GMM PFAUDLER : A Formulation Gone Sour

GMM PFAUDLER : A Formulation Gone Sour

Primarily catering to sectors such as pharmaceutical, specialty chemical and agrochemical, among others, the company had been on a sure footing till recently when stake sale at a heavy discount to market price attracted regulatory scrutiny over allegations of possible insider trading

GMM Pfaudler manufactures alloy steel equipment, storage vessels and glass-lined equipment. It is a leading supplier of engineered systems and equipment to the chemical and pharmaceutical markets. The company’s business segments include chemical processing equipment, mixing systems, filtration and separation equipment, and others. Its glass-lined reactors include AE series, BE series, CE series, PHARMA series and accessories while its filtration and drying products include Mavazwag® agitated nutsche filters, Funda® centrifugal disc filter, Mavasphere® spherical dryer and Mavapad® vacuum paddle dryer. GMM Pfaudler’s engineered systems include wiped film evaporators (WFE) and temperature control units (TCU). Its heavy engineering equipment includes heat exchangers and pressure vessels. 

Industry Overview

GMM Pfaudler primarily caters to sectors such as pharmaceutical, specialty chemical and agrochemical, among others. The Indian pharmaceutical industry is considered to be the world’s third-largest producer of drugs by volume and is valued at over USD 40 billion. The industry has been able to attract more than USD 2 billion FDI inflows over the last three years. With innovations in processes and formulations being its backbone, the Indian pharmaceutical industry has long established itself as one of the most reliable, high-quality and cost-effective global drug suppliers. With this and increase in spending in the healthcare sector, the demand outlook for the sector looks positive. 

Overall, it is expected that pharmaceutical companies will continue to focus on improving their manufacturing capacities which will in return help them in improving their global market share. As a result of the clampdown on chemicals manufacturing in China, the Indian specialty chemical industry is expected to witness strong growth in the future, especially benefitting from strong demand growth in consumer industries, availability of raw material at competitive prices, outsourcing opportunity and export opportunities. As of now, leading companies in the industry are aiming to diversify their supply risk equation, thus creating a perfect opportunity for Indian players to improve their export opportunities. 

As the economic scenario will improve, additional investment made in research and development and manufacturing capabilities is expected to create strong sustainable growth for specialty chemical companies. Though the agrochemical industry is dominated by USA, China and Japan, India is the fourth-largest producer of agrochemicals globally. Supply disruption in the Chinese agrochemical market has opened new opportunities for the domestic agrochemical companies to capitalize on the situation and expand their respective market share globally.

In the domestic markets, increase in focus on doubling farmers’ income, use of quality agrochemicals, farmers’ awareness about crop protection, etc. will drive growth for the agrochemical industry. Other sectors such as oil and gas, petrochemical and metals and minerals to which GMM Pfaudler caters to through its heavy engineering and mixing systems’ businesses are currently lagging but improving economic conditions and increase in investments will lead to demand and revenue growth. 

Business Segments

Glass Lined Equipment (GLE): GMM Pfaudler is one of the largest manufacturers of GLE in India. In FY20, this segment contributed 69 per cent towards the company’s total revenue. In FY20, the company manufactured 1,970 electric units (EUs) as compared to 1,860 EUs in the previous year. During FY20, the segment’s revenue increased by 24 per cent from Rs 285.05 crore in FY19 to Rs 354.74 crore in FY20. In Q1FY21, the segment’s revenue declined by 19.84 per cent to Rs 77.20 crore from Rs 96.31 crore reported in Q1FY20.

Heavy Engineering (HE): The HE segment continues to be one the key focus areas for the company. The segment contributed 10 per cent towards the total revenue of the company for FY20. The company has been taking several initiatives to improve its HE capacities and capabilities. During FY20, it handled equipment with a total weight of about 1,100 MT in different materials of construction. In Q1FY21, the HE segment posted significant growth in net sales by 565.39 per cent to Rs 41.72 crore as compared to Rs 6.27 crore in Q1FY20.

Mixing Systems (MS): The MS segment is branded as Mixion. This segment makes up to around 10 per cent of the company’s total revenue in FY20. A new brand, Mixion was launched during FY20 and has witnessed mixed response from the customers. During the year, the company also launched its own in-house developed product – the high-efficiency gas induction impeller (HEGI).

Engineered Systems (ES): As part of GMM Pfaudler’s move to become a solution provider from just an equipment seller, it is involved in the developing process of engineering capabilities to provide complete modular engineered systems along with process guarantees to its customers. The ES segment accounted for nearly 3 per cent of the total revenue of the company for FY20. 

Financial Overview

Looking at the quarterly trends on a consolidated basis, for Q1FY21 the company reported net sales of Rs 154.43 crore, increasing by 2.77 per cent from the net sales of Rs 150.27 crore posted for Q1FY20. For Q1FY21, the company gained operating profit of Rs 30.21 crore, clocking a growth of 4.5 per cent compared to the operating profit of Rs 28.91 crore gained in Q1FY20. GMM Pfaudler gained net profit of Rs 19.19 crore in Q1FY21, rising by 8.5 per cent compared to the net profit of Rs 17.6 crore gained in Q1FY20.

On the annual front, in FY20 the company’s net sales increased by 17.59 per cent to Rs 591.07 crore from Rs 502.64 crore reported in FY19. For FY20, operating profit increased by 36.85 per cent to Rs 116.89 crore compared to Rs 85.42 crore reported in FY19. The company gained net profit of Rs 71.13 crore in FY20, which is an expansion by 40.63 per cent compared to the net profit of Rs 50.58 crore gained in FY19.

Conclusion

While in August GMM Pfaudler acquired a majority stake in the global business of Pfaudler Group, the company announced an offer for sale (OFS) by the promoters to sell 17.6 per cent stake in the company at a floor price of Rs 3,500 per share on September 22. The previous closing price was Rs 5,421 per share and the floor price was offered at a steep discount of 33 per cent. Post the announcement, shares of the company tumbled as stake sale at a heavy discount to market price attracted regulatory scrutiny over allegations of possible insider trading involving short selling of the company’s shares.

Further to which the regulator has sought data from exchanges to ascertain any irregular patterns. As a result of the turmoil, sentiments over GMM Pfaudler seemed to be sour. The company has also been affected by the pandemic-led imposed lockdowns which created disruptions in its supply chain. Additionally, the uncertainties surrounding GMM Pfaudler and its future growth lack clarity at this moment. Hence, we recommend AVOID.

 

 

 

 

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