GMM Pfaudler: A safe way to play the Pharma/Chemical cycle


(ANANT JAIN) #1

GMM Pfaudler a subsidiary of Pfaudler Inc. and is engaged in the manufacturer of glass lined equipment and other process equipments. GMM Pfaudler is the largest producer of glass lined equipment (GLE) in India and the parent Pfaudler is the market leader and inventor of GLE worldwide with its manufacturing unit located in Karamsad, Gujarat. GMM Pfaudler earlier known as Gujarat Machinery Manufacturers (GMM) was set up in 1962 by Dr. Ashok Patel and formed a JV with Pfaudler Inc in 1987. The current MD Mr. Tarak Patel took over from his father in 2015. GMM has over 50% marketshare in GLE. GLE is used extensively in Pharma/Chem/Agrochem for critical reactions and the inside Glass Lining ensures that the vessels is not corroded or is active in the reaction. As per current shareholding Pfaudler Inc has 50.44% shares, Patel family owns 24.56% and the rest is owned by public. Parent Pfaudler is currently owned Deutsche Beteiligungs AG (DBA) a PE fund.

Business Divisions: Broadly the business can be divided into 3 segments:

GLE: This is what GMM is basically known for. Out of the total Consolidated sales of 410 cr GLE sales were 218 cr (53%) in FY18. On a standalone basis GLE is nearly 70% of the business. The major products hee are Glass Lined Reactors, Glass Lined Storage Tanks, Columns, Condensers, Conical Dryer Blenders, Kilo Labs, Glass Lined Pipes and Fittings. The industry size in India is nearly 400 cr with GMM having roughly 50% of the market share. The industry is oligopolistic worldwide with a total size of roughly $500 mn. Key players in India apart from GMM are Swiss Glascoat (listed), Sachin Industries, DeDietrich and Standard Glass Lining technology with each commanding a market share between 5% to 15%. GMM’s quality is considered superior and GMM commands a strong pricing power , the key difference as I see is due to technology from Pfaudler and the very specialized lining glass Glasteel manufactured by the parent. The other sources for GLE is Europe which is prohibitively expensive and China which has quality concerns. GMM also has a huge range of glasses with very specific properties to cater the complete range of reactions across the ph scale. The current capacity is 170 units per month which the management is looking to take up to 190/200 per month by Q3 and then upto 220/230 levels next year. Over a period of time the company could get into supplying GLE vessels to parent and the first sales happened in FY18. Currently the India order backlog is very high and the company will focus on India. GLE was 68% of sales of GMM in FY18.

Non-GLE Process Equipment: These can be further divided into: The major reason for company’s foray into Non GLE was to piggybank on the existing GLE customers and supply them Non GLE Process Equipment along with GLE Vessels eanbling a uniform delivery. Over a period of time the company has started to piggybank on parent Pfaudler’s requirement of Heavy Engineering equipment since fabrication is difficult and costly in Europe. The key differentiators here as per GMM are its ability to manufacture heavier and thicker equipments which most fabricators cannot handle. There is a stronger focus on exports and the company’s standard are far superior since they have to match European standards. The major reason to foray in Non GLE equipments was to increase the opportunity size for the opportunity. The long term plan is to make this around 50% of the sales. Non GLE equipment can be further divided into

  • Heavy Engineering: Heat Exchangers, Pressure Vessels and Columns. 12% contribution in sales in FY18. Mixing Systems: High Efficiency Agitators and Magnetic Drive Agitators. This business accounted for 8% of the Company’s total revenue. 12% contribution in sales in FY18.

  • Filtration & Drying: Agitated Nutsche Filters, Funda Filters, Paddle Dryers and Spherical Dryers. 8% contribution in sales in FY18.

  • Engineered Systems: Evaporation Systems, Heating & Cooling Systems and Biotech Systems. 4% contribution in sales in FY18.

Mavag: Mavag AG is a wholly owned subsidiary of the Company, located in Neunkirch, Switzerland. Mavag is a supplier of highly engineered Filtration & Drying Equipment and Mixing Systems to the pharmaceuticals, biotech and fine chemicals industries. Mavag’s product range includes the state-of-art Spherical Dryers, Filter Dryers, Funda Filters and Magnetic Drive Agitators.

What Changed for the company in last 2/3 years:

  • Tarak Patel becoming the MD of the company and initiating internal programs and processes to increase efficiencies.

  • Takeover of Pfaudler by DBA. The relationship of GMM with parent with the earlier management of Pfaudler was strained. With DBA taking over PFaudler the relationship changed very +ve. DBA supported GMM to expand in non GLE areas and also worked with GMM to enable GLE exports to the parent.

  • Large demand opening up due to China closures.

  • GLE is around 10% of the total setup cost of a Pharma/Chemical Company, a change in mindset driven by quality and regulatory requirements.

Growth: The management in multiple conf calls have indicated growth of 15%+ and margin expansion due to operating leverage. The subsidiary Mavag has high operating leverage and 50% of anything above 10 Mn $ flows to PBT. The management in the latest conf call indicated that it should meet/exceed the growth guidance that it has provided. The company has order booking for next 2/3 quarters extending upto Q2 next year.

Financials: The company has over 120 crores in cash. Further if one includes advances the company essentially operates with very little working capital (between 0% to 5% of sales).
Other financials from screener.in

Risks:

  • The company’s dependence on Pharma/Chemical sector. Any regulatory/environment risk to these sectors can impact company’s prospectus.

  • Any failure in GLE equipment can erase out the brand premium that it carries.

  • Parent Pfaudler is owned by a PE fund DBA and PE funds generally looks for exit in 5 to 7 year time frame. The new owners relationship wih GMM can impact the company.

  • Valuations are relatively expensive for a small cap (and in comparison with the listed peer Swiss Glasscoat) along with very little liquidity so entry exit could be difficult.

Finally: GMM Pfaudler is a market leader in a niche space making some of the most critical equipments for Pharm/Chem companies. The growth in this space due to a lot of production moving to India provides a large opportunity to the Indian Companies and for which GMM is a proxy. GMM does not carry the regulatory, environment and pricing risks associated with the Pharma/Chem companies but still provides a good opportunity to play the upturn.

Disc: Holding in family accounts. Views are biased


(ashit) #2

Slightly old blog post of may 2017 but it’s good one

Thanks
Ashit


(vchhajed) #3

Have been looking at this company since a couple of months now. I think the management is very clear about the future prospects and the order book looks strong for atleast the next 3-4 quarters. The non-GLE segment is starting to grow and the company wants to increase its share to 50% soon. Being a market leader with >50% share in GLE, they should be able to leverage their existing relationships with clients to promote non-GLE as well.

All that said, I think the valuations are a bit stretched right now. It’s corrected about 15-20% recently. Would like to know what your views are regarding the same, and is there scope for further downside? If anyone is tracking it closely, appreciate your comments as well.

Thanks!


(ayush.jha) #4

Apart from the valuations everything else is in favour!


(Arun S G) #5

This was on my radar a few years back and I did not find an answer as to why its revenue and profit growth trajectory was not in consonance with the tremendous growth seen in all pharma companies in the same period. One reason could be lag in orders, but GMM had not seen growth in any cycle prior to the the pharma industry growth.


(Mridul) #6

Mgmt reply to a similar Qn put fwd…


(Hitesh Patel) #7

One of the reasons which the management ascribed to good growth besides the usual business tailwinds was the establishment of cordial relations between gmm management and pfaudler after the latter was taken over by PE guys. It seems Tarak Patel was given a freehand to pursue growth without too many restraints.

Coming to valuations last year standalone eps for fy 18 was 20 and eps of 10 was added by mawag. This year as per results and management commentary both gmm and mawag are doing very well.

According to my estimates post q2 fy 18 figures and q2 fy 19 concall, company is likely to post consolidated eps of 40-42 per share. How much to pay for the company is one’s individual call. Especially in context of current market sentiments.


(narendra) #8

Few points from scuttlebutt (All the points mentioned here may not be correct):

*GMM Pfaudler is no 1 in India in terms of quality and service. Their equipment will not get corroded even with high alkali/ corrosives.Very good management and market reputation.
*Presently have good order backlog of 6 to 8 months

*Industry we are supplying is growing and companies are expanding due to China problem with chemicals and pharma intermediates.

*Glass liners : we have 50% market share in india

*Non Glass liners(NGL):Market size is huge. GMM presence is less in non glass liners. GMM has huge scope to improve. We are making pressure vessels.we are like tier II player. Don’t have much capacity.There are more than 100 players(L&T is big player)

*Pfaudler does not have much interest to expand gmm capacity. We should have expanded 3 to 4 times by now.presently we are choosing orders.

*Net profit is glass liners is 30%.NGL is around 15%.

*Glass liner will not survive for more than ten years. It has to be replaced. Witnessing such activity now. Cost of each GL is from 20 lac for 10 kl capacity upto Cr. Avg company does 5 to 8 Cr per project.

*Hyderabad pharma city: Govt has to acquire land of 20k acre.till now only 7k acre of land is acquired.It will take another 3 to 4yrs.For GMM business will start 5 year from now and it’s going to be huge like what happened with Vizag pharma park in 2007.

All pharma companies from Hyderabad city has to move to outside slowly and it will give us business.Our competitor De-dier in Hyderabad is not doing well. We are getting all his orders from Hyderabad companies. Many companies are waiting for us to give business.

Customers:Good companies like Dr Reddy/Divis/Natco/Sai life sciences wait for our equipments to install. Entire Biocon/Syngene project executed by GMM Pfaudler.

Hikal ltd: At Jigani Bengaluru factory have installed Sachin glass line reactors by spending around 50 lac. But it has got total damaged they have to replace whole thing with GMM equipment.

Even chemical companies who are looking for quality and long term will wait for us.

Every Year GMM taking price hike. GMM dictating the price in the market and others follow.

South India market is around 100 cr, roughly ⅓ of company.

Export opportunity: Not sure as pfaudlers has companies in various countries where they can manufacture.

Service business: GMM service is excellent. If any service required by customer GMM will attend in one day but others will take almost a week. For other companies service people has to come from Hyderabad. Gmm has service in all major cities like Hyderabad,Chennai,Bangalore…etc.
Small defect in reactors will be repaired in two days. Few cm defect can be repaired using material( I couldn’t recall),service charged for the same is around Rs 30k.Material required is imported from China /Korea in bulk of size(4
6) which will cost around 50 to 60K for GMM.With that GMM do business of around 6 lac. Service team head office in Baroda. They will inform service guys when required.If the entire equipment to be replaced it will take 90 days.

****Competitor:****Total 6 competitor. To name a few:De Dietrich,Swiss glasscoat,Standard glass,Sachin glass…etc. Many of the competitors came out from GMM and started business.
Other competitor like sachin/swiss are not good quality and just copied technology.
*De Dietrich: is biggest competitor for Gmm globally.

*One China company(couldn’t remember name) has its own formula,design and ceramic based which withstands all alkali/ corrosion.They have installed glass liners for few which are doing good. They may be dispatching around 5-6 reactors per day.( Need to find more about this)


(ValueInvstr) #9

I am having a difficult time to explain to myself the following issues:

  1. The company shows Rs. 1.03 crore as finance cost in FY2018. The break-up is: INR 40 lacs as ‘interest expenses’(perhaps interest on overdraft availed by company) and INR 63 lacs as ‘other financial charges’. Given that the company is debt free and has robust cash flow, why does it need to overdraw and pay interest? Though this is a very small amount for a company grossing 400 crore in annual sales, can’t it meet the WC/opex requirement from internal accruals and cash shown at hand?
  2. The management says that at present the company is operating at 90% capacity utilization - which is, practically, equivalent to full utilization. A new fabrication facility is expected to be operational by the end of Q4FY2019 which may take the throughput from 170 units per month to 200 units per month beginning FY2020. Now, when there is no room for capacity expansion for the rest of the current FY, how is the topline going to go up QoQ?
  3. The management maintains that the order book is overflowing and the Q3 and Q4 are historically good quarters for the company. What difference does it make for the H2 when the capacity utilisation is already full? The order book was strong even for the recent quarters gone by.
  4. The management says that it takes them 3 to 4 months for execution of orders for a smaller GLE and 6 to 8 months for a larger GLE from the date of receipt of orders. Does the company report revenue before or after execution and delivery of orders? If revenue is reported before completion of order, then does the company receive any amount(at least part-payment) from clients as pre-deposit to ensure indemnity against default or rejection of equipment by clients? I could not get around this. 6 to 8 months is a long period. Does it not stretch working capital and raw material inventory build-up?
  5. Carbon steel and stainless steel are the main raw materials. The management says that they hedge the RM price hike by buying the raw material a few months in advance. How does it all work when the order is placed by client, for example, say in January and executed in July and the commodity prices are so erratic that they make a full cycle in 6 months. How does the management catch it at favourable levels?

Request @hitesh2710 and @Anant to express their views and help me understand the business better.


(ANANT JAIN) #10

I think most companies will have some or other finance costs irrespective of the cash they carry. This is ignorable in my opinion.

The YoY topline growth in Q1/Q2 looks sustainable for the next 2 quarters and the topline growth for FY20 will be driven by capacity expansion. It is very difficult to predict any QoQ growth.

Most companies would want to align their capital goods purchases along with the project schedule and deliveries from other suppliers. There is no point buying a reactor early and waiting for the rest of the equipment to come in late. There is also a budgeting push that happens in Q3/Q4. These two factors makes capital goods skewed towards Q3/Q4 and GMM too will follow the same pattern.

GMM receives advances from customers. Please take a look inside the AR.

The mgmt hedges a part of it by procuring against advances. Most of the times these factors get evened out if you making significant value addition or if you have a shorter product duration.


(NamantS) #11

Company checks all the parameters
Growth Visibility- Good order book for next 8-10months and further(Management is Confident of the growth)
Market Leader - 60% Market share in GLE
Debt Free Company
ROCE = 29%
ROE = 20%+
Only concern is valuations trading at PE of 37-38.
Can somebody take discussion further on the valuations front?


(Hitesh Patel) #12

@NamantS

If you are looking at GMM Pfaudler, look at the annual report and go through the concalls. Also look at the consolidated nos in the FY 18 nos and try to figure out what kind of nos it can report in FY 19. The the PE calculation will change somewhat.


(NamantS) #13

Hi @hitesh2710 I did that today. Went through last year’s annual statements and latest concall. Management is very bullish about the order book. It’s not able to cater to the demand. I’m just reserved cause of general market conditions and wether there is a general PE contraction still to happen. I feel this is a very safe company two invest given its market leadership and decades of experience. How are you guys planning to invest in this counter? I was thinking of a staggered investment on dips. Would like you know how others are approaching their investment here.


(Hitesh Patel) #14

@NamantS

FY 18 consolidated eps was 30. Standalone was 20.

I expect FY 19 consolidated eps to be in range of 38-40 on a conservative basis. I dont know how Mawag is going to perform but according to management commentary that too is doing well. Standalone results till q2 fy 19 have been good and have shown nearly 50% growth in profits.

Based on expected FY 19 earnings valuations come down to below 30 PE.

The good thing about playing this theme of capex in speciality, agrochem and pharma is that one is not exposed to vagaries of individual molecule prices and any USFDA or other regulatory agency actions.


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(NamantS) #15

Yeah I expect it to be between 40-45 on a consolidated basis. Definitely a safe play for pharma and specialty chem. There are a few other companies with good growth but high valuations that I like one is TCI express(management commentary is very confident) and the other one is is Aarti Industries.


(Rohit91) #18

We all know how pharma, agrochem and specialty chem all three cylinders are now firing for the company.
I believe the +ve two surprises can be in form of Parent and subsidiary
Pfaudler and Mawag to support growth: Export accounted for 10% revenue in Q1FY19 compared to the average contribution of 5%, led by Parent Pfaudler network. Subsidiary Mawag (Switzerland) operates in Non-GLE segment, also uses GMM as a sourcing hub, has posted stellar revenue & profit growth in last 2 years. It forms 23% of the consolidated revenue.
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