GMM Pfaudler Ltd had another subdued quarter mainly due to high capacity utilization and the loss of business due to lockdown impacting the entire supply-chain. I will explain more about the Q4Fy20 performance in the blog “GMM Pfaudler Ltd- Q4FY20 Analysis”.
I also have written one more blog on the company :
GMM Pfaudler Ltd- Q4FY20 Analysis
GMM Pfaudler Ltd- Q4FY20 Update
GMM Pfaudler Ltd’s struggle with growth continued for the third consecutive quarter after 8 quarters of consecutive growth(Quarter on Quarter). The under-performance was mainly on account of capacity constraint in the 2 of the 3 quarters(to meet the increased order of its products), though an additional gas furnace was added in December 2019 to cater to the increased demand. But then coronavirus stuck. Company lost more than 10 days of work in Q4FY20 and revenue loss of almost 30 crores.
For the fourth quarter i.e. Q4FY20, the Consolidated revenue declined by 5% YoY(Year on Year) and 15% QoQ(Quarter on Quarter). Profit after tax(PAT) tax fell by 7.5% (YoY), but QoQ the profit fell by 47%. The strong demand for the company’s hero product that is Glass lined equipment(GLE) continued{63% of sales for Q4Fy20}. The EBIT for GLE segment reached a high of 26.3% for this quarter.
The company has a order book of ₹351 crore as of 31st March 2020 compared to ₹253cr as on 31st March 2019 a growth of about 40%. This ₹351 cr order book is evenly distributed across the 3 categories of business i.e. Glass Lined Equipment(GLE), Heavy Engineering & Proprietary products.
Company also have added ₹60-70 cr of added order book in the 2 months of Q1FY21.
Heavy Engineering is also seeing a strong traction with a order book of ₹86 cr compared to 28 cr on a YoY basis.
You can look at the financials here: Link
GMM Pfaudler Ltd- Quarterly segment wise result
GMM Pfaudler Ltd - Quarterly segment wise result
GMM Pfaudler Ltd- Impact of Lockdown
Facilities was shut from 23rd March officially due to national lockdown declared by the govt but I assume it would be working on reduced manpower from the announcement of Janta Curfew on 21st March. The company lost about 10 days of work in Q4FY20. And 10-15 days of loss of work is significant for any manufacturing company more so when they have so much demand to meet.
The company said that they could not do the shipment for a heavy engineering order procured from Pfaudler Inc network due to the lockdown.
Eventually losing out 30cr of revenue for Q4FY20. And that led to the loss in the heavy engineering segment. But as far as my knowledge of accounting goes, if the product is not sold, the cost is also subtracted from the P&L.(Not sure 100%)
Also, in Q1FY20, they already have lost almost 20 days of work due to lockdown. And then the facilities started to open with reduced manpower and many of the laborers were not willing to come initially because of the govt’s announcement that the employees should be paid even if the factories were closed or they donot come to work. But gradually things have started to normalize. Still things have not reached the capacity utilization of pre-covid levels.
Also, since the plant location is far from the city and laborers are hired locally, they have not faced the severity of the impact of lockdown.
GMM Pfaudler Ltd- Production Capacity
As of now the company has furnace capacity to generate 2000 Equivalent unit(EU) of equipment. Since 2018, the company changed the way of measuring output from number of count of equipment to the effort that goes on making one standard sized unit.
These furnaces were running at 90%+ capacity i.e. full utilization. The company added one more gas furnace in December 2019, which would take the total manufacturing capacity to 2300-2400 EU. That would have gave some relief to the capacity constraint but then the entire business was shut due to COVID.
The company has placed orders for 2 more gas furnace from Japan which would add around 500 EU to the capacity taking the entire capacity to 2700-2800 EU. Expecting to receive in June-July and start functioning from September 2020. But based on the ground level situation across the globe, I would think there would be some delays.
GMM Pfaudler Ltd- Q4FY20 Analysis
GMM Pfaudler Ltd- Plan to setup new facility in Hyderabad
The company is in talks with Telangana govt to setup a greenfield(new) facility in Hyderabad targeted at the proposed Pharma city. According to the management, Telangana Govt will announce the project in first week of June 2020, i.e. on Telengana Foundation Day.
According to GMM’s MD Tarak Patel, in the conference call, pharma companies have placed their bids for land requirement. Land allotment has still not started. Currently, Roads are being built.
Capital expenditure(CAPEX) for this project will be ₹50cr and will be met through internal accruals.
The management is waiting for something to start on the ground before they put up the facility. With this new capacity they will cater to the new pharma plants that comes over there.
Pharma companies require smaller sized equipment compared to larger sized equipment required for chemical companies. Hyderabad unit will have capacity for smaller equipment. In case of requirement of larger equipment, it will be manufactured in their Gujarat based facility and then shipped.
This plant is still a year or two away.
GMM Pfaudler Ltd- Future Prospects
The demand for the companies’ GLE products will be driven from domestic specialty chemical companies(SRF, Aarti Industries etc) and agri-chem(UPL, PI Industries etc) which are looking to aggressively expand.
Chemicals including Specialty chemical & Agri-Chemicals continue to be the key drivers of the business with 55% contribution to revenue compared to 35% of Pharma.
Indian Govt recently announced that they are considering banning of 27 key agro-chemicals all of a sudden in the midst of an economic crisis situation in India. If that is implemented, it will be quite damaging not only to the industry but to farmers as well.
GMM gets good business from Agri-chemicals. In case it is implemented, it will dampen the industry’s growth momentum.
In terms of Pharma(Laurus, Aurobindo Divis, Dr Reddy’s), the expected demand will be from Domestic pharma companies who are looking to expand or create backward integration to reduce their China dependence.
Some pharma related development
Because of the stand taken by India & China regarding the decision to restrict the sale of critical pharma products on account of COVID-19 have made US as well as European countries very alert and caught them off-guard. Though it was lifted after the strong reaction by the importing countries mainly US.
The management said in the conference call that they expect some pharma business moving out of India & China to the US and EU. That is a bad news given that US is the most free market for pharma companies and all companies want to do business in US because of the high margins and large market size. In almost all countries there are price caps on medicines but US it is open for the company to decide and the competitors to compete.
Also, due of the long lockdown, they are seeing the interest of companies waiting on the sideline to enter India waning.
GMM Pfaudler Ltd-My take
Based on my understanding of management commentary, they are expanding the capacities gradually implying that they do not want to create oversupply which will kill the pricing power of the company.
Although the management have repeatedly assured that things have been normalizing but I think Q1FY21 will have just a fraction of revenue compared to the earlier quarters. In addition to reduced manufacturing, there will be lot of supply-chain related issues which will take time to settle down completely.
Also, the MD asserted that they will be continue to grow over FY20 and the loss business of FY21 first half will be compensated by the 2 new furnace that they are expected to come by September. There is lot of ifs and buts over there, let us watch how that pans out.
A lot of things have changed due to the prolonged lockdown caused by coronavirus & has a severe impact on the economy. Another factor that many of us are not factoring in is the logic that due to lockdown which has caused drop in demand in some of the segments that its clients cater to(mainly chemicals) as well as liquidity crisis(Credit sales has almost stopped) in the entire business ecosystem, some of the orders may get deferred/postponed/or even cancelled. Some of the concalls I have attended(Eg. jubilant lifesciences, etc), almost all the management is looking to conserve cash as their topmost priority.
Coming to the performance, Despite underperforming for 2 consecutive quarters, the stock price did not fall much implying that it is still a darling of market. Continues to be richly valued at Price to Earning ratio(PE) of around 75(standard is around 20x-30x) and Market Cap to sales ratio of 9 times(standard is around 2x-3x) as on 28th May 2020. When valuations are so high, the probability of things going wrong are higher than things going right.
At the current valuation almost all near-term future positives of the company have been factored. Please be cautious of such stocks, if the result is not back on rapid growth track in the next couple of quarters, it might lose its favored position. Also, once the performance of smaller company reaches certain level, the ability to further improve or maintain it becomes much more difficult.
The management’s very strong commentary on the future business prospects seems to held the share price up as of now.
Further reading: