GMM Pfaudler Limited (505255) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the GMM Pfaudler Limited Q2 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Diwakar Pingle from Christensen IR. Thank you, and over to you, Mr. Pingle.

Thank you, Janus. Good evening, good morning to all participants depending on where you've logged in from. Before we proceed to the call, let me remind you that the discussions 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 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 is also available on company's website. In case you've not received the same or you're not on our mailing list, please do 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; Mr. Jugal Sahu, CFO; and Mr. Mittal Mehta, the Company Secretary. We'll start the call with a brief overview of the quarter gone past and then get into the Q&A session. With that said, I'll hand over the floor to Mr. Tarak Patel. Tarak?

Yes. Good afternoon, everybody. Sorry, good evening, rather. And let me just give you a brief update on the quarterly performance. Let me start off by giving you the performance on a stand-alone basis. So we had a very strong quarter this quarter, where our revenues grew by about 18% from INR 130 crores in the previous quarter to INR 154 crores in this quarter. The EBITDA also increased significantly from INR 24.3 crores to INR 36.7 crores. In terms of -- as a percentage of sales, the EBITDA margin on a stand-alone basis grew from 19% to 24%. And the net profit also grew by about 53% from INR 16.4 crores to INR 25.1 crores in terms of the percentage of sales from 12% to 16%. So all in all, we had a very strong performance at a GMM Pfaudler stand-alone basis. As I mentioned last time, our Q1, the performance was also strong. There was a good foundation in spite of having 25 days of shutdown because of COVID, we were able to ramp up the operations very quickly. And building on that, we have a very strong performance for this quarter as well. Looking at the consolidated revenue. We had an increase of about 21% from INR 154 crores previous quarter to about INR 186 crores this quarter. The EBITDA also grew by about 43%, INR 27.5 crores to INR 39.5 crores. As a percentage of sales, it increased from 18% to 21%, and net profit increased by 40% from INR 19.2 crores to INR 26.9 crores. And in terms of percentage of sales from 12% to 14%. So we are very happy with the performance. We expect the performance to continue going forward. There has been a significant improvement in profitability. I will probably shed some light on why the profitability has increased drastically. But we expect that going forward, we will maintain a similar level of profitability and might be able to even improve it slightly. The reason for the increase in the profitability margin has come from 3 or 4 different areas. One is because of the incremental revenue. As we grew from INR 130 crores to INR 154 crores, the additional revenue came in. There was a significant amount of it that flew into the bottom line. There is also some amount of credit goes to the product mix. This quarter, we had a large amount of glass lined sales that accounted for higher profitability. And within glass lined sales itself, we had a good kind of distribution between reactors, tanks and the spare part business. We also had some savings in terms of the raw material cost, both in terms of carbon steel, stainless steel prices, but also in terms of power and fuel. Now that our 2 new gas furnaces have also just come online, we expect margins to improve further because we can now finally switch off our electric furnaces and have all our production in Gujarat coming from the gas furnaces. Besides that, we also saw some improvement in terms of the other costs. So in terms of operating leverage, there was some improvement there as well. And then lastly, in terms of the export business and the proprietary business that we get, we have been able to kind of implement the strategies that we have been planning to. One is to go after high-value, critical equipment rather than the run of the mill standard equipment. So that's something that is now the bearing fruit. And going forward, with the backlog that we have, we expect to close this out -- this year out in a very strong finish. A couple of other updates that I would like to also give you is that since yesterday or day before rather, our Hyderabad facility is now producing equipment. Today was actually the first glass lined reactor that got completely glass lined and has now come into final assembly. We should be able to ship that equipment out in the next week to 10 days or so. So Hyderabad is up and running. From an order standpoint, we have a very strong order backlog, I think close to about INR 350 crores, which is an improvement over Q1. And this order backlog is spread quite nicely between glass lined, proprietary product and heavy engineering. We've had a good amount of export business also in Q1 and Q2 of this year. So hopefully, over the next 6 months, when we ship these export orders out, we will see a further improvement in margin as well. Glass lined business is booming. We have more than about 1,100 equipment in backlog. We do see that the industries that we cater to in glass lined continue to invest, both pharmaceutical and chemicals are looking very, very strong. With the kind of inquiries that we have, I think we can go ahead and go after market share because we have now capacity available in Hyderabad. Plus with the new gas furnaces coming in Gujarat, I think we can go after and improve our market share as well. Besides that, the Pfaudler transaction is something that we still are working on. We are now have completed our antitrust filing. The FDA filings are now underway. We expect to close the international -- for the international transaction sometime by the end of this calendar year and hopefully be able to consolidate the numbers by the first quarter of next year or for Q4 -- sorry, by Q4, by January 1 of next year or by Q4 of this financial year. Besides that, I also want to spend a couple of minutes and give you a quick update on the OFS. We have managed to really change the profile of the company. We've increased the public shareholding from about 25% to about 45.05%. We have brought in high-quality investors. This will bring a lot of stability to the stock as well, long-term investors who believe in the long-term story. And they will obviously support us in the way that we have planned to grow our business. And then obviously, also the way that we will bring about change in the international business and use India as a low cost source. So overall, we've been very happy with the performance. We are quite bullish on the outlook of the company. And with that, let me now open this call for Q&A. We will be happy to answer any questions that you may have. Thank you very much.

[Operator Instructions] The first question is from the line of Sanjay Shah from KSA Securities.

Sir, my question was, first of all, congratulate and good luck to for completing all the acquisition deal and making India a global player as far as GMM is concerned. So in this quarter, we have grown very good in glass lined. Even our margins have improved, and it has really shown a good growth and we have started out [indiscernible] of growth by what are the benefits which has occurred. So can we expect this type of margin growth and continue or there are one-off in this glass lined business? That was one. And my number two question was in proprietary. In proprietary, in stand-alone, we have really grown very good on both the fronts, top line as well as EBIT margin. But when we see the consolidated numbers, the growth is absolutely muted. So there is good top line growth of around 38%, but absolutely very low growth on EBIT side, maybe around 10%. So can you elaborate on that, sir?

Yes. So a good question, Sanjay. So on the glass lining front, at least for the next 2 quarters, with the order backlog that we have, we can expect a similar line of the performance. Like I mentioned to you, with the 2 new gas furnaces kicking in, we should be able to further save some of the costs. So that should also result in improvement. Our Hyderabad facility also will now start shipping out equipment in this week. So we can move some of the production there and open up some more backlog. If we have capacity available, that means that we can go after market share. And when we can deliver quickly, we can definitely get a pricing benefit from the customer. So all in all, at least for the next 2 quarters and the guidance that we are planning to get or we are giving for the rest of the year that we should be able to maintain a similar level of profitability that we have shown in this quarter. We are quite confident that we can. And we think with this new synergies that will come into play in the coming quarters, we might be able to even improve on that. Regarding the proprietary business, like you mentioned, the India business has done extremely well. We've had a good share of export business, but we've also focused on really high-end equipment like [indiscernible]. We've also gone after very critical equipment, which require a lot of process engineering and other equipment. So that's something that we are focusing on. And we've also been able to supply quite a bit to our Swiss subsidiary. Now specifically for the results of Mavag for this quarter, yes, even though they've had a top line growth, they have not had a very good bottom line growth. This is something that is expected to change over the next 2 quarters. Let me also give you some guidance in terms of -- this is the first time in the history of Mavag that they have a order backlog of close to CHF 20 million which is unheard of in their kind of small area that they operate. They are pretty much pulled in about August of 2021, which means that most of the manufacturing will move to India. And even though this year, this quarter's profitability is not that great, we expect them to be back at the same level for the entire year. So there's nothing specific to worry about over there. They had a couple of low-margin orders that got shipped this quarter, but that will be made up in the coming quarters. But Mavag is doing extremely well. In terms of order backlog, they have a very, very strong order backlog. So we expect this year to be very, very strong, and we also expect next year they can relatively start the year with a very strong backlog and then build on that going forward.

That's great, sir. After long, we are very confident on Mavag side.

Yes. So what's happening, Sanjay, is that even the European and U.S. markets have been slow, but now because of the COVID pandemic and people looking at alternative to China, government in Europe and U.S.A. have been mandated to clear -- create local redundancies. We are also seeing a similar kind of thing happening with the Pfaudler network as well. People are now talking of setting up small facilities. Investments are coming back in Europe. So that is something that will help us also with the Pfaudler transaction. They also have currently a very strong order book. And if they can go after market share and get more business, that will put them in a very strong position.

The next question is from the line of Aditya Kondawar from JST Investment.

I just wanted to ask you this question. We saw in the news recently that SEBI has initiated some inquiry into the OFS shorting, like the shorting of the GMM stock before the OFS. So is it possible to get some color on that?

So officially, we haven't heard anything from SEBI, and we would be more than happy to assist SEBI or any regulator with any information that they would need. But as of now, as of right now, there has been no communication from SEBI at all.

The next question is from the line of Jason Soans from Monarch Networth.

Congrats on a healthy set of results. My first question is as you know, I mean, we are a indirect play on the pharma and the chemical end-user industries. Just wanted to know that in terms of the demand and the order backlog, could you break it up between new and replacement demand over the long term? Because obviously, equipment also needs to be replaced. And I believe in an earlier con call, you had mentioned that whenever any CapEx is done by a pharma or a chemical firm, 20% to 30% of the cost, obviously, excluding land is GLV or glass lined equipment. So just some picture on replacement demand and new demand.

So most of the demand that is coming through from pharma and chemicals is mostly driven by new demand. There is some amount, a very small amount, of replacement demand that is in the mix right now. And now the number of projects that are being been put up for adding new products for expanding capacity of the existing product line of these companies is still going very strongly, and that's what is driving our demand right now. Of the other question that you asked, about 20% of the CapEx being glass lined, it's not 20% on glass lined. That is percentage of all the products that GMM manufacturers that can be sold to those customers who are putting out plans because as you probably know, apart from glass lined, we also make other products that are downstream and ancillary to the glass lined equipment itself and therefore also go into the chemical and the agrochemical, the chemical decision.

Okay. And sir, any number possible if you could give between new and replacement demand, whatever the demand is coming through, say, it's 80 new, replacement 20 or something like that? Is it possible?

So normally in our -- say, 85:15 is probably the typical mix that you could think of, and it is probably right now replacement. But the replacement numbers will go up because many of the supplies that we made to many of these big companies in the pharma and chemicals are aging. They are over 7, 10 years old. So we can see a replacement cycle starting soon. So that itself again also fuel demand.

So a replacement cycle generally lasts for 7 to 10 years, is it?

Typically, yes.

Typically 7 to 10 years. Okay. Okay. So my next question is -- I mean, you had mentioned in the last call that your Italy and your China and Germany facilities also are -- they are improving within the Pfaudler network. Just wanted to know that as in glass lined equipment or glass being a breakable item, so -- and you also mentioned that you are looking at a long-term strategy to do most of the fabrication work here in India and then ship it to these locations, right, so as to save cost, and it helps you in margin improvement as well. So just wanted to know how do you take that call? Because glass is also being breakable and transport also might be an issue at some time. So how do you take that call to probably make it locally or get a lot of the fabrication work done here in India and then ship it to the onshore locations?

Right. So when we said shipping, we did not say shipping glass lined business. We said that we would do the metal fabrication here, but we still need local glass lining. Because the quality levels at the end of the day, the local factories will have to do the glass lining. But right now, for the time being, where most of the arbitrage really come for the labor-intensive activity, which really the fabrication, the welding, the [indiscernible] welding, that is something that we can do very easily in India, but we can do the glass lining locally at those facilities.

Okay. So the metal work is basically done in India. The glass line is done locally, right. That makes sense. And sir, after this DDPSI acquisition, what will be our market share, approximately? I think before DDPSI, it was around 55%. So what would be currently approximately?

So our market share currently is around 50% to 55%. I can't put a number to it, but if we can ship out what we plan, we can increase our market share by another 10%, 15% very easily. DDPSI currently was at a 10% level. And if we just had to replace them and take their market share away, that's 10%, and we probably are going to be a little bit more aggressive in try and take because now that we don't have a technology similar competitor who has the same level of international technology, we are pretty much the only guys here in India who have a technology advantage compared to the other manufacturers.

Okay. So that will be 10%. And one final question from...

Sorry to interrupt. May I please request you to requeue the question queue? The next question is from the line of Ravi Naredi from Naredi Investment.

Very good result. Sir, my question is some bitter sales in the company, why you maintain when OFS come before announcement, some player use SLB method of stock market and do some hedging. Are you aware of the same? Because same strategy, some did who has knowledge of this OFS, and you come on back foot and gave so many explanation. Please mind, it creates so much bad name to our image. And did you notice?

Yes. So I am in the same position as you are whatever I know about it through the newspapers and media articles. Now I can't control what people do outside of my company. And if people do something, they do something. I can't control it. I have to just live with the fact. It is unfortunate that it happened. But at the end of the day, we are going to focus on what we are good at, which is taking care and running our business. And what happens externally, I can't control it. So either we can't spend too much time to lose any sleep over it. But like you rightly said, whatever I've heard and whatever you've heard has been through the media channels, and that's all I know about it.

Because whatever OFS activities are going on, someone has leaked the information or something has happened because it never happens in the history of India, if such things has been happened without knowledge of management.

I don't think that is very correct. I don't think that's true. I don't know and I don't -- I've not studied the history of India per se, but I think that unfortunately, somebody did it in our case and our name came out, and there's nothing we can do about it. We just have to let the regulators do their investigation and see if there is somebody who had any kind of insider information. And if they do find somebody, good for them. But again, we are not regulators. We are a company, and we have to control what we can control, which is our business.

But because Tarak, here, you must go to the SEBI and ask them to investigate for the goodwill of the company because it creates a very, very bad image. You do not know, but you imagine those shareholders that have bought the share in INR 6,000, and they are seeing INR 3,500. What bad image comes to GMM, you tell me.

Yes. So we have no locus standi to go to SEBI again. Again, I'm saying that this is very difficult and awkward situation for us. So I think better -- the less I say about this is better. I mean, in terms of time, the truth will come out, and the regulators will do their investigation. But let's not jump to any conclusion. Let's give it some time. If the company's name has become bad for some reason, it will change over time because at the end of the day, we believe in what we do. We believe in our ethics and integrity. And after a point, we have to just go on with life. How much will you sit and complain and cry about what somebody else did? I can't. I have to focus on business and move on with life.

The next question is from the line of Amar Mourya from AlfAccurate Advisors.

Hello. Yes. Am I audible?

Yes.

Sir, couple of questions from my side. So first thing is this now we have 101 -- 1,100 glass lined reactors order book. Now given that this new glass furnace in Hyderabad plant, so how much more glass lined reactors we can deliver in a year versus the existing capacity?

So our current capacity before we installed the 2 gas furnaces and before Hyderabad was about 2,300 in a full year basis. Obviously, we lost some months because of COVID. So let's take that as a starting point. On top of that, we can go with the 2 new gas furnaces in Gujarat to about 2,800 or so over the next 2 years or so. So we have incremental 200, 250 reactors every year for the next 2 years to about 2,800. In Hyderabad, we have a capacity on a full year basis of about 400 units. That is without any kind of CapEx, without any kind of changes, but we definitely want to bring in some kind of operational excellence. We want to bring in our kind of improvements that we have made in Gujarat into the Hyderabad facility. And hopefully, we can build on these numbers. But all in all, as it stands today, you can take it as about 2,300 in the Gujarat, 400 in Hyderabad and about 250 more this year because of the new furnaces coming in, on a full year-over-year basis.

Okay. Okay. And sir, now in terms of the margin, you indicated that in glass line, at least, you have a visibility of 2 quarters. So basically, the visibility is on the growth you are indicating, right, that the growth intensity will remain the same as it is in the Q2.

Yes. So our top line growth will probably continue. It will continue because there is nothing now that will hold us back. The other book is already on hand. Like I told you, we have Hyderabad as well, all 3 product lines are up and running. They all have good backlog. The furnaces are coming online. So I don't see why there would be any reason for us to not grow and build on the Q1 and Q2 performance that we had. So I do expect H2 to be stronger than H1 per se because like I mentioned, H1, we did lose about 25 days in April, which in H2, hopefully, we will not lose. I don't believe there'll be another lockdown. I think things in India are returning to normal. So H2 performance will be definitely better than H1.

Fantastic. Fantastic. So sir, one last from my side. The Pfaudler, you indicated that the Pfaudler global order book is also increasing and improving. And secondly, if you can mention what would be the last 2 quarters profitability of the Pfaudler global?

There is an investor presentation on our website. I would just recommend that you have a look at it. I would not know it quarterly. I can just tell you that on a full year basis, we have at least given a guidance or that the consolidated revenue will be about INR 2,000 crores and the consolidated profitability would be about 13%. This is for FY '21 full year basis. However, those numbers will change a little bit because, as you've seen, the performance here in India has already improved significantly. And we also believe that the Pfaudler businesses from what I've been seeing in and the performance that's been happening in the last few months has also improved there. So I think once we consolidate, you will see some improvement from what we had guided in our investor presentation.

The next question is from the line of Mudit Kabra from Hem Securities.

My question is, what is the purpose of borrowings of $12.4 million which has been shown in our today's Board resolution? And when does that the company plans to redeem this borrowing?

Sorry, we could not hear you very clearly. Did you say that what is the reason for the $12.4 million that we will be borrowing?

Yes. Yes, sir. And when are we planning to pay it back?

Yes. So the $12.4 million is the debt that we are planning to take on the GMM Pfaudler's balance sheet to invest it in the 54% that we will acquire of the international business. The balance will be funded through our internal cash reserves and $5 million of debt at our Swiss subsidiary. We will probably draw down this debt sometime in December or January when the transaction is closing. And we expect to probably pay back the debt in about a 2-year period on the GMM Pfaudler's debt.

Okay. My next question is if we look on to the financials, under other expenses, we can see around $250 million of expenses recorded every quarter. But in Q1, we had $188 million. So what -- what kind of expenditure is this, which has been decreased and yet again being normalized again?

So can you repeat that? You were not very clear. There was a decrease in, what expenses did you say?

Under other expenses, we can see on an average $250 million of booking every quarter, but it has been decreased to $188 million in Q1. What kind of expenditure are these?

These are [ conveyance ] expenses, security expenses [indiscernible]. So in the first quarter, we did not have power cost for 1 month. Therefore, other expenses was a bit low in the first quarter.

The next question is from the line of Amandeep Singh from AMBIT Capital.

Sir, in your press release...

Mr. Singh, I'm so sorry to interrupt. Your audio is not audible, sir. Requesting you to please speak a bit louder.

Is it better now?

Yes.

Sir, in your press release, you mentioned that overall investments by pharma and chemical companies is expected to be around INR 74,000 crores over FY '20 to '23. So sir, can you help us understand if this is based on your interactions with the customers or as per management commentary in the earnings conference calls?

So I think there's a slight disconnect here. We did not mention this in the press release. We did mention it in our investor presentation. But this is basically data taken from the Indian government in terms of what investments will happen in the chemicals and in the pharmaceutical sectors. Obviously, we don't cater to the entire chemical nor to do we cater to the entire pharmaceutical sector per se. In pharma, we only cater to the bulk drugs and APIs and the chemical is mainly agro and specialty. Obviously, there's a lot more investment that's coming. So the number will decrease. But we were just basically talking about the 2 industry segments that we cater to in terms of what their current kind of momentum is and what kind of outlook they have.

Sure, sir. That's helpful. The post Hyderabad [Technical Difficulty] say that your capacity has increased by around 200 equivalent units for the next 6 months. And does this lead to 8% to 10% sequential expansion in revenue for the next 2 quarters?

So the way that we calculated it, we said about -- we have about 5 to 6 months of production. Obviously, things are in a good situation right now. We've been able to produce. Unfortunately, there were a few days of very high rainfall in Hyderabad, so we got pushed back by a few days. But yes, if you say about 200 equipment in a 6-month period at an average price of about INR 15 lakh, INR 16 lakh, about INR 30 crores of revenue should be possible. Obviously, this is something that we will try for, plus or minus 5% to 10% is something because the new factory, we need to understand the local rules, regulations, the customs there, the culture there. But however, we have a team already in place. We're already working on a lot of improvements. We've already done a lot of the metal fabrications sent in from Gujarat. So we are in a good situation there. I think there should be no reason why we can't achieve this number.

Sure, sir. That's helpful. And sir, as a follow-up to this, we understand that in Hyderabad market, competition from local players is quite intense. Sir, in that context, can you help us understand the competitive scenario here? And you are looking to open an after-sales service center in this market. Given the large pharma -- and also if the large pharma players have started giving orders or it's still the smaller players driving the sector demand, as you have highlighted in the previous call?

So I don't think the competition is intense. We are still the market leader in Hyderabad. And then with this new facility that gives us a local footing, I think we'll become even stronger. And like I mentioned in my last or maybe a few conference calls, the Indian customer is also changing. The need for quality equipment is increasing. Most of these customers have regular FDA audits. They have regular audits from their customers. So people don't want to compromise on quality. They have understood and realized that GMM Pfaudler stands for technology, for quality. It's very, very unlikely that they would take and compromise on quality because of price. As the local competitors have not been able to really deliver good quality equipment, yes, it might work for a short period of time, but many people have burned their hands. So I think overall, I think if we can meet deliveries and if our pricing is somewhat reasonable, I see no reason why we can't go and increase our market share in the south.

The next question is from the line of [ Srinivas Iyer from Rockford Consultancy ].

Congratulations, sir, for excellent numbers. In the previous con call, you told that once the gas furnaces are operational, we will not be using electric furnaces. Since we have huge order book, can't we use electric furnaces also to convert orders into cash [indiscernible] idle?

So yes, we will be left with one 800 kilowatt furnace and 2,400 kilowatt furnace. So the only operating permit that it could be used on a regular basis is 800. So our constraint is not necessarily always a furnace. So if and when we do require, we will definitely consider that. But we are trying to exploit first the gas furnaces fully and make sure only when that is fully operational and fully consumed will be then even consider possibility of using anything in the electric power. So that's the general philosophy that we will follow and to make sure that, that is never a constraint for us.

Okay. Second question is when are we going to start production of interseal acid recovery systems and fluoropolymers in India? Do we have plan to offer sealing solution apart from our own consumption?

So interseal is a product line that we are working on. They're working very closely with interseal Germany. We are in the process of developing vendors, developing the right sourcing. Those process are continuing, and we hope that we will have a prototype that is ready for testing by the end of this year, calendar year. Once that is tested, is approved by the German company and also by the German statutory authorities so that we have certain qualifications that is well recognized, we will start manufacturing. So I would presume that we will be setting up our manufacturing in the last quarter of this year. And in the new year, we'd be able to launch the product for the Indian market. On the fluoropolymer front, we have been for a very long time have fluoropolymer as a product line when we make PTFE lined pipe. It is still a business that is used mostly for in-house consumption, but we sometimes cater to the customers for special requirement. But that's something that we don't plan to expand in any great fashion at the moment right now. We've got our eyes focused on the product lines that we need to focus on right now, which is glass lined proprietary and this new business of interseal. On the acid recovery, one of the key requirements from customers is the requirement of a process and -- at that center, and we are establishing that [indiscernible] where customers can bring the product and we can prove to the customer that we can take this waste assets, purify all the waste elements inside this residue asset and concentrate and make sure that we give the right output that he is looking for. And for that specific of plan, and that, again, should be ready by January or so of next year. Once that's in place, we will have that being offered to the customers for them to go try.

The next question is from the line of [ Surendra B ], individual investor.

Hello?

Yes. Go ahead.

Just I wanted to know the revenue from our Pune facilities.

The revenue for the Pune facility because of the lockdown in Pune, which was kind of extended, I think in H1, we did about INR 5 crores to INR 6 crores of revenue. However, they have a strong order backlog, and we expect the next 6 months to be much, much stronger. They've already shown a lot of improvement. But as you know, Pune is a small part of our total turnover. So it will still be something that we can make up very easily.

Okay. Sir, one more question, which is you have already mentioned in Hyderabad you are going to start one more facility in Hyderabad. I think you have acquired some land, industrial land. So is this project still live or it's hold for some time?

No. So this was -- this is an option before we acquired the Hyderabad DDPSI facility. This was an option as a second option. If we could not acquire that, we would then set up a brand-new greenfield facility. Now that we've acquired a very big facility, that plan is no longer required, and we will now focus on shipping and improving the local facility that we have.

Okay. One more question is, sir, is rationalization done with China facility [indiscernible] glass lined reactors. So [indiscernible] glass lined furnaces. I think this is one of the biggest facilities Pfaudler has. So this -- can we -- how we can expand that facility to generate turnover from that?

No. So the China facility, I'm not sure about your information, but Pfaudler has recently created a new China facility, about 200 kilometers away from their old facility. It has doubled capacity that the old factory had. And now that China was now operational, you will see a good amount of improvement there. However, China is a market, in spite of the growth market, we have a very strong backlog. So the first idea is to reduce the backlog, ship out the equipment and then go after new business. But right now, we have doubled the capacity that we had in the old Pfaudler unit.

The next question is from the line of [ Asil Shah ], individual investor.

One quick question I had was, in your recent results, is there any reason why the heavy engineering profitability has dropped so much compared to last quarter and last -- and year-on-year basis as well?

Yes. So I think it's basically only because of the top line. If you remember, H1, we had a very strong HE order shipment of about INR 42 crores. This year, it's about -- this quarter, it's about INR 7 crores, INR 8 crore. So just because of that, you will get the leverage, the operating leverage. So I mean, the next couple of quarters because heavy engineering, what happens is some of the projects have very long lead time. So some of them get impacted together in 1 quarter, the next quarter is really not a very high way to build up WIP and in the next couple of quarters you see. But it has nothing to do with the specific product line. Again, for the both year basis, we will be on target in both revenue and profitability for HE.

Got it. And proprietary products, sudden jump in [indiscernible] was -- is it expected to continue into H2 as well? Or is this a one-off event?

No, no. I think the [ PC ] business is going to go and continue. Like I mentioned, there's a significant amount of business that we will now do in our Swiss subsidiary because they have a large glass order backlog. The kind of business that we are taking here in India is also high-margin business. We've got some export business as well. So you will see this continuing for this year at least.

The next question is from the line of [ G. Vivek ] from GS Investment.

Sir, just wanted to talk about the opportunity size of our sector glass lining equipment, [indiscernible] equipment, which we make in India as well as abroad, since after the acquisition. What is the growth rate we expect, sir?

So in India, we can -- we've been always guiding that both industries that we cater to pharma and chemical grow at about 15%. That's something that we can easily maintain, if not more. Internationally, I think chemical growth is about 6% pharma growth is about 7%. But again, now with the new COVID kind of issues [indiscernible] people looking at alternate to China, we might see both those rates increase slightly. However, obviously, you all know that international markets are not growing as fast as India. That's something that is clear. However, we have to use low-cost Indian sourcing. We have to use operational excellence. We have to use everything else that we have to really grow market share. Luckily for us, our competitors internationally are not very strong. They are also going through a bit of restructuring. Pfaudler has spent a good amount of money over the last 2 years, close to $20 million have been spent on 2 new facilities, 1 in China, 1 in Germany, much more cost efficient. They've reduced the number of people. So all those things will start playing and bearing fruit. They bought about 5, 10 small companies. Those new products will also increase and enhance the product portfolio. So it's not really only a question of market and growth rate. It's a combination of many, many different things where a company can become successful.

The next question is from the line of [ Puneet. K ], individual investor.

Can you hear me?

Puneet, go ahead please.

Firstly, congratulations on a super set of numbers. I think as you say, the comeback is always much stronger than the setback. So congratulations on that. I just wanted to understand on an individual level, when do we see the entire set of the subsidiary numbers also embedded in the GMM quarterly results? I missed it.

Yes. We expect from 1st of January, we will start consolidating. So in Q4 of this year, you will see it consolidated. Jan -- we probably expect the transaction to close in the third week of December. And I think for -- just for 1 week of consolidation, it's just too much of an exercise to get the numbers consolidated. So most likely, we're targeting 1st of January to consolidate.

[Operator Instructions] Next question is from the line of Sunil Jain from Nirmal Bang.

Congratulations of good numbers, sir. My question relates to more of overall volume what we can do. You said that Hyderabad, we can do additional 200 units. And from expansion, again, we can do in second half around 200, 250 units. Am I correct, sir?

No, no. I said 200 units from Hyderabad, so 6 months yet. And I said 250 additional units on a full yearly basis once everything is online. So in terms of the next 6 months, I would say that we could probably look at another 100 units from Gujarat facility because the 2 gas furnaces are just coming online, plus we have to do some other work in terms of making space, manipulate and all that. So I'm just giving you a random number, but 100 is probably something that's doable, maybe a little bit more than 100.

The next question is from the line of Rahul Jain from Credence Wealth.

Sir, 2 simple questions. One is, how has been the order inflow in this quarter? And how was it compared to the last year?

Yes. So the orders this quarter are better than Q1. And compared to even last year, things have picked up. Let me just give you the details. So H1 of this year was about INR 324 crores of orders. Just a second, sorry. Yes. Sorry. So Q2 of this year was about INR 175 crores of orders. And Q1 was INR 150 crores of orders. And at the same time, last year, Q2 was about INR 100 crores. So INR 100 crores is increased to about INR 175 crores.

The next question is from the line of [ Venkat from the 3Sigma Financial ].

I have 2 questions. One is Pfaudler International, which manufacturing facilities are included in Pfaudler International? And the second question is, are you using IoT anywhere? Yes, these are my 2 questions.

Thank you. So yes, we are using IoT in a small way across the Pfaudler Group. Also in India, we are using something that we are looking at also expanding. In terms of the facility, there are about 13 facilities in 8 countries that will become part of the group. Just to give you a broad level, we have 1 factory Brisbane, 1 in U.S., 1 in U.K., 1 in Germany, 1 in Italy, 1 in China, 1 in India. So India is obviously not covered in that. And then we have 3, 4 smaller units that we have recently acquired, Normag, interseal in Europe as well. So basically, all the units of Pfaudler in the Pfaudler Group will get consolidated. There is nothing else that gets left behind. The entire group is now under the GMM Pfaudler umbrella.

The next question is from the line of [ Farhan Amlani from SG Enterprises ].

I have a couple of questions. First is on the audit side. Basically, you guys recognize revenue from long-term contracts on the basis of percentage of completion method. Am I correct?

Can you repeat that again? Sorry.

Yes. You guys actually use recognized revenue from the long-term contracts on the basis of percentage of completion method, right?

Yes.

Yes. But it is highly dependent on the management guidance and all. So can you please share a words of wisdom on that?

The way -- we have here it's a $1 million contract that is within a 6-month delivery period to the same customer, the same PO is that that's something that we work on. However, this quarter, we've actually reduced our POC because some quarters like last quarter, we built WIP, and we were not able to ship it out because of COVID and stuff like that. However, this quarter, we kind of reduced that amount so that we shipped out more. And then at the end of the year, we usually try to come back to the same level of POC that we start with.

The next question is from the line of [ Asil Shah ], individual investor.

Sorry, Tarak bhai, I don't have any questions. Just wanted to congratulate you on a good set of numbers and commend you on your ability to focus on the business rather than all of this external noise that's happening because of the OFS.

Thanks so much. Nice to hear.

The next question is from the line of Dhavan Shah from ICICI Securities.

Yes. So I have a question on the GLE segment. So you mentioned the order book of around 1,100 GLE equipment. So I think that is almost the same, which was mentioned last quarter as well. So just wanted to understand, post this 8-hour capacity comes on stream, I mean, do you foresee that to capture that market share? Will there be any pricing war for the GLE equipments, additional around 200, 250 GLE?

I think, first of all, last quarter, the numbers were not 1,100. It's probably close to 800, 900 equipment. So the -- actually, the backlog has gone up in the last quarter. The rate of orders coming in have decreased. That's point number one. Once the production streamlines in the 2 new gas furnaces, we will definitely ship out more, enabling us to take additional orders. Will there be some amount of attritional margins? Probably not. Because the demand is still strong, and we do command a good premium over competition. So we don't see much of that problem. But if it comes to that, there could be some attrition in market, right?

But just to add to that, we are still losing business to our key customers only because we can't meet the delivery. So a company like PI, SRF or Divis Labs, who wants to buy from us and just cannot buy from us, those are the customers that we focus on first. So those customers still have and still will give us a premium over the other. And that's something that we'll target the low-hanging fruit and then go after the low-end margin business, if we need to. But I don't see that to be a strategic direction for us right now.

The next question is from the line of Rohit Ohri from Progressive Shares.

Just one question. Does the management think that it is time to go for a price hike? Or are you going to look for another 2 quarters or so before you go for a price hike?

So I think your friend Ashok will be able to answer that better, but go ahead, Ashok.

No, price hike on what? On the prices of our equipment?

Yes.

So I think the point here is that we should make sure that the pricing is justified and is acceptable to the customer, it's not completely efficient. It has to be subject to the market posture. So as long as we have that understanding, we will do all those acts that are appropriate to the market. I can't comment on whether we're going to hike prices or not.

The next question is from the line of Ashwani Sharma from Anand Rathi.

So my question is that just a small clarification. So the former integration, which you're planning to do by Jan next year, so will that be on a proportionate basis? Or since you have already given a guidance of -- number of INR 2,000 crore, the combined entity, so now the integration will be what? Is it going to be a competitive number? Or will it be a proportionate basis? That's what I wanted to know.

No, no. So everything will consolidate into GMM Pfaudler, the entire 100% will be consolidated.

From January 1.

Yes. From January, obviously, for the last quarter was 3 months, but the entire revenue and profitability will flow through into GMM Pfaudler.

The next question is from the line of Jason Soans from Monarch Networth.

Just wanted to know, you said that your margins could improve due to the gas furnaces. Would you like to ascribe a number to that in terms of bps, basis points?

I think we have said something like 50 bps for the last 2 quarters, 6 months. Jugal, how much would the savings be in terms of using the gas furnaces?

0.5%.

Yes, 0.5% around.

The next question is from the line of Ravi Naredi from Naredi Investment.

Tarak bhai, while you maintain heavy cash balance in hand, INR 113 crores and debt to maintain such high balance, why not you enjoy short-term working capital limit from the bank instead of maintaining cash?

So we have some working capital limit also, Ravi bhai. I think the question was that we had to raise some debt for the international acquisitions, and we will use some of the cash on hand as well. But again, to run the business, we didn't want to make it such a difficult situation. So we decided to find a right balance between debt and cash. And I think we have. But even the borrowing that we are doing in India right now, it's not too large for a company of our size. It is still very, very comfortable, something that our cash flows, which we generate can be very easily paid off in the very short period of time.

The next question is from the line of [ Deepak Thacker ], individual investor.

Tarak ji, very nice way you are conducting all the businesses in spite of the [indiscernible] cry over the market. I would like to just request you that the capital base of our company is too low, INR 3 crores only. And reserves are almost INR 380 crores as on today. So why don't you issue good amount of bonus shares, say, 5 shares to each 1, so that at least the capital base will be around INR 20 crores or so?

Yes. So every time I comment on bonus, I think everybody takes my words. So the idea right now is to really focus on creating value for all our shareholders through this international transaction. We want to conserve cash, and we want to focus on really transforming the business, really, really turning around the international business, which we strongly believe we can. I think shareholders will be rewarded once we consolidate, once we bring in the increased revenue and profitability from the international operations. And like I always mentioned, if the timing is right and if we believe that there is an opportunity for us to reward shareholders, we will be the first people to come out and say that we will.

We take the last question from the line of Amar Mourya from AlfAccurate Advisors.

Sir, I have 2 questions. Number 1 is that you indicated that Pfaudler Global, the order book has increased. If you can indicate that? And secondly, I was talking about the guidance part only. In going by the guidance, at least, we expect there will be at least good margin improvement at the global level also. So indicate -- have you seen that kind of improvement in last 2 quarters? Basically, the understanding was that.

Yes. So the order book remains very, very strong. And the German facility, the Italian facility, the Chinese facility, the U.S. facility, all have a very strong order book. So that definitely bodes very well. And we have seen Pfaudler actually turn around the international operations over the last 6 months or so. Their profitability has gone from about something like 5% to 8% and is improving now. There are 2 factories that are currently loss-making, but they've already been turned around. One was the German facility, which broke even in March of this year. The China facility, because of the relocation, also had a negative EBITDA. However, now that they have moved and they've started operations, that will also turn into positive. So overall, we will see a significant improvement in the international business as well.

Well, ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to the management for their closing comments.

Yes. So thank you, everybody, for joining the call. And I look forward to also talking to you again at the end of the next quarter. Overall, business looks good. Yes, there has been some noise and negativity around the OFS and the other issues. However, we continue to focus on business and make sure that we keep performing, and we keep working on the strategic direction that we've planned. And our next focus is obviously to turn around the international business. We have some very good ideas. And I think that if we put our head down and work hard, I'm sure that it is going to be achievable very easily. So thank you very much, and I look forward to speaking to you all next quarter.

Thank you. On behalf of GMM Pfaudler Limited, that concludes this conference. Thank you all for joining. You may now disconnect your lines.