GMM Pfaudler Limited (505255) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q4 FY '24 Conference Call of GMM Pfaudler Limited. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Ms. Priyanka Daga. Thank you, and over to you, ma'am.

Thank you, Manav. Good day, ladies and gentlemen. A very warm welcome to all of you into the Quarter 4 FY '24 earnings call of GMM Pfaudler Limited. The earnings presentation was uploaded on the stock exchanges this evening and is also available on our website. 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 International Business, Mr. Thomas Kehl; our CEO of India Business, Mr. Aseem Joshi; our CFO of International Business, Mr. Alexander Porter; and CFO of India business, Mr. Manish Poddar. We will give you a brief overview of the performance of the company, after which, we will get into the Q&A. Before we begin with the overview, a brief disclaimer. The presentation that was uploaded on the stock exchanges as well as our website, including our call discussions that will happen now, contains or may have certain forward-looking statements regarding our business prospects and profitability, which are subject to certain risks and uncertainties. The actual results could materially differ from those in such forward-looking statements. I will now hand over the call to Mr. Patel to provide an overview of the performance. Over to you, sir.

Thank you, Priyanka. Good evening, everybody. We are happy to report a strong finish to the financial year, where we were able to grow both revenue and profitability by 8% and 11%, respectively. Despite challenging business environment, driven by a weakness in the chemical sector, we've seen sequential improvement again in Q4 order intake, that grew by about 14% to about INR 861 crores, driven by the non-glass-lined technologies and system platforms. This is partly a result of our business diversification strategy and has helped mitigate the slowdown in the chemical sector by allowing us to focus on nontraditional industry segments. Edlon also one of the companies that is there within the group, has seen an improvement in terms of order intake and in terms of EBITDA, which is mainly coming from the semiconductor industry. So like I mentioned a lot of the new industries that we have diversified into is giving and making up some of the shortfall that has come from the slowdowns in some of the key industries that we cater to. Further, we are currently having a strong opportunity pipeline as well, and we believe that the order intake for Q1 will continue also in a similar trend. In terms of financial performance, our consolidated revenues for the year grew by 8% to INR 3,446 crores, while EBITDA increased by 11% to INR 477 crores, with an EBITDA margin of 13.8%. Q4 revenue was at INR 741 crores, and EBITDA stood at INR 91 crores, with margins at 12.3%. Profitability margins improved in the international business, while margins in India have been kind of stable for the last few quarters now. This is the result of the ongoing cost control measures and the focus on operational excellence. Our balance sheet metrics have also seen improvement, and CRISIL has upgraded our ratings to positive. There was a strong focus on improving our working capital during the year. This has resulted in significant cash inflows in H2, leading to higher debt repayment and improved debt ratio. Manish will be talking about this in a minute. In terms of corporate updates, we have completed the consolidation of MixPro in Q4 Canada. The results that have been published includes MixPro. I also welcome a new member to the GMM family. Ms. Shilpa Nirula, who has been appointed as an Independent Director effective May 22, 2024. With her appointment 70% of the Board now comprises of independent directors. I will now hand over the call to Manish, our CFO of the India business, and he will take you through the financial performance of the company. Thank you. Over to you, Manish.

Thank you, Tarak. Good evening, everybody. We'll refer to the slide deck uploaded with it as [ Q4 FY'24 ]. Apart from the P&L, our focus has been to strengthen the balance sheet. You may recall, earlier in the year, we had communicated that we plan to -- we target to repay INR 140 crores of debt in financial year '24. Happy to report that we have repaid INR 145 crores of long-term debt in this year. We have prepaid and closed the entire debt of Hyderabad and Vatva acquisition that we took in the past 2, 3 years. Overall, we have repaid INR 96 crores of long-term debt in India and INR 50 crores for a long-term debt in the international business. This has helped us improve our financial covenants. Our net debt to equity now is at 0.4 and net debt to EBITDA is at 0.8. In the upcoming years as well, we plan to continue this journey. We have marginally improved our working capital days for [indiscernible] inventory in FY '24 as referred on Slide 8. Moving to cash flow front, on the cash flow front, we have significantly improved our cash generation in H2 as demonstrated in cash flow Slide 9 of the deck. This is primarily on account of inventory optimization and cash collection. While in H1, due to operational reasons, our working capital has expanded, we brought it back to decent levels in H2. Overall, through the year, we generated INR 253 crores of free cash flow, which is a [ decent ] over 50% of EBITDA of INR 477 crores that we did in this year. With that, over to you, Priyanka.

Thank you, Manish Manav, please open the line for questions.

[Operator Instructions] Our first question from the line of Anirudh Shetty from Solidarity Investments.

I have 2 questions. Sir, I just wanted your update on the competitive environment in the domestic GLE space, you did mention that demand is still weak, but how has the competition intensity evolved into last book? I just wanted your views on that.

Yes, sure. So this is Aseem. I'll address it. So yes, demand, as you know, continues to be a little sluggish. We have to compete vigorously. Having said that, we've taken efforts to make sure that we are competitive from a manufacturing efficiency standpoint, also reaching out to a broader set of customers. So I think that is helping us in winning more orders and capturing share in what is right now a slow market for us.

I think maybe just to add a couple of points. The last 2 quarters have seen significant improvement in Indian glass-lined order intake. So I think we were kind of, in Q1, Q2 around the INR 70 crores, INR 80 crores, INR 90 crore mark, which has doubled or increased to INR 150 crores, INR 160 crores in that quarter. So I think the glass-lined business has seen some improvement. I think our market share probably has also increased. But as Aseem mentioned, the competitive incentive is still there. And hopefully, once the market and industry kind of turns, you will see some of the pricing pressure moving off.

Clear. And sir, second question on the international front. The revenue seems to have grown, but the order intake is declining. So just wondered your read of the situation there in terms of your conversations with the customers there, are they pausing some of the projects that they intend to do? Is there any delays happening there? Like some color around the global environment would be helpful.

Sure. So I will hand over the call to our International CFO in a second -- [ CEO ] in a second. What I would like to just mention is that do keep in mind that the international business obviously has a large component, which is services, and that keeps getting adding on as the year progresses, so it's a short delivery items. We do obviously understand that the stocking backlog is a bit lower than last year. And that's definitely something that we are trying to improve and increase the order intake. We had received a large order in Q4, a $12 million order from the U.S. And we have further also this quarter seen another large order coming in from the U.S. market as well. So in terms of order intake opportunity pipeline still remains very strong. Decision-making has been a bit slower than usual, but we are seeing now some positivity at least in U.S. and Europe, where we do see order intake also improving. And we are seeing something similar here in India. Thomas, do you want to add something as well?

So thanks for the lead and I think there's not much to add to what you said. The order intake, as you rightly mentioned is lower than the revenue last year. That is because the markets are -- have slowed down somewhat, but we are seeing recovery signs and signals in Europe as well as in America. So the projects are out there. decision-making processes are slightly improving in speed. That is a good news. We have been gaining a couple of large projects, especially in the Americas in the systems business [indiscernible] that were due so or we are above the expectation's in this quarter in this business. China is a different issue. China is still rather slow. The number of projects is not necessarily increasing, but we expect the China recovery also very, very soon.

[Operator Instructions] We have our next question from the line of Bhavik Shah from MK Ventures.

My question is, in the presentation you have shown the EBITDA for next year at INR 630 crores as against revenue of INR 3,700 which gets us to the margin of, say, 17-odd-percent. But when we say historically last 10 years, we have only hit the 17% mark once in FY '20. So what makes us so confident that we are achieving those margins again this year?

This is that you are talking about the guidance, right?

Yes.

The guidance was made obviously what it was 2 years ago now. So Bhavik just to give you a background, we -- 2.5 or 3 years back, we had given a guidance for INR 3,700 crores of top line and INR 630 crores of EBITDA. This slide is basically just a reference to where we are versus what we had guided to.

Right. So it's clear that obviously, since that time, the industry has seen a kind of a down cycle, especially the agrochemical industry, which is obviously a big chunk of our glass lined business. And some of that, you obviously see in terms of order intake and the current margin scenario. The idea, obviously, now is to kind of use this time, this kind of a down cycle to kind of improve on the internal cost efficiency measures, which we are working on. And we believe and we do see some signs of recovery. And hopefully, as the market recovers, some of the benefits that we will be working on today will kind of translate into much better margins as well. Going back to your question on historical margins, yes, from an industrial perspective, capital goods company, 13.8% EBITDA margin for this year in the peak of a down cycle, I think is a pretty [ pleasing ] performance. And I think we've kind of held our ground quite well. Going forward, obviously, we want to improve on this number and that's what the kind of idea is. It's been 3 years since we've acquired the Pfaudler business and since the acquisition has happened, 3, 3.5, 4 years, we see significant change in size and scale. Even the margins internationally have improved significantly, nearly double. The Indian margins are now kind of stable. We have obviously a clear strategy for our different product lines. We have higher growth product lines coming from newer acquisitions. We have the [indiscernible] business in India, which is also doing exceedingly well. So we have come out this kind of risks associated with the down cycle in chemical and pharma is being kind of compensated by the other product lines, right? So I think, we, today, are in a position to kind of start of looking at maybe a 3-year plan again. And hopefully, in the next maybe few quarters, we should be able to kind of come back to the market with some kind of recalibration in terms of where we are and where we want to go. And I think that's something that we've been working on internally. And I think, very shortly, we'll be able to share some kind of road map with you and the investor community.

Right, sir, got it. So sir, this number, which is in the presentation is not the guidance for FY '25, if I understand correctly. That means...

Guidance for that was given, we are just giving you a comparative to say that, yes, this is the guidance that we have put out and how we are tracking towards that guidance. This shows you that we are not changing the guidance mid-way. So that number is out there and we are showing you where we are. Obviously, that guidance will probably get recalibrated when our new guidance comes in, in the next few quarters.

Okay. Okay. Got it. And just from an opening commentary, we're seeing good demand from your semiconductor industry. So sir, what exactly do we provide there? And what kind of demand are we seeing I mean in this subsidiary?

So we have a company in the U.S. It was historically part of the Pfaudler Group. And we used to make PTFE lined vessels. So these are very kind of corrosion-resistant vessels, equipment of very high purity applications. And there's a very specific kind of a low metal requirement for the semiconductor, 0 metal, I think parts-per-trillion is 0 point something, something, something. And Edlon has capabilities and experience in technology that goes into this. And that's driving some of this improvement in that business. And semiconductor also is an interesting area for us. It is not only to be kind of cater to them through Edlon, but there are other product lines that could also go into some of these semiconductor downstream or upstream kind of chemical facilities, right? There are specific chemicals that go into. So one of the areas that we're trying to see there's other areas of adjacency in the semiconductor space where we could look at cross-selling some our other equipment.

Right. Sir, what percentage of our order book will be coming from this?

I think the size of Edlon today is about $25 million, or $25 $30 million, which last -- I mean 2 years ago was about $10 million, $12 million. So is a significant growth. Alex or Thomas, you want to jump in?

[indiscernible] It's about [ $25 million ] [indiscernible ]. We expect this business to grow significantly further due to the investments that are done in the semiconductor industry in the Americas, but also starting in Europe right now. We are well positioned. The quality and the purity of our PTFE [indiscernible] outstanding, and we are #1 in quality performance in that industry. We have been investing in a new site, setting it up as we speak, having the capability to also provide all sizes that are needed, tanks, larger tanks, smaller tanks and midsized tanks to the industry, and this is how we actually support the growth [indiscernible].

We have our next question from the line of Pramod Dangi from Unifi Investment Management.

And Tarak, just on the international market, while you're going through the presentation, we showed that they are not saying that they stated for the final sale value for the Mixel acquisition. So is there any one-off in the profit after tax you reported for the international business over there of just INR 2 crore?

So, Pramod, on Mixel specific, this was acquired last financial year. And as per the PP allocation that has to be done in the one, the evaluation has to be done within 12 months. So in this quarter, we see that revaluation. And accordingly, there was an inventory -- so there was an intangible created and that's intangible as per the PPA has to be amortized in this quarter, and therefore they have this onetime impact for the Mixel related transactions.

Sir, how much would that be, if you can quantify that?

Yes. About $1 million, I think.

INR 8.5 crores?

Mixel will come probably next year. Mixel was approximately $1 million.

But I think what you are asking primarily [indiscernible] is also asking is that there was a onetime charge for acquisition expenses. There has been, I think, a $1 million charge for acquisition expenses in this quarter because we were kind of working on a couple of targets, and we have spent some money. There is a $1 million charge in this P&L as a onetime charge. That is also there additionally.

Okay. Okay. So if I -- so what you're comparing is that reported on the Slide #28. If I look at the like-to-like excluding the onetime charge, it will be more than INR 10 crores, right? It is not mentioned anywhere in the note.

You're talking about the distance from EBITDA to PAT in Slide 13, Slide 14 of the international business, right?

Yes. Yes.

So one is the amortization of the Mixel intangible, that is what has happened. And the second one is the additional deferred tax provision that we had created in this financial year. And maybe, Alex you want to -- and both of these are noncash. Both of these are non-cash.

Okay. So if you can quantify Mixel amortization, you said $1 million, what will be the...

We have given that as a note typically in the disclosure that is just for the financials. We have that number in that disclosure.

Okay. I will refer to that.

Effective tax rate for the India and the international business collectively stands at 27%. These are onetime adjustments on account of a new entity acquisition and related deferred tax creation.

Okay. Perfect. And the second is how the total overall environment is looking into the international market now? You were saying that there was some slowdown and -- because the international market was doing very well in last quarter year-on-year. This is 1 quarter where we have seen the year-on-year degrowth, quarter-on-quarter degrowth in the international market. So where it is coming, how we are...

And maybe give you a little bit of what we expect. I think international business will probably trade around the same kind of margins for the next financial year. We are quite confident of that. There are a couple of areas that we need to call out. China is definitely an area where order intake has been slow, and we probably will face some absorption issues in China, but we expect the China recovery to happen, and we are planning for that. We are also doing a couple of restructuring exercises in Europe, especially in our U.K. site, where we have restructured that site to become a reglassing facility. So we've kind of reduced our cost structure there. In the meantime, we have also kind of started our journey of a low-cost source in Eastern Europe. So that's first few orders have been placed to a local supplier there to cut down our cost in Europe. So many of these strategies that we are building will hold and help us maintain margins if not improve. India also, we are going to be working on a transformation project here. So that's something that we are quite hopeful to in terms of cost savings. But generally, in terms of environment, if you had to compare with 12 months ago, I would still say that we are probably looking at slightly a more positive outlook. However, are we out of the woods yet? I would say we still have maybe 6 to 9 months before we see a complete turnaround, right? But the signs are positive. And luckily for us, we've made up some of the shortfall. We've been through the most difficult period with a lot of help through other business lines like our heavy engine business, where we have catered to, let's say, the Adani Group or the Reliance thing is completely different from our traditional markets of chemicals and pharma, right? So -- and then obviously, the services and the systems business internationally has also kept us and kind of made up for some of the shortfalls that has come because of the slowdown in the chemicals and the subsequent impact on the glass-lining business, right? So all in all, I think we've kind of made it through the toughest part. I think now that we have focus on internal cost concerns, I think we are going to be in a strong position to kind of get some of the benefit as and when the market will return. And starting the year today with INR 1,700 crore backlog is not a bad number. Obviously, at the highest point in the last 2, 3 years, if we checked, it would have been around INR 2,200 crores. So that was a bit abnormal. The market went a fire. Somewhere between, let's say, INR 1,800 crores to INR 2,000 crores would be a good number to start with, right? So the focus is definitely on internal cost efficiencies. At the same time, we are being aggressive in the market. And I think if the market will turn a little bit more positive, which we expect it will, I think, there will be a nice uptick in the business.

Okay. Lastly, if I may ask on that, we have given this guidance 2 years back. Obviously, today, the margins are lower, the revenue is in line with the margins. So is there any color which you can throw on that those guidance which we had given 2 years back in terms of the ROCE, EBITDA and the revenue? Revenue is not an issue, but especially on the EBITDA and the ROCE?

Of course, EBITDA INR 630 crores is a tough call at this stage for FY '25 for sure. We have done INR 477 crores. So I think past 2 years have been getting on track, but then, of course, with regard to the new scenario in which we are operating now that seems a bit difficult. We have been -- as Tarak mentioned, we have been focusing on cost optimization and getting up to scale as he mentioned earlier in his enumeration. So -- and of course ROCE is just an outcome of what we have earned. So therefore, it will [indiscernible] up with the EBITDA numbers.

But I think we are quite confident of growing the EBITDA number for next financial year as well. I think we all are aligned that, yes, obviously, it's has been a tough year but we have internal measures, but we've already taken actions, and we believe that we're in a strong position to at least maintain or grow margins, right? So the idea is to definitely grow and the kind of at least in terms of cutting down cost structures where we can and then make the improvements in terms of operational efficiencies, we will definitely work towards that.

[Operator Instructions] The next question is from the line of Pradyumna Choudhary from JM Financial.

Now that we are seeing a growth in our order intake, can we expect -- like going forward, do we expect maybe another couple of quarters of Y-o-Y degrowth? Or do we expect that from here on, at least there will be some recovery in terms of Y-o-Y growth? That's the first one. And for FY '25, like, I understand that you want to come back later with the guidance, but some initial idea on what can we expect in terms of revenue? And like the hope would be more towards recovery in the second half of year, would that be the case?

Yes. Do keep in mind that there is a minimum lead time associated with executing orders and these lead times are different for both India and the international business. So in India, at least, we can book orders till maybe November of this year that kind of gets shift out in this financial year. In international business, I think it's a little bit shorter time cycle. So August would be the latest that we need some of these orders to come in. You keep in mind also the International business has 30% of services revenue coming in, these orders can come in as and when [indiscernible] end of the year, right? So all in all, I think the International business is starting off with a pretty decent backlog. There are certainly areas where we have, I would say, maybe shorter lead times. And in these facilities, we need to kind of be more aggressive and books those orders so that's what we are working on. But generally, in terms of guidance, I think it's better that you wait for the Investor Day. The strategic plan of the company is being worked upon. We had a Board meeting today also where we have discussed it and we will be coming with our external community with a presentation and a deck and our thoughts over the next few years and what we expect the company to be strategically 3 years down the line, right? So I think just give us a couple of months here, and we will come back to you. In the meantime, just in terms of general outlook, I think you can say that next year should see some amount of growth, both in terms of revenue and profitability. And obviously, that is a bit of a conservativeness and if things improve rather quickly, then we could definitely outperform that, right? So I think it is better to kind of be a little conservative at the same time and if the market turns, we will definitely take advantage of that.

All right. Just a follow-up here. So you've mentioned the minimum lead timing for India to be November and for international to be August. This is for the new orders which are coming, you're saying like that's when you start supplying these new orders? Is that thinking...

What I'm saying is if I book an order in November, I can still ship it out by March 31 in India. If I book an order by August 31 in international, I can ship it out by March 31. That's what I was saying.

Our next question from the line of Keshav Mundhra from Guardian Capital.

Keshav, we can't hear you. Can you unmute maybe or...

Keshav, are you there?

No, I think maybe he'll get back in the queue. Maybe we can try the next one.

The next question is from the line of Rahul Agarwal from Himalaya Investment Advisors.

My question is more on the end-user industries that we serve. Do you think that there is significant overcapacity that has built in into the end-user industries, which would imply that the order inflow slowdown that we have seen over the last 2 quarters is likely to be a prolonged one over the next 3, 5 years as you look at it? Or what sort of a rate -- growth rate would you under -- would you expect from our core end-user industries over the next 3, 5 years?

So I can give you some kind of maybe idea in terms of what we are seeing, predicting how these industries will kind of react would be a little bit difficult. But generally, let's break it down first into pharma. So I think pharma, we are already seeing a nice recovery. I think our pharma looks good for the future. And pharma has seen all the pricing pressure in the U.S. kind of -- also kind of reduced. And I think people are investing now. We have good large investments coming in pharma, some of our key customers that outline projects and large projects. I think the contract manufacturing in pharma is also picking up. And some of the companies that we are talking to are saying that, hey, listen, we want to compete with China, and we want to put up these kind of facilities and take them head on, right? So pharma is not looking that bad. I think what has really hit us is chemical and in chemicals basically agrochemicals, which has seen a lot of oversupply. I would not say overcapacity, but I think there's been dumping, overstocking, which has caused some of the kind of slow down. But we think that this can change very quickly, right? So we are already hearing that now in the next couple of quarters is overstocking problem in going to kind of reduce and some amount of the business is going to come back. But do keep in mind, there's always going to be competition from China, and there was a lot of pricing pressure from the Chinese competitor. That's something that I don't know how exactly to play out. But probably it's not something that is very sustainable. But all in all, I think if you ask me, I would say about 9 months before we really see a significant change. So I think the next couple of quarters look somewhat similar. You will see some improvement, but I don't think it will be significant. I think significant reinvestment will probably start maybe early next year.

Got it. So that's very helpful. And typically, what are the replacement cycles for existing capacity that your customers have? Like do these equipment last 10 years, 20 years, how do you think of replacement cycle? And second, from a longer than 3, 5-year perspective, it's hard to say to take guess on where some of the CapEx -- where would the CapEx would probably end up? Would you say high single digits? Would you say double digits? Where would you put that?