> Pennar Industries Ltd. (IndiaNivesh)

CMP Rs. 52 |P/E (FY15E) 9.7x | P/E (FY16E) 6.5x Target Rs. 81

Investment Rationale

 Moving from commodity to value added products: Pennar Industries is moving from pure commodity player to value added player with its range of engineering products. This transition is helping the company improve its consolidated margin as company has added many high margin segments in its portfolio.

 Direct Play on overall macro-economic recovery: As company caters to the large part of economy’s sectors like Automobile, Infrastructure, Railway etc, it is well placed to take the advantage of any economic uptick through its diversified business portfolio.

 High Operating leverage and Low Financial leverage provides high upside and limited downside potential: Muted economic environment has reduced capacity utilization for Pennar Industries in last couple of years. With likely economic cycle revival, increase in capacity utilization will act as major margin booster for the company. On the other hand delay in revival should not be major concern as company has low financial leverage and large part of its debt is working capital debt.

 Subsidiary PEBS is Key Growth Driver: Other major growth driver for the company will be PEBS, which is amongst top 5 players in India. As the concept of pre-engineered building products (PEBS) is catching up fast in India; anyone setting up an industry now would look for early commissioning of plants, PEBS is poised for abnormally strong growth. A corporate action by the company on getting this subsidiary (PEBS) separately listed on exchanges could be the additional trigger for the stock.

Valuations
 At CMP of Rs.52, Pennar Industries is trading at P/E multiple of 9.7x FY15E and 6.5x FY16E earnings estimate, which is well below 14.3x – three year historical average. Average ROE for the company is past 3 year has been 12.9%. In FY15E and FY16E, the ROE of the company is likely to improve to 16.4% and 20.3% respectively on back of increased capacity utilization and margin expansion. We value this company at conservative PE multiple of 10x to FY16E EPS (Rs.8.1), which gives the target price of Rs 81. RISH TRADER