Pennar made a remarkable turnaround from the downturn during the economic recession of the nineties to highest
ever sales in the year 2005-06. A dedicated and committed management team crafted the turnaround by adopting a
three pronged strategy of business transformation, financial restructuring and productivity improvements.

The Growth Period

Pennar began its industrial journey in 1988 by setting up a Cold Rolled Steel complex on a 26 acre site at Isnapur near Hyderabad with a capacity of 30,000 metric tonnes per annum. In the very first year of operation, Pennar achieved cash profits and followed it up with profits and dividend in the second year. Buoyed by continuous growth in turnover and profitability, Pennar expanded its capacity to 50,000 metric tonnes per annum.

Liberalization and globalization of the Indian economy unleashed competitive forces. Pennar felt that need to have a higher capacity to achieve economies of scale and diversified product mix. Consequently, it merged Nagarjuna Steel plant located on a 43 acre site at Patancheru near Hyderabad with itself in 1997.
This resulted in increase of production capacity to 142,000 MTPA and a diversified product mix consisting of cold rolled steel, cold formed profiles and pressed components.

The Downturn

Though the merger of Nagarjuna was a sound business decision , it coincided with the recession in the Indian economy and the steel sector in particular from 1998 to 2002. The competition in commodity cold rolled steel intensified with increase in domestic capacity and due to imports. The finances of the company were also stressed. The Company's operations and margins were under pressure, resulting in the sales turnover decreasing to Rs. 76 crores in FY'02 from a high of Rs. 320 crores achieved in FY'98.

The Turnaround

In a span of just four years from 2002 to 2006, Pennar achieved a remarkable turnaround with profits in five successive quarters starting March 2005. Sales zoomed to Rs.647 crores in the 16-month period ending 2006 (Annualised amount Rs.485 Crores). The gross profit (EBIDT) for the period was Rs. 50 crores and the operating profit was Rs. 26 crores. After accounting for remission of loan due to financial restructuring mounting to Rs. 23 crores, the profit before taxes (PBT) was Rs. 49 crores. The company earned a net profit (PAT) of Rs. 41.6 crores resulting in annualised Earning per Share (Rs. 5/-) of Rs. 3.74.

The Turnaround Strategy

A dedicated and committed management team crafted the turnaround by adopting a three-pronged strategy of business restructuring, productivity improvements and financial restructuring.

Business Restructuring

1. To reduce the risk in the business, Pennar shifted focus from commodity cold rolled steel to value-added steel products. The proportion of value-added products to total sales was improved from 20% to 50%.
2. New business segments were developed including Electrostatic Precipitators (ESP),Pre-Engineered Building Systems, Tube products, Road Safety Systems, Railway Coach Profiles.
3. Made a beginning in exports as Pennar was selected as a global source for F.L.Smidth,Denmark and Hammon Research & Cotrell of Belgium for the steel profiles used in Electro Static Precipitators.
4. Set up fabrication facilities for supplies to Industrial buildings, ESP's and seed processing plants.
5. Special efforts made to develop manufacture of components for the Auto and White Goods Sectors.
6. Focused marketing efforts - strong relationships were forged with prestigious customers like Tata Motors, Ashok Leyland, ICF, BEML, L&T, Thermax, ABB, and ACC who are giving continuous business to Pennar.

Productivity Improvements

1. Improvement in manufacturing operations resulted in productivity increases across many of the areas. Yield improved from 87% to 92%. The power consumption was reduced resulting in energy savings. Machine utilization was improved significantly.
2. Improved quality with ISO 9001:2000 certifications for the rolling forming and components divisions.
3. Post-merger, manpower was rationalized and productivity was improved. Training imparted in various technical and operational areas. Manpower motivation and commitment was always high and IIM, Ahmedabad has made a Case Study of the company's restructuring with the full cooperation of the workforce.
4. Improved management of inventories and receivables resulted in better productivity of working capital.

Financial Restructuring

In early 2004, the Corporate Debt Restructuring Forum (CDR) approved a restructuring scheme which resulted in reduction of interest rates and also reduced debt through a one-time settlement with some banks. Induction of additional equity further reduced the leverage. Even though the Company successfully implemented the CDR Scheme, it still had large amount of long-term debt and the solution lay in replacing it with a combination of equity and debt. Accordingly, in July 2006, the company restructured the debt for a second time with the induction of foreign investors who brought in Rs. 122.4 crores. This amount was used to retire the long-term debt and for  capital expenditure required for the new plant near Chennai.

Environment

The company conforms to all the norms with regard to water and air pollution. It has also put up a waste water recycling plant to conserve water resources. In addition to maintaining excellent employee relations and industrial harmony, the company has given a helping hand to the neighbouring village of Bandalaguda in the setting up of a primary school and a place of worship.

Expansion / Diversification

Even during the revival period, Pennar was open to new opportunities and acquired the Press Metal profiles division of the Tube Investments Group (TI). This plant located at Tarapur near Bombay was helpful in sourcing supplies to Tata Motors and Eicher Motors. In order to service the growing auto sector and the Rail Coach Factory based in Chennai, the company's fourth facility is being set up on a 35 acre site near Chennai. The new plant will produce value-added profiles and components for the automobile and railway sectors.

Outlook for the Future

With the fundamentals of the economy remaining strong and the requirement for materials in the Auto industry and building industries expected to increase, the outlook for the demand for products of the company is very encouraging. In view of the financial restructuring undertaken by the company and with the strategic association of foreign investors, the company intends to diversify further in the domestic markets while also forging international linkages to take Pennar beyond the Indian shores. The overall strategy to increase turnover as well as profitability is as follows:

• Increase the proportion of value added niche steel products and reduce the quantum of commodity cold rolled steel
  
• Manufacture of auto components
  
• Increase the quantum of exports for which a beginning has been done
  
• Inorganic growth through acquisitions of companies in allied fields
  
• Focus on pre-engineered steel buildings which have high potential due to large scale
  investments in infrastructure