GMM Pfaudler Limited (505255) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to GMM Pfaudler Limited Q3 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, Aman. Good evening, ladies and gentlemen. A very warm welcome to all of you into the Q3 FY '22 Earnings Call of GMM Pfaudler Limited. The earnings presentation was updated on the stock exchange and available on our website as well. Hope all of you had a chance to go through it. From the management, we have with us our Managing Director, Mr. Tarak Patel; our CEO of India Business, Mr. Aseem Joshi; our CFO of India Business; Mr. Manish Poddar; our CFO of International Business, Mr. Alexander Poempner; and Company Secretary and Compliance Officer, Ms. Mittal Mehta. We'll give you a brief overview of the performance of the company, after which we will get into Q&A. Before we begin with the overview, a brief disclaimer. The presentation which we have uploaded on the stock exchange and our website today, including our call discussions that will happen now contains or may have certain forward-looking statements concerning our business prospects and profitability, which are subject to several risks and uncertainties, and the actual results could materially differ from those in such forward-looking statements. I now hand over the call to Mr. Patel to provide an overview of the quarter performance. Over to you, Tarak.

Thank you, Priyanka. Good evening, everybody, and good afternoon, good morning to people dialing from other parts of the world. This has been another solid quarter for us, driven by strong execution in both our international as well as our India business. Order intake continues to remain positive with our order backlog at an all-time high across the globe. Our key industry segments, chemical and pharmaceuticals, continue to invest in new capacity, and our outlook remains positive. Chemicals, specialty and agrochemical, investments continue to drive growth with large projects planned in the coming months. The China Plus One strategy, backward integration to reduce raw material volatility and the CRAMs opportunity will continue to drive investment in these sectors. Further, pharma continues to remain a bit subdued. However, with the new government initiatives like PLI, we may see investments in the coming quarter. Let me now take you through the business performance, starting with our international business. As I mentioned earlier, we have shown a strong execution in the international business for the third successive quarter. This goes to show that our focus, operational excellence strategy and integration efforts have started paying off. It is now clear that some of the underperforming units, namely Germany and China, have turned around and will continue to perform well. We have managed to significantly grow the international business's revenue, which is up 25% over the last 9 months on a comparable basis. On the profitability front, we have also improved profitability by 52%, and our EBITDA margin has increased from 8.5% to 10.3% over the last 9 months, again, on a comparable basis. When we bought Pfaudler International, it was an EBITDA margin of about 7.5%. So this is definitely a significant improvement. This is a fantastic achievement and will go a long way in building confidence and momentum in the international business, which we acquired only a year ago. Order intake in the international business continues to remain strong with an increase of around 46% for 9 months. The backlog of the international business is currently at an all-time high at INR 1,589 crores, which is around 53% higher than the previous year. Some of the order highlights during the quarter. We received an order from South Korea for acid recovery in the range of $10 million. We received another filtration and drying order in Europe for $6 million. The Mavag backlog currently stands at $38 million. And then we received some systems orders from France for about EUR 3 million as well. Now talking about our India business. Again, the execution across our product lines has been quite strong. Revenue is up 30% and EBITDA is up 31% on a 9-month basis. However, higher input cost and investment in our new facilities, which are basically Vatva and Hyderabad, have impacted profitability in this quarter. On the input cost front, we were enjoying the benefit of steel prices and steel plates that were procured at lower prices a few quarters earlier. However, now we are consuming plates procured at much higher rates. We were also hit by a onetime increase in gas prices in Gujarat during this quarter. On the ramp-up cost of Vatva and Hyderabad, these are essential investments to scale up the operations and for our new areas of growth, and as revenues grow, we will see the benefit flowing through. We expect the current profitability to continue for the next couple of quarters. However, we are beginning to see commodity prices taper and we may see the benefits flowing through to our bottom line. Order intake in India business continues to remain strong with an increase of around 39% for 9 months. The backlog of India business is currently also at an all-time high of INR 568 crores, which is around 46% higher than the previous year. Some order highlights during the quarter. We got our first micro reactor order from a pharmaceutical company, a large glass line order from Bangladesh, a large Mixion order, and then we got a large heavy engineering order in the tune of INR 50 crores, which will really help us push and grow the heavy engineering business. Momentum on the integration front also continues with the launch of Interseal ace5000 in India. We have now installed 11 Interseals and we now expect more orders in the near future. The new furnace in Brazil is operational. The one in Hyderabad will be operational in about 2 weeks. We expect the new furnace in Gujarat to be in operation by June 2022. Further, on the value sourcing, we have -- we regularly supply components made in India to our European entities. We have also recently started a stock in sales program where we will stock vessels in Europe. The first order for these equipment -- 24 number of equipment have already been placed and the manufacturing has already started. The group's new brand architecture is also ready and we will be launching that shortly. In spite of the challenges faced during the quarter, the China -- the power shortage, the energy cost increases in Europe, the higher input cost in India, we have still managed to grow both revenue and profitability on a year-on-year basis. The credit goes to the multiple teams across the company whose hard work and determination has led to this performance. We are confident that we'll continue with this performance and we will end the year on a high note. I now hand over to our CFO, Manish, to take you through the financial performance.

Thank you, Tarak. Good evening, everyone. So let's turn to the consolidated numbers. During Q3 of FY '22 on a Y-o-Y basis, the revenue increased 218% to INR 642 crores and we clocked in an EBITDA of INR 82 crores versus INR 42 crores in the corresponding previous year. Profit after tax, excluding the noncash PPA impact, also increased 85% Y-o-Y to INR 43 crores versus INR 23 crores last year. On a 9-month basis, both top line and bottom line exhibited similar growth. For stand-alone business, during the Q3 FY '22 on a Y-o-Y basis, revenue increased 26% to INR 209 crores with a flat EBITDA of INR 38 crores. PAT was down 12% Y-o-Y to INR 12 crores. Lower margins during the quarter were a function of a few things: one, the full cost impact of higher steel prices during the quarter. So the weighted average cost of steel plates was lower during the previous quarter, and as we consumed the initial quantity on account of the past inventory growth rate, but as we progressed through the year, the full impact of the new prices in inventory has come in, therefore, impacting the lower -- therefore, impacting the material cost. Higher -- second, higher gas prices during the quarter also impacted the margins. We had a onetime impact of some INR 2.5 crores on the higher gas cost. Similarly, the third piece is on the ramp-up with the higher admin cost at Vatva to enable future growth. We are adding resources in this facility, cost of which is not yet fully absorbed due to the lower scale of operation. This is visible in the employee benefit expenses, labor cost and other expenses. On a 9-month basis, top line grew 30% Y-o-Y to INR 586 crores and EBITDA increased 31% Y-o-Y to INR 133 crores. PAT stood at INR 75 crores with a 17% growth. Annualized EPS, if we adjust for PPA, stands at INR 96 per share, YTD December-- which is YTD December performance on an annualized basis versus INR 66 per share in FY '21. Kindly note, this excludes the share of the minority interest. Currently, only 54% of the Pfaudler International profits are being included in this EPS. If you take that at 100%, another INR 20 can be added on the EPS. Also, we are happy to inform that CRISIL has reaffirmed our rating to AA- with a stable outlook, which is equivalent to a low risk. This was done today morning only. Priyanka, back to you.

Thank you, Manish. With that, I would like to now open the call for questions. Happy to answer any questions that you may have. Thank you. Aman?

[Operator Instructions] The first question is from the line of Salil Desai from Marcellus Investment Managers.

The question I had -- maybe Alexander can help answering this. Can you give us some idea on how the working capital cycle typically is in the international business? And if you could break it up into the [indiscernible] components of inventory receivables -- payables and if customer advances are a significant part of it?

So Salil, if you recall, in Q2, which is H1 performance, we had shared a detailed presentation with regard to the working capital cycle, including the net of advances numbers. There's not much of a change with regard to those numbers over this 3 months. From a working capital perspective, the DSOs stand at something like 43 days and DIOs net of -- excluding advances also stand at something like 20 to 23 days. So maybe -- Alex is on the line, right?

Yes.

So Alex, you would like to respond to this question?

Specifically, on the international business, right?

Specifically, on the international business, yes.

Yes, I fully confirm what Manish said that in fact there is no much fluctuation in our working capital. Nevertheless, we launched several improvement measures. And therefore, I think through the guidance we gave in the presentation last year, we see improvements, so long term. And to give you an idea regarding values, and I'm talking now in USD, we are inventory-wise in a range of, let's say, $60 million, $65 million. We have receivables of -- in the range $30 million, $32 million. And yes, I think these are the key you are looking for. And if you -- payables, we are a little bit lower than receivables in the area of close to $30 million.

Next question is from the line of Sandeep Tulsiyan from JM Financial.

Firstly, congratulations on the recent set of numbers given the cost pressures that we have seen. So firstly, if -- I would like to check if you like to give a guidance for annual growth for next year. Given the kind of order ramp-up that we have seen in the first 9-month period, what kind of growth can we expect in India of order, international as well as one business separately, if you can guide for...

Right. So I think, Sandeep, India continues -- we grew around 25% plus here in India. This year in Europe as well, we are growing at about 25%. We are currently working on -- and I had spoken earlier about the strategy meet that was planned in December, which got postponed. We do plan to come out with guidance -- revised guidance in terms of both revenue and profitability for the next few years, even in terms of what we plan to do and what are the different areas where we plan to grow and how we plan to grow. So a little bit more granular, a little bit more in detail. I would just request that just hang in there for a month or 2. We are kind of working on something and we'll come back with something that's a little bit more concrete and structure rather than giving you a number right now. But I think I am comfortable to say that on a yearly basis even though we've seen a decrease in profit here in India, we pretty much are confident that we will maintain a similar level of profitability. So on a full year basis, we'll still be around the 20% mark, the EBITDA mark. And as you said, Pfaudler has done extremely well. They are now at a 10% mark as well. So those 2 numbers look very, very possible. And in terms of the backlog that we have and the execution that is happening, I'm quite confident that we can end the year on a good note.

Okay. Second question is regarding [indiscernible] of course, you gave some color that these [indiscernible]

Sorry, your voice is breaking, Tulsiyan.

Sorry, Sandeep. Can you say that again? We lost you for a second.

Yes. My question was pertaining the growth drivers for the international inflows. When we had acquired Pfaudler International business, we had guided for a 5%, 6% kind of a long-term CAGR, where the industry grows at. But the inflows seem to be indicating the growth is much higher than that. So if you can give more color why such a sudden jump in the inflows what we are seeing right now and what could be a sustainable growth going forward?

I think from an overall standpoint, obviously, when we acquired Pfaudler, we acquired it at a good time when obviously business was not doing that well. We managed to very quickly bring in order intake and got the factories up and running quickly. So I think one of the areas that you are seeing this improvement coming is both China and Germany have now reached and pretty much operating on full capacity, right? I mean we are obviously looking at improving and increasing capacity and output. But these 2 factories were obviously not doing that well and we were in the process of moving from an older facility to a newer facility. I think these 2 facilities definitely add to the revenue improvement. Also, many of the strategic initiatives like sourcing from India as well as new products like acid recovery, Interseal, those have done quite well. And then lastly, the U.S. market has done quite well. So Brazil and the U.S. both have done quite well. So that's why probably we're seeing a double-digit growth rate of international business, which obviously people thought would be growing at a much slower rate. And I mean, to be honest with you, this quarter the international business kind of makes up for the slower growth rate here in India. So all in all, we've been quite happy that acquiring this global business mitigates some of the risk that we had with being only an India-centric company. Alex, do you want to add something to this?

No, no, no, this is fully correct. And I think we gave as guidance last year the high single-digit growth. Currently, we significantly overachieved and we overachieve in all regions. And Europe is doing strong. And China, we already said after the setup of the entity is growing fast on revenue and order intake size, but as well as the U.S. Nevertheless, what should be considered, we have especially -- we are doing well on the technology order insight and the systems, which are big projects. However, the service business, which we also have strong in our international business, this is currently making -- it's doing -- it's growing, but it's still not going as fast as the technology business. So there we still have improvement potential also from the margin side. Regarding the profitability, already what Manish -- what Tarak mentioned. And Germany is one of the key growth driver. The turnaround of the site is more or less completed. And therefore, we see a big jump in profitability and also expect further improvements going forward.

And what will be the sustainable growth here moving forward? This year, we believe the growth was good. Going forward, should we go back to that single digit -- mid-single digit growth or…

I think -- let me say, we keep the outlook that we gave. And as Tarak mentioned before, we come with a new guidance in the coming months. And I think I would -- or we would like to leave it there and do not want to now adjust already our growth projections.

Got it. And one last question, if I may squeeze in. On the South Asia business, 2 quarters back you had given an update that there will be introduction of products. You don't have a major presence [indiscernible] that Pfaudler makes in those markets. So if you can give an update on that? And what is the progress on that, have you got any orders from that region?

Yes. So we've had about 3 large wins in Southeast Asia. We've had a couple of systems orders and some glass line business as well. So that's progressing. Obviously, we would have wished that we could have traveled into the Southeast Asian countries a little bit more. Unfortunately, the borders are closed and they're quite strict about it. But again, it's a long-term strategy of ours to grow this business. It will take some time, but we are definitely making some headwinds.

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

Yes. Sorry. Am I audible now?

Yes, Utsav. Go ahead.

So Tarak, I wanted to understand our gross margins a bit better because if I recall correctly, last quarter we said that -- I mean, you've seen the worst of the steel price inflation probably 2 or 3 quarters ago, right? And last quarter, we said that now we have repriced most of our new orders that have been coming in. I'm also looking at international, where gross margins have expanded. Whereas, in India, they've contracted. So if you could just help me understand the dynamics behind all of this?

Yes. So Utsav, if I may take that and maybe Tarak can then supplement on that. So you're right, we had taken price increases earlier in the -- 3, 4 quarters back as well. So what has happened is there's a lag of -- whereas the price increase benefit came in immediately, relatively earlier, and the full impact of the price increase of the material has come maybe a couple of quarters later. So take for example we were buying steel at, say, INR 60 a kg and over a period of time it's increased to INR 80 a kg. So initial quarters, your weighted average would have been something like INR 70. Now as INR 60 stock gets depleted, you actually come up and you come to a realistic picture of INR 80. Now as the prices taper down and hopefully in the near future, the margins should improve here. So I think just one point to add here. The only difference in strategy in terms of procuring steel plates -- when the prices are lower, we procure large quantities. We procure maybe 2 quarters worth of plates at one time. But now with the volatility in the steel prices and the higher steel prices, we kind of only procure what we really need. So as soon as we're seeing this coming down, we'll try and mitigate or reduce the time frame or the lag between actual using of these plates so that we get the benefit as soon as possible. Go ahead.

And similarly, if you see Vatva facility, now obviously at the current run rate, the full cost absorption is also not happening whether you talk about labor cost or the overheads as well. So overall profitability also gets impacted. Although materially -- material cost, of course, we know from a weight perspective -- heavy engineering per se is not as profitable as a glass line equipment business.

Understood. The second part of my question was then how come -- I mean, will we see a similar dynamic play out in international, where right now we're enjoying some benefits which could taper off later?

No. So I think when you look at the international business, you look at 3 major areas. One is obviously the U.S. U.S. has not been affected at all by energy or significant -- I mean, the price of steel has gone up, but they've been quite able -- I mean, they have been able to pass it on quite well. However, U.K. and Germany have been hit by higher energy cost. Hopefully, those will start reducing. China had a short-term impact of shortage of power, but that has been fixed and I mean, did not have a big impact at all. But going forward, we believe that the 9% to 10% EBITDA margin range is still possible for the international business. We don't see a significant impact on material cost impacting, because the orders that have been taken have been taken with these new prices in mind. Alex, do you want to add something here?

No. In general, I can confirm that this above 10% margin is definitely something we should also see in the coming months. And we're clear especially the energy cost in Europe, what Tarak mentioned, and this will be -- has an impact on margins now shortly. But definitely, we will remain above 10% with further upside potential, especially with the growth potential in our service business.

And Utsav, if I may just add one more thing. Kindly appreciate India business is heavily dependent upon OE business, the original equipment business.

And the glass line.

The glass line business. So the services portion unfortunately is a very -- much smaller size, 5%, 7% of the total business per se. So therefore, there's a full blow impact of material on the India P&L vis-a-vis -- when we go to the international business, they have a 45% of services business, so which doesn't really get impacted much by the raw material prices.

But I think just to add to this I think more from a future and what we are planning to do to mitigate these increases, we are actively looking at cost reduction measures. We are looking at internal controls as well as renegotiating contracts with our suppliers to make sure that we have much more efficient procurement. So that's something we are working on already. On top of that, we're trying to increase our exports as well as our service components because obviously they are more profitable. So we have a clear plan in terms of how do we look at increasing profitability. And this is all internal controls. And on top of that, if you see material prices taper off and come down, then that will be additional benefit that will flow through. On the second front, when the 2 facilities, mainly Vatva and Hyderabad have significant improvement in revenues next year because they will significantly grow, you will see some fixed cost absorption there, which will also help profitability. So I think we are in a strong position. I don't think there's anything structurally wrong with the business that has resulted in lower margins. I think this is a 1 or 2 quarter event which we really could not control, especially the gas increase prices is a onetime price increase. But we will do our best to try and mitigate some of these cost increases so that we kind of maintain and improve profitability.

Understood. Appreciate the detailed answer, Tarak. I'll just close off with just asking for the debt and the cash number on a both consolidated and stand-alone basis at the end of the quarter?

So debt -- there is no fresh debt. The partial repayment of debt has happened. So December end, we stand at INR 525 crores of debt and...

Consolidated.

Consol. And INR 300 crores of cash. And on India basis, we have some 140 million, 142 million -- INR 42 crores of debt included in this INR 525 crores numbers.

Can you just repeat the standard -- or the consol debt number, please? I just missed that.

Consol debt number is INR 525 crores. Cash in hand is -- cash, cash equivalents is INR 300 crores.

Our next question is from the line of Ravi Naredi from Naredi Investments.

Tarak Patel, you are doing exceptionally well. My point is this order backlog INR 2,067 crores and international order book INR 1,589 crores. So total order book is INR 3,500 cores, right?

No, no, no. So INR 2067 crores, Naredi, includes 15-odd of the international business. Total is INR 2,067 crores.

Okay. Okay. It was confusion, so I want to clear it. And sir, why international margin is low versus Indian margin?

I think the international business historically has been lower because their labor cost and employee cost are definitely much higher than in India. But what we are trying to do here is to really increase the size and scale. So with the same number of employee base if we can grow the revenue 2 or 3x, then you will see the employee cost as a percentage of revenue come down. And just to give you an example, when we bought our Swiss company in 2008, it had 38 employees and it was doing a revenue of $7 million. Today, also it has 38 employees but does a revenue of $25 million, right. So if we can double or triple the revenue of the international business, then the employee cost will come down.

Right, right, right. Very intelligent thing. And CapEx plan for quarter 4 and financial year '23?

So there is no new CapEx plan. Like I mentioned, we have the Hyderabad furnace coming in, in the next 10, 15 days. So that will be definitely a capacity boost for us. We also have a new furnace coming in Gujarat, which will come into production sometime in June or July, which is going to also help us because it's a large furnace, 80,000 liters, will give us capacity both for the Indian market but also to export to our parent organization. So it will be a very timely CapEx that we will add. Besides that, there is no other significant CapEx that is planned for this financial year. Next year, we will probably think about it a little bit more in detail. But I don't see significant CapEx next year. I think next year, we will probably use all the CapEx that we have made and all the investments that we made and really try and grow the revenue.

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

Tarak, the question is for you. In one of the interviews you mentioned that there is a large order from U.S. Whether it is included in this result or whether it will be factored in March quarter?

No, it will be -- all shipment will happen in Q4. There is no shipment that has happened this quarter. The U.S. order is going to be shipped in Q4 of the next -- of this financial year. So you will see that playing through in Q4. And that -- and Q1 a little bit. But they have also increased the quantities in that order. So they have actually added more quantity. So you will -- that U.S. order will continue into Q2 and maybe Q3 also. And yes, that's a good order and that will definitely help improve profit not only in India, but also in the U.S. business because the order was taken by the U.S. organization.

Okay. My second question is whether we have shifted entire production of proprietary products to our Vatva factory? Or...

No, the proprietary products remain in Karamsad, predominantly 90% of it is. But we had moved some small equipment that -- we needed extra capacity and Vatva had it. But I think as a long-term strategy, Vatva will be pure HE and proprietary products will be made in Karamsad.

Our next question is from the line of Vivek Gautam from GS Investments.

Sir, I just wanted to know about the -- sort of industry dynamic question. Has India cemented place of becoming the international chemical manufacturing hub for the world? Or are there still threats from China and other countries? And what about the concerns on the environment, pollution and the fire incident which happened, sir?

So I would not say that we have taken over the leadership position, but I can definitely say that the chemical market in India is growing. There is new investment coming in. Today, during the Board meeting, we had made a presentation and we had listed out all the companies that are planning investments over the next maybe 1 or 2 years, and there's significant investment coming. Many of you know also about the recent IPOs and people and companies that have raised funds, and these funds will be reinvested. Like I mentioned, there's the China Plus One strategy. There's a contract manufacturing strategy. There's also backward integration to reduce dependency and volatility of products that people buy. So all in all, I think the India chemical industry does look quite positive and we have -- I mean I could count on the top of my head the number of inquiries and new projects planned in the next 2 to 3 months, and they are quite large and they are quite big. So I don't see an issue there. But I still believe that China is going to revive. China will come back. But today, I think there is definitely a reduction in global supply of chemicals. I think during the pandemic there were many companies that downsized and shut down. And today, you see an increase in higher -- the chemical prices only because the supply is limited, but the demand is still high. But I would see over the next few quarters people investing and building capacity.

The concerns on the pollution and the fire incident, unfortunately, which is increasing in India?

Yes. So I think that's something that could work well for us. I think one is when safety norms kick in and people want to set up good manufacturing facilities, then they're trying -- they try and buy equipment and technology from reputed companies. So that could be definitely a benefit for us. The other area that we could add value is in terms of acid recovery, right? So acid recovery is definitely something that companies will become much more conscious about because it's becoming an environmental issue. There were recent examples where people had disposed of chemicals and obviously they were not disposed of correctly. So in the future, people will look at kind of cleaning up these products within their facilities rather than just kind of giving it to a third party, which in turn could spur a new business for us when it comes to acid recovery.

And how are we placed in ANFD filters, sir? And what is the opportunity size over there?

In ANFD?

And internationally, domestically. And our recent international acquisition is helping us more sale of our product through cross-selling?

Yes. So ANFD in India, we are definitely not a big player. We focus on really the high-end market of spherical dryers and kind of clean ANFDs and sterile ANFDs and things like that, containment application. But we are a big supplier to our Swiss company, which has currently a backlog of close to CHF 30 million, CHF 40 million. So they are nearly booked out for 2 years. And the focus there is obviously that the European business is quite strong, but we want to break through to -- in the U.S. market. So one of the focus is now is to grow the Mavag F&D business line in the U.S. market. The good thing about the U.S. market, it is ASME and it is something that GMM can supply directly. So most of the equipment that we will end up selling in the U.S. market will be manufactured here in India.

And how is the opportunity size for the ANFD filter, sir, India as well as abroad?

I would say that I don't have the numbers at the top of my head, but the Indian market could be around maybe INR 300 crore mark, I would say. Yes. And then in Europe, maybe about $60 million, $70 million and maybe another $30 million in the U.S. And these are just kind of broad level numbers, so don't hold me to them. But this is probably a thumb rule that I can give you.

Our next question is from the line of Ronil Dalal from Museum Capital.

So most of my questions have been answered. But I just wanted to understand that you had mentioned last quarter about the chemical orders, which were doing well, and you touched upon that in the previous participant's question. But you also mentioned that the larger pharma companies are not really participating in the orders as much and it's just the smaller pharma companies. Could you give us a sense of how you see the demand dynamics evolving? From a near-term perspective, what are your thoughts and also from a little longer term maybe a 3-year perspective?

So I know of -- our big pharma customers, they have been pretty subdued in terms of investments. Divi's, for example, has kind of held any kind of CapEx in the short term. But what we are seeing now is definitely people taking interest in terms of the PLI scheme. So we've seen a large inquiry coming for fermentation reactors from Hyderabad, where they will make pen G. So that is really driving. And there's a list of I think about 10 or 12 different companies who've signed up for this kind of investment through the PLI scheme. Again, like I mentioned to you, the smaller guys have been investing. The guys who are kind of supplying into the bigger pharma guys have kind of doubled their capacity and improving or increased their products to that. But again, pharma is something that has not really taken a lot of aggressive investments recently. But I personally think that the next couple of quarters, you will see something. I think Ashok or Aseem, do you want to add something here?

No, I think you've covered it.

Ashok, something?

So the pharma business is, like Tarak mentioned, subdued. But we are expecting a cycle of CapEx in the big pharmas also to take off soon. So we know that they have plans to sort of start the expansion of API products. Most of them are now concentrating on the production after the API, so in the finished product. And they've not gone back to API, but we think that they will change and we'll start seeing traction in the....

So they've all acquired land and we have huge parcels of land. So I know that even Aurobindo has for the pen G 300 acres lined up. They're starting to stable activities now. They're floating the inquiries. Even Divi's had Unit 3 in Kakinada kind of thought about, but they haven't actually gone down to actually releasing orders or having anything concrete. But yes, we do expect something to come in the next financial year.

So the PLI thing that he talked about -- what he talked about was the fermenters. And apart from that, they also have PLI for the key [ starting ] material, which is not bio type of products. They are chemical products. So we'll start seeing action in that as well once the projects are firmed up.

So my follow-up is that -- so it's not impacting your schedules and your targets?

No. So in terms of current backlog, we are in a very strong position. We also know of large orders that are being planned in the next maybe 2 or 3 weeks. So no, from a capacity standpoint, we have no problem in terms of execution. We have enough of orders coming in. And for us also what happens is, when it's chemicals, the sizes are much bigger. So we have definitely a large backlog in the bigger sizes, which is 16,000 and 20,000 and higher. But pharma, once it start picking up, you will get much more of the smaller sizes, which we also need. So I think it will be a good mix to have, but it's not affecting any short-term revenue or growth possibility for us, no.

Sure, sure. And just one comment from my side is that given just the meeting that you all had with the 46 key management personnel, we would like that you can share that at the earliest. That's all.

So we didn't actually have the meeting in person. We actually had to cancel it because of the third wave. We had an online town hall. But we will be sharing some kind of documentation. We are creating a new story for ourselves. Obviously, 1 year of integration is completed. We can't keep integrating. And the integration -- the efforts will continue. But there's clear strategies around market share improvement, cost reduction, sourcing from India, new markets, M&A opportunities. I think we're going to put something down. We are already working on it. And I think over the next few months, we will be able to share something with the group that gives you a clear idea on what -- on where we want to be in the next 3 to 5 years.

Right, right. So can we expect this to be a much more advanced version of Project Apollo?

Yes, I think so. I think it will be more granular in nature. So I think we can't keep harping about integration. I think integration is done and dusted. We have a good team. These processes are now set. We don't really need to -- it's like pretty much on autopilot. We'll push it obviously. We'll review it. But there has to be other growth areas. There has to be other areas of improving profitability, adding new technologies and products. So all those things will fall into that document, which will be shared with the group.

[Operator Instructions] Our next question is from the line of P. Sachdev from Albatross Capital.

Tarak and the team, congratulations on great set of numbers in a challenging cost environment. Most of my questions have been answered. I just wanted some rough estimate on the capacity utilization across various plants at Pfaudler Inc.?

So I think maybe Alex would be in a better position to answer that. Alex, what is the current capacity utilization around our main facilities, namely Germany, Italy, China, U.S. and Brazil?

They are highly utilized, we have to say. So we grow so fast and we grow faster than originally anticipated. So yes, they are at the higher end of utilization.

Yes. So I think the problem is not having capacity right now. That's why we are adding capacity in Brazil. We are also adding some capacity and new equipment in the U.S. So again -- also from a standpoint of motivating the local teams, I think we've not invested and Pfaudler has not invested in these facilities for quite some time. So people are quite motivated. Germany and Italy, obviously, our brand-new facility, and China is as well. But I think we all would prefer that at some point we increase the output. But right now, the focus is really stabilize the business and ship out as much as possible. And obviously, Q4 is an important quarter for us. So the focus is really on execution. And then we'll probably spend some time looking at operational improvements and how we can kind of get more output from the same capacity.

Okay. So I would really appreciate if you could put a statement or a slide on the optimum capacity, on the optimum turnover that you can achieve post this capacity expansion when you come out with the revised vision guidance?

Sure. So we can do that. And I think it will be helpful also -- we worked out some numbers also across for our Vatva facility as well, which is a new unit, Hyderabad, and then for the rest of the company. We'll try and put something together as part of the document where we are and where we can go with the current setup.

The next question is from the line of Harshil Shethia from AUM Fund Advisors.

Congratulations on a good set of numbers. Sir, going ahead -- I have 2 questions. Firstly, has our Vatva facility started?

Sorry, I missed that.

Harshil, we lost you.

Yes. Has our Vatva facility started?

Yes. So Vatva facility has started. We have also moved quite a bit of the orders to Vatva. There's some work that's happening in Karamsad and some in Vatva. But I think about 80% of the work has now shifted to Vatva. And -- go ahead.

We started the operation partially in Q1 of this financial year and both achieved -- being run this year in both the operations -- both the places, one at Karamsad and at Vatva. It's a transition period. I think by end of Q1, we should be in good position to completely transition into Vatva for HE business.

Okay. So can we say that Vatva should be at full capacity by Q1 or maximum Q2 of '23?

Okay. So I'll put it that entire HE production for GMM Pfaudler will happen through Vatva in Q2, starting Q2. However, capacity -- achieving full capacity will obviously take time because, as we know, to reach INR 400 crores, INR 450 crores of turnover will obviously not happen in the next financial year for sure. Aseem, you want to add something?

Yes, I'll just add. I think as we've exercised our Vatva facilities, the factory is ramping up and that will continue to happen in the next financial year after we transfer completely to Vatva. So Q3, Q4 we'll continue to ramp up. And I think the following financial year is when we expect to be at full capacity.

But we do have an overall thought around what the actual tonnage this facility can ship out. We've done some internal calculations. We also know about what is the right mix between carbon steel, stainless steel and exotic materials so we can maximize revenues and profitability. So we are quite aware and conscious of that. And then on top of that, can we improve and do we have the operational improvements that can further improve this business. But all in all, I think Vatva will really show its true colors next year. The order backlog remains very strong. And the only thing that we really need to focus on next year is the execution part of it.

Okay. Second question, sir, has the -- we always plan of making India the whole manufacturing base and shipping out the equipments globally across all our facilities. So looking at the freight cost environment and the way the prices have run up like dramatically high. So how do we counter these [indiscernible]? Are we actually, as of today, shipping out products from India to other countries?

So we are. And most of the contracts that we have -- I mean, all of the contracts that we have are mainly ex works, so that the customers will end up paying for the shipping. So the entire U.S. order, for example, is ex work. And at the time when the equipment are ready for shipment, we will get a quotation from the local supplier, the shipment guy, and then he will give it to the customer and then he would directly deal with them. For our internal consumption, for our internal transfer, yes, this will be an issue. But again, we have time. And in spite of the logistics -- higher logistics, there's enough of benefit of sourcing from India. So the landed cost after seeing the higher logistic prices is still very lucrative and very profitable.

So Harshil, just -- sorry.

So again, I'll just add one thing to what Tarak said. Ultimately, these higher logistics costs are transitory in nature. About 6 months to a year, we would expect that these would settle down. And so for us, this is a long-term strategy that we are -- we think will work out for us well.

Okay. And a follow-up on the same. So are we seeing any delay in orders of picking up from the Indian facilities by our global customers?

No. I think in most cases, they are actually pushing us to kind of ship faster. So -- I mean, the U.S. order, for example, is on a fast track, the project. And we have regular reviews. And they would be more than happy to pick it up even before our schedule. So I think most of these plants have been planned. There is no slowdown in terms of customers wanting the facility -- I mean the equipment. They would rather have it quicker than later.

Okay. And sir, one more, if I can. Are we seeing like people -- better margins from global customers compared to our Indian clients?

So export orders are always more lucrative, Harshil, compared to the Indian market. The Indian market is a good market, it's a volume-based market. But yes, export business gives us definitely higher margins.

Next question is from the line of Rohit Ohri from Progressive Shares.

Your press release speaks about launches of some new products. What are they related to and which segment are you looking at?

New products. New product launches.

Sorry. So yes. So we are obviously looking at Interseal in a big way. So that was a launch that was planned for last quarter, which we now update. We have installed 11 Interseals in India. They are working quite well. The customers are quite happy with them. So hopefully, that will lead to further orders. Interseal is something that we are quite focused on. We believe it's a great product. And hopefully, that will add to both revenue and profitability. Profit comes with, obviously, a good aftermarket business as well. So that's always a good thing to have. We also have acid recovery. Again, that is something that we've been working on. We did get a large order. There are a few plans for Indian companies to set up acid recovery plants. We're actively pursuing those opportunities. And again, acid recovery plants are built around lifetime equipments. So it's a natural kind of complementary product for us. So these are the 2 main areas that we are focusing on here in India.

Okay. You seem to be expanding the sectoral bandwidth. So any thoughts as to -- do you see any opportunities in green hydrogen and related equipment manufacturing?

So all good things to think about. I don't think we will say no or yes to any of them. I think there are definitely opportunities available. But I think we have to be a little bit careful in terms of how we can link it back to our product and what our strengths are, right? So yes, we are looking at different things right now and if there's something that obviously would be something futuristic but could kind of come in quite handy, we will think about that. But I think currently, we have enough on our plate. But we will keep thinking about and keep evaluating opportunities in between energy segment, in having an ESG kind of a glass, which is maybe non -- which is more environmentally friendly and things like that.

Okay. My second question is related to the pension liabilities and the pension obligation. So what is the current obligation that we have on a yearly basis, if you can share that?

So pension liability, Manish.

Sorry. So pension liabilities, yes, they currently stand at something like INR 450 crores outstanding as of 31st December. Not much of a movement as we already have alluded that there is a -- it's a fixed closed pension plan, no new additions are happening. And what -- the movement primarily happens on account of actuarial valuations. And there is something like 25-plus years of payout period. So it's naturally progressing in that direction.

Next question is from the line of Jason Soans from Ashika Stock Broking.

I would just want to know from the stand-alone order book -- obviously, it will be bifurcated into glass-lined, heavy engineering and proprietary products. Could you have a segmental breakup of this, if possible, of your stand-alone order book?

Broadly, if you see -- so GMM standalone, we have INR 570 crores of order backlog, INR 200 crores of GLE, INR 240 crores on account of HE. And PP is another INR 120 crores.

Okay. INR 240 crores is HE and PP is INR 120 crores, right, and the balance will be GLE.

INR 200 crores is, yes, GLE.

INR 200 crores is GLE. Okay. And also -- yes, so Mavag -- and the other thing, in the international business, your order backlog is given. So basically, PFI order -- the total order backlog minus the PFI will be the Mavag order backlog. Is that right?

No, no, no. So INR 568 crores we said is GMM...

No, no. What I meant is -- of course, in the international results, the order backlog is -- stands at INR 1,589 crores. And you have mentioned that INR 1,281 is PFI. So the balance would be Mavag. That's what I...

INR 307 crores or INR 308 crores is Mavag. INR 308 is Nova.

INR 307 crores or INR 308 crores is Mavag. Okay, sure.

That's right.

Okay. Yes. And just would want to understand. So I was just looking at the results and there is -- I did read some comments on the purchase price allocation. So just would want to understand it a bit better, if possible. I understand there are some impacts and they are noncash. So how would we read into those?

Sorry, I didn't -- PPA?

PPA.

So PPA --okay. So PPA -- if you recall, quarter 4 last year and Q1 this year, we had something like INR 46 crores per quarter of PPA allocation, which is basically once you acquire a new business, there are intangibles being created and the existing order book -- the profitability there on is not allowed to be routed through the P&L. Although the cash -- the revenue comes to you, but the margins there on does not accrue to the new management because that is assumed to be the efforts of the previous management, just to oversimplify it from an accounting perspective. That number has substantially reduced. And now, last quarter, we had something like INR 18 crores or INR 19 crores of amortization of intangibles. This quarter, we have INR 6.5 crores. And I think next quarter onwards, we'll have something like INR 5.5 crores of amortization happening on a quarterly basis. And that will continue. So it is a noncash item as we earlier alluded to. However, because we get a tax benefit on account of lower profitability, it net-net impacts us on the positive side from a net tax saving and a positive cash impact.

Right. So this is real cash flowing through, which you have mentioned in your [ press ] release actually. That's right. The -- okay. Sure. Okay. And yes -- and just one final question I would just want to ask you. So basically, on a stand-alone basis, GMM has historically posted margins of around 24% to 25%, right? And obviously, after the Pfaudler acquisition, which has margins of around -- which had margins of 7%, now it's around 10%. And your Mavag acquisition also has margins around 13% to 14%. So would just want to know -- I mean, obviously, domestically in the filtration and drying equipment market, your positioning is not that strong. So just would want to understand what is your strategy going towards -- for strengthening your foothold in the filtration and drying equipments market? As well as when you go globally, what will drive margins further?

So I think in India, the filtration and drying market is a little bit decommoditized. So I don't see margin profile there to kind of be in line with what we plan to do at the group. So I think we don't want to compete in the low-end, low-margin, the F&D business. We definitely want to focus on the high-end, the [indiscernible], the sterile equipment, the containment facilities and things like that. We also have enough of backlog in Mavag, where we are manufacturing components for them. 80% of the material that is manufactured from Mavag gets manufactured here in India. And then the final 20% of finishing and cutting and instrumentation and automation gets done locally. So it's a win-win situation for us. So our focus today is really to cater to Mavag. On top of that, if we make a breakthrough in the U.S. market, all the production for the F&D business in the U.S. market will come from India. So from an F&D standpoint, our focus is definitely on exports, and I think that will continue. We don't want to really increase market share here and go after orders at low margin. At the group, obviously, there are significant things that we are working on. They're working on sourcing components from India for European entities, which have started and doing quite well. We regularly supply nozzles, steel plates. We supply other components that are then used by the European entities to reduce their cost. We also look at certain markets -- lower price markets like Eastern Europe, Southeast Asia, Spain, some parts of South America where GMM Pfaudler will export directly. And then we have obviously cross-selling, so where we can bundle different products together. So these are all different areas that we are working on. And then lastly, on top of that, we also look at our internal cost structure, the efficiency improvements, operational excellence. So all these things are going on and that's why you've already seen in a very short period of time -- like I mentioned, 1 year since we acquired this company -- and we've already shown a significant improvement in revenue and profitability, 25% growth of the international business, which is -- as many of you had asked that how do you and why do you want to acquire something which is growing at 5% to 7% range, we had mentioned that there are opportunities available and there's no reason why we can't really go and capture additional market share and grow -- continue our growth journey. So I think from that standpoint, we are quite clear in terms of what we want to do. Some of these things take time. I think we have a good foothold, we have a good foundation and we just need to build on it.

Sure, sure. And sir, just one last -- just from a company understanding perspective we want to ask you. So obviously -- so GMM on a stand-alone basis are the proprietary products division, right? So is the main purpose of the division to supply -- make equipment here and transport it back to Mavag? Is that how it plays out? I mean just would want to understand, because -- so proprietary systems where you have here at Karamsad, it also has the same business...

In proprietary products, we have filtration and drying. In filtration and drying, yes, about 70% to 80% of what we do is basically sent to Mavag. And these are basically the vessel body, the legs, the lanterns, the drive units. All that stuff gets made here locally. It gets sent there. Then Mavag will work on it. They will add all the wiring, the instrumentation. They will do the local testing, the FAT. The customer will come there. He will see the local equipment. So it's a kind of win-win situation where the customer gets the best of both worlds. He gets obviously a cost advantage. But at the same time, he gets completely European kind of finished equipment and a local European guarantee as well and a local European face to which he can communicate with, right? So I think that is the strategy here.

And F&D is one portion of PP?

Yes.

Ladies and gentlemen, due to a paucity of time, we'll be able to take one last question. That is from the line of Sandeep Tulsiyan from JM Financial.

Just 2 questions on the capacity. Firstly, on the glass line capacity in India. In Indian terms, where do we stand now? And after the current furnaces that you have mentioned will come online in Hyderabad as well as the Gujarat facility, where will it move to?

So -- no, sorry, we didn't get that, Sandeep. Can you repeat?

Capacity in EU?

So EU, yes. So EU capacity, I think we are currently at 2,400 here, about 400-odd there. We will give you a new guidance for the next financial year with the new Hyderabad facility coming here. Obviously, it won't have a huge impact in Q4 because there will be 1.5 months basically that will get diluted. But next year, we should ramp up the EU capacity both by the investment in Hyderabad plus the new large furnace that will come into play in our Karamsad facility.

And for propriety products, if one were to measure your capacity, how do you look at it maybe in volumetric terms or absolute value terms?

I would say it will be around the INR 150 crore mark. I think that's something that we can look at. I think anything over that, we would probably need to add a little bit of capacity. Like I did mention to you, we had space available in Vatva. If we still have that space available in the near term and we're not using it, then we could dedicate that to the proprietary products business. But again, the proprietary business has also done quite well. And like we were mentioning to you earlier, this entire fermentation piece, which is really, really important and which is really going to come up now in the next few quarters -- all those agitators is something that we can build here. We have the expertise. These are very large agitators. Technology is very, very important because these are -- what's the power rating, Ashok?

930 kilowatts.

Yes. Yes. So 930 kilowatts, right? So a lot of technology goes into power savings, shaft sizing. All those things are something -- so if that kind of picks up, then we can use Vatva as well to make some of these agitators. Very large in size. But we've been talking to a lot of customers who are very, very interested in using our Mixion agitators for their fermentation applications.

Okay. But if INR 150 crore is the capacity -- you did INR 144 crore revenue in PP last year. So you don't have headroom to grow there, right?

No, I don't think we did INR 144 crores. Did we do INR 144 crores?

We did -- yes, we did INR 144 crores -- yes, last year we did INR 144 crores. So I think this time, we are like INR 120 crores already. So we should be within...

So maybe around -- I'll just take a number. Yes, INR 175 crores, INR 200 crores could be there. But again, PP is an area that we are a little bit cautious with, because, one, unless we have the right margin profile, there's no use of expanding. We would rather expand where we have more control, where we are the market leader like the glass line equipment. So that's like an easy low-hanging fruit for us. But if Mavag needs additional resources, which they will need at some point, then we will look at adding a little bit of more capacity here as well.

And obviously, Sandeep, you'll choose your battle setting. There's enough to do on the glass lining front. And then, of course, heavy engineering, Vatva is coming up, with Apollo project coming up. So we need to prioritize the growth areas.

[Operator Instructions] Our next question is from the line of Pritesh Vora from Mission Holdings.

Can you hear me?

Yes. Yes, go on, Pritesh.

Yes. You are in the -- so I just want to look at 3, 4, 5 years down the line, I mean, not to the current order. When do you think this cycle turns around? And do you see a steady state of orders coming in even 3 years down the line? What do you see, because you are the barometer of the chemical industries and pharmaceutical industry? Where do we see the growth coming up, from which industry for next 2 to 3 years? Where do you see the orders coming up?

So good question. I think in the short term there is definitely visibility both here and in the international markets. And international markets -- when I say international market, I say Europe and U.S. Both have been very, very active in the last 6 to 9 months. How long does it continue? I think probably another 6 months to a year you will see investment. We are booked out. Like I mentioned to you, INR 40 crores -- $40 million in Mavag. All our Pfaudler units have close to 9 to 12 months of order backlog. So currently, the industry cycle is definitely on the up and there will be definitely investments coming in. What we do hope is that even if the market were to slow down at some point, there would be a high installed base of GMM Pfaudler or Pfaudler made equipment. So that would obviously create a recurring business, a very sticky recurring business in aftermarket and part. So that's something that we can always focus on. We also have diversified. So besides just the offline, we have filtration and drying. We have Mixion. We have heavy engineering. Some of these go into the same markets, but some of them also go into, let's say, oil and gas, petrochemical. So there is risk mitigation strategy. And like I said, being a global company today, let's say, if India were to slow down, there could be a resurgence of, let's say, investments in Thailand, for example, or, let's say, Africa. So you can always pick and choose. But again, we have to be careful that we don't over create capacity. We keep continuously watching our cost. We don't have a very high fixed cost. And one of the things that we will look at doing over time as we move production to India is to probably look at rationalizing some manufacturing internationally. There are no plans of that right now. But as a good business strategy, this is something that we will have to look at. But again, I think for the current short-term period of about 3 years, I don't see too much problem with terms of business coming in.

And maybe if I may add. What Tarak mentioned -- and it had to be seen especially globally, the service business. This is the aftermarket business. This is for the international business with a higher margin, the better margin. This will be the future business based on the current strong sales. So there we will earn the margin in the future. So this is 40% of the international business. So this will be an ongoing growth driver which will be based on the current sales of the [ OV ] glass line business.

Next question is from Deepak Narnolia from Birla Sun Life Insurance.

Hello? Can you -- am I audible?

Yes.

I had one question on your profit margin. Probably you have discussed this in the past also. But I just wanted some light on that. Your stand-alone -- you had been reporting 24%, 25% kind of margin increase last few quarters. And your gross margins [indiscernible] somewhere around 44%, 45%. All of a sudden it has increased. And I remember you have been maintaining that you would be making this kind of margin in India business. So what has happened? Something has surprised you like -- if commodity increase has happened, then was it not known to the management, something like that?

Yes, that's a good question. And I'm glad that people keep track of what I say. But yes, I did believe -- and I think it was more from a yearly kind of number. We still believe 20% plus is something that we can maintain as a stand-alone number in terms of EBITDA. There was a onetime cost of the gas price increases, which were not considered. Obviously, that has had an impact. And 2, I would say would be the investments really that we are making in both Vatva and in Hyderabad that have kind of impacted profitability also in this quarter. But definitely, there has been an impact in steel prices. Currently, we were enjoying steel prices which we had bought a few quarters ago. We were consuming those. And as Manish said, that as we start consuming the newer plate, our kind of weighted average cost went up and we saw a kind of a decrease in profitability. Now to be honest with you, 25%, 27% EBITDA margin was obviously something that was probably not sustainable. I think around the 20% mark is something that we do aim to do. Glass lining, obviously, is a little bit more lucrative for us and I think we have maintained the margins there. With the export business coming in also we believe that glass line will continue to improve. And we do believe that once the steel price begins to taper, you will see some improvement. So like I mentioned to you, yes, it's not a structural change in the business. It's more of a short-term impact due to material prices. I don't think we will be the only industries which are impacted by such costs. I think it is probably something that will happen across the board. Now we need to kind of really focus on how do we bring it back by looking at our own efficiency improvement. Do we have levers available? Do we have buckets available where we can start working on to make sure that internally also that we are very cost conscious.

Ladies and gentlemen, that would be our last question for today. I now hand the conference over to the management for their closing comments. Thank you, and over to you.

Thank you, everybody, for joining us. Stay safe and look forward to speaking to you during our next investor meeting. Thank you once again, and good night.

Thank you.

Thank you very much. Thank you, ladies and gentlemen, on behalf of GMM Pfaudler Limited. That concludes this conference. Thank you all for joining us and you may now disconnect your lines.