Pitti Engineering Limited: Is it on an inflection point?
Pitti Engineering Limited (PEL) formerly Pitti Lamination Limited, started its operations in 1983. It is in the business of producing Sheet Metal, Die-cast Rotors & Assemblies, Stator Core Assemblies, Fabricated Machined Components, Pole Assemblies, and Machined Components for varied industries including industrial drives, freight and passenger rail, mass urban transportation, power generation, aerospace, oil & gas, mining and earth moving equipment, renewable energy and infrastructure projects, amongst others. Company’s products find application in basic capital goods, such as motors and alternators, which are themselves quintessentially used in any process engineering. Marquee clients of the company include many leaders in the electrical equipment manufacturing field.
The expansion plan:
During the quarter ending Dec 2019, the Board approved the expansion plan to enhance its installed capacity from the existing 36,000 MT to 46,000 MT for sheet metal components and from 247,600 hours to 405,600 hours for machining which will be completed in a span of 36 months with a total capex of INR 270 crores. At the end of Q1 FY 21, the Board reiterated its resolve to go ahead with the capacity expansion despite low turnover and loss at the net level in that COVID19 affected quarter.
Promoters increased their stake @ 90 per share:
The Company allotted 22,22,222 convertible warrants at a price of INR 90/- each to be converted into 22,22,222 equity shares of 5/- (including a premium of 85/- per share) on preferential basis to the persons belonging to Promoter/ Promoter Group on 14th February 2018. The same were converted into fully paid-up equity shares on 24th June 2019.
The Aurangabad Advantage?
PEL has two plants at Hyderabad and one plant at Aurangabad. The Aurangabad plant started its operations in January 2018, after the facilities from Hyderabad were partially shifted to Aurangabad. This shift to Maharashtra brings the Company in proximity to its customers as well as raw material sources. This will supposedly reduce the Company’s logistics and operational cost to a significant extent, making its operations more competitive.
This supposition by the management may be true, as after the start of Aurangabad operations, PEL had two years of improved sales and profitability, as shown in the figure below (curtesy screener.in).
The tailwinds
Capital goods, electric vehicles, data centers, Indian railways, and wind energy are some of the sectors using company’s products, and that are showing uptick in growth momentum. PEL expects substantial order flows from these sectors during coming years.
Apart from increased expectations of growth in these sectors there is increased focus on making industrial goods inside the country through Make in India and Aatmnirbhar Bharat campaigns. These indigenization drives will help PEL in increasing its production.
Aiming at 1000 crore annual turnover with shifting goalpost
During FY 2012 PEL increased its capacity to 32000 TPA and aimed at 1000 crore annual turnover during subsequent three years. However, maximum turnover so far that the company could achieve so far is 622 crores during FY 2019. But the latest annual reports continue to reiterate company’s position to become a 1000 crore company. And there has been an uptick in the turnover of the company during last two years.
Strong relationship with the customers
PEL boasts of strong long-term relationship with its international customers. The 2015 Annual Report of the company says and the same is reiterated in subsequent annual reports:
“At Pitti Laminations, we are catering to evolving requirements of customers through developing better products and processes, focusing on quality parameters consistently, implementing best-in-class technology and sustaining price competitiveness.
“We are a fully integrated player addressing the needs of a huge customer base. We work with customers as developmental partners, rather than just business affiliates.
“In the laminations segment our domestic clients include ABB, Andritz, Alstom, BHEL, Crompton Greaves, Cummins, L&T MHI, ReGen Powertech, SE Electricals, Siemens, TDPS and Voith, among others. Around 36% of our domestic revenues are derived from existing relationships with long-lasting clients (Crompton and Siemens are with us for over 22 years, whereas Cummins and ABB are our clients for 17 years). The GE Group is the single largest global customer, accounting for a majority of our export in 2014-15. We were awarded with the ‘Certificate of Excellence’ by GE for being the ‘Best Supplier – Quality 2015’.”
Increased focus on domestic sales
For last several years, PEL has been focusing on domestic sales, after witnessing the unpredictability of the export markets. Export sales volume of laminations in FY17 was at 2790 tonne, after its recent peak of ~8000 tonne in FY15, while domestic sales showed a slow but steady rise. This fall in exports was mainly due to the key customer GE witnessing a marked slowdown in the offtake of its products. It was not related to client attrition.
Inputs are needed from industry and financial experts
I have tried to understand the journey of PEL during last decade, mainly through company annual reports and research reports of ICICI Direct. In this report, I have tried to describe that journey. Based on my limited understanding, it seems that PEL has become an established name in the electrical lamination industry domestically and worldwide. The company has continuously focused on improving the quality of its products and cost efficiency. The company has also focused on becoming more customer friendly. With increasing demands of the products and increase in value addition and capacities, it is possible that the company is at an inflection point.
I am hopeful that this description of the journey would awaken the interest of experts from electrical lamination industry and financial experts, who will be able to cast more light on the prospects of the company.
Disclosure: Invested.
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