| GMM Pfaudler Limited | ||||||
| Ratings removed from 'Watch Developing'; Ratings reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has removed its ratings on the bank facilities of GMM Pfaudler Ltd (GMM Pfaudler) from ‘Rating Watch with Developing Implications’. The ratings have been reaffirmed at ‘CRISIL AA-/CRISIL A1+’ and a ‘Stable’ outlook has been assigned to the long-term rating.
The ratings action follows the completion of acquisition of fifteen Pfaudler entities (target entities) post receipt of regulatory approvals in February 2021. On August 20, 2020, CRISIL Ratings had placed its ratings on ‘watch with developing implications’, after the company made an announcement regarding acquisition of 54% stake in the target entities across US, Europe, Brazil and China, from the current holding company, Pfaudler UK Ltd.
GMM Pfaudler has acquired 34.4% in these entities by itself, and the balance 19.6% through its wholly-owned subsidiary, Mavag AG. The consideration for the acquisition stood at Rs 205 crore (USD 27.4 million), funded through fresh debt of around Rs 83 crore (USD 11 million) and balance through internal accruals and cash surplus.
This acquisition would consolidate the company’s businesses globally and make it the market leader in corrosion-resistance technologies, systems and services. The business risk profile will be further strengthened owing to synergies and access to newer geographies for the company. However, the consolidated financial profile of the company is expected to get moderated in the near term with addition of debt and sizable under-funded pension obligations totalling to around Rs. 925-950 crores. Further, the company has announced acquisition of the assets of HDO Technologies Ltd in the heavy engineering segment for total consideration estimated at around Rs. 60 crores. This will add to the overall debt levels. With increased integration and business synergies, the consolidated profitability and cash flows are expected to improve going forward, thereby resulting in the strengthening of debt protection metrics. While overall consolidated Debt/ EBITDA (including pension obligations) is expected to be ~3.8 times for fiscal 2021, we expect it to get moderated to around 3 times over the medium term.
However, liquidity is not expected to get majorly impacted as the company together with target entities expected to hold cash and bank balance of about Rs. 215-230 crores and repayment obligation are minimal in the near term. Also cash outflow in lieu of pension obligations shall be spread over around 25 years. Additionally with this acquisition, the net cash accruals of the combined entity is expected to improve significantly over the near to medium term.
CRISIL Ratings will continue to monitor the integration process closely; however we do not foresee any major challenges on that front as GMM Pfaudler and Pfaudler Inc (along with the other entities acquired) have been working closely together for more than 30 years. The companies have been sharing technological expertise with each other for a long time and also supporting each other on operational aspects.
The ratings continue to reflect leadership position in the glass lined equipment (GLE) market and strong technological expertise and market presence of the Pfaudler group in the overseas markets. These strengths are partially offset by limited revenue diversity outside the GLE segment, large working capital requirement and moderate financial risk profile.
For the nine months ended December 31, 2020, the company’s revenue (excluding the acquired entities) grew 18% year-on-year to Rs 543 crore, backed by steady demand from end-user segments, specifically the pharmaceutical sector. The operating margin remained healthy at 20%, driven by a favourable product mix and healthy operating efficiency. The combined entity should sustain its growth momentum and maintain operating margins of 11-12% going forward, driven by stable demand from end-user industries such as pharmaceutical, agro- chemical and speciality chemical despite the Covid-19 pandemic.. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has combined the credit risk profiles of GMM Pfaudler and its subsidiaries, GMM Mavag AG, Mavag AG, and GMM International S.A.R.L. collectively referred to herein as GMM Pfaudler.
Additionally, CRISIL Ratings has treated the pension liabilities as a part of the total debt as part of their analytical approach.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths: * Market leadership in the domestic GLE industry Strong product quality and large production capacities have made the company the market leader in the domestic GLE segment, with a market share of around 55%. It faces intense competition in the small vessel segment from other domestic players. However, the group has a near monopoly in large vessel (with capacities of over 16,000 litre) segment. Smooth integration of the acquired entities along with benefits on account of synergies will be a key rating monitorable.
* Strong technological expertise and market presence of Pfaudler group in global markets The business risk profile benefits from the technological support provided by the Pfaudler group. The company has acquired technology for manufacturing GLE from Pfaudler and has access to the diversified product mix and strong research and development capabilities of the group. Besides, the group also has a strong global reach with manufacturing facilities in four continents.
Weakness: * Moderate financial risk profile Financial metrics on a consolidated basis have moderated in the near term owing to debt and sizable under-funded pension obligations totalling to around Rs 925-950 crores. However, debt protection metrics and cash flow is adequate for the rating category. The capital structure is comfortable, with gearing estimated at around 1.6 times as on March 31, 2021, and same is expected to improve with accretion to reserves and repayment of debt over the medium term. Net cash accrual to total debt and interest coverage ratios are estimated at 0.19 time and 11.93 times, respectively, for fiscal 2021. Net Cash Accrual to total Debt ratio is lower primarily on account of significant under-funded pension liabilities against which cash outflows shall be spread over around 25 years. On account of the acquisition, consolidated Debt/ EBITDA has moderated to 3.8 times for fiscal 2021 as compared to 0.10 times for fiscal 2020. With increased integration and business synergies, the consolidated profitability and cash flows are expected to improve and Debt/ EBITDA is expected to improve to about 3 times over the medium term. Any large debt funded acquisition will remain a key monitorable.
* Limited revenue diversity Operations are concentrated in the GLE segment, with limited diversification in other segments. The company has been making attempts to diversify into non-GLE products both organically and inorganically through acquisition of Mavag AG in 2008 and HDO Technologies in 2021. Also, with the aforesaid acquisition, the revenue base for the company has diversified with sizeable contributions expected from systems & services segment. The non-GLE segment contributed about 32% of revenue in the standalone entity in fiscal 2020, and its share is expected to improve gradually over the medium term. Further access to newer geographies and improved presence in global markets, post the acquisition will also help offset challenges in the domestic market.
* Large working capital requirement The long lead time in production and high cost of specialised raw materials lead to large working capital requirement. Gross current assets were 190 days as on March 31, 2020, with average inventory turnover of up to 120 days. Given the long lead time in order processing and delivery, operations may remain susceptible to inventory pricing risk and potential delays by customers in taking deliveries. |
Liquidity : Strong Healthy cash surplus estimated at around Rs 215-230 crore as on March 31, 2021 together with net cash accruals of around Rs 150-160 crores per annum is adequate to cover the entire capex and debt repayment obligation over the next 2-3 years. Further, liquidity is augmented through presence of unutilized bank lines wherein average utilisation has been low in the past. |
Outlook Stable GMM Pfaudler should continue to benefit from its strong market position in the GLE segment and technological support from the Pfaudler group. The company is likely to maintain a healthy financial risk profile through steady cash accrual and benefits of synergies flowing in over the medium term. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company GMM Pfaudler was originally incorporated as Gujarat Machinery Manufacturers Ltd (GMM) in 1962. The company manufactures GLE, heavy engineering and proprietary products. In 1987, Pfaudler Inc, the world leader in GLE and glass-lining technology, acquired a 40% stake in the company, and increased its stake to 51% in 1999, following which GMM was renamed as GMM Pfaudler. The parent of Pfaudler Inc, Robbins and Myers Inc, was acquired by National Oilwell Varco, Inc (NOV) in February 2013; NOV sold its stake in Pfaudler to Deutsche Beteiligungs AG (DB AG), a German private equity firm in December 2014.GMM Pfaudler's products are used primarily in the chemical, pharmaceutical and allied industries. Its facilities are located in Karamsad and Ahmedabad in Gujarat, and Hyderabad in Telangana.
GMM Pfaudler is listed on the Bombay Stock Exchange and the National Stock Exchange. As on March 31, 2021 the promoter and the group entities held 54.95% stake and the general public held the remaining.
On a consolidated basis (excluding the acquired entities), for the nine months ended December 31, 2020, operating income and profit after tax (PAT) stood at Rs 543 crore and Rs 69 crore, respectively, against Rs 459 crore and Rs 60 crore, respectively, for the corresponding period of the previous fiscal. |
Key Financial Indicators*
*CRISIL Ratings Adjusted numbers (includes only GMM India and Mavag) |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*Fully interchangeable with each other |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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