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
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