Engineering A Profitable Journey

GMM Pfaudler Limited

Given the fact that GMM Pfaudler caters to such industries as pharmaceuticals, specialty chemicals and agrochemicals which are expected to witness an upward movement in the coming years, it has a lot of growth prospects going ahead.  

GMM Pfaudler Limited manufactures glasslined equipment, storage vessels and alloy steel equipment alongside other special-purpose machinery. Its business segments include chemical processing equipment, mixing systems, and filtration/separation equipment, among others. Its geographical business segments include within India as well as other countries. The company’s glasslined reactors include AE series, BE series, CE series, pharmaceutical series and accessories.

It offers glass-lined Glasteel equipment as well. GMM Pfaudler’s filtration and drying products include Mavazwag agitated nutsche filters, Funda centrifugal disc filter, Mavasphere spherical dryer and Mavapad vacuum paddle dryer. Other than these, the company offers mixing systems such as Economix and Mavadrive magnetic drive agitators whereas its engineered systems include wiped film evaporators (WFE) and temperature control units (TCU). GMM Pfaudler’s heavy engineering equipment includes heat exchangers and pressure vessels while its services include glass integrity checks, high-voltage spark tests and conductivity tests.

Industry Overview

Since GMM Pfaudler caters to such industries as pharmaceuticals, specialty chemicals and agrochemicals which are expected to witness an upward movement in the coming years, it has a lot of growth prospects despite witnessing a setback due to the ongoing pandemic. The bulk drugs or active pharmaceutical ingredients (API) industry is expected to grow at a CAGR of 8 per cent through FY25. Factors such as increasing demand in global markets, stable growth in domestic market consumption, low-cost manufacturing capability in India and slowdown of the Chinese economy will aid the sector’s growth. 

As a result of the current pandemic a lot of importance is being given to the pharmaceutical sector. As against the stringent environmental norms imposed in China, the Indian specialty chemicals sector has witnessed a strong performance on the back of a continued increase in demand from end-user industries and tightened global supply from China. For FY19, the Indian chemicals sector was around USD 160 billion with specialty chemicals contributing up to 20 per cent. Thus, it is expected that the specialty chemicals sector will grow at 10 per cent annually to almost double the market size by FY25. 

Being the fourth-largest manufacturer of agrochemicals after USA, Japan and China, India is expected to grow at a rate of 8.35 per cent to reach Rs 559.71 billion by 2025. Considering the current downturn in economy caused by the virus outbreak disruptions, revival in the economy is necessary along with short-term boosts by the government. Though the global demand outlook my look skewed as of now, experts believe that once there is clarity about the exact extent of the impact of the pandemic, demand will return to normal.

Business Overview

For FY19, the company gained 68 per cent of its total revenue from the glass-lined equipment segment. The shipment orders for the same grew by 33 per cent from Rs 2,185.99 million in FY18 to Rs 3,512 million in FY19. The company has been able to create a remarkable competitive advantage for itself by leveraging its brand, strong engineering capabilities, multiple code accreditations and proven track record of manufacturing complex equipment for its heavy engineering business segment.

As for its mixing systems business, the company has acquired the industrial mixing solutions division of Sudarshan Chemical Industries Ltd. located in Pune. The acquisition is expected to enhance GMM Pfaudler’s industrial mixing business vertical by bringing in new products, technologies, customers and industry segments and will also provide it with access to other markets, including minerals, metals, sugar, food, etc. and have deeper penetration in the paint manufacturing industry.

Overall, other segments such as engineered systems and filtration and drying have seen considerable positive performance as well.

Financials

On a consolidated quarterly front, the company reported net sales of Rs 155.97 crore in Q3FY20, up by 18.69 per cent from Rs 131.40 crore in the corresponding period for the previous fiscal year. Operating profit for the quarter ended December 2019 came in at Rs 33.85 crore, which is an increase by 63.85 per cent from Rs 20.66 crore in the quarter ended December 2018. The company reported a net profit of Rs 21.05 crore in Q3FY20, clocking growth by 74.35 per cent from Rs 12.07 crore in the same period for the previous fiscal year.

On an annual basis, its net sales saw a growth of 22.31 per cent to Rs 502.64 crore in FY19 as compared to Rs 410.96 crore in the previous fiscal year. The company reported an operating profit of Rs 85.42 crore in FY19 as compared to Rs 71.47 crore in FY18, registering a growth of 19.51 per cent. GMM Pfaudler gained net profit of Rs 50.58 crore in FY19 which is 18.52 per cent more as compared to Rs 42.68 crore gained in FY18.

Outlook

GMM Pfaudler is considered a market leader with nearly 60 per cent market share in GLE in India. It is well-placed to capture the opportunity from increasing demand through brownfield expansions and higher capacity utilisation. A majority of its customers are pharmaceutical majors such as Dr. Reddy’s Laboratories, GlaxoSmithKline Pharmaceuticals India, Aurobindo Pharmaceuticals and other such pharmaceutical companies which are poised to perform well in the current market scenario. Thus, the company’s order book continues to remain healthy and offers revenue assurance until Q2FY21 on the back of strong demand from the chemical and pharmaceutical sectors.

Around 50 per cent of the order book comes from its glass-lined equipment (GLE) while 30 per cent is from heavy engineering and the rest from proprietary products. With huge capacities added in speciality chemicals and agrochemicals, demand for GMM Pfaudler’s equipment is rising. The glass furnace capacity is a bottleneck and hence a demand shift to other operators can be seen. However, GMM Pfaudler has installed a new gas-based furnace in November 2019 and has also ordered two more from Japan which are expected to be commissioned by June 2020. This would help the company to fulfil all its necessary potential demand and also avoid any diversion of orders in the future.

The company is targeting organic as well as inorganic growth. It has plans to buy land near Pharmaceuticals City in Hyderabad which is likely to be finalised in FY21. On the inorganic front, the company is looking for acquisitions in the areas of technology to improve its product portfolio and to increase its market size. Its recent acquisition of mixing solution business is likely to further boost its growth engine.

Additionally, GMM Pfaudler will possibly leverage its deep-rooted relationship with GLE customers to cross-sell its non-GLE equipment. The company’s strong brand name, loyal client base and superior growth in non-GLE help it command a premium valuation. Its debt-free status, healthy operating cash flow with strong prospects and profitability are all positives for the company.

Hence, we recommend a HOLD on this scrip.