*GMM Pfaudler* was established in 1962 as *Gujarat Machinery Manufacturers* and listed on the Bombay Stock exchange. It's a *small cap* company with a market cap of around *₹ 6500* crores. In 1987 Pfaudler Inc., USA the world leader in *Glass Lined equipment* subscribed to 40% equity to form a joint venture. Pfaudler Inc. further increased their stake to 51% in 1999 and the name of the company was changed to GMM Pfaudler Ltd. *A truly world class organization, GMM Pfaudler is an ISO 9001 company.*
With over five decades of manufacturing experience, GMM Pfaudler is a well-established and *financially stable* company. With a *market share of more than 50% in Glass Lined equipment*, GMM Pfaudler is the *market leader* in India. Pfaudler Inc is a *130-year old* Company, founded by the inventor of the process of the glass-lining of steel. *Glass-lined equipment* is a necessity in industries such as chemicals, pharmaceuticals, food and beverages etc., where the production process goes through *very very high temperature* and volatile environment, requires equipment with high corrosion resistance or cleanliness properties.
Over the years, GMM Pfaudler has diversified its product portfolio to include *Mixing Systems, Filtration & Drying Equipment, Engineered Systems and Tailor Made Process Equipment.*
GMM is operating in *pharma, agro chemicals and speciality chemical sectors* which are growing at a *CAGR of about 15%*. Indian pharma is *40 billion dollars* industry and world's *third largest* producer of drugs. There are lot of tailwinds for pharma and speciality chemical business in India due to favourable govt policies(like PLI scheme for pharma industry), China ban and China plus one policy.
*KEY SUCCESS FACTORS FOR GMM*
*Technology edge*:
The quality of glass-lining is a key differentiator in this business. GMM’s majority ownership by Pfaudler gives it a clear *technology edge* – and a critical *competitive advantage* – in the Indian market. Only two companies in the world are having the patent of making glass lined equipment of which GMM is one and the leading player.
*Long-standing customer relationships:*
GMM Pfaudler has been operating in India for close to *five decades* and has been a *credible supplier* to most of the large Indian companies in the pharmaceuticals, chemicals, and petrochemicals sectors.
*Scale benefits:*
GMM is the *largest glass-lined equipment* maker in India by a wide margin. Using their technology edge and leveraging on their execution skills and local customer relationships, GMM has expanded capacity by *50% in the last 3 years*. The company now has more than *twice the revenues of the second-largest player* and has a 48% overall share of industry’s revenues. GMM’s *EBITDA margins* are nearly *double of its nearest competitor* and so is its RoCE.
*Strategic capital allocation:*
The management team of GMM has consistently displayed *prudent capital allocation skills.* Organic growth has been a key priority for the company, having utilised *free cash* from the business to increase capacity by over *50%* in the last 3 years. Recently, in 2020, GMM acquired the assets of De Dietrich Process Systems (DDPS), the other global glass-lined equipment maker in India. With the exit of DDPS, GMM has further strengthened its technology leadership in India.
*GMM has history of acquisitions through most prudent and efficient capital allocation.* In 2008, the company acquired *Mavag AG in Switzerland*, a maker of equipment used in downstream processes in the chemicals and pharmaceuticals industries. In 2019, it acquired the industrial mixing division of *Sudarshan Chemicals*. Also, it announced the acquisition of *De Dietrich India's (DDPS)* sole Indian manufacturing facility in Hyderabad.
GMM managed to turn around Mavag’s operations, with Ebitda moving from negative when acquired to an operating margin of 13 per cent now. The Sudarshan Chemicals' division bolstered the portfolio of Mavag products in India.
*The management team of GMM has consistently displayed prudent capital allocation skills,* and with the exit of DDPS, GMM has further strengthened its technology leadership in India. They followed this up with the acquisition of the Pfaudler Group’s non-India business. The move is expected to give GMM lifetime access to Pfaudler’s technology base and innovation capabilities. It is seen to be enabling the group to optimise manufacturing between GMM’s India factories and Pfaudler’s global facilities, giving the former access to Pfaudler's overseas markets .
*Is GMM Pfaudler's Debt too high?*
As of September 2020 GMM Pfaudler had ₹405.9m of debt, an increase on ₹245.6m, over one year. But it also has ₹2.22b in cash to offset that, meaning it has ₹1.82b net cash.
*Is GMM Pfaudler's Balance Sheet strong?*
We can see from the most recent balance sheet that GMM Pfaudler had liabilities of ₹1.88b falling within a year, and liabilities of ₹777.3m beyond that. On the other hand, it had cash of ₹2.22b and ₹894.6m worth of receivables due within a year. So it actually has ₹464.1m more liquid assets than total liabilities.
This state of affairs indicates that GMM Pfaudler's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹63.1b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, GMM Pfaudler boasts net cash, so it's fair to say it does not have a heavy debt load!
*At what price should one buy the stock?*
This is the million dollars question. As you can see, if someone would have bought the stock over Rs 6000/- (52 week high is Rs 6900/-) an year back, he would still be making losses till today. The stock is available at 63% discount to its 52 week high but trading at almost double to its price two years back. So, the lesson learnt is that you should not buy any stock blindly, specially when the stock price has sky rocketed from 1300/- to 6900/- in one year. You need to stagger your investments in four to five tranches. Every investor needs to adopt its own strategy as per his/her risk appetite and time horizon for the stock. For short term, always put a stop loss though I never advocate for short term investment. Also, remember that it is a small cap stock and will be more volatile. So, allocate only a small percentage of your total capital in the stock.
*KEY CONCERNS*
*Stock Price Correction:*
GMM’s high valuations and the 33% discount in the OFS issue are not the only things that stand out in this story. The floor price for the offer for sale (OFS) issue was set at ₹3,500 apiece, far lower than the prevailing market price then. The peak price of GMM Pfaudler was *6900/-* on 11 Aug 20 with a PE of 148. The share price sky rocketed to 6900/- from 1300/- in one year period. So, the OFS offer came at discount of almost 50% from its peak price. Also, the majority of selling came from the Private Equity Fund DBAG and promoters family has only sold very miniscule percentage. The positive of OFS is that it has increased the free float in the market from 26% to more than 40% which will increase the liquidity and volumes in the market. The sufficient supply of shares will lead to more stability in the share price in future. Its shares has risen by *4700% in last ten years*. The current market price of GMM Pfaudler is around ₹ 4400.
*Revenues & Earnings:*
The current profits of Q1 FY 22 looks weak inspite of very robust revenue growth due to accounting adjustment for PPA (Purchase Price Allocation)and that is non cash item and doesn't affect the cash flow. Net profit of GMM Pfaudler declined *86.50%* to Rs 2.59 crore in the quarter ended June 2021 as against Rs 19.19 crore during the previous quarter ended June 2020. Sales rose *257.24%* to Rs 551.68 crore in the quarter ended June 2021 as against Rs 154.43 crore during the previous quarter ended June 2020.
As per management commentary, the revenues are expected to be around 2800/- crores with 16% EBIDTA margin by FY 24. This means that it can generate around 325/- crores of PAT by FY 24.
*IMPORTANT PARAMETERS*
*Sales Growth*
1 YEAR : 24.1%
3 YEAR : 27.06%
5 YEAR : 22.79%
*Profit Growth*
1 YEAR : 53.09%
3 YEAR : 49.65%
5 YEAR : 38.95%
*ROE*
1 YEAR : 30.27%
3 YEAR : 25.28%
5 YEAR : 21.81%
*ROCE*
1 YEAR : 35.59%
3 YEAR : 33.58%
5 YEAR : 30.32%
*CRITICAL RATIOS*
*Debt/Equity : 0.25* (As on Mar 21)
(It is a measure of the degree to which a company is financing its operations through debt versus wholly owned funds. Generally, a good debt-to-equity ratio is anything lower than 1.0.)
*CFO/PAT (5 Yr. Avg.) : 1.08*
(Essentially, the operating cash flow ratio shows, whether you are making enough money from operations to pay your bills. A business's operating cash flow ratio should be 1.0 or minimum 0.8 to 0.9).
*CONCLUSION*
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.
GMM has a history of *Consistently Increasing Sales, Earnings & Cash Flow*. Absence of any strong competitor, GMM Pfaudler is expected to stay as a *sole majority supplier* in glass coated equipment. It is a *rare Indian company* that too a small cap, which has made a *global leadership.*
*DISCLAIMER*
The above article is not a buy or sell recommendation. It is made for the purpose of information, knowledge and education and should not be used to start investing in the stock. Please do your own research before investing in the market. The content, data and views have been taken from various websites and YouTube videos freely available on the internet. Few of the references have been given below.
*References*
No comments:
Post a Comment