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 further strengthen over the medium term post the acquisition of 100% stake in 17 Pfaudler entities (target entities) which has made 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 has moderated marginally post the acquisition 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 2022, company recorded revenue of Rs 2541 crores driven by improved performance in Europe, America, and Asia. The revenue momentum has continued into the first half of fiscal 2023 with company recording revenues of Rs 1,519 crores majorly driven by international operations and healthy traction in India, China, and Germany. Overall margins were also healthy at 13.0% during fiscal 2022 owing to improvement in margins in the international business. Revenue growth is expected to sustain at ~13-15% over the medium term driven by improved geographical diversification and stable demand from end-user industries such as pharmaceutical, agro and specialty chemicals.

 

The consolidated financial profile of the company moderated post the acquisition of Pfaudler entities owing to addition of sizeable debt and existing under-funded pension liabilities (though reduced). The overall debt levels including pension liabilities are expected to be in the range of Rs 1000-1050 crores in fiscal 2023. However, the debt protection metrics are expected to remain healthy for the rating category. 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.

 

Company’s liquidity position also remained strong with annual accruals of over Rs 250 crores, sufficient to cover repayment obligations and regular capex. Liquidity position was further augmented by cash balance of Rs 236 crores, as on September 30, 2022.

 

GMM Pfaudler (GMMP) acquired the balance 46% stake in 17 Pfaudler International entities through GMM International S.a.r.l (GMMI) from its exiting owners (DBAG Fund VI: 20% share; Millers Concrete Technologies Ltd: 26%) for a total consideration of Rs 344 crores. Rs 194 crores payable to Millars Concrete Technologies Private Limited (Company held by the promoters of GMM Pfaudler i.e., Patel family) was settled through issuance of fresh shares of GMM Pfaudler worth Rs 170 crores while balance Rs 24 crores was paid in cash. Rs 150 crores paid to DBAG Fund VI was settled in cash.

 

The cash component worth Rs 174 crores was funded via a structured debt with a long tenor and stepped-up repayment schedule. The transaction has been structured in this way to ensure leverage at GMMP remains at a comfortable level.

 

Post the aforementioned acquisition, the group shareholding structure has gotten simplified with GMMP ultimately holding 100% stake in the 17 Pfaudler International entities through GMMI. Equity stake of Patel family in GMMP has increased from 22.3% to 24% as on December 31, 2022. This is expected to increase to 25% with the completion of inter-se promoter transfer from DBAG (announced in December 2022), subject to regulatory approvals.

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 global GLE industry: Strong product quality and large production capacities have made the company the market leader in the global GLE segment, with a share of ~40%. It faces intense competition in the small vessel segment from other players. However, the group has a near monopoly in large vessel 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 16 manufacturing facilities in four continents.

 

Weaknesses:

Moderate financial risk profile: GMMP has a total debt of Rs 1009 crores as on September 30, 2022, which includes pension liabilities worth Rs 243 crores. Further with the acquisition of GMMI, the overall debt levels including pension liabilities are expected to be in the range of Rs. 1000-1050 crores next fiscal. However, the debt protection metrics are expected to be healthy for the rating category with interest cover expected between 7-9 times over the medium term. Company’s TOL/TNW was high at 3.41 times as on March 31, 2022, owing to pension liabilities and high share of customer advances which stood at Rs 422 crores. These customer advances help the company manage its orderbook execution efficiently while also reducing the company’s dependency on external debt. Also, cash outflow in lieu of pension obligations shall be spread over around 25 years. 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 leverage and debt metrics over the medium term. Consolidated Debt/ EBITDA is expected to stay less than ~3 times over the medium term. Improvement in the company’s leverage and debt protection metrics will remain a key monitorable going forward.

 

Limited revenue diversity: Operations are concentrated in the GLE segment. The company has been making attempts to diversify into non-GLE products both organically and inorganically through several bolt-on acquisitions. Consequently, the revenue base for the company has diversified with sizeable contributions from non-glass lined technologies (18% of FY22 revenue), systems (15% of FY22 revenue) and services (27% of FY22 revenue) segment. The non-GLE segment’s share is expected to improve gradually over the medium term; while access to newer geographies and improved presence in global markets, post the acquisitions, will 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 236 crores as on September 30, 2022, together with net cash accrual of over Rs 250 crores 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 utilization.

 

ESG Profile of GMM Pfaudler

CRISIL Ratings believes that GMM Pfaudler’s ESG profile supports its already strong credit risk profile. The sector has a moderate environmental and social impact, primarily driven by its raw material sourcing strategies and energy-intensive processes.

 

Key ESG highlights:

• GMM Pfaudler is continuously taking initiatives to reduce carbon footprints through initiatives like increasing renewable energy consumption and implementing measure to reduce energy intensity. Also, the company has achieved 96.07% recycling of waste material generated.
• Company is committed in ensuring safety and security of its employees. There were no complaints related to sexual harassment, discrimination of workplace, child labour, forced labour, wages and other human rights related issues in fiscal 2022 and there were no reportable lost time injuries or safety incidents.
• The governance structure is characterised by effectiveness in board functioning and enhancing shareholder wealth, presence of investor grievance redressal mechanism and extensive disclosures.

 

ESG is gaining importance among investors and lenders. GMM Pfaudler’s commitment to ESG will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

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.

Rating Sensitivity factors

Upward factors

* Revenue growth CAGR of 12-15% over the medium term, along with a steady operating margin of 13-14%

* Improvement in Debt/EBITDA to below 2.75 times on a sustained basis (Net debt/EBITDA below 2 times on a sustained basis)

 

Downward factors

* A sustained decline in revenue by over 10% per fiscal, with operating margin below 11%

* Any larger-than-expected debt funded acquisitions or elongation in working capital cycle, leading to moderation in DEBT/EBITDA beyond 4 times (Net Debt/EBITDA above 3.2 times).

About the Company

GMM Pfaudler was originally incorporated as Gujarat Machinery Manufacturers Ltd (GMM) in 1962. The company provides corrosion-resistant technologies, systems and services. GMM Pfaudler's products are used primarily in the chemical, pharmaceutical and allied industries. The company has 16 manufacturing facilities with 3 in India, 1 in China, 4 in Americas and 8 in Europe.

 

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 (DBAG), a German private equity firm in December 2014. During 2020-22, GMM Pfaudler acquired 100% stake in its parent company, Pfaudler International. Further in December 2022, DBAG sold 17% stake of the company, post while Patel family has become the single largest promoter shareholder in the company.

 

GMM Pfaudler is listed on the Bombay Stock Exchange and the National Stock Exchange. As on December 31, 2022, the promoter and the group entities held ~39% stake and general public held the remaining.

 

On a consolidated basis, for first half of fiscal 2023, operating income and profit after tax stood at Rs 1,591 crores and Rs 158 crores, respectively.

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	117.00	NA	CRISIL AA-/Stable
NA	Cash Credit##	NA	NA	NA	20.00	NA	CRISIL AA-/Stable
NA	Cash Credit#	NA	NA	NA	11.00	NA	CRISIL AA-/Stable
NA	Cash Credit@	NA	NA	NA	25.00	NA	CRISIL AA-/Stable
NA	Bank Guarantee	NA	NA	NA	102.12	NA	CRISIL A1+
NA	Working Capital Demand Loan*	NA	NA	NA	30.00	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Sep-27	218.38	NA	CRISIL AA-/Stable
NA	Letter of Credit	NA	NA	NA	76.50	NA	CRISIL A1+

*With sublimit of bank guarantee upto Rs 30 crore, letter of credit Rs 30 crore and overdraft facility Rs 12 crore

#With sublimit of bill discounting upto Rs 2 crore and export packing credit Rs 3 crore

##With sublimit of letter of credit upto Rs 17 crore

@With sublimit of bank guarantee upto Rs 25 crore and letter of credit Rs 20 crore