GMM Pfaudler Limited (505255) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to GMM Pfaudler Limited Q1 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Priyanka Daga from GMM Pfaudler Limited. Thank you, and over to you, ma'am.

Thank you, Faizan. Good morning, afternoon and evening, ladies and gentlemen. A very warm welcome to all of you into the Q1 FY '22 earnings call of GMM Pfaudler Limited. On this call, we will be referring to the earnings presentation that has been uploaded on the stock exchange and also available on our website. Hope all of you had a chance to go through the same. Before we begin, I would like to mention that some of the statements made in today's discussion may be forward-looking in nature and may involve risks and uncertainties. Please note the disclaimer mentioning these risks is on Slide #2 of the presentation that was shared earlier during the day. From the management, we have with us our Managing Director, Mr. Tarak Patel; our CFO, Mr. Manish Poddar; and our CFO of International Business, Mr. Alexander Poempner. Prepping to the agenda given on Slide #3, we will start the presentation with the overview of the quarter from Mr. Patel. Over to you, Tarak.

Thank you, Priyanka, and good evening to all the participants. Let me just quickly take you through the presentation and give you an overview of both the India as well as the international business. So the India business has shown tremendous resilience. We've had a strong improvement in both revenue and profitability. Our order intake across all verticals remained very strong, especially driven by heavy engineering where we've had significant inroads made into the oil and gas and petrochemical segments as well. We've also been very pleased with the Pfaudler International business. The turnaround is happening much before expectation, and this is being driven by the turnaround in both Germany and China. Mavag business continues to outperform. The current backlog at Mavag is close to about CHF 38 million, so significantly higher than what it used to be and significant amount of order intake. In terms of the integration process, we are now completely handed over the whole integration process to our internal team. We are now working with the local geographies and local offices to extend the operational excellence, the cross-selling and the low-cost sourcing models so as to increase market share and profitability. I'm happy to report as well that you will see now some of the impact of the synergies coming into our bottom line as well. We are very happy also with the order intake which shows and gives us good visibility for this financial year. Our outlook for this year remains very positive, not only in India but also globally. Most of the Pfaudler facilities are now booked. And now we are looking at adding CapEx in certain areas so that to free up some capacity. We believe that the chemical and pharmaceutical market in the geographies in Europe and in the U.S., especially, we'll continue to invest, and we'll see a lot of growth coming from that. In terms of GMM Pfaudler stand-alone performance, even though we had some disruption due to COVID, our performance has still been very good. We are currently now running both Karamsad and Hyderabad at full capacity. The Vatva facility is kind of operational. We have 2 bays operational and we expect 2 more bays to come online shortly. We ordered 2 new furnaces, 1 for Hyderabad and 1 for Gujarat. And we now believe that, that will also help us free up some capacity and kind of have more capacity. Like I mentioned to you, we got a significantly large order from L&T close to more than INR 100 crores worth of heavy engineering business -- the business from L&T for the oil and gas and the petrochemicals segment. So that puts us in a very good position for heavy engineering and great thing about this order, it comes perfectly in time so that the Vatva facility, which we have acquired, the new order will be manufactured there. We've also been rated by ICRA, subsidiary of Moody's, as AA-/Stable/A1+. Just to give you a quick update on the numbers. In India, the revenue grew by 31%, INR 130 crores to INR 171 crores this quarter. EBITDA is up 80% to -- INR 24.3 crores to INR 43.7 crores. The order intake has improved significantly, up by about 120%. So the order intake during the quarter was close to INR 290 crores. The current backlog compared to previous year same time has increased by 60%, so we have INR 500 crores of backlog currently on our books here in India. Like I mentioned to you, gives us great visibility for the future. A quick update on the international business. Pfaudler International has shown improvement both in revenue, profitability and order intake. Germany and Interseal are stronger and improved profitability and robust order book. Germany, obviously, the facility there has gone from loss making to positive, close to $1 million of EBITDA. So that is a significant improvement there. Mavag business, like I mentioned, has significantly outperformed. We recently received an order for CHF 8 million, the largest single order in Mavag's history, taking their backlog to about CHF 28.5 million. Please bear in mind that this company's revenue last year was about CHF 15 million. So it had maybe double of its revenues already in their backlog. Normag, Italy, U.K. Benelux also on track. We're seeing a strong recovery in the U.S., and we are now in the process of adding some capacity in Brazil so that we can cater to the growing U.S. market. China also has turned around and has made a good start this quarter and has turned profitable. Again, slight improvement in execution is the focus there. And then we also now have a commercial strategy in place so that we want to increase market share. So international results, if you compare -- I mean, obviously, we can't compare Q1 -- with Q1 of this financial year. But looking at pro forma numbers, there's a 23% improvement in revenue, 29% improvement in EBITDA, order intake is up by 37% and order backlog is up by 31%. In terms of consolidated results, again, not including the PPA impact, which I'll speak about in a little while. The revenue is up 257%, EBITDA up 80%, order intake is up 378% and then order backlog up 340%. Again, not right to compare Q1 and Q1 because last year, we didn't have Pfaudler as part of our business and this year we do. But still it goes to show that there's improvement in all fronts. In terms of the income statement, our numbers -- so like I mentioned to you, India stand-alone is INR 171 crores with about INR 43.7 crores of EBITDA, which comes to about 26% as a percentage of revenue. Pfaudler stand-alone is about INR 408 crores of revenue with about INR 40.6 crores of EBITDA which is about a 10% EBITDA margin. So significantly higher than what we have guided to us. And obviously, final impact of PPA, which is a minus INR 46.5 crores. So if you look at it, the INR 43.7 crores of EBITDA coming from GMM stand-alone plus INR 40.6 crores coming from Pfaudler, which gives you about INR 84 crores, minus INR 46.5 crores, which is the PPA impact. Again, it's a noncash impact, it's an accounting entity, and this is the last quarter that this PPA impact will reflect in our book. From next quarter, we will not have any further PPA impact, so you can straightaway add this number back. There are some intercompany eliminations and hence, we get a total of INR 551 crores of revenue and about -- the EBITDA of about INR 35.9 crores, which is about 7%. And then obviously, PBT and PAT are negative, and that's mainly because of the impact of PPA. Again, noncash, does not affect the cash flow. And from the next quarter, again, it won't be there. Just a quick update on integration efforts as well. We've made a good amount of inroads both in terms of operational excellence, value sourcing and cross-selling. We are in the process of launching some products here in India. Similarly, we will use the Pfaudler network to sell Indian-made products into European, U.S. and South East Asian markets. We are also looking at implementing some of the manufacturing excellence projects that we have had here in India to some of the global subsidiaries as well. So all in all, we are quite happy with the performance, especially of the international business, which has turned around quicker than expected. And with the backlog that we have in hand, we expect this year to build on the momentum and really come out with a good performance this year. India, obviously, remains very strong and we will build on the India performance. And now with the new capacity coming in, the new Vatva plant also coming online, we expect the India growth story to also to continue. So with that, I don't have any more points that I would like to make, and we will then open it to Q&A and answer any of the questions that you may have. So thank you very much.

[Operator Instructions] The first question is from the line of Amandeep Singh from Ambit Capital.

Tarak, firstly, on the domestic business, we saw a sequential decline of 10%, and you mentioned that it would be largely led by the COVID impact. But can you help us understand how would be the segment-wise revenue start up during the quarter between glass lined, HE and PP for the stand-alone business? And how does this compare with the last quarter?

Sure. So I would just kind of caution you, in a manufacturing company, Q4 is always a very big quarter for all manufacturing companies. So it will be kind of unfair to compare Q4 with Q1. But in any case, yes, there is a slight decline because of COVID. But anyway, Q1s are always a little bit lower. In terms of the breakup, I think Manish, you can provide that.

So I think we've -- we're now doing more technology systems and services from a breakup standpoint. And -- because that is in -- that is getting in line with the international business that we wanted to cater to. So if you could give us some time, we will just come back...

Tarak bhai, if you take Slide #14 of the presentation, that has the segmented overview which talks about technologies, systems and services. So on a stand-alone basis, 91% of revenue came from technologies business.

So technologies, again, just to clear your mind, is basically any equipment that we manufacture. So all our F&D, glass lined, everything will go into technologies. After sales is obviously the services part of the business, the spare parts, and then the systems is anytime we combine these into a large kind of a complete unit.

Sure, Tarak, I got that point. But this breakup would be helpful if possible. Secondly, you mentioned about order backlog of CHF 38.5 million at Mavag. So can you help us understand the delivery time line for this and how would this impact the domestic PP segment given the outsourcing?

Right. So I think most of our PP segments here are now geared up for the capacity that we now send to Mavag. And obviously, Mavag has been successful because they have a low-cost source here in India, which makes them much more competitive in the European and U.S. market. But obviously, this number of CHF 38.5 million is significantly higher than anything that they could do in Switzerland. So we have 2 thought processes here. One is we're going to kind of free up some capacity in Karamsad by moving some of the PP work to Vatva, because Vatva we have 7 sheds, right? And we're not going to use all 7 in the short term. So some production will move there. We will then have more space available for Mavag-related work here in India. And what we are planning to also do, Amandeep, is we are going to use the U.S. now. U.S., the Rochester Pfaudler facility is also kind of large, and we will use that to finish some of this filtration & drying work for Mavag, and we will use that to kind of free up some capacity as well. So it's a 3-pronged approach. And obviously, we want to kind of increase revenue. If we have such a strong backlog, it's important that we kind of work as much as possible to make sure that we can kind of bring it down as soon as possible.

Sure, Tarak, that was really helpful. And 1 more, if I could squeeze in. So in the previous con call, you mentioned about coming back with the updated guidance, given the few acquisitions, including HDO Tech, in place. So any update on that?

So I think we are still some time away from that, from firming up the strategy and the long-term strategy and plan around that. So give us probably a couple of more quarters and then we'll be able to reproduce -- but your question was more again around Vatva, right?

Yes. I mean -- so on the FY '24, the consolidated guidance, which I guess you had mentioned and given the better-than-expected turnaround happening and also including the Vatva facility, any updated numbers on that? Or we can wait a couple of quarters for that?

Yes. So Vatva, to be honest with you, we started up much quicker than expected. I was actually planning it in maybe Q2 or early Q3, but because of the large orders that have come in, we need to ramp up and have the capacity available immediately and that's why we've done that. But I think from a guidance standpoint, let these 2 quarters. See, this is the first quarter that we are consolidating fully. From next quarter, the PPA impact also goes away, so you will get a true idea in terms of what the numbers are. I think then maybe 5, maybe 6 months -- I mean maybe 6 months in this calendar year, we'll try and look at maybe if there is any requirement and how we are tracking towards the final -- the performance, we'll try and give you some kind of update on guidance.

The next question is from the line of Dhaval Shah from Girik Capital.

Sir, I have a question with regards to the opportunity size, which you have mentioned in the annual report. The domestic opportunity size coming to around INR 74,000 crore over FY '20 to '23. So -- and we did around INR 640 crore of revenue last year in the stand-alone. So how should we understand that how will this convert for us in terms of our top line over the next 2- to 3-year period?

So I would -- the calculation that we normally will use is we'll continue to grow at a similar rate that we have been. Luckily for us, the glass lined industry itself has been growing at a good pace. With the investments coming in, in agrochemicals, specialty chemicals and pharmaceuticals, we believe that this market will expand. So we have a bigger market to kind of participate in. And currently, we have market share close to 50%, if not more. So that's the thumb rule that you can take. Having said that, we've also kind of entered into new markets such as oil and gas, petrochemical, which are growing at a much faster rate and also much, much bigger, right? So even a small kind of pie there, even taking maybe a few big orders, means INR 200 crores, INR 300 crores of additional order intake. So I think you can -- as a rule of thumb, India will continue to grow at a similar rate for the next 3 years that we have been enjoying for the last maybe few years. I think that's what you can hope for. And I think the markets are there. The investment will continue. From what we are seeing, the pipelines and the kind of inquiries that we have on hand, we don't believe that either of these segments will slow down in the foreseeable future.

Got it. So this would include the PLI-led opportunity? Or is it excluding this?

No. So we've not really factored that in. If that comes in, obviously, that's a bonus. Whatever government policy, the changes that would happen, that will promote further manufacturing here in India or more investment coming in, that would be just bonus on top of what we are currently calculating. And obviously, being bullish, that's why we've kind of acquired a new factory, so to free up capacity in Karamsad and then adding 2 new furnaces. So I don't see any reason why there should be any kind of slowdown in terms of growth when it comes to GMM Pfaudler's stand-alone.

Got it. Got it. And sir, if I can ask 1 more question. Now this is with regards to the expansion and the opportunity which we see in the Western market that you mentioned, Europe and the U.S. Now here, our -- the product consideration would be premium to what we are selling in India with regards -- like the similar portfolio which we'll be selling here, would that have some sort of premium edge to it?

See, in terms of basic equipment, it's very similar. The glass that we use here in India is the same as the glass they use there. Obviously, there could be more bells and whistles. Their equipment might be more sophisticated compared to what an Indian buyer would buy, but that's the only difference. But -- I mean there's nothing that we cannot manufacture here that they are manufacturing. So that's the only difference. They do have some kind of smaller technologies in different glasses that we don't make here in India, but we can import it and kind of quote it over here. But otherwise, there's no real change in terms of -- so that's why the idea of using India as a low-cost source, and maybe this is a good time to talk about some of the successes that we had. We had a certain order in Spain, we had a certain order in Russia, where the customer would not have bought on Pfaudler because of the price point. But now having access to India, Pfaudler was able to sell Indian-made equipment in these geographies and get market share and at good pricing as well. And similarly, we are currently working on a very large project in the U.S. as well that we believe that the Indian-made equipment will be a right solution for the customer there.

[Operator Instructions] The next question is from the line of Sandeep Tulsiyan from JM Financial.

The first question is pertaining to the margin -- stable margin levels in Pfaudler International. As per your earlier guidance of that FY '20, 16% consol, gave a back calculation of roughly around 12% to 13% margins. However, you delivered 9.5% in the current quarter, which has come in earlier than what you're expecting. So would you think that these 12%, 13% margins can be further exceeded over a 3-year period? Or would you still want to maintain similar guidance for international business margins?

Sandeep, I think this is the first full quarter for Pfaudler International and probably a bit too early to say that this 9.5%, 10% margins -- EBITDA margins are more sustainable. I think we need to test this number for another 2, 3 quarters and then probably. So -- but I think, Sandeep, I think we'll just jump in here and kind of add, if orders were a problem, we would have been a little bit more conservative, but the good thing is that order is already in, so we're not scrambling for orders. Now the focus really shifts to execution, and if we can get the momentum going in the execution, there's no reason why these numbers are not only sustainable but may be even probably improvable. Maybe Alex can jump in and kind of give you a little bit of color on the international business and what we expect the margin profiles to be?

Yes, I'm happy to do so. Thanks, Tarak, and hello everyone. In fact, we are really happy with the performance of the international business. And in fact, you're right, we are doing better than we gave guidance for before. And from the margin perspective, this is especially driven by the faster turnaround of the German business and also other improvement measures, and we already see the results earlier. So the margin definitely went up. And also in the future -- we are still under the COVID crisis in several jurisdictions. Nevertheless, if this now comes more or less to the end, we also see there another push to the margins and other -- and improvement potential. So we are really happy with the performance year-to-date and also positive for the outlook.

Got it. And second question is on pertaining to -- you mentioned in last conference call that there is a particular European country where you want to make a mark, where low-cost products are more acceptable and Pfaudler does not have a share there. If you can update on that? And also if you can probably give us the CapEx guidance for this year? Those are my last questions.

Right. So on the markets where Pfaudler is not very strong, Spanish market, some European -- Eastern Europe and Russian market, Southeast Asia, are areas that definitely India can be leveraged, and we are leveraging India already. China, obviously, there is a good potential there to improve the Chinese business as well. We have now a factory which has doubled the capacity. So we believe that China is definitely a growth area for us. So these are the kind of low-hanging fruit that we have. In terms of CapEx, there is a new furnace that we'll be adding in Brazil. That's about $400,000. There is a good backlog now in the U.S. and Brazil need to ramp up because Brazil is the low-cost source for the U.S. market and the U.S. markets are investing. In India, like I mentioned to you, we've already approved 2 CapExes for 2 new furnaces, 1 in Karamsad and 1 in Hyderabad. It was done last Board meeting, and decided that we have no other significant CapEx plan. So I think this will put us in a strong position. And then obviously, moving the HE business out from Karamsad gives us that additional capacity in glass lined in Karamsad.

[Operator Instructions] The next question is from the line of Utsav Mehta from Edelweiss AMC.

Could you just give some sense on the operating cash flows that you've done in this quarter and where the working capital at a consolidated basis would be?

Yes. So cash flows have been consistent and very healthy. Although there is some investment -- increased investment in regard to inventory due to the -- one, due to the higher backlog that we have -- order backlog. And also, we need to safeguard ourselves on a back to back basis for the procurement of the steel prices. And like Tarak mentioned earlier, the noncash expense of INR 46.5 crores of PPA impact also gets into the cash flow for us. So we are pretty much comfortable soon. Of course, the next quarter, we'll probably be sharing the cash flow going forward. From a debt/EBITDA perspective, so we have a debt equity ratio of 1. And the net debt to EBITDA on a consolidated basis as well is at 1. So we are, all in all, at June end, we are very competitive from a cash flow perspective.

Okay. Could I just request the gross debt number? And second part of my question, Tarak, this is the second quarter in a running that the stand-alone business has done close to 25% or 25% plus margins. Do you believe that this sort of a number is sustainable? Or is there some element of benefits of raw material prices or inventory gains baked into this, and therefore, it should revert to 20%, 21% back again?

I don't think so. I think that we can sustain these margins on 2 or 3 fronts. One is that we will add a significant amount of export business now that we are part of the Pfaudler network and we are leveraging India. So we will be doing probably close to maybe 17%, 18%, 20% of export business every year. That will definitely help the margin profile. Like I mentioned to you, we're also kind of going to ramp up our intercompany business. So the stuff that we will send to Mavag because of their backlog will kind of increase as well. And then with the Vatva facility and the large flow through of orders going through that, I'm sure there will be some absorption as well. So I'm not too fussed about profitability numbers for this year. And in the glass lined space, it's pretty easy to pass on the price increases to our customers because they buy raw materials all the time. Glass line is not the only equipment they buy. They buy stainless steel, they buy heat exchangers. So they take those metal prices into account when they kind of budget their expenditure. So all in all, I believe that we can sustain these margins for the financial year.

Yes. And on the debt perspective, your question, Utsav? The gross debt is at $73 million. Cash in hand is $30 million. So net debt turns out to be at $43 million on a global basis.

The next question is from the line of Jayesh Parekh from Sunidhi Securities & Finance.

Tarak, great commentary. I just had a clarification question on the PPA. From next quarter, the entire INR 65 crores will go away or just the changes in inventory, the INR 46.5 crores?

Right. So this is Manish here. So INR 46 crore goes off on the COG side for the next quarter onwards. So it was INR 92 crore; INR 46 crore in the previous quarter, INR 46 crore in the next quarter -- in this quarter that is Q1. So that is off. The amortization of intangibles which is at INR 18.8 crores this quarter will be INR 17.8 crores in the next quarter. And thereafter, it will be INR 6 crores per quarter for Q3 and Q4, and thereafter it will be at INR 5.5 crores per quarter.

The next question is from the line of Shanti Patel from Shanti Patel Investments.

Sir, my question is taking into consideration all these factors, what will be the return on capital employed and return on equity as on 31st March 2022?

So on return on capital -- so we can -- kindly appreciate that future guidance, we will not be able to share with you. But currently, we will -- we are running at ROCE of 16%.

Look, we have got more or less monopoly type of products, correct? The competition is not that much. Then return on capital and return on equity should be much, much higher than what it is.

So this is the -- so from a margin standpoint, I think we have been running at 25-plus percent on the domestic market. And now international business is there, which does lower our percentage per se, but then it gives us a more dollars in the absolute terms. So we need to appreciate from that perspective that from a percentage perspective, it may go down on a global basis. But in absolute terms, it's going to be nearly double in coming quarters.

Sir, I will repeat. You told return on equity is 15% or return on capital?

Return on capital employed is 16%.

And return on equity?

Return on equity, I have to check. I'll come back to you on that. But in terms of -- coming back to our numbers, 3 acquisition numbers, we have targeted internally a 3-year period by where the ROE and ROCE will come back to those numbers. Obviously, there will be a little bit drop in these numbers because of the acquisitions, but a little bit of downturn, but at the end of the day, we're changing the size and scale of the company. So eventually once things settle down, we should be able to come back to the original numbers.

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

In the PPT -- presentation, Page #13, profit before tax is INR 18.1 crores.

Page #13, 18-point -- sorry, can you please repeat?

INR 181 million, and the tax is INR 118 million.

Right. I think -- we would like to jump into this. This is basically the additional tax provision that we had to make in this quarter in probably U.S. in regards to the amortization. Do you want to explain that?

No, no. The profit before tax -- the tax amount on INR 181 million profit, tax cannot be such high, no?

No, I agree that this is the deferred tax amount on INR 181 million PBT. You are seeing the tax impact of INR 118 million which is considerably higher vis-a-vis a percentage of average 25%. But that is where I'm saying we had an additional tax impact on account of deferred taxation due to the timing differences. That's why I just wanted -- and if you would like to explain this further on -- probably on the U.S. piece, and maybe on the amortization of the intangible differences, timing defenses?

So next quarter, such a heavy tax provision will not be required?