GMM Pfaudler Limited (GMMPFAUDLR.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to GMM Pfaudler Limited Q2 and H1 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Dhaval Rajput from GMM Pfaudler Limited. Thank you, and over to you, sir.

Thank you, Shifa. Good evening, ladies and gentlemen. A very warm welcome to all of you to the Q2 and H1 FY '26 earnings call of GMM Pfaudler Limited. The earnings presentation was uploaded on the stock exchanges today 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 CFO, Mr. Alexander Poempner; our CTO, Mr. Gregory Gelhaus; and our Compliance Officer, Ms. Mittal Mehta. 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 and also on our website, including all 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 several risks and uncertainties. The actual results could materially differ from those in such forward-looking statements. I would now hand over the call to Mr. Tarak Patel to provide an overview of the performance. Over to you, Tarak.

Thank you, Dhaval. Good evening, everybody. Let me start off by giving you a quick update on the performance highlights of the quarter. Our revenue stood at INR 902 crores, up 14% quarter-on-quarter and 12% year-on-year. Our EBITDA for this quarter is up 20% quarter-on-quarter and 27% year-on-year and stands at INR 122 crores. Our EBITDA margin currently is at 13.5%. The revenue for H1 FY '26 is up 7% year-on-year and the EBITDA is up 21% year-on-year. Order intake was strong this quarter with INR 878 crores of order intake and the order backlog currently stands at INR 2,146 crores. The acquisition of SEMCO has also been completed this year and we have consolidated SEMCO for this quarter as well as consolidated the backlog that SEMCO brings along with it. Overall, just to give you a little bit more flavor in terms of what's going on, our India business has performed quite well, both in terms of revenue and in terms of order intake. Like I mentioned to you in the last call, we expect India to have a good year this year. And with the order backlog that we currently have, which is well diversified across our 3 business lines, which is glass line, non-glass line and heavy engineering, we do see the India -- the business doing quite well for this financial year. In the international business, Europe is still slow when we talk about our traditional industries of chemical and pharma. However, we are seeing some kind of uptick when it comes to newer industry segments, especially for our systems business, where we did receive a very large order last quarter in a new sector that goes into acid recovery as well. That is a play that we see that is growing more and more, and we are currently negotiating a few large contracts in the similar space where we use our acid recovery systems to produce nitric acid. In terms of the mixing business, with SEMCO coming on board, that opens up a new growth area for us in South America. There are industries there that are currently growing quite rapidly, namely metals and minerals, mining and water treatment. SEMCO has a strong order book and a strong brand name in the local market, and we expect SEMCO to have a nice growth going forward over the next few quarters. The American market, the U.S. market has seen a little bit of improvement. Obviously, there is a Make in U.S. initiative. There is a lot of contracts that have been signed recently, that plan of investment in the U.S. If some of these investments in chemical and pharma materialize, that should help our U.S. business as well. So all in all, I think that we are in a good situation as of right now. It gives a good visibility for the year. However, there is obviously a lot of work to be done. We are working on internal improvements, operational improvements, financial improvements. We are thinking about strategy and long-term strategy, especially when it comes to our focus on diversification. So all in all, it's part of a journey. We are obviously on our way and the market does seem to support it. And hopefully, over the next few quarters, we can see additional order intake and growth for some of the markets which have not been growing as quickly as we would like. I would now like to hand over the call to Alex, our Global CFO, who will take you through the numbers in more detail.

Thanks a lot, Tarak. Hello, everyone. In addition to the financial highlights that Tarak already presented, I would like to touch on 3 key areas. First is on the consolidation side. We have completed the 2 acquisitions and considered first-time consolidation of SEMCO, the latest acquisition in Brazil, as well as the JV in Poland. You will see it in the books. We acquired SEMCO for a total purchase price of USD 18.5 million, which corresponds to INR 162 crores, and the investment in Poland was PLN 11 million, which is roughly INR 25 crores. You will see in the accounting that both acquisitions have been accounted for as goodwill only, and we will conduct, as usual, the PPA in the next 12-month period and we'll adjust the goodwill accordingly. The acquisition of SEMCO due to the size was funded partly by external debt. We draw down an acquisition facility of EUR 10 million. The rest of the purchase price was financed by internal cash. Another point is the working capital. As you have seen, it increased in H1 versus the end of the last financial year. This is especially driven by higher inventory, especially higher inventory in India. This is the basis for our expected growth. And therefore, we see this increase in this number. However, in the next half year, the remainder of this financial year, we expect an improvement again. The other increase in working capital you'll see on the receivable side, where we also work on and we are positive regarding the outlook till March 2026. Finally, compared to last quarter on the FX front, in the last quarter, we faced this significant depreciation of the USD versus the euro, which caused a big financial loss, and therefore, also increased our tax rate. In this quarter, the euro-USD FX rate did not really change significantly and it directly has a positive impact on our results. And therefore, you also see a significant improved tax rate on the international business. This is so far from my side. Thanks a lot. We are now open up for questions.

[Operator Instructions] The first question is from the line of Jaiveer Shekhawat from AMBIT Capital.

Tarak, first question, could you call out how much is SEMCO's order backlog in the overall backlog that you reported?

Yes. We have USD 20 million in the backlog, USD 20 million.

Understood. So when I look at your overall international order intake, I mean, is recovery still expected to be possibly later down the year? Are you seeing any green shoots there? Because we have seen a considerable recovery on the India business. How is the situation on the international side? I understand on the chemical side, it's not still picking up, but possibly the rest of the industry.

So maybe I'll add and then I'll jump in here and then Thomas can add a little bit about what he' seeing in Europe and the U.S. But as I mentioned, the defense play that we've been kind of participating in over the last maybe 6 months or so seems to be gaining further traction. We currently have an opportunity close to about 10 million currently in Eastern Europe as well, very similar to what we are currently supplying the large acid recovery plant that we got. We have another very large contract that we are currently discussing with. We also have some opportunities in the U.S., where the client has signed engineering contracts, which makes -- that gives us visibility of the order intake coming in shortly as well. So all in all, the systems business and the non-glass line business has done quite well. Europe, as I mentioned, has been slow and glass line particularly has been a bit slow. We are seeing some improvement in the U.S. But Europe, from a pharmaceutical and chemical perspective, investment is still being delayed. Decisions are still taking time. I think there is still a lot of uncertainty surrounding global trade and geopolitical issues. But on the flip side, on the bright side for us, luckily, there is a whole different market that we can currently cater to. These are long contracts. These include a lot of internal as well as external kind of equipment. But again, it's the process technology that we have in-house that gives us the ability to kind of cater to this, right? So these are quite critical in nature, quite -- it's not that anybody can come in and supply an acid recovery plant for such a large contract, right? So we have that capability, and hopefully, we'll be able to build that. And as we continue to do so, we hope that some of the other decisions which have been held back for a few months will also materialize. So we are being aggressive in the market. We are trying very hard, but the market also needs to support. Thomas?

I mean there's not much to add to this. This really describes the situation in Americas as well as in Europe. And as Tarak already said, we are very clear that we started diversification and process engineering a couple of years ago as part of our strategy and seeing the successes now in those times. However, we are seeing a little bit of uptick in service activities as well as in Americas and Europe. This is clearly a sign that our customers are getting more busy than they had been in the last quarters. And that makes us to believe that the increase in order decisions will come for us.

Sure. On the international business, again, just more on the pharma side, given the amount of investments that are being put in on the GLP-1 or the semaglutide side, and we've also seen some of the other pharma index players also do well, especially in the international geographies. How is that portion of your business doing for you?

Semaglutide, GLP-1s are very interesting business for us right now. We did see some investment a few years ago in Europe for these products. We're seeing more actually traction here in India for semaglutide and peptide manufacturing. So that's really become the buzzword here in India. We are currently executing a very large contract for a peptide manufacturer in the south of India. And with that, we have a lot of opportunities, open opportunities where we are seeing that a lot of these pharma companies are looking at peptides in a very large manner. So that's definitely an interesting play for us. And we have technology available for this play because of our association with MAVAG, our subsidiary, and that really helps us kind of be slightly different from competition. So that's been a nice story for us in India. Internationally, yes, of course, there is semaglutide play. There could definitely be more investment. Where this investment happens -- I know currently for sure there are large global players like Bachem and stuff who are looking to add investments. We are currently talking to them. I'm sure Lilly as well. Lilly, we received some orders recently from the U.S. for this. Is it specific to semaglutide or not, I don't know, but Lilly -- probably it will be something to do with Mounjaro or one of the new generation GLP drugs, right? So yes, I think this is going to be a big business for the future. I think a lot of people -- and I've done a lot of research on this. I think that it is definitely going to be something that in future a lot of people will be consuming for better health and longevity. So yes, I think that's a play and we have the technology to tap into this play as it kind of grows and progresses.

So rjust a clarification. So your reactors, glass line reactors will still be used wherever there's semaglutide manufacturing that's happening. Is that a fair understanding?

It's not glass lined. It's a filtration equipment. It's called an HPPS reactor. It's a technology that we had in-house and we've been having for quite a few many years now, and that's the technology that we are selling here in India now and also internationally.

Understood. Understood. On the India business, it's interesting to see the share of systems and services that seems to be increasing in the order intake. Could you call out what's happening here? Again, here, in India, as well the share of systems is increasing. And why is that?

So I think systems in India has kind of been working on quite a few things over the last few years. We've been kind of building a test center very close to our facility in Gujarat. We've been actively pursuing new product development, right? So over the last few years, we have launched some new products that have actually been quite popular in the Indian market. We've replaced some existing products that were only -- could only be procured from Europe. So that has been a nice kind of an opportunity for us. And I think more and more people today, they don't want stand-alone equipment. So when you have equipment like in the peptide case as well, they want you to kind of put instrumentation, automation, glove boxes and really give them the whole complete system, right? And we have that capability in-house. We have a strong engineering team here. We have a global engineering center as well. But we can really add these kind of technologies very quickly along and as part of our equipment and really give them a complete solution rather than just the equipment and then they need to worry about stuff later on, right? That's been kind of strong. What we also did quite well last quarter was started building a backlog for our heavy engineering business. So there was some large orders received in heavy engineering. And currently, we have very large opportunities that we believe that we are very, very strongly placed for in the nuclear kind of industry here in India. So that's been one of the strategic kind of diversification plays where we want to kind of enter into, and we've been working quite hard to get our names registered. And because of our association with HDO, the company that we bought in Vatva, we got some of these qualifications along with that acquisition, right? So that's been a nice growth area. And we do expect order intake from this industry at least in this quarter as well. So we are quite bullish there. So India looks strong across the 3 business lines really. But I think what's also nice is that this quarter we saw agrochemical coming back in a large way, right? So 2 of our big agrochemical clients after really an 18-month –- 24-month sabbatical have now started investing again. So it's not back to the original heydays when they were adding plants every 6 months, but there is definitely some amount of investment that's coming back. Hopefully, that can sustain and help us kind of bring the glass line business and grow the glass line business.

Sure. Last question on your balance sheet side...

Mr. Jaiveer, I would request you to rejoin for a follow-up. [Operator Instructions] Next question is from Koushik Mohan from Ashika Group.

Sir, [indiscernible] the same question. I just wanted to understand from last year to this year, our goodwill has grown by INR 200 crores. Can you give some clarity what is this exactly? How much for this acquisition, recent acquisition? And what is this accounting, like INR 200 crores accounting?

This is Alex. If I understood correctly, you asked regarding the INR 200 crore increase in goodwill. This is due -- mainly due to the SEMCO acquisition. So as of now, we have considered everything in goodwill. We will conduct the PPA now in the following or up to 12 months, and then the goodwill will be reduced. But the increase is just coming from SEMCO and a little bit from the Polish acquisition.

Okay. And this will be depreciated over the next 5 years. Is my understanding right then?

No. What we do, with all the previous acquisition as well, we conduct a purchase price allocation and then we will allocate part of the value to, for example, customers or technologies and the remainder will be the goodwill. And for the goodwill we do on a yearly basis, as already done now, a goodwill impairment test. The goodwill number will reduce in the coming 12 months.

Next question is from Kunal from Sunidhi Securities.

My question is that just recently U.S. Biosecure Act was passed in both the houses and it's due to become a law. So what traction do we see in the next 2 to -- let's say, 2 to 3 years and then the next 5 years in terms of reshoring by the U.S. pharma companies for this?

So you're talking about the Biosecure Act. So yes, that has been passed. Like I said -- and I wrote that in my -- in our press release as well that we mentioned that the U.S. could see some investments coming in from the Make in U.S. initiative, the Biosecure, the tariff situation. Currently, are we seeing a lot of movement on the ground? Probably not. I think we probably will have to wait a few months for probably some of this to materialize. We've had requests once -- maybe in the last couple of months once or twice for U.S.-made equipment to be supplied quickly for a U.S. site, where they clearly mentioned that only U.S. equipment would do. And if that were to materialize, that would definitely help our U.S. entity because we are one of the only manufacturers of glass line equipment in the U.S. in terms of a large scale and size. So that would definitely be beneficial. We have another business in the U.S., which is obviously the Edlon business. But that's more semiconductor. So I don't think it has too much of a play in pharma. But for our glass line business and our filtration and drying and mixing business, yes, there could be an opportunity if investment were to increase over the next few quarters in the U.S.

Okay. And my second question is that the unfunded pension liabilities increased by about INR 30 crores over FY '25. So what is the reason for that? I think when we had acquired [ Hydro ], I think about INR 430 crores around was the pension liability, which reduced to INR 285 crores. Now it's increased to about INR 312 crores. So what is -- and what -- how do we forecast this going ahead?

So yes, if I understood correctly, you discuss about the pension liability that we have on the balance sheet. There we have usual -- only 2 impacts because the plan itself is closed. So we have an impact due to changes in the assumption in the actuarial report and also some FX impact. But these are the only 2 impacts. It will vary just with -- yes, mainly the FX and the interest rates, but nothing more. So there will be no additions coming in the future.

Okay. And my final question is what is the percentage of services in the order backlog on the consolidated level, services segment?

So services won't be a very large number because services are very fast moving and they are just -- you get stuff and you kind of execute that within the quarter. But I would say at any given time, maybe 10% of the order backlog would be around services, yes.

Yes, I would agree. Services is really -- it's a fast-moving business. Therefore, really in the backlog, it's only a limited period. It's fully different for the technologies as well as especially for the systems. Systems business, long running projects, therefore, it makes a big chunk out of the backlog. For services, it's not, no.

And the average order execution cycle would be about 8 to 9 months?

Sorry, which execution cycle?

Average execution order book -- order backlog execution would be about 8 to 9 months?

So it depends. So a system order like the one that we received in Eastern Europe is going to go on for 3 years. Glass line equipment in India goes in about 14 weeks. In the international business, glass line goes in maybe 6 to 8 months. So everything is different. Agitators go much faster. So it changes. It's not one number for all product lines. So it kind of changes. But services generally would be shipped out within a 6-week period because services need quick replacement. The people are waiting for that. So I would say even faster.

And have we hired any new person for the India business because the employee cost has increased?

We have not employed new people, but as part of our tax optimization strategy, we are doing internal kind of recharges and stuff like that. So that's part of our optimization strategy and –- yes.

Yes. In fact, what we are doing, we are working more on the integration. And in line with the integration, there are also some costs which we now see in India. And this, of course, from a group perspective, it will help us. It will help us especially from the profit. And -- but as Tarak said, we did not hire any new people. So this is normal...

Not like any new people. I don't think we had -- I think we can say that any new senior people in the management team, yes.

[Operator Instructions] Next question is from Sagar Shah from [ Spire ] Private Wealth Management.

First of all, congratulations to the team of GMM Pfaudler for delivering better results actually. So my first question, sir, was related to our especially performance on the international foray. Now global situation is still under uncertainty because of the U.S. tariffs actually. So going forward in H2, are the -- does the uncertainty looks to prolong there? Or do you think that there will be some sort of improvement which we saw in Q2 in terms of new order intakes as well as -- in the non-glass line technologies, especially? So what do you think of H2, especially for the -- under such uncertainty?

So I'll start and maybe we'll look at each market separately. But again, we can't paint the same brush for the whole international business. There are definitely segments which are growing. Our Edlon business in the U.S. driven by semiconductor is growing. Our SEMCO business in Brazil now driven by metals and minerals, water treatment is growing. In Europe, we have businesses in acid recovery and systems that are growing. So it's different, right? So I think chemical and pharma in Europe is slow. Maybe, Thomas, you might want to add in terms of Germany, the Western Europe countries, what are you seeing there?

We are seeing a few differences in Europe. If you look at Southern Europe, Italy, Eastern Europe, we see a better demand, higher demand than in other regions. Germany is rather slow in demand and the economy is rather slow. There are still some uncertainties. And if you look to China, China is a totally different ball game. China is still one of the largest or the largest chemical industry markets. The demand has been slow for a while there since there's overcapacities that are being used up, and we expect the market to come back by next year. But rather slow at this time.

So I think what has helped us over the last maybe few quarters also, like while we've seen a slowdown in our core business of glass line and our core industries of chemical and pharma, I think our diversification strategy, our ability to cater to newer markets and newer industries has helped us make up some of the shortfall. And I think that's been an interesting learning for management as well. And I think as we go and move forward, you will see obviously new verticals that will add obviously a lot more kind of growth to the current portfolio that we have.

Okay. Got your point, sir. Now my next question was related to our 2 acquisitions actually. One was in Poland and second one recent with SEMCO for industrial mixing business. First was in Poland. So now on the Poland, the acquisition is completed, the joint venture is signed. So what have you thought of especially on the stainless steel reactors to produce there? What is your thought process regarding to expand in Poland? And second was on the SEMCO. Now on the SEMCO, you've got the South American business over there. So basically, we have another 3 companies also in industrial mixing business. Now this is the fourth one. So first of all, any color on how do you integrate all these 4 companies? We already know what's your thought process. But now going forward for the fourth acquisition also. So what kind of -- is there any new product introduction in the mixing business that you are thinking? What is your thought process regarding these 2 acquisitions now?

Yes. So good question. I think Poland has been a strategy for quite some time. Eastern Europe has been our strategy in terms of improving operational efficiencies in Europe, especially Western Europe, where we have 2 sites in high-cost geographies. We have MAVAG, obviously in Switzerland and Mixel obviously in France. So Poland is a kind of a supplier or a kind of a dedicated workshop for these 2 companies. And over time, we would look to move more and more production to Poland. We are already full up in Poland with orders from both MAVAG and Switzerland. The first few orders that were executed were executed at a very high-quality level, and both the Swiss and French counterparts were very happy with that additional kind of facility and footprint that they now have. So I think over time, you will see that more and more fabrication work will move to lower-cost geographies, and that's a clear direction that we are working towards. At the same time, we do want to maintain our ability to be local. So we will have some amount of testing, services, engineering locally that's still going to be required. But from a production and manufacturing setup, we definitely want to look at a better cost structure. India also kind of supports our Swiss and our French subsidiary. We do export directly for MAVAG into the U.S. as well because we have the ability and the stamp for U.S., ASME stamps, which obviously is more difficult from Europe. So that's something that's already we're doing. And I think we have enough of work within the group where we have different options when it comes to where equipment can be manufactured. SEMCO, again, a very good, strong company in South America. The focus is really growth. I think today, we have a very comforting business in South America, where the order backlog is basically a year worth of order backlog that they have. I know that currently, they are negotiating large opportunities, which will add to this backlog as well. And I think the investment in both metals and minerals, water treatment and mining over the next few years will continue to grow. So that's a nice option. But coming back to your point about how do we combine this. So during our recent visit to SEMCO, we did realize that they have a few equipment which we can actually bring back to Europe and to India. They have these new dryer systems and stuff like that, right? From a strategy perspective, there is an entire strategy being built around these 4 mixing platforms. We definitely want to combine them under one umbrella. There's a rebranding strategy going on. We want to bring the product portfolio under one roof. We want to kind of have these portfolios divided by industry segments that can be sold across the world, right? So we can replicate some of this. So the idea was when we bought these 4 companies to not buy the same technology. Each one has their own area of expertise. So let's say, SEMCO is metals and minerals and mining, MixPro has more chemicals, while India does more pharma and then Mixel is kind of biotech and things like that, right? So they kind of complement each other quite well. And the idea is to really grow this business. I think from a global perspective, I think we are now –- from a -- I think from an acquisition and global perspective, the four -- I think the world is now completely covered. Now we need to just go out and get market share and win orders under our new kind of created umbrella, of this mixing umbrella.

Okay. So if I just can squeeze one more. What will be the drivers –

Mr. Sagar, you may rejoin the queue for a follow up.

It's a follow-up on the existing question.

Next question is from Bharat Sheth from Quest Investment Advisors.

Sir, my first question like what -- semaglutide we are talking a lot. About a couple of years back, process flow industry process were -- also a lot of talks were going on. So can you give a bit color how that process flow, which saves a lot of energy? So how we are placed and what are the happening? And do we have old technology like including glass line reactor that we have for chemical business?

So okay. So there are 2 different things. One is semaglutide is a real story because there is consumption here. There is more and more people using. I think last quarter or last month, Ozempic was the best-selling drug in India. So it is picking up. So that is going to grow for sure, 100%, okay. Coming back to process flow technologies, there's a lot of talk. There has been a lot of talk. But first, it became a buzzword. But there is definitely a move. And we have actually created an entire flow chemistry setup in our facility in Karamsad where customers can come and do trials with us. So we made a complete chain of equipment that has multiple different applications, reactions, filtration, drying that can be tried out. So we are definitely getting ready. Has it taken up in a big way? Probably not. But there will definitely be specific chemical reactions within chemical plants that can move to flow chemistry. Will all of it move? Probably not. But there could be specific areas where they could definitely use flow chemistry. And this is something we are working along with NCL and a U.K. firm as well to see what are the kind of new technologies we can develop. And part of this consortium, we also have other chemical companies. So we are kind of working together with industry, with customers, with experts as well and scientists to try and see how much these things will grow. So it's growing, but there are specific applications. But otherwise, I think that will still continue. And flow is, obviously, something for the future.

Second question, sir, now a lot of, I mean, from this generic pharma, the way it is happening, moving to the biotech side. So how is the -- we are placed with [Technical Difficulty] more colorful [Technical Difficulty].

Yes, I think it's different. I think biotech is a specific area, biosimilars and stuff like that. Chemical and pharma, I think pharma -- the big generic pharma will still need large plants, large capacity. You look at the generic players in India, they're adding capacity. So that's going to continue. Volume generic API, that will continue.

Next question is from Mayank Bhandari from Asian Markets Securities.

Sir, I just wanted to understand as you're talking about a revival in the domestic market, how much of your order book pipeline would have grown in the last 6 months? Or is there a number that you anticipate...

So I think last quarter, India order book numbers, I think we are about INR 90 crores, about INR 100 crores higher in order book this quarter versus previous quarter. If you look at the India order book trend, they are definitely on an upward trajectory. Glass lining has still been slow. HE and obviously the other businesses have done quite well. But some amount of glass lining, like I mentioned, has come back in chemical and specifically agrochemicals. So we are seeing some investment. Is it back to putting up 3 plants in a year? Not yet. But it's coming back slowly.