their stake which was amounted to almost 50% at the time of public issue? What went wrong with the Pechiney-collaborated project that the company has no operations today? Are the promoters not answerable to those public investors who contributed Rs 56.5 cr in 1993? If PACL’s position is pathetic, Pennar Paterson’s plight is still worse. PPSL, which issued shares to public at Rs 45 a piece, defaulted payments to even fixed deposit holders and went into liquidation!
If the promoters have failed miserably in the past why such failures are not disclosed in the offer document. And, if promoters’ past does not matter, what sort of regulation does SEBI propagate?
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PENNAR’s VISITS TO CAPITAL MARKET |
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YEAR |
COMPANY |
ISSUE TYPE |
AMT CR |
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1988 |
Pennar Steel |
Public Issue |
1.32 |
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1991 |
Pennar Steel |
Rights Issue |
14.43 |
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1993 |
Pennar Steel |
Rights Issue |
10.34 |
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1993 |
Pennar Aluminium |
Public Issue |
56.50 |
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1993 |
Pennar Paterson |
Public Issue |
7.50 |
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1995 |
Pennar Paterson |
Public Issue |
22.50 |
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TOTAL |
112.59 |