Nrupender Rao is the Founder Chairman of Pennar Industries Ltd. He is the eldest son of late J. V. Narsing Rao, former Deputy Chief Minister of Andhra Pradesh. He is B. Tech. (IIT Kharagpur) – 1961-66. He has also done M.S. Operations Research & Industrial Engineering, Purdue University, USA – 1966-67. Mr. Rao has 40 years of experience in various disciplines in organisations like National Cash Register, USA; Union Carbide India and the Nagarjuna and Pennar groups. He is also the Chairman of Pennar Chemicals Ltd., which manufactures Fuel Additives in technical collaboration with Total of France. Mr. Rao has been the Chairman of the Andhra Pradesh Industrial Infrastructure Corporation (APIIC) for two years (1988-89). He was also a member of the Planning Board of Andhra Pradesh State, for two years. Mr. Rao is a Past National President of the Indo-American Chamber of Commerce and a Past President of the Hyderabad Management Association.
Pennar Industries Limited, commenced manufacture of Cold Rolled Steel Strips in 1988 at Isnapur (45 km from Hyderabad) with an installed capacity of 30,000 MTPA. The company achieved profits right from the first year of its operation followed by declaration of dividend from the second year. The company increased its manufacturing capacity to 50,000 MTPA in the year 1997.
Propelled by liberalization and globalization of the Indian Economy, Pennar acquired Nagarjuna Steel Ltd., Patancheru (32 KM from Hyderabad) and Press Metal, a unit of Tube Investment (TI), at Tarapur near Mumbai.
Pennar's fourth Manufacturing facility is located at Chennai and manufactures Profiles and Components for the auto sector. The facility also services a steel service center.
Pennar is now a multi-location, multi-product company manufacturing Cold Rolled Steel Strips & Tubes, Cold Rolled Formed Sections, Electro Static Precipitators, Pre-Engineered Building Systems, Sheet Metal Components, and Road Safety Systems.
Speaking with Hadrien Mendonca & Hemant P. Maradia of India Infoline, Rao says- "This year we are looking at a turnover of Rs8.5bn and for the next fiscal, we are looking at a turnover of Rs10bn".
What led to the record breaking performance in Q3?
The company had undertaken restructuring a few years back. We looked at new areas apart from the cold rolled steel. We decided to change into a company manufacturing products with a lot of engineering cum technological content and with a lot of value addition. With this, we went ahead and we have been continuously stepping up that effort.
For the last 20 quarters, quarter on quarter (QoQ) as well as year on year (YoY) performance has constantly improved, both on the topline and on the bottomline. The same trend continued in this quarter (October-December) also.
During the last two years we have stepped up our business in the Railways in a significant manner. Two years back our turnover from the Railway segment was around Rs700mn. Last fiscal year, it was Rs1.7bn. This year we are looking at something around Rs2.5-3bn and next year we are definitely looking for Rs3bn plus turnover from the Railway sector.
For Railway wagons as well as coaches we are supplying different specialty profiles made from stainless steel and we have made significant headway in this segment.
Actually our entry into the Railways segment stood us in good stead in the time of the global recession. The automobile segment is another big segment for us; that area did come under some pressure after October 2008.
However, our presence in the Railways and Infrastructure not only helped us overcome the recession but also helped the company present a better performance in comparison with other companies. So, even during the downfall we actually managed to grow.
As a result of all these factors, our performance in Q3 FY10 was better than ever before. Our topline grew 23-25% to Rs2.1bn in comparison with the same period last year, our EBIDTA (gross profit) stood at Rs275mn, translating into a growth of 40% over last year and PAT grew 40% over last year at Rs135mn.
Our performance was strong because we diversified into making more engineering, value added, knowledge and design based products.
So is this the peak or you can do better than this?
No this is not the peak because this year we are looking at a turnover of Rs8.5bn. For the next fiscal year, we are definitely looking at a turnover of Rs10bn in the main company.
We have formed a subsidiary to produce pre-engineered building products; it has already commenced commercial production and has an order book of more than Rs600mn. In the coming three months itself, the company will do a turnover of Rs300-400mn and by next year we are looking at something around Rs1.5bn.
So, next fiscal year’s consolidated turnover will be in the order of Rs10.15bn.
Are you planning to list your subsidiary company?
We are not planning to list it right now and have not even thought about it. However, all options are open going forward.
One of the reasons why the subsidiary company was formed was we have a technical collaborator called NCI Building Systems in the US. It is a very large US company; probably one of the largest company in the world in this area.
They have given us technical knowhow. Their team was in India when the inauguration took place on Feb. 11.
They have expressed the intention of exploring possibilities for financial collaborations via joint ventures in a number of other segments.
What are the future prospects of your subsidiary?
The future prospects are very, very good because the concept of pre-engineered steel buildings was introduced in India a few years back. The concept is to manufacture every part in the factory and then assemble it at the site. All the welding and fabricating work which was initially done at the building site is now done in the factory and transported via trailers to the site. The advantages of this concept are that you will get more reliability, good quality, cost efficiency and more importantly time.
With this new concept one can make a building however large it is in nearly 3-6 months. This is a big advantage for companies building large factories, large sheds etc. For e.g., we broke ground on our own factory in March 2009 and the foundation was ready in June 2009. By September 2009, it was ready and we started trial production.
Moreover, NCI has come up with a new technology which they have shared with us giving the opportunity to produce special leak proof roof sheets with a guarantee of over 10-20 years. These floating roofs would have the ability to move forward and backward depending on the expansion. We have already got an order for making a factory shed from Dr Reddy’s Labs, which is building a new pharmaceutical plant.
My own feeling is that increasingly construction will move from cement to steel and within steel also conventional to non-conventional products. So, pre-engineered buildings have just seen the beginning and there is going to be manifold expansion. As of now we expect demand to go up to double in 4-5 years.
Currently, demand is at around 750,000 tons per annum and which we think will go up to 1.5mn tons per annum. Because all factory building, all warehouses, all air-craft hangers, sports stadiums and all such building which are not multi-storied will move to this form of construction. Only those structures which are 6-10 stories are done by different kind of technology, not typical PEB but basically heavy structures.
Are you also launching green building products range?
In pre-engineered buildings we want to go one step further and start advising on how to make buildings that are energy efficient.
In addition we also want to advice on the surroundings of the green buildings like stopping soil conservation, water conservation, solar energy, etc. These are all the things we can do. In fact we are in talks with a collaborator, whereby a separate film can be put on the roof along with our sheets which will also generate electricity. In addition to just making a building we will also make buildings that can produce electricity.
We already are a member of the Indian Green Building Council. We intend to move in this direction. We are the first PEB company to publicly announce that we are open to help you make green buildings.
Initially we don’t expect everybody to be energy conscious and start constructing green buildings but definitely MNCs and large Indian companies like the Tata’s are willing to go for such buildings.
Over a period of time, my own feeling is that the Government will also encourage such green buildings and companies constructing such structures will be benefited with some incentives.
How have you managed to reduce your debt?
We had a debt of something around Rs2.2bn some years back. Then we went for a restructuring with the institutions which led to a reduction in the debt to Rs1.7-1.6bn and then we brought in Rs1.22bn from the Private Equity funds - one based in New York and the other in London. Out of this, part was equity and part was debt. Out of that, we paid off the debt part. As a result, our equity became large and the company became very strong financially.
Today the debt is only around Rs200mn; out of which around Rs100-150mn is short term debt for 1-2 years. After that we will be left with debt of Rs20-30mn.
This means that the appétit for debt is high. If we plan of taking up any big project we can easily use the debt route to fund our expansion.
So the ability to look at expansion and growth both organic and in-organic is quite good because of our debt scenario. We have not been borrowing money and we are cash rich. In fact, we are drawing less from whatever working capital limits the banks have given to us. We also have bought back some 5% of our shares from the market.
Are you scouting for any acquisition(s)?
We would look at inorganic growth. In fact we have been looking for something feasible for some months now, especially in the field that we are in. If something good comes up we would like to go ahead and acquire. In all probability in the year 2010-11 we will succeed in making an acquisition.
We are not in favour of an overseas acquisition.
How do you see product mix going ahead?
In product mix we are focusing more on the value added segment. As far as our main company is concerned, once upon a time we had a product mix of 80% steel and 20% value added products. Today we have reversed that situation; we currently have a product mix of 70% value added products and 30% steel products. As we move along we will probably make it 80% and 20% in favour of value-added products.
If you look at our products we have engineered products, heavy engineered products and infrastructure products.
Our engineered products are supplied mainly to the automobile, press steel and tubes for buses. Heavy engineered products are mostly supplied to Railways like metro rail coach. Infrastructure products are for buildings, road safety, etc.
Further we have gone in to this building and construction, which is a very large field where there is enormous potential for growth. So basically we are looking for increase in infrastructure, construction, engineering and heavy engineering segments.
What about raw material costs?
Basically, raw material for us is steel whether it is hot rolled or cold rolled steel. We mainly buy from the main steel plants. Our major supplier is JSW Steel and Jindal Vijaynagar; we buy probably about 60% from them. Our stainless steel comes from Salem Steel and Jindal Steel. We also buy from the Tatas, Ispat and SAIL.
So, there is a lot of steel available in the country and there should not be any problems. We don’t import any steel we are able to manage from here itself.
When you import we are two risks; one is the dollar rate fluctuations and the other is gyrations in the import prices. We maintain very low inventories i.e. less than a month of physical inventories.
We are one of the largest customers for Jindal Vijaynagar, biggest in Andhra Pradesh and second or third in South India. So, we also get some preferential treatment in term of volume discounts. Taking all this into consideration, we are quite comfortably poised.
What impact will rising inflation have on your operations?
Yes, in the last two months prices have gone up and some of our prices also may go up. We really don’t worry about it as we are a secondary manufacturer. So manage to pass on the hike in input costs to customers. If the price is high we charge high if the prices fall then we reduce our rates as well.
So you have the pricing power and can pass it on the customers, right?
We have no choice; if someone doesn’t agree with the terms then we say we can’t supply. Small companies can immediately agree, whereas large companies will say the pricing committee will take the decision. This leads to a time lag.
Do you foresee any impact from the Telengana issue?
It is basically a political issue with certain people wanting some specific things. But, this certainly doesn’t affect us as a company because our sales are all over the country. All this doesn’t bother us as we are very close to the highways.
Whether the proposed new state is formed or not, it doesn’t matter as Hyderabad itself is a metro like Mumbai, Delhi, and Kolkata.
People who are in the real estate business and are localised around Hyderabad, they are the ones who may get slightly affected by this issue. But for us it really doesn’t matter. We are linked to the Automobile industry which is not in Hyderabad which is there in Chennai and Pune. We are into Railways which is in Chennai and Kolkata. We don’t have too many customers in Andhra Pradesh.
Which segments will drive growth for your company?
As we said earlier, we are into different sectors like Railways, Infrastructure and Automobiles. These are the three major areas in which we are moving ahead.
Automobile was down six months ago, but now it is booming. This month we were actually flooded with orders.
Capacity wise we have put up a new plant in Chennai and we are expanding it again mainly for Automobile and also for Railways. We are also trying to expand at our Hyderabad plant. Our capacity is not a problem, we can add more capacity.
Our old product i.e. cold rolled steel was capital intensive. That is why we decided not to increase that business. The new segments are people intensive and knowledge intensive.
Are you looking to expand capacities?
We are looking to expand capacity in the value added segment only. Right now with the kind of equipment we have increased tool rooms and hired more design people.
People can have machines but they can’t copy designs, people skills prototypes, etc. It is not easy and takes long time. So we have that kind of capabilities and flexibility.
Right now we are looking at a capex of around Rs400-500mn every year for this kind of work. But acquisition it’s different story.
So we don’t see capex being a bottleneck for us.
But to answer your question differently, we are definitely not going to go into heavy capital intensive projects.
Are you planning any fund raising?
Right now we are not looking for any fresh fund raising and definitely not equity as we already have a lot of equity thanks to what we did earlier. By buying back shares from the market we are reducing the equity little bit.
We have very little debt, and we will go for the debt route only if we plan to go for a completely different project other than what we haven’t talked about.
What are you plans for exports?
Up until now we have not been a large export company. Most of our exports in the main company have been in limited area what is called as electrostatic precipitators or dust collectors. We make components for that product.
The largest cement machinery manufacturing company in the world called F.N. Smith Corp. selected our company as their global source of supply. So, whenever they have orders in the Far East, they take the components from us.
Two years back, we had exports worth Rs200mn from this company.
Generally the steel products that are long and heavy are difficult to transport. So, it becomes a little tough to export as the transport costs are very high. But as you go further down the line into more value-added engineered components then definitely it will be possible to export them.
For eg; we recently commenced a plant for producing rotary compressor shells. The compressors that you see behind the Refrigerators are reciprocating compressors – an old model. We produce rotary compressors for one of our customers, Tecumseh India in Hyderabad, one of the world leaders in the compressors segment.
Through them and independently also, we think there is a good opportunity in the domestic as well as in the export market. So we have just started off with them and we intend to move forward with this and develop exports.
Which geographies you are looking to tap for exports?
Because we have been doing export only through FN Smith it’s mostly in the Far-East. But in the future we will also look at Europe.
What would you say is your USP?
What separates us from other in this field is we have a large engineering manpower. We are heavily engineering oriented; we have 400 people from the engineering background. So from that angle it differentiates us.
Many of our customers like Tata’s, Ashok Leyland, Eicher Motors, etc have been our customers for 25-30 years. The reason is that we are seen as a reliable and a trustworthy supplier.
We basically think long term and not short term. These are the customers which I developed in 1977 when I was the head of marketing in Nagarjuna Steels which later got merged with Pennar Industries.