GMM Pfaudler Limited (505255) Earnings Call Transcript & Summary

[Audio Gap] Ms. Priyanka Daga from GMM Pfaudler Limited. Thank you, and over to you, ma'am.

Thank you, Faizan. Good evening, ladies and gentlemen. A very warm welcome to you into the Q2 FY '22 Earnings call of GMM Pfaudler Limited. On this call, we will be referring to the earnings presentation that was uploaded on the Stock Exchange last night and is 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 discussions may be forward-looking in nature and may involve risks and uncertainties. Please note the disclaimer mentioning these risks and uncertainties is on Slide #2 of the presentation that was shared last month. From the management, we have with us our Managing Director, Mr. Tarak Patel; our CFO, Mr. Manish Poddar; our CFO of International Business, Mr. Alexander Poempner; and our Company Secretary and Compliance Officer, Ms. Mittal Mehta. Listening to the agenda given on Slide #3, we will start the presentation with an overview of the business from Mr. Patel. Over to you, sir.

Thank you, Priyanka. Good afternoon, everybody. So let me start off by giving you an update on the business. The business continue to remain very positive, both in India and internationally. India continues to improve, both in terms of revenue and earnings. The China plus 1 strategy is working well. We see a lot of investment both in pharmaceutical and chemicals continuing in the next few quarters. And the strong order intake across all our verticals. So both the GL, BP, and the heavy engineering business here in India has done really well in terms of the order intake. The global business, the foreign international business has also done very well this quarter. Investments also continue across developed markets, both in Europe and in the U.S. We have a record order book across the U.S. and European market, which will give us a good visibility into the next few quarters. And there has been no significant impact in our manufacturing operations because of the global pandemic. In terms of the integration update, the operational excellence programs are working well and gaining momentum, especially in Germany and in China. Our value sourcing has already started from India, so components have been sourced from India. The first round of components have reached Germany and the feedback is very positive. And lastly, on the cross-selling front, we've been able to win some large businesses, both in Europe and U.S., where we bundle multiple products together to increase customer spend. The outlook remains very positive. We have a healthy order backlog across geographies. I'll talk a little bit more about that when we come to the numbers, but we have visibility, at least for the next 9 to 12 months in most locations. Our order intake trends remain also very positive. So we're seeing investment continue in Europe and in the U.S. and in India, of course, is going quite strong. There have been some potential short-term problems regarding steel price increases, input cost going up. However, we've been able to either price them in or pass them on to our clients. And obviously, energy cost in Europe in the short-term have increased, and we plan to pass that on to our clients as well. In terms of other updates this quarter, we have a new India CEO, Aseem Joshi, who will be joining us on November 8. He's achieving a lot of experience. He's somebody who's worked both in India and in the U.S., and he will be a welcome addition to the management team here. As the size and the scale and the complexity of our business has increased significantly over the last year or so, it's important to bring in the right people to help us continue this growth journey that we are on. We've also approved an employee stock option, which pretty much will mean about 0.353% dilution, which was up about 51,600 shares. And the details of that, I will speak about a little bit later. The last update was, again, a little bit more on the raw material energy prices, but I already spoke about that. Like I mentioned, we have seen increases across geographies. However, we've been able to price them on Europe has seen an increase in energy cost. However, the Americas and India have been unaffected. China, there has been a short-term power supply restriction. And that has happened across China. However, it will not affect our forecast for this year, both our revenue and margin forecast remain unchanged at this point. In terms of numbers, I would take you through the consolidated numbers. So revenue has grown from INR 551 crore previous quarter to about INR 647 crore. This quarter, a big improvement, especially in the international business coming from the momentum, manufacturing momentum in Germany and in China. The EBITDA has also increased by 14% from INR 82 crores to INR 93 crores and is at about 14.5% of revenue. PAT has also increased from INR 130 crores to INR 52.8 crores, which is about 8% of the revenues. What's really heartening, like I mentioned, is our order backlog. The current order backlog stands at about INR 1,800 crores, like I mentioned, gives us good visibility into the next few quarters. On the consolidated balance sheet, I will hand over to my RTI colleague, Manish, he will take you through the balance sheet. And of the -- go ahead.

Thanks, Tarak. So as you saw in the last slide that because of this, we have a strong result of overall 2. If you see our acquisitions in the past 18 months, whether it's Hyderabad, Vatva or International. They have all shown good progress and as actual overall organization. The cash generation has been healthy. And overall, you see a much stronger and a healthier balance sheet in September '21 versus March '21. If we go to the individual details on the first high polling of cash generation in the cash flow statement, we see that while our -- on the Slide #19, if you can reach up on the Slide #19. While our PBT has been only INR 40 crores, the cash ratios been INR 138 crores -- INR 137 crores out of -- because of the PPA adjustment, which was noncash, not hitting the P&A. However, it doesn't impact the cash flow generation. So therefore, INR 40 crore of PBT has led is compacting into a cash generation of INR 138 crores. Similarly, the Dash has later been well-invested into working capital out of efficient users, and we'll come to that working up the site later of production to INR 53 crores. Routine CapEx of INR 12 crores has also been consumed out of the cash generation and the balance cash -- free cash generated during the H1 of INR 73 crores has been well-invested into interest, dividend. And also, we have paid INR 42 crores of debt and lease payments. So we have reduced our existing debt. For Vatva, we want to -- we had to pay it of cash. We borrowed only INR 61 crore. So INR 7 crores of money has been invested out of our home sources, internal accruals and balance, of course, if the addition will be a cash in hand. And then we go to the working capital slide, which is slide number -- working capital slide summary, Slide #28, please. So we see that on the left side, Slide #28, on the left side, consolidated top, we see, we had the opening inventory of INR 538 crore. The inventory has actually increased to INR 610 crore. So optically, it looks like that we have invested a lot of -- and the net has risen. But if we see in the light of the backlog increase 3 lines later from INR 1,483 crores to INR 1,813 crores, we had to increase our inventories to make sure that there is a hedging with regard to the commodity exposure, we minimize as commodity exposure. However, in the same, we're happy to say that the customer advances has also increased from INR 288 crores to INR 371 crores. So that would net mean that the investment in inventory has actually reduced from INR 251 crores to INR 239 crores. So that would give you a reflection of how we have been able to reduce the exposure of commodity as well as conserve cash in the full exercise. Similarly, when we talk about the receivables, while the sales have increased Q-o-Q by 17%. And still, we have been able to reduce the total receivables from INR 310 crores to INR 293 crores. And therefore, there is a reduction in the receivable days as well. So overall, coming back to the consolidated balance sheet, we see a very stronger balance sheet. We can actually also do take this movement to go to the QPS slide, Slide #29. Yes. So Slide #29, you will see the ROCE, which was into FY '19 and FY '20 was 27%, 28% is now back to 26%. Remember, this is on a higher base of a $50 million debt that we have in international business. That -- but still, we are very close to the numbers that we were earlier in 2019 and '20. And actually, if you see the ROE has actually improved from 21.5% to 31.5% in a matter of 18 months. And this is exactly what the bottler business has done to us. This is -- and if you see on the left-hand side, the EPS on the same line from INR 49 has increased to INR 97 annualized basis. So we have had a substantial addition to the EPS and the ROE out of the bottler business acquisition. We can now move on to the stand-alone, Tarak?

Yes. So I think stand-alone numbers are obviously very strong. India continues to remain and do quite well. I won't go into the standalone numbers. But I think from an India standpoint, everything is quite positive, both in terms of revenue profit as well as the order backlog. You can now turn to Page #12, the income statement summary, which is just a kind of a macro view on the income statement, and Priyanka will quickly take you through that. Priyanka?

Thank you, Tarak. So if you refer to Slide #12, you would notice that on our consolidated reported results, our revenue increased 17% quarter-over-quarter, while our EBITDA increased around 161%. Now that is primarily because in the last quarter, we had a step-up inventory of around INR 45 crores, which is no more there. So we are done with the set of inventory, which Tarak had also mentioned in the quarter 1 call. And we see that it's due to which our EBITDA has actually improved to now INR 94 crore. Further, the PPA amount, the PPA sitting in the amortization cost in the amortization line item that is of around INR 18 crores, will further reduce down to INR 6 crores in the coming quarters. This is, again, in line with the disclosures we had mentioned in our quarter 4 results, and that has helped us improve our profit. In terms of the PAT levels, if you notice that our stand-alone while our stand-alone generated a profit of around INR 29 crores. Our international business has also yielded a profit of around INR 29 crore, which is similar to our stand-alone performance. Thereby, proving that the international business is as robust as a stand-alone business in terms of earnings and accretion. Moving on to the next slide, that is Slide #13, which gives a segmental overview of the business, we see that our revenue is pretty much diversified with around 59% coming from technology and 26% coming from services. Our order intake is also reflective of the revenue generation right now with 60% coming from technologies and 24% coming from services. Moving on to the integration update. I would like Tarak to take over the integration update.

Yes. So just to give you some of the updates across the globe. One is that, as I mentioned to you, China and Germany, both actually started up not very long ago, both of them are gaining momentum. They both have we produced and shipped out a good amount of equipment in the first half of the year. We expect that to continue. So the German and China turnarounds are really helping the international business grow both in terms of revenue and profitability. The Vatva factory ramp-up is ongoing. We should have full capacity there by Q4. The order backlog in AG remained very strong. Only we received another very large order approach about INR 50 crores for the AG business. So there's a good amount of growth that will come from the AG business as well. We have new furnaces that are going to be commissioned in December, both in India and in Brazil. The India one obviously will be helping us to kind of improve and increase capacity here. And the Brazil is a low-cost sourcing for the U.S. market so that should also help us increase the capacity and grow our U.S. market share. We also have now finalized the global EU concept, and we expect to launch that in Q3 of FY '22. We'll give you some numbers around that once the EU concept has been launched. In terms of value sourcing, we have, like I mentioned to you, the first phase of components have reached Europe. The feedback is positive. The second phase of components, we are working on that right now. We've also developed European grade raw materials here in India, which we now ship to the international facility. We have seen a good amount of market share improvement in Europe and in the U.S., in markets like Spain and Russia and in the U.S. as well, where we've been able to win business because of our ability to source from India. Lastly, on the cross-selling front, Interseal is now up and running. We will have a launch official launch by November. We've already received about 8 orders. So we expect that business to also pick up in the coming quarter. Like I mentioned to you, a large order from the U.S., which consists of glass line heavy engineering and mixing systems to our ability to cross-sell our products to our clients is something that we are working on. And lastly, we now have a centralized global opportunity management system. So we have 1 single group that controls this. It really gives us a lot of visibility in terms of what is happening around the world. With that, I just want to say that business remains very positive. We hope that the next couple of quarters, we will see some more improvement in terms of earnings due to the synergies that will come in. And the backlog that we currently have gives us a very robust outlook in terms of what this year is going to finish as well as maybe a few quarters into the next financial year. With that, I'd like to now open up this call for questions. Happy to answer any questions that any of you might have. Thank you.

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

So firstly, on your domestic business, while GE continues to lead the growth, say, by 46% Y-o-Y growth in 1H FY '22. We know that the growth in heavy engineering segment remains muted at 5% despite some COVID led impact in the last quarter, so which would imply a bit lower pace. So while start we acknowledge that you have been receiving higher orders for the AC business over the past couple of quarters. Can you help us with your thoughts here with respect to the scale and how the margin for the stand-alone business would pan out with increasing share of AC in Europe?

Yes. So the AC business is definitely a growth area for us, Amandeep. Now that this new factory will come online, we will have additional production capacity. In the first quarter, obviously, it was just a quarterly kind of. But there's no significant reason why there was lower AG. But you will see that picking up over time because some of these have long lead kind of orders and some of them ship out over 13 quarters. But we believe that we can maintain a similar level of profitability, not only by doing export business, but we also kind of pick and choose the operation and the material deal that we want to focus on, right? So having a good mix of carbon industry, exotic materials, having a good mix of domestic as well as export business. So all these will kind of help us improve our AG profitability. I mean, the idea here is not to really compete with the local fabricators. It's kind to kind of be able to differentiate yourself to the thicknesses you can handle, the weight you can handle, the materials that you can have. And Vatva, because of the infrastructure that it has, gives us that edge over many of the other manufacturers, right? So like our GE is about 200 tons, which not many people have the ability to roll 140 mm cost steel, that's something that we have. We have 2 sheet drilling machines there. So that gives us definitely an edge and the kind of business and the kind of clients that we try to cater to really are looking at the top end of the spectrum.

So correct. That's really helpful. And just continuing on the domestic part. So with upcoming GLE capacities across Karamsad and Hyderabad. So can you give us some sense on what could be the potential for quarterly run rate of GLE segment post the stabilization of these furnaces?

So this new furnace in the Hyderabad will come in -- come on line in, let's say, end of December, early January. So you have 1/4 of additional capacity in Hyderabad. However, we are usually working also on improving and increasing capacity in Karamsad, we have also placed an order for 1 more new furnace in Karamsad, and we expect to have 1 more order actually place very soon. So that will give us additional capacity. So the Hyderabad facility, I think, has around 97 EILs is what we did in Q2. Yes. And this additional furnace, I don't see exact number, but I think it's around 400 is what we had planned [ EILs ] from Hyderabad this financial year.

And lastly, on your international business. So the order booking for the Portland international continues to remain healthy over the last 2 quarters, which implies that there would be extension and some delivery time lines. So in that context, while this remains a positive development, can you help us understand your strategy to ramp up execution also considering the short-term impact of power supply in China? That would be my last question.

Yes. So ramp-up of capacity is happening. Like I mentioned to you, 1 new furnace in Brazil is being added on. So that's something that will have capacity in Europe -- in the U.S., sorry. In Europe, what we are working on is forth getting our current factories up and running to a much higher kind of the capacity utilization. Germany is one such facility, which we are ramping up at the brand new facility. China is, well, the way that we are planning is that keeping that when we have power shortages, we'll work on the fabrication aspect. And then obviously, have -- with the powers back, we will have the capacity and the -- I mean the reactor is ready for the glass lining process as well. So overall, we are okay, but I still think that we need to improve our operational excellence aims of the facility so that with the same infrastructure, the same amount of resources, we increase the output. And I think there is a good amount of -- you can see a good amount of improvement there by just looking at internal processes and trying to work on operational excellence.

The next question is from the line of Sanjay Shah from KSA securities.

Congrats on healthy numbers. So my question was regarding -- we have done so well in this volatile world, where we are facing from coal to shipping to raw material rise. And still, we have pretty done very good on margin side. So Tarak sir, can you help me to understand what is the scenario ahead on that side because we see still there is a lot of volatility on raw material and shipping freights and all. So are our whole contracts, we are able to negotiate the price or we have hold raw material lying at our place on how do you see that future ahead.

Yes, Sanjay. So we have, like you said, a combination of multiple things going and working in our favor. From a logistic standpoint, most of our contracts works. So the logistic costs are never on our account is usually the customer will pay when the material is ready for shipment. But we do -- and like Manish had mentioned, we have invested in inventory. So in terms of steel plate, which is obviously the one that has increased the more than a big raw material for us. We have a good amount of inventory already available. And for whatever new orders are being discussed or have come in, we've already priced those price increases into those orders as well. So we don't see a significant impact or pretty much no impact on our earnings for the rest of the year. We will try to kind of minimize if there's any impact, but we believe that we can maintain the same margin profile, at least for the next 6 months or so.

That's very exciting. Can you please highlight upon our -- highlight upon heavy engineering, proprietary products, how they are panning out? And also some comments on Vatva, how that things are doing over there.

So Vatva, like I mentioned to you, we've already started moving some business. We had planned to start that up later this year, but we actually decided in the amount of business that we have got to actually go ahead and ramp it up. We've also put consultant there who's going to help us ramp up the business. They're going to be patient there for about a year's time. So they really help us transition and monitor that the transition period and make sure that our shipment numbers are met. But like I mentioned to you, the AG backlog, as it stands currently, is that more INR 150 crores to -- yes, INR 150 crores. So about INR 200 crores of AG backlog already on our books. So it's a really exciting time for the AG business. It's a good mix of heat exchangers, a good mix of stainless steel, carbon steel. And what we've also seen in the proprietary business, we've actually kind of had some shortages in capacity in Karamsad. So we've moved -- we actually -- since we have 5 scheduled backlog. One of them is now being given to the propriety the business to kind of increase their throughput and increase their capacity as well.

The next question is from the line of Ronak Vora from AUM Fund Advisors.

Congratulation on good set of numbers. I would like to ask the order backlog in your stand-alone book is flattish on a Q-on-Q basis. So what may be the reason for that?

Sure. So on a Q-to-Q basis, I think we were already quite full. So big kind of -- because in terms of shipment, obviously, the last 2 quarters that we had seen an incredible order book. So that's what we are now waiting to kind of reduce the backlog and then book new orders. So this gives us a little bit of more flexibility to pick and choose the right business right, the right business and the right kind of the profitability that we would like to get. So it's not a trend. It's not something to worry about, but it's just a part and parcel of the amount of backlog that we already have. So the last few quarters has been significant in terms of order intake. And -- because we can't now deliver in time, we will have to have a slowdown until we ship out some equipment. And then again, we'll come back to the normal kind of order intake as well.

Okay. So to like explain it in terms of days or months, what would be -- if I'm a customer, I give you order what would be your execution time line? So suppose 6 months, 9 months, what is the current whole scenario?

So again, it depends on the products that you are talking about. In Blast Line, about 5 to 6 months is our normal delivery time line. For certain sizes, it could be a little bit longer. In AG right now, since we have the new Vatva facility, we can, depending on the size of the order and how on the materials will take, give you something into 6 to 9 months. And in the PC business, again, I would say about 6 months is the order backlog that we have.

Okay. And secondly, on the Pfaudler International business, can we consider that 10% EBITDA margin would be a base going forward?

That's what we are hoping for, and that's what we had guided towards. I think Pfaudler international has turned around quicker than expectation, which is a great sign. And this is not considering a lot of the synergies that have been and that will pan out over time. So I think as a base, 10% EBITDA margin for the Pfaudler business is definitely something that's comfortable for us. And if the synergies start panning out, I think that can also see a slight improvement there.

Okay. And when we say that we have INR 370 crore of advances from customers. So is it like you get 20% of your order book are advanced to confirm the orders? Can you just highlight?

Yes. So basically, it is a process payment that we receive once you have the agreement kind of the contracting has executed thereafter basis points are being discussed. And then you have a milestone payment, 10%, 15%, 20% depending from terms of the individual order. And then, of course, subsequently per milestones to keep in the progressive patents.

The next question is from the line of Sandeep Tulsiyan from JM Financial.

Congratulations on great set of numbers. First question is pertaining to the strong order inflows that we reported, particularly in the international segment. If you can share more color which geographies these orders are coming in from, along with an update on the Asia Pac penetration strategy that you had described a couple of quarters back? If you can give us an update on that.

Okay. I may take it, Alex from the International business. So in fact, we see it through all our territories. So we have strong order in America. So we're really happy with the Tarak already mentioned that we also invest in Brazil to support the growth of the Americas business in the U.S. and we also have a really good development in China, where we are happy with. This is supporting our growth plan and the new factory. Also Europe is currently doing well. So in general summary, it's a good trend, and we are happy with the performance.

And just to add to what Alex said, even for Mavag, we have close to about $35 million, $36 million of backlog, which is in 18 to 24 months. They are in the process of finalizing another $6 million, $7 million worth of dryers as well. So there is definitely a good momentum picking up in the international market, both the U.S. and European markets are after a long, long time, seeing a good deal of investment. So it's really happening for us when we have practices that are whole, and we're looking at investing in kind of increasing the capacity. I think this is something that Pfaudler has not done in many years. So I mean, in terms of timing, it's really great for us that we are seeing it right now.

Sure. Second question is pertaining to Mavag. Specifically, we've seen a very sharp ramp-up in the order book over there. Our revenues have not grown, if you compare it to both Q-o-Q sell as Y-o-Y. And you had mentioned there would be a plan to outsource and get some of the fitment tone from the India facility for that. So if you can share update, how do you plan to ramp up given this -- would you be investing more in the local facility over there? Or is there an alternate plan to cater to the strong demand that you've seen in Mavag?

So you will see the second half of the year be a much stronger performance from Mavag because I think a lot of the stuff that we are publish out of India is on the process of being shipped. So they will obviously turn that around, and then you will see that revenue increase happening. There is no plan of increasing capacity in Europe. However, in India, like I mentioned, we actually have additional capacity now with the Vatva still being available. So we're going to do some of the proprietary work from Karamsad goes to Vatva, which then will create more room for Mavag related activity. But you're right, we have to increase Mavag which apply because the business increases automatically, our business will continue to increase.

Right. And lastly, on any long-term growth guidance that you want to give -- you had mentioned in previous calls that probably a couple of quarter later, you'll have some visibility on that as we as? That's my last.

Yes. So I think we are working on something. We have a global strategy need. So we have about 45 of the key employees going to meet in Dubai December. This is the first global conference that we plan. It gives an opportunity for all of us to interact and really build a long-term strategic plan, a 3 to 5-year plan for the business, look at things around M&A opportunities, look at things around corporate, once this meeting has been -- once meeting takes place, I think, at least by Q4, we will have a document in place. And in terms of guidance, we can then kind of give you some new set of numbers that we believe is achievable over the next 3 to 2 months.

The next question is from the line of Ashit Kothi, individual investor.

Wish you happy Diwali and congratulations on the good numbers. Sir, I would want to understand what has been overall China contribution to our turnovers? And with the current power scenario there, power shortage and other issues, how are we planning to use that as an opportunity or shifting of base from China to India?

So I think the current shipment has been around in the first half of the year. China should grow in 5% of the total shipment. Of the international business, right now somebody in local business. Yes. So how much is that in 2019? About $12 million of shipment has come from China so far. And we expect that number to at least from the half the year that is pretty much half the target for the year. However, the China does stay a bit of the energy issue. So they have to shut down their energy for test in a week, but we expect this to kind of improve from December and January. And as of right now from our local people in China, there has been no major disruptions because what they do is while the power is not available because of fabrication and the glassing. And then when the power is available, they have the vessels ready to go into the blasting factory. But obviously, we won't be at full capacity. But for this year's numbers and guidance that we have planned internally, we should be fine.

So we are not looking at shifting of operations or products.

There have been total orders which have come to India. So because of the capacity constraints in China because they were booked out, we have manufactured some equipment, some orders or the glassine equipment orders have come from India, which are undersupplied. But that would always be an option. If there is no need and more, the demand coming from China, we can always look at not only India, but any of the Pfaudler facilities to supply into China.

And sir, apart from a glass lining business, the capital goods sector, how much more growth you are expecting?

So I think India continues to remain very strong. I think the investments will continue. I don't see any slowdown here. Internationally, obviously, the markets are booming right now. There is local capacity being created. So at least the next 12 to 18 months looks very good. Obviously, the IPI is to not only ride the market growth, but we need to work on market share. And hopefully, with the kind of the group that we have, the size and sales and even the ability to source from anywhere in the world, we can see go up and go further market share globally. So just think of it is exactly like how we have grown the Mavag from being a INR 6 million or INR 7 million switch line company. And today, there are about $22 million, $23 million the company. So we've seen that grow about 3.0 to 4.0x without using or increasing the infrastructure without increasing a single reversal. But just by using and we're trying to move some of the fabrication noncore activities to a low cost country. So even for Pfaudler, the capacity that's available, if it can be huge for the value-added tap and move the fabrication to India, we can see a good improvement there as well.

So what kind of growth, sir, percentage?

So in terms of guidance, we've already given the growth guidance, INR 2,800 crores by 2024. I think that's a conservative number. And if you see what we are tracking towards, I think we will probably achieve something better than that.

We'll take the next question from the line of [ Ronil Dalal from Museum Capital ].

Congratulations on a good set of numbers. My first question is that, Tarak, how have you been spending your time between the international India business operation strategy and now that Mr. Joshi will be joining us, how would this change, if at all?

So I think in terms of actually going and meeting these people and trying to visit the facilities, I was lucky enough to have an opportunity last month. I was in Germany, where I visited the German facility. I saw the Interseal facility. I saw the Normet facility. I was also in Scotland, and I've got to see the U.K. facility a few months before that, I was in the U.S. So I've got to see the Rosita facility as well. However, obviously, I would like to spend more time at these facilities because of the pandemic that was something that was a bit difficult. But over time, I do plan to have a little bit more involvement in oversight in the international business, although we have a CEO or CFO, who are responsible for that, once the team joins here in India, there would be definitely opportunity for me to kind of try and meet these -- spend more time with these factories and kind of look at some of integration efforts well as operational efforts that are going on in these geographies.

Right. The second question is that given that there's a strong demand momentum, and you touched on the INR 2,800 crore target. But what about anything on the margins? Besides, of course, Pfaudler needs and just kind of discuss of 4, 5-year plan, but on the earlier guidance, would there be any revision?

So the only thing that I can say is that we've given guidance of 15% by 2024. We already, at a group level, at about 15% or the 14%, 15% guidance. So 16% looks very achievable, and that was not including synergies, right? So on top of that, when we have synergies, I think you will see that improve as well. You have more revenue coming in as you grow and as the factories become more efficient, you would probably also see that improve. So in terms of guidance, I don't want to really give you a number right now. Like I mentioned, we will have this meeting. We will come back to the market with the story in terms of what we expect it to do over the next 3 years and maybe even in terms of profitability, what we believe will be possible.

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

Tarak, could you hear me?

Yes, I can hear you, Puneet. Go ahead please.

Tarak, greeting from Dubai and happy Diwali in advance. And I think this number, obviously, has to be Diwali bonus, so congratulations on that front. Very heartening to see the numbers and the International business taking shape as it is. I have a question on the U.S. order that you mentioned, would be really helpful to understand the numbers on that front. And clearly, you mentioned the last con call as well that this will flow in this year by the year-end, the last quarter. So any number on that front would really be helpful.

Yes. So I think the value was around INR 8 million to INR 9 million mark. I think that was 1 single order. We are actually also in discussions with the same client to kind of increase the supply. So hopefully, we'll see some more kind of growth on that number. So this is -- it's quite interesting because this is really a good example of how we could leverage the strength of the group. When the inquiry came just was quoting and their time line was close to something like 17, 18 months. And this was a fast track project, and we could do it from India. So with entire, although it will now be manufactured here in India, the pricing is similar to European or U.S. prices. So there's no kind of reduction in the pricing. So as a group, it is going to be something that will be profitable, will be quite profitable. And I think this also helps people kind of understand that there is so much more to the group now than just being a country-specific organization. So sourcing from different geographies, having low-cost facilities, I think that gives us an edge over competition. So that's something that's definitely happening. And I think as more and more sales people will start seeing this, I think you will see that market share improvement, just we're coming through areas where there will be a bunch of customers who are never buying for Pfaudler, but now suddenly, this opens up a brand-new market for us.

Tarak, my second question was actually an extension of the first one only and which you clearly highlighted right now. So since it's just the integration has started to happen right now. And I'm very hopeful that going forward, not just in America, the other regions as well-being -- since at the beginning itself, we won a big order. This is just a start of things and I'm sure bigger plans ahead for other geographies as well.

Yes. So I think the few successes that we've had. And I think I mentioned it during the last con call, the budget that we had put in for the entire year for low-cost sourcing or sourcing in India into European and U.S. market, the budget was made in the first 3 months. So we still have 9 months less for any additional. So that was how quickly we were able to kind of beat the budget. So that just shows that there are opportunities available. And now that people have kind of seen that it's possible. I mean this is it open up a wide and much, much more, more -- the bigger kind of opportunity that will come to us.

Very happy to hear that Tarak. And just on a lighter note, if you made any assistance from my side in Dubai, please let me know.

Thank you so much and nice talking to you.

The next question comes from the line of Sujan Kumar, individual investor.

Can you hear me?

Yes, go ahead.

I just have one sir. So in our international business, I see a lot of spending on employees. So I'm seeing that continuously from the second quarter. I see some drop from last quarter, but how it is going to reduce in future in terms of cost -- employee cost?

Employee cost is much higher in the international business. That's the question?

Yes, it is almost 30% of even the last quarter, as 26% from the even this year.

Yes, employee cost, we need to understand this, that when you talk about the international business, it is heavily loaded towards the developed market of Germany, Italy, U.K., Switzerland, and America, which is a high cost countries per se from an employee cost perspective. We know it on day 1 itself. So as Tarak mentioned, there are 2 ways to do it. You want to cut down on cost, A, that's a shortcut measure to improve profitability. But then if you want to do it the hard way, the long-term way of increasing the health of the business, increasing the size of the business, like we did in Mavag. We just want to replicate that model. We have the same number of people. We have the same capacity, but we doubled fold or tripled fold the business. That's the way to do it. Yes, it's harder. Yes, it will take not a few quarters, a few years, but I think that's the more healthier way of creating value for the shareholders.

Sir, my next question is regarding the borrowings. So in your balance sheet, I see there is a significant improvement in the borrowings. But in your opening remarks, I noticed that there is -- you have said some decrement, some repayment has been done. I didn't feel that, can you explain that?

Right. So net, there has been an increase in net debt. However, what we mentioned in the cash flow slide was that the existing debt as on 31st March has been repaid to an extent of INR 42.5 crores, if I remember correctly, debt and lease payments. While the new acquisition of Vatva required us to invest something like INR 68 crores. However, we had -- we had taken a loan only of INR 61 crore. So net, if you take it up, there has been an increase in the debt levels on an overall basis. But the existing debt has been repaid and the fresh debt for virtualization has been taken up. So that's why you see both the numbers.

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

My question is you mentioned that order book and the performance in Germany and China is very good. But what about other locations like Brazil, U.S., U.K., France and Italy, you have not mention anything for those ones.

So I think the performance is great across the world. If you see the international business has grown at double digits, which is faster than the market there. So it's definitely heartening to see it's not happening only because of Germany and China, but we just highlighted Germany and China because they have done increasingly well. Please remember that both Germany and China were loss-making last year, last financial year. So this is now turning them around and making them profitable as well as getting the momentum going forward. It's going to have a double impact for us going from negative to positive. So that's why they've highlighted. But across the U.S., we've seen fantastic performance there, both in terms of order intake and in terms of shipment. Brazil continues to do well, and that's why we are adding 1 more furnacing business so they can ramp up and ship out more equipment to Europe. China, like I mentioned already, has already gone in half the year, a very good start to the year. So across the 4 businesses have done well, orders remain very, very strong. So we wanted to highlight the 2 factories that have turned around most of all. That's why China and Germany, but the performance of the international business as a whole has been very positive.

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

Hi Tarak, I hope you continue to play like Rahul Dravid in this journey to point over the second innings of GMM Pfaudler.

Rahul has got retired now. So I don't want to retire too early. But yes, I'll try and play like him.

Okay. I have 2 questions and 1 vision statement. So in terms of the subsidies that we have, the 16, how many of these are in autopilot mode, how many are in semi-automatic? And how many of these require absolute attention from the management perspective?

So I think with all the subsidiaries, I think being in a manufacturing business, you still need a lot of human intervention. I think that from a management standpoint, even though we have the local general managers in each location, there is definitely oversight review meeting a lot of conversations. Now with the integration project that we're working on internally, we have revenue on cost, where the entire group gets together and we start talking about a lot of things like operational excellence, cross-selling, low cost sourcing. So the entire company is actually working together. So a lot of people know what's going on across the board. So it's not like each country is in a silo kind of region thing. Everybody is part of a bigger kind of a team and a bigger kind of a goal that we all are trying to work towards. So I think that's definitely a benefit. I think now this meeting in our global strategy, lead will also be very helpful to get people working together, get them to know each other much better. I think positive as well. I mean at the end of the day, it's really the people of the company that's going to take the company forward, right? So if we can get that kind of culture that creates kind of teamwork and accountability and growth, I think then you can see really the next level of growth coming for Pfaudler. The brand name is there. The technology is there. The factories are there. So we really need to kind of get the culture going to really kind of drive the next level of growth for us.

Okay. So it is ESG plus culture for you. My second question is that you spoke about the global EU concept. Can you take us through that? And how does it benefit us?

So EU is something that we developed in India, and it's worked very well for us. It's something where we pay -- so earlier, it was just units, right? And units are not going to be a way to measure your output. So we kind of developed the EU concept, which really measures output by the amount of effort that goes into it, right? The good thing about the EU concept is always the more number of EUs, the higher the revenue. So there's a direct proportion linked to that. In terms of units, if you have 100 more units, that could be less revenues than 50 units, right? So that was level of kind. So this is something that as a company, it's a great thing for us to measure the performance. And hence, launching it internationally, will help people want to understand their capacity and then to at least kind of get some idea in terms of their revenue and shipment possibilities, right? So really, this basis a kind of similar standard across the group so that every factory can be measured against each other.

Okay. In terms of patenting any processes or as your thoughts on that? If anything in progress or in process?

Sorry, can you please repeat that? You mean in terms of process, right? So asset recovery is one thing that we've been working on. We've had some successes. So that's something that, hopefully, as the world goes green and ESG becomes more important, more and more companies will kind of look at cleaning up or reusing their assets. So that should be a good business for us. So that's something that we're working on. But as a company, we do a lot of systems business as well. So there's a lot of technology in lube refining, there's a lot of technology in chemicals, there's a lot of technology in latex. So we have a bunch of stuff that we're working on. So these are all process oriented. No, I was asking about patenting some of the processes or -- Oh patenting, yes. So I think Pfaudler has a lot of patents to its name already. We're also working on new types of glass that will eventually improve heat transfer and things like that. And as and when we work on these technologies, we will end up patenting them.

Okay. Sir, any vision on becoming a debt-free company once again?

So a lot of people ask me this, and we would eventually become a debt-free company. And I think I mentioned 3 to 4 years, I think this was last year. But the problem, it's not going to be a problem. It's a good problem to have is that debt is so cheaply available, right? It would be inefficient to not use debt. And that's exactly what we are looking at our debt ratios are so comfortable that there is no reason for us not to use debt. I know for Indian shareholders, debt-free is always nice, but I would find it inefficient if I didn't use that when it's available so cheaply.

Rohit, just to extend that point, our debt equity is 0.9. And the overall debt available to the company is at less than 4%. So we have 2 options. We can enhance the customer -- the shareholder base by double, right, from INR 50 crore to INR 6 crores of share capital that what we can do. But then that will reduce to the ROE and the EPS to half. I'm sure none of us want that. So therefore, if somebody is putting 50% of the money at 4% the cost, it's a no-brainer for us to be. As long as we are in comfortable zone with regard to our debt EBITDA, debt-to-equity ratio, I think it's -- yes. And a little more visibility standpoint, the order book is there for the next repoint 0 to 18.0 months. So there is no problem from that standpoint as well. So I think right now, debt has to be used efficiently, and I think it will only help us improve our ratio.

The next question is from the line of Ronak Vora from AUM Fund Advisors.

Sir, can you just help me with -- in terms of growth for the current quarter, how much would be value-led growth? And how much would be volume-led growth because of the increase in raw material prices? Can you just bifurcate between us?

So I think 90% would be volume-led. These are -- these increases cannot only come from price increases or price are passing on. Many of these orders were probably older orders are getting shipped out now. So the volume growth has come from, say, like Germany and China, they have ramped up their manufacturing. So that's really -- so 90% of that would be.

And Ronak, I think you've got to give credit to our sales as that the increased consumer price, the metal prices and all that, they have been able to sustain profitability to that it still speaks for it.

That's definitely true that our profitability speaks for itself. But just to get a sense of you how much more EUs that we sell and how much was due to the commodity inflation, which we had passed on? That is what my...

Yes, 90% would be volume-based. There will be some 10% or commodity passed on. And the volume was led by facilities like Germany and China, who last year did not have much manufacturing because we just build these new facilities and the move was ongoing.

Okay. And secondly, are we still looking further for any inorganic opportunity for our heavy engineering business, looking at that we have capacity constraints?

So now, no. I think capacity now we have excess capacity. The order book is very strong. Now what we get backlog fully up and running, then I think we will have capacity at least or make 2 to 3 years there. So no, right now, we don't need additional space in the heavy engineering business.

The next question is from the line of Ashit Kothi, individual investor.

Sir, just would want to get a feel as to when exactly Pfaudler invested in acquiring international businesses would be back, I mean, say, return of capital by financial year 25 or 26?

So Ashit, if you go to the Slide #29, we have mentioned the ROE and ROCE percentages. ROCE as 25.5% and ROE continues at 31% -- is at 31.5%. So by that, we can actually determine the return period as well.

So basically, another 3 to 4 years, whatever invested to acquire will be free and met to us.

You can't take it as simply because the base is off of the share capital and the reserves that we have earned over the period of time. And this is a completely new business. So -- and it's a bit more complicated than then because you don't have 54% at this stage, we don't have that 20% as well. So yes, if you call that just tick on the -- so we are having the quarterly international EBITDA margins at 10%. So yes, take that as a benchmark, and you can calculate the written period there now.

Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.

Yes. So thank you, everybody, for joining the conference call, and wish you all a safe and happy Diwali, and we will talk to you again in quarter 3. Thank you very much.

Thank you. Ladies and gentlemen, on behalf of GMM Pfaudler Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.