GMM Pfaudler Limited (505255) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to GMM Pfaudler Limited Q1 FY '21 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over to Mr. Binay Sarda from Christensen IR. Thank you, and over to you, sir.

Thank you, Vikram. Good afternoon to all the participants on this call. Before we proceed to the call, let me remind you that the discussion may contain forward-looking statements that may involve known or unknown risks, uncertainties and other factors. It must be viewed in conjunction with our business risks that could cause future result performance or achievement to differ significantly from what is expressed or implied by such forward-looking statements. Please note that we have mailed the results and the press release and the same are available on the company's website. In case if you have not received the same, you can write to us, and we will be happy to send the same over to you. To take us through the results and answer your questions today, we have the top management of GMM Pfaudler, represented by Mr. Tarak Patel, Managing Director; Mr. Ashok Pillai, COO; and Mr. Jugal Sahu, CFO. We'll start the call with a brief overview of the quarter gone past and then conduct Q&A session. With that said, I'll now hand over the call to Mr. Tarak Patel. Over to you, sir.

Good afternoon, everybody. So let me start off with throwing some color on our Q1 performance. So for us, I think we've started the year with a very solid performance in spite of the current coronavirus pandemic as well as the nationwide lockdown, which affected our -- the production capacities because of the loss of days. We were still able to show a strong performance, which puts us into a good position for the rest of the year. Our factories have worked really hard over the first quarter. In spite of having a loss of production in most of April, we have managed to turn it around in May and in June, and we performed quite well for the quarter. Our backlogs continue to remain quite strong, and the industry segments that we cater to, namely pharmaceuticals and chemicals, continue to show a lot of traction. Our order book across all our product lines also remains quite strong, and our outlook for this financial year remains very positive. We will use the next few quarters to build on our Q1 performance and maintain the same -- the level of growth that we have been achieving over the last few years. In terms of other highlights for this quarter, we have, as many of you know, completed the acquisition of De Dietrich Process Systems India facility in Hyderabad. This facility will be most likely handed to us on the 1st of September. This gives us a ready-made glass line capacity in Hyderabad. It will improve our presence in the region and help serve our customers in a much quicker and prompter manner. We have already taken steps to make sure that we hit the ground running. Our raw materials, our glass lining materials, our labor, our glass line players, our vendors, our supply chains have already been geared up so that on September 1 we are very quickly up and running, and we can start producing as soon as the possible from that facility. That facility also will help us reduce our -- the current backlog at our Gujarat facility, which means that our backlog will reduce by about 200 to 300 units, which means that we can now supply equipment faster to our customers, which will mean in turn that we can then go and capture some more market share as well. Like I'd mentioned to you during our last call, our heavy engineering business has done extremely well. This is the first year that we have started the year with a very strong backlog, which means that this is the first year that heavy engineering business will perform up to the expectations that we expect from it. We have built a lot of capabilities over the last 2 or 3 years. And now they are finally bearing fruit. In our proprietary business also, we have a very strong order book. These orders are not standard equipment. We have managed to really upsell these equipment and really go after technology and innovative products, really trying to differentiate ourselves from our competitors, and I believe that we will see margins improving as well. The export business also continues to do well. Southeast Asia and Middle East have been markets that have been doing quite increasingly well for us. We have seen significant amount of order intake from these regions, which will then translate into better margins going forward. Lastly, our 2 new furnaces have also arrived on Indian shores. They are now on our way to our factories. And within the next couple of months, we should have that up and be running, which will mean that we will have enough capacity to cater to the glass line market here in India for the foreseeable future, and we can maintain our market leadership position. So with that, let me then open this investor call for questions, and I'll be happy to answer any questions that you may have. Thank you very much.

[Operator Instructions] We have our first question from the line of Rohit from Progressive Share.

The numbers look optically flat. Indeed, a good achievement in the current scenario.

Yes. Rohit, so yes, you are right, compared to Q1 of previous year and Q1 of this financial year, yes, the numbers are flat, but you must also understand that for Q1 of FY '20, we had 3 full months of production. In this Q1 of FY '20, we have month -- of FY '21, we had about 2 months of production. There were many issues relating to labor, to supply chain, in terms of start-up and things like that. In spite of that, I believe that we have still performed well. I believe a lot of other companies in the manufacturing sector will probably not have a similar kind of performances. We were not very heavily dependent on migraine labor. Most of our employees are from local villages. So that helped us a lot. We also had a very strong backlog and materials in stock with us, which helped us. And then lastly, we used our financial ability to make sure that all the bought outs that were required to complete this equipment were supplied to us in time. So I think going forward, I think many people would have expected Q1 to be worse than the Q4 of previous year. However, we've turned it around, and we've actually outperformed Q4 of previous year. We're showing about a 17% quarter-on-quarter growth. In spite of having more off dates than in Q4. So I think a lot of credit goes to our -- the facility in the Gujarat. I think they've done extremely well to get up and running quickly. And again, like I said, it puts us in a very strong position to do well in this financial year.

Tarak bhai, I agree to that. That's why I said optically flat. I have 2 questions, which are related to this new plant. So of this approximately 6 acres of property at Telangana, what percent is currently used for manufacturing or was used for manufacturing by them? And what is the free land available to you for future expansions, if any?

So I think it's about 49,000 square feet as the covered factory area, but I'm not completely sure. It's around the 40,000 square feet mark. We do have significant ability to expand that facility. Not only that, that facility has not really had anybody invest in it for quite some time. It is something that has been continuing from the last 10, 15 years. So we definitely want to bring in our own efficiencies. We've reached a kind of level at GMM Pfaudler in Gujarat that we want to bring and implement in this new facility and really ramp up both in terms of operational excellence as well as in terms of improving efficiencies, so we can bring that in. And as we bring that in as well, we will then slowly, slowly add new machines, new work centers and look at improving the output from there. So in the first, if we have a full year of production, we believe we can anywhere in between INR 60 crores to INR 70 crores of output. Now that for this financial year, we have about 6 months of production available starting in September, we expect another INR 30 crores to INR 40 crores of output. But it's more of an opportunity cost for us. For us, it gives us 2 benefits: one, it gives us a benefit that we immediately are able to bring our backlog down; and two, it gives us the ability to manufacture equipment locally, which means that we don't have to spend transportation costs from Gujarat to Hyderabad. We can now produce it locally and then supply it from there to the local market.

Okay. I understand that you are having a ready-made plant to drive down the market share. But any views or any thought or calculation as to how many equivalent units was the plant able to make earlier?

So we have no idea in terms of what they were able to make. Their processes are very different from our processes. Their firing cycle for glass line are very different. But in terms of what we expect, we expect about 400 equivalent the EUs in the first year -- the first full year. And obviously, that can be ramped up as and when we keep bringing in more and more efficiencies.

[Operator Instructions] We have next question from the line of Rahul Jain from Credence Wealth.

Congratulations on a good set of numbers. So just to carry this further in -- with regard to our acquisition. So we are adding roughly about 400 units. And over and above that, we were adding about 500 units at Gujarat, which is supposed to come by August and September, and you had already planned the CapEx at Hyderabad. So roughly putting, I think, from around 2,300, you are going up to almost 3,700. So firstly, whether your new CapEx at Hyderabad, the new facility, would that get a bit delayed because of this acquisition? And if not, sir, do you feel there is -- you're adding almost more than 50% capacity addition is happening within a span of 12 months. So is it that the market is growing at a very fast pace? Or will you be taking market share?

Okay. So just to clarify, now that we have made this acquisition in Hyderabad, we will not be adding any further capacity. So the greenfield project was something that we had thought about because we did not have this option of this acquisition. Now that we've acquired this company and we have ready-made access, there will be no longer any investment in the greenfield project. So we will use this facility to produce in Hyderabad for the next 3 to 5 years. And maybe then look at maybe adding more capacity or even looking at a greenfield project at that time. So right now, for the next 3 to 5 years, we only have 2 facilities, one in Gujarat and the one that we just acquired from DDPSI, India. So in terms of adding capacity, we are not really adding 60% capacity. Like you rightly said, in this financial year, once the new furnaces come in, our EUs in Karamsad, Gujarat will be about 2,300 units. And in Hyderabad, it will be about 400 units. However, in Hyderabad, please note that we only have 6 months left since we will acquire this facility only in September. So we have about half of that. So about 2,500 to 2,600 EU capacity this year. We believe that the market is conducive. There is a lot of traction happening in both the chemical and pharmaceutical space. So one is that we will reduce our backlog and whatever new orders that come in, that's something that we can also cater much quicker and much faster to our customers.

Sure. And sir, just 1 last thing. How has been the order inflow in this quarter? And do you find any difference in how the managements are talking about that CapEx in the time gap between our call for the fourth quarter and as we speak today?

Right. So there is definitely more traction on the ground. Because of the pandemic in Q4, things had slowed down. We are now seeing more and more managements now taking a call on new investments. We are seeing there is definitely some traction in the pharmaceutical space. There is the smaller players who used to order maybe 1 or 2 equipment are now going and ordering 6 to 10 equipment. It's not the big traction that we want to see in the big players. But on the ground level, it is happening. We do believe that Indian companies will look at localizing production of intermediates. There is going to be a shift from China to India. We believe the government is also pressurizing Indian companies to look at manufacturing locally. So all in all, I do believe there's traction in the pharmaceutical space. I think more traction will be seen in the coming quarters. Chemicals still remains very strong. Our big chemical players still have investment plans, major CapExs are on their way. And like I mentioned earlier, we have seen some -- we've seen some traction in the international markets. We recently got 2 large orders from Southeast Asia, Malaysia and Taiwan, which also will be quite nice in terms of international and export business. But yes, so I think overall, we are quite positive in terms of the outlook for glass line equipment.

So the order inflow number for this quarter?

Sorry. So I said the backlog numbers right now, I -- sorry I missed that. So on the end of Q1 of this financial year, we have about INR 330 crores of backlog on our books, executable backlog. And this is evenly spread between glass line and nonglass line, 50% with glass line and 50% with heavy engineering and proprietary products.

We have next question from the line of Dhaval Shah from Girik Capital.

Yes. Sir, congratulations on great performance. Sir, for the current -- for the Q1, how much of the sales or the growth would you attribute to the spillover sales from the fourth quarter, given we had shut down in the past couple of days of the fourth quarter?

Right. So it's a combination, again, Dhaval. Readymade equipment, I would say, would be in the range of, let's say, INR 5 crores to INR 7 crores. But like you know, there's always work in progress. And that also got carried forward. So I would say in the range somewhere between maybe INR 15 crores to INR 20 crores. And then obviously, we also created WIP in this quarter. So even though we could not ship everything this quarter, some of it will again spill over into next quarter. So we were quite cognizant of the fact that we need output, but we also need to create WIP which can then be used in the following quarters because as we want to grow in the next 3 quarters, we expect to be a significant ramp-up in output. And the WIP that we created in Q1 will help us doing much, much better in Q2, Q3 and Q4.

Okay. Great, sir. And sir, on the heavy engineering part, can you elaborate more on the product side? And even the profitability-wise, we have been very, very healthy, roughly 20% EBIT we have done. Can elaborate a bit more on this and the way forward?

Sure. So heavy engineering is something that I've been talking for long, long time. Many of you must be hearing my heavy engineering outlook, every year I say it's going to do well. But this is really the first year we really hit significant volumes, right? So the absorption in terms of the fixed costs will finally come through and that will affect the profitability. Last whole year, the numbers in heavy engineering were close to INR 50 crores. But in Q1, we've already done about INR 41 crores, right? So immediately, you will see a big improvement in profitability. In the same way, the proprietary products did not do extremely well in the first quarter, even though we have a lot of WIP, and we'll see a big in Q2, there was not enough output for the profitability to improve significantly because of the absorption of the fixed costs, right? So yes, exactly -- I mean, the reason why you've seen a big surge in profitability is, obviously, the volumes. The revenues have increased significantly. But again, we've also managed to have a good mix of the right kind of orders in heavy engineering. So we've had a little bit of export to the Middle East. We have the alloy material. We have carbon steel. We have stainless steel. So the product mix has always been nice. And again, that's one area that I'm quite confident in is heavy engineering, and we have really spent a lot of effort to build in our capabilities so that customers will really regard us as one of the premier players in this industry segment.

Sir, what would be the industry segment in which we have supplied given...

So it's again a mix. There'll be oil and gas. There'll be fertilizer. There'll be chemical as well, maybe a little bit of pharma, but it's really -- the idea here is to kind of diversify from our legacy segments of chemical and pharma. So oil and gas, petrochemical would be a significant portion of this.

We have next question from the line of Sanjay Shah from KSA Securities.

Yes. Congratulations Tarak bhai and Ashokji on good performance despite these many challenges due to COVID virus pandemic. And sir, I wish you a good luck for future. Sir, my major questions are answered. But sir, can you elaborate on heavy engineering side, what is our total rated capacity and what turnover we can do with the established facility? And what are we doing for increasing that later on?

So Sanjay, good question. We have -- we do have additional capacity. The last 3, 4 years, we've been INR 40 crores, INR 50 crores and odd. We can very easily, in my opinion, reach anywhere between INR 150 crores to INR 200 crores, allowing the right kind of product mix, right? So we have to be very careful here in terms of what we bring in. There has to be the right combination. If you bring in all carbon steel only, which is low-value, you might not even reach INR 100 crores. But -- and if you bring in, let's say, all stainless steel and hastelloy, then you can very easily even do more than INR 200 crores. So finding the right product mix is something that we are working on. We have a clear strategy in this front. But all in all, I believe that between INR 150 crores to INR 200 crores is currently our capacity. We have 2 large manufacturing sheds, which we have built recently. One was slightly older. One is new. We have capacity available. And again, I think it's important to understand that for this business line, there's not a lot of CapEx required. So even though if the business were to increase significantly, we can really bring and add manufacturing space very quickly by just adding space, right? So this business is something that we have been quite bullish on. Finally, we have a time where we have a good starting backlog and a good order book. And hopefully, now we can pick and choose good margin business that will allow us to have revenue growth as well as profitability growth going forward.

That's great. Tarakji, can you highlight and elaborate on how our international verticals are doing? As you rightly pointed out, we have got good orders from Malaysia and all, but how our subsidiaries are doing, Mavag and all? And what are the opportunities you see outside India?

Right. So Mavag, for all of you, it's going to do extremely well this year. GMM already started with a very strong backlog, but Mavag has started with an even better backlog. Last year, I believe there is something like CHF 12.5 million to -- CHF 12 million to CHF 13 million, maybe slightly lower than that. So this year, they have a very, very strong backlog. So you will see significant improvement in both Mavag revenue as well as bottom line. Many of you will know that the breakeven is about CHF 10 million. And we hope for them to perform very, very well because the order book is already on hand. Now it's only execution. And they, unlike in India, have had no lockdown. And you will see in the next few quarters that their numbers will keep improving. Our parent also continues to do well. So like we have seen in India, there is a buzz around the world in both the chemical and pharmaceutical industries. Like investment is coming back on Indian shores, the same way, there's investment that is going back in the U.S. and European markets as well. Many of these countries have realized that they were had overdependence on both India and China. So local capacities are being created. So I think globally, chemical and pharmaceuticals are 2 industries that seem to be somewhat insulated from this crisis. And I think over the next maybe 3 years or so, you will see a good amount of investment in new capacity being added.

That's great. Sir, my last question.

I'm sorry to interrupt. Please come back in the question queue. We have next question from the line of Kaushal Shah from Dhanki Securities.

Congratulations on a very good set of numbers. Sir, I have 2 questions. One was if you can throw some light on the CapEx that could be required? You mentioned about the fact that DDPS, there could be some investment required for you to streamline some activities or the work processes are a little different. So what would be the likely CapEx that could be required in that facility for us to kind of get started in a meaningful way? And the second question was on the heavy engineering side. When you mentioned about the order book. So if we do the math, roughly heavy engineering has an order book of, I would presume, in the regions of around INR 80 crores, which is roughly, let's say, 2 quarters of work. So are we expecting additional orders as we go forward in heavy engineering, when you mentioned that we are likely to see significantly better performance in the current year?

Right. So maybe I'll answer the first question. The plant that we bought from DDPSI, I think it's important to understand that it is still a good plant. It's a well-maintained plant. It is run by French multinational. So the system, the quality levels, the maintenance of the equipment is quite high. So I don't see a lot of CapEx happening there. I think maybe CapEx in the range of maybe INR 8 crores to INR 10 crores over the next 3 years, right? So that's something that -- it's mainly in terms of just getting the plant painted, cleaned up, some new small equipment, small cranes and things like that. So no major CapEx will go in. And the numbers that we have planned currently are without a new furnace. There could be a possibility that if the markets are conducive, the markets are growing, we might even add a new furnace in Hyderabad. That's something that we have not taken a call of right now. But in the -- maybe in the next 6 months to 1 year, we will take a decision on that. There is space available to add new furnaces and then really ramp up the production capacity there. In terms of heavy engineering, yes, you should understand that, yes, business is good. But however, some of these items are long-lead items. So even though we have a good starting backlog, maybe Q2 might not be at the same level. But for the year, definitely, you will see a significant improvement in the HE production and the output. There is capabilities. We still have capacity available for Q3. There is a shortfall there by a few crores. But in Q2 and Q4, I think we have booked solid. So for this year, we are now done. So now we are focusing on the booking business now for the next financial year. Again, having a good backlog to start the year will again help us grow further in this business line.

Your next question from the line of [ Ankit Gupta from Bamboo Capital. ]

Congratulations for producing good set of numbers. Sir, on the pharmaceutical side, if you can highlight how has been the order inflow or inquiries because what we have been hearing and what the government has been planning the incentives that they are planning to give for setting up API or intermediate plants in India, like there are big incentives coming in. So if you can highlight how has been the inquiries and have the inquires started getting translated into confirmed orders? And how will this impact both our GLE business and the ANFD business that you have on the proprietary side?

So -- yes. So I think that's a good question. I would not -- if I were to be honest with you, it's still going to take some time. Even though there's a lot of talk, there's a lot of government pressure, it's too early for it to translate into actual orders on the ground. Having said that, there are smaller players, intermediates who supply to the bigger guy who have started now investing in new capacity. So I've said that the Tier 2 pharma guys, we've seen a traction there. Instead of them buying 1 or 2 equipment like they have been doing for the last 5, 6 years, now they're buying 8 to 10 equipments. So they are definitely adding capacity and that's probably a reason because Indian companies are now saying that, why don't we have more local supply. So that's happening at the ground level. However, to see big change in, let's say, Dr. Reddy's, Sun Pharma or Cipla and Lupin of the world, I think that will take some time. There is a clear shift in policy for sure. Like you mentioned, the government is forcing players. We have heard from customers like even like the specialty chemical, the customers that there is direct contact from central government to ask them to look at manufacturing intermediates locally. So all this is happening. The government has also identified 3 clusters for intermediate and pharma manufacturing. One of them, like you know, is Pharmacy City in Hyderabad. But again, to translate it to actually on the ground, I think that will take some time. I think it will take a couple of quarters. Pharma City is still maybe 1.5 years, 2 years away, maybe even more. But I think now the government will definitely push to move that a little bit faster, so that over the next few quarters, we will see some traction there. In the meantime, the chemical business still continues to remain quite strong. So we still do have some time where business is not a problem. The market continues to grow. And by the time the pharmaceuticals picks up, we will see that -- then we will have additional capacity as well. Just 1 more point here. I think for you to understand is that chemical -- sorry, pharma plant, especially the older ones in Hyderabad have now reached their life cycle. People are looking at upgrading these plants. Now with FDA issues coming in, people are looking at revamping many of these plants. So not only demand from new investment, but even demand from replacement business will pick up in the coming quarters.

Sure. And -- but have you started seeing inquiries from some of the star companies. I think DBs, I think they've already supplied to them. So any additional inquiries from large companies like DBs or Dr. Reddy's or Cipla? Or they have not even started inquiring for...

Yes. So I would not compare Hyderabad pharma with Mumbai pharma. So Heteros, Aurobindo, DB have always invested. Every year, they have projects. Hetero recently invested. DB recently invested, and they will continue to invest. So that will be continuous businesses. Aurobindo also is very bullish. However, Sun Pharma also recently did a bit of investment, but their investment is more in terms of operational improvements and efficiency improvements. They are revamping their old facilities and really trying to extract as much efficiency. So there are different strategies at play for different customers. Many of these also have very -- the different products and markets. But overall, I think you will see a shift of intermediates. I think that is something that the government is very, very strong about that they believe that our dependence on China is significant, and that's something that we should reduce over time.

Sure. And how much of our current backlog is from pharma and how much from chemicals, if you can give us a broad breakup?

So about 50-plus is from chemicals, 55% is from chemical, about 30% to 35% is from pharma, plus or minus 5%.

Okay. And this was almost say, 1.5 years back, that pharma used to contribute more compared to...

Yes, exactly. So we are pretty much at the same level still.

We have next question from the line of Deepak Mehta, investor.

And good set of number, congratulation. My question is that as we have seen good momentum in first time in the heavy engineering. So we have added any new logo? Or it is from our existing plant, sir?

No, it is all from our existing facility in Gujarat. We have 2 sheds already available. And we don't -- we not added any additional capacity in heavy engineering.

Okay. And what is the order book right now for heavy engineering, sir?

So like I mentioned, the total order book on the end of the first quarter was INR 330 crores for the entire GMM Pfaudler, out of which half is for glass line and half is for nonglass line. So if you do your calculations, you can calculate that it will be 25% for the 2 product lines that are not part of glass line business.

Okay. And 1 more question that we are already doing great as a company, so what headwind we can see due to Atmanirbhar Bharat. So I think there would be some good push for our company as well.

So yes, there is definitely opportunities. I think that having a competitor -- significant competitor leave India and not compete with us for the next 3 years, as part of this agreement of purchasing this acquisition and this land in Hyderabad, that will be a significant advantage. Because we are indirectly now the only quality and technology glass line equipment brand in India. Everybody else is not a global brand. They are all local players. So we definitely now have a differentiation and market leadership. So that's something that's going to be beneficial to us. Like I mentioned, that our ability to have access to this facility by the first week of September is also very important because right now, the need of the date for us is to reduce our backlog and to give faster equipment, faster supply to our customers. That will help us. In both the other businesses, the proprietary products and heavy engineering businesses, we already have pretty much a backlog that takes us to the end of the financial year. So we all only have to now execute. Financially, we are stable. Materials are not a problem. Our factories are now working at full capacity. So we are in a good situation. My only hope is that this virus does not result in us having to close down. I don't think that is the case because we have a lot of SOPs and precautions that we have built in, but you never know with this virus. But it seems that things are now opening up and things are getting better. So I believe that you will see better performances from the company in the coming quarters.

We have next question from the line of [ Hasmukh Gala from Finvest Advisors. ]

Tarak bhai, congratulations for a very good set of numbers. Sir, just 2 questions from my side. One question is, as on 1st of April, we started with order backlog of about INR 350 crore what we disclosed in Q4 conference call. And now we are saying INR 330 crores. Does it imply that the inflow of orders have been lesser than what execution has been?

No, I don't think so. I think while we have executed, we have also booked. You will see small changes between every month, but the trends continue to remain strong. 1 or 2 months of poor orders because of the pandemic, like I mentioned, April would have been a very slow month. But things are picking up again, but nothing alarming because we have enough orders to take up at least for this financial year. We probably have some capacity in Q3 and Q4 for certain product lines, but that's something that we will very easily -- if you maintain the same run rate of order book, we will meet those numbers very, very easily.

Okay. Sir, on proprietary products, I think, which includes the Sudarshan Chemicals business, how that is faring?

That is doing also quite well. I think overall, we have a very strong backlog in the proprietary orders, the business. However, our Pune facility was shut for a little bit longer than our Gujarat facility. So that is something that we'll make up. But yes, these orders are of good quality and high margins. And I think this is 1 product line, again, that you will see a good amount of growth. You will see a significant improvement in profitability because, like I mentioned, we are now focusing on high-margin business, not the standard products that some of our competitors make. We've been able to differentiate ourselves here. And we have a good amount of order book from our subsidiaries in Switzerland as well, Mavag, which manufactures most of the components here locally in India because there's a cost advantage, has also seen a good upsurge in orders, which has translated into more business for us.

Right. And sir, in heavy engineering...