‘Indian economy cannot go down any further and should recover in about six months’

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: The journey of Pennar Industries, manufacturers of cold-rolled steel strips, metal profiles and engineering components, was never a bed of roses. The company, which made a modest beginning with production capacity of 30,000 tonne per annum, managed to grow year-on -year till it got caught in the turbulence caused by recession, during the late 90s. A three-pronged approach adopted by the company, under its vice-chairman Nrupender Rao, helped in the turnaround process. Today, the company has a strong topline and is raring to go up to Rs 1,000 crore by 2009-10. In a freewheeling interview to FE’s Kavitha Venkatraman and B V Mahalakshmi, he talks about the slowdown in the Indian economy, company’s turnaround story, future prospects and foray into other business segments. Excerpts:

How is the slowdown affecting you?

The slowdown definitely has had impact in certain sectors especially in the auto industry. I personally feel the Indian economy cannot go down any further and should recover in about six months.

But as far as Pennar is concerned, the slowdown has not affected us to a great extent as the company supplies to a large number of industrial segments, including pollution control, railways, packaging, auto and road. There is no reduction in our turnover over the past two months compared to the earlier quarter performance. The effect will be seen only to the extent of our exposure to the auto sector.

Pennar Industries has seen both the good and the bad times. How did you negotiate the1998-2002 recession?

Pennar Industries was the first company to be established within the Pennar group. The journey started in 1988 with the setting up of a cold-rolled steel company at Isnapur in Medak district near Hyderabad. In fact, during the first year it made cash profit and from the second year onwards it started giving dividends. The journey has not been very easy as far as Pennar is concerned.

In 1997, we enhanced the production capacity from 50,000 tpa to 1,40,000 tpa by merging Nagarjuna Steel with Pennar Industries. And the merger also gave Pennar a diversified product mix that included cold rolled steel, cold formed profiles and pressed components. But right after the time of merger, between 1998-2002, recession caught on with the Indian economy and the engineering and steel sector in particular were the worst hit in the country. Auto sector also did not do well.

As a result, Pennar’s operations and margins came under severe pressure. Yet, in a span of four years (2002-2006), Pennar achieved a remarkable turnaround with profits in six successive quarters starting from March 2005. Sales shot up to Rs 647 crore in the 16-month period ending July 2006 (annualised amount was Rs 485 crore). Last year, we did a turnover of Rs 641 crore and this year it is likely to touch Rs 800 crore. Our plan is to take it up to over Rs 1,000 crore by 2009-10.

How did the turnaround happen? Did you look at business restructuring to bring back the company on the growth path?

The turnaround started from 2002 onwards. The company had a study done by Deloitte, Haskins & Sells and their recommendation was that the company should move towards value-added products to restructure its business. So, first, we worked on business restructuring. Prior to the downturn period, nearly 80% of the company’s product mix came from cold rolled steel and only 20% was from value-added products like cold form profiles and components. Then we started focusing on newer areas, more value added products, more engineering and knowledge built into it. We have been largely very successful in the business restructuring exercise. Currently, nearly 60% of our turnover is from value-added products and the balance 40% is from cold rolled steel products. By 2009-10, our goal is to make it 70% value-added products and 30% cold rolled steel products.

What were the other areas of focus in the turnaround process?

We also looked at productivity improvement and financial restructuring. It was important. In the case of productivity improvement, we looked at all aspects of the company like operations, rationalisation of production, including manpower. As a result, we saw improvement in all areas, including machines, people, capital, inventories and receivables management etc. We also did financial restructuring by bringing down the debt component.

In 2003, our debt component was to the tune of Rs 245 crore and today the total long- term debt is only Rs 30 crore. We achieved this with the help of foreign investment. Last year, we got money from two foreign funds—Eight Capital and Spinnaker Capital—to the tune of Rs 122 crore. We used the funds to repay all the term loans taken from financial institutions and banks.

This drive helped us to make the company stronger both financially and businesswise. Even during the revival period, Pennar was open to new opportunities. It, in fact, acquired the Press Metal profiles division of Tube Investments, which had a plant at Tarapur near Mumbai. We also inaugurated our Chennai facility last year to service the auto sector and the rail coach factory.

What is the road ahead for the company? What would be the focus areas in the coming years?

Railways is one area where the company sees a lot of business potential. Indian Railways is modernising its fleet of rail cars with high strength stainless steel profiles. Pennar has developed these profiles for four models of rail wagons and has started supplying to the Indian Railways and their wagon vendors. Besides, it has also executed trial orders for the stainless steel side walls, end walls and roof for railway coaches made by ICF in Chennai. Five years ago, we started working with the Railways to make floor completely with stainless steel. It is only now that we have been finally approved by them. Railways has about 200,000 wagons. And if they decide to convert even 20,000 to 30,000 coaches every year, it has good business potential for us.

Are you also planning to expand into newer businesses?

We are also looking at the non-conventional energy segment. We have initiated studies on the feasibility of the project. Once the feasibility of the project is ascertained, the company would look at initiating collaborations either with domestic or international players for this initiative. The other focus area for us would be the pre-engineered buildings. The company has already made a beginning by forming another entity called Pennar Engineered Building Systems Ltd (PEBSL) within the Pennar group.

What is the idea behind setting up Pennar Engineered Building Systems Ltd?

Pre-engineered buildings are best suited for all industrial segments and are fast emerging as a preferred choice of every business house. To take advantage and target this business opportunity, the group has established the subsidiary, PEBSL, in association with the My Home group. PEBSL is setting up a facility for the design, manufacture, supply and erection of pre-engineered steel buildings and building components.