Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on the bank facilities of GMM Pfaudler Limited (GMM Pfaudler).

 

The ratings continue to reflect the company’s 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 albeit improving financial risk profile.

 

The group’s business risk profile is expected to strengthen over the medium term post the acquisition of 54% stake in fifteen Pfaudler entities (target entities) in February 2021 which will make the company a market leader in corrosion-resistance technologies, systems and services. Pfaudler entities’ product portfolio and offerings will complement GMM Pfaudler’s existing portfolio and allow it to expand its sectoral bandwidth, explore cross selling opportunities and enhance wallet share with existing customers. The business risk profile shall further benefit owing to access to newer geographies and expected synergies between the parent and target entities. In order to smoothen the acquisition process, company had initiated Project Apollo which identified work streams for capturing synergies across its three pillars – operational excellence, value sourcing and cross selling. The financial risk profile, which moderated marginally owing to sizeable debt addition and pension liabilities, is expected to improve going forward with increased topline and profitability that is likely to further strengthen the debt protection metrics.

 

For fiscal 2021, company recorded revenues of Rs 1001 crore (including revenues for the target entities for February and March 2021) driven by improved performance in Europe, America, and Asia. The revenue momentum has continued into the first half of fiscal 2022 with company recording revenues of Rs. 1199 crore with the standalone Indian entity contributing 31.5% while balance came from international operations driven by healthy traction in India, China and Germany. Overall margins were also healthy at 14.6% during the first half of fiscal 2022 owing to improvement in margins in the international business. Revenue growth is expected to sustain at 10-12% over the medium term driven by improved geographical diversification and stable demand from end-user industries such as pharmaceutical, agro and speciality chemicals.

 

The consolidated financial profile of the company moderated post the acquisition of Pfaudler entities owing to addition of debt and sizable under-funded pension obligations totalling to around Rs. 925-950 crores. Further, the company also completed the acquisition of HDO Technologies Ltd in the heavy engineering segment in first quarter of the current fiscal which entailed additional debt of around Rs. 61.4 crore. However, the impact of aforementioned additional debt on debt protection metrics is expected to be partly tempered on account of company’s low cost of borrowing at under 4% and moderate repayment obligations of ~Rs. 60-70 crore per annum. Also, cash outflow in lieu of pension obligations shall be spread over around 25 years. 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. Consolidated Debt/EBITDA (including pension obligations) is expected to get moderated to below 3 times over the medium term.

 

Company’s liquidity position also remained strong with expected annual accruals of ~Rs 250 crores sufficient to cover repayment obligations and regular capex. Liquidity position was further augmented by cash balance of ~Rs. 250 crore, as on September 30, 2021

Analytical Approach

CRISIL Ratings has combined the credit risk profiles of GMM Pfaudler and its subsidiaries, 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 part of the total debt in its analysis.

 

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 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 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 robust global reach with manufacturing facilities in four continents.

 

Weaknesses:

• Moderate financial risk profile

Financial metrics on a consolidated basis have moderated owing to addition of debt and sizable under-funded pension obligations totalling to around Rs 925-950 crore. Further, the company also completed the acquisition of HDO Technologies Ltd in the heavy engineering segment in first quarter of the current fiscal which entailed additional debt of around Rs. 61.4 crore. However, with greater integration and business synergies, the consolidated profitability and cash flows are likely to improve over the medium term which coupled with progressive debt repayment would strengthen the debt metrics over the medium term. Consolidated Debt/ EBITDA which moderated to 4.8 times for fiscal 2021 post the acquisition is expected to improve to less than 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, Pfaudler International in 2020 and HDO Technologies in 2021. Also, with the aforesaid acquisition, the revenue base for the company has diversified with sizeable contributions expected from systems and services segment. The non-GLE segment contributed about 32% of revenue in the standalone entity in fiscal 2021, 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 result in large working capital requirement. Typically inventory days range from 100-120 days while debtor days remain around 40-50 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 balance, of Rs 250 crore as on September 30, 2021, together with net cash accrual of around Rs 250 crore per annum is adequate to cover the entire capex and debt repayment obligation. Further, liquidity is augmented through the presence of bank lines with low utilisation.

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.

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. The company has 14 manufacturing facilities with 3 in India, 1 in China, 3 in America and 7 in Europe.

 

GMM Pfaudler is listed on the Bombay Stock Exchange and the National Stock Exchange. As on December 31, 2021, the promoter and the group entities held 54.95% stake and general public held the remaining.

 

On a consolidated basis (excluding the acquired entities), for the six months ended September 30, 2021, operating income and profit after tax stood at Rs 1199 crore and Rs 20 crore, respectively, against Rs 341 crore and Rs 46 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators

Particulars	Unit	2021	2020
Revenue	Rs crore	1001	591
PAT	Rs crore	63	71
PAT margin	%	6.3	12.0
Total debt/Networth	Times	2.07	0.04
Interest coverage	Times	20.41	33.15

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Cash Credit	NA	NA	NA	25	NA	CRISIL AA-/Stable
NA	Bank Guarantee*	NA	NA	NA	66.55	NA	CRISIL A1+
NA	Working Capital Demand Loan#	NA	NA	20-Aug-22	52	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	31-Mar-25	45.00	NA	CRISIL AA-/Stable
NA	Letter of Credit *	NA	NA	NA	11.45	NA	CRISIL A1+

*Fully interchangeable with each other

#WCDL is main limit. Sublimit of BG and LC - inter-changeable upto Rs 48 crore. Sublimit of CC - fully-interchangeable. All of these limits are revolving in nature

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Mavag AG	Full	Subsidiary
GMM International S.A.R.L.	Full	Subsidiary