Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of GMM Pfaudler Ltd (GMM Pfaudler) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL AA-’. The rating on the short-term bank facilities has been reaffirmed at ‘CRISIL A1+’.

 

The revision in outlook factors in the company’s improving business risk profile which is expected to sustain over the medium term, backed by scale up in non-glass lined business platform. Revenue growth will be further supported by continuing product diversification given a larger product base and geographical expansion. The product base has widened with entry into mixing and membrane technologies, alloy process equipment and water treatment, among other products. The new products find applications in industries such as paints, metals and minerals, and oil and gas. Additionally, the company is expected to sustain strong operational efficiencies going forward with steady improvement in operating margin from current levels of around 14%. Coupled with sustained working capital management and no large debt-funded capital expenditure (capex), this will drive steady improvement in the company’s financial risk profile.

 

The ratings also derive comfort from GMM Pfaudler’s continued leadership position in the glass lined equipment (GLE) market, its experienced management and improving financial risk profile. These strengths are partially offset by large working capital requirement and high (although reducing) dependance on chemical and pharmaceutical segments.

 

In the first nine months of fiscal 2024, the company recorded revenue of Rs 2,706 crore (Rs 2,312 crore in the corresponding period of the previous fiscal). This is growth of 17% on-year, driven by ~22% growth in the international business (~63% of overall revenue) and 3.5% growth in the standalone business (~26% of overall revenue). For the full fiscal 2024, revenue is expected to cross Rs 3,500 crore. The company’s order book, as of December 2023, stood at Rs 1,625 crore which provides revenue visibility over the medium term. While slowdown in key end-user segments, including chemical and pharma, might keep revenue growth flattish in fiscal 2025, the company is expected to go back to its double-digit growth trajectory, driven by expanding product base (including scale up of subsidiaries acquired, especially in the mixing division) and increasing geographical reach. 

 

The earnings before interest, tax, depreciation and amortisation (EBITDA) margin during the first nine months of fiscal 2024 was healthy at 14.34% (~14.5% in the corresponding period of the previous fiscal) driven by stable gross margin. The company usually receives 15-20% of its order value as customer advance, which is used to procure raw materials and protect the company against variations in raw material prices (steel being a major input). Going forward, the margin is expected to sustain at 14-15% and further benefit from improved product mix with higher share of mixing equipment.

 

The financial risk profile is characterised by adequate but improving capital structure and comfortable debt protection metrics. Gearing is estimated to be ~1.1 times in fiscal 2024 and expected to improve to below 1 time over the medium term with accretion to reserves and progressive debt repayment. Overall gross debt for the company was Rs 1,082 crore as on September 30, 2023 (including unfunded pension liabilities of ~Rs 259 crore) which is expected to reduce slightly at year end. Total outside liabilities to tangible networth (TOLTNW) ratio is expected to be 2.6-2.7 times in fiscal 2024 owing to substantial pension liabilities and high customer advances (Rs 400-420 crore). However, it is expected to come down to below ~2 times over the medium term. Debt protection metrics such as interest coverage ratio is estimated to be 6-8 times over the medium term, while net cash accrual to total debt (NCATD) ratio will sustain at over 0.3 times.  

 

The company’s liquidity position remained strong with expected accrual of Rs 300-350 crore, over the medium term, against debt obligation of Rs 117 crore and Rs 67 crore, respectively, in fiscals 2025 and 2026. The annual capex of Rs 100-110 crore is also expected to be funded from internal accrual. Liquidity is further augmented by liquid surplus which stood at ~Rs 306 crore as on September 30, 2023.

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 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 market share of 50% in America, 40% in Europe, 20% in China and 50% in India’s GLE segment. It faces intense competition in the small vessel segment from other players. However, the group has a near monopoly in the large vessel segment. The company has steady and longstanding customer relationships. It has been servicing about 70% of its top customers for more than 20 years.

 

• Strong technological expertise and market presence of the 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 has a robust global reach with 20 manufacturing facilities in four continents.

 

Furthermore, post-acquisition of Pfaudler Inc, the company has been able to diversify its revenue streams with share of revenue from systems and services segment increasing to ~24% and 28%, respectively, on consolidated basis, against 6% and 4%, respectively, on standalone basis.

 

• Improving financial risk profile: The company has moderate capital structure with estimated gearing at ~1.1 times and TOLTNW ratio at 2.6-2.7 times as on March 31, 2024. Networth is estimated to be ~Rs 900 crore with estimated debt of Rs 1,000-1,100 crore (including pension liabilities which stood at Rs 259 crore as on September 30, 2023) in fiscal 2024. Gearing is expected to gradually improve to below 1 time with accretion to reserves and progressive debt repayment. The TOLTNW ratio is high on account of pension liabilities and high share of customer advances. However, these customer advances help the company manage execution of orders efficiently while reducing its dependency on external debt. Also, cash outflow in lieu of pension obligations shall be spread over a long period.

 

Debt protection metrics such as interest coverage ratio is expected to be healthy at 6-8 times over the medium term, while gross debt to EBITDA ratio is estimated at 2.0-2.1 times in fiscal 2024, which is expected to improve to below 1.75 times over the medium term.

 

• Experienced management: The promoters have experience of more than six decades in the industry. The third generation of the promoter family is actively involved in daily operations. Mr Tarak Patel, who is the current Managing Director, has experience of more than 15 years. The business is professionally run with separate Chief Executive Officer (CEO) and Chief Financial Officer (CFO) for the Indian and International businesses. Mr. Assem Joshi is currently the CEO of the Indian business. He has previously worked at Honeywell, Eaton Corporation, IBM Corporation and McKinsey whereas, Mr. Thomas Kehl has been the CEO of the International business since 2016. He was previously president and CEO of Coperion Group, CEO Of Freudenberg Nonwens, and held executive positions at the Hoescht group.

 

Weaknesses:

• High but reducing dependance on chemical and pharma segments: GMM Pfaudler is highly dependent on orders from chemical and pharma segments which are the main end-user industries for the company’s products. While almost ~100% of the revenue was derived from these segments 6-7 years back, the dependance is gradually reducing but remains high at around 60%. In order to reduce this dependance, the company has been expanding its product base and gradually ramping up its non GLE and mixing portfolio which find applications in adjacent industries including paints, biotech, metals and minerals, and oil and gas. This will shield the company from downturn in any particular segment.

 

• 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 ranges from 100 days to 120 days while debtors remained at 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 306 crore as on September 30, 2023, together with net cash accrual of over Rs 300-350 crore per annum is adequate to cover the entire capex and debt obligation. Furthermore, liquidity is augmented through the presence of bank lines with moderate utilization.

 

Environmental, Social and Governance (ESG) profile of GMM Pfaudler

CRISIL Ratings believes that GMM Pfaudler’s ESG profile supports its already strong credit risk profile.

 

The capital goods sector has moderate environmental and social impact, primarily driven by its raw material sourcing strategies and energy-intensive processes.

 

The company’s increasing focus on addressing ESG risks supports its ESG profile.

 

Key ESG highlights:

• The share of renewable energy in the total energy consumption has declined around 124 basis points (bps) on-year to 2.67% in fiscal 2023. However, the company is working towards increasing the usage of renewable energy and its share in overall energy consumption is expected to improve going forward.
• Intensity of greenhouse gas (GHG) emissions has decreased nearly 13% on-year in fiscal 2023.
• The company’s gender diversity stood at 3.71% in fiscal 2023 (4.85% in fiscal 2022) which is slightly above the peer average.
• The governance structure of GMM Pfaudler is characterised by 50% of the board comprising independent directors, a split between the positions of Chairman and CEO, extensive financial and non-financial disclosures, and robust internal control systems.

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: Positive

CRISIL Ratings believes that GMM Pfaudler will benefit from its expanding product  range with entry into newer segments, fostering diversification across end-user industries and mitigating reliance on any particular end-user industry. Furthermore, GMM Pfaudler will continue to benefit from its global leadership position in the GLE segment. The financial risk profile is expected to remain strong over the medium term, on the back of healthy cash accrual and large liquid surplus.

Rating Sensitivity factors

Upward factors

• Steady increase in scale of operations while maintaining operating margin at over 14%.
• Improvement in debt to EBITDA ratio to below 2.75 times on sustained basis (net debt to EBITDA ratio below 2 times on sustained basis).

 

Downward factors

• Sustained decline in revenue by over 10% per fiscal, with operating margin below 11%.
• Any larger-than-expected debt-funded acquisitions or stretched working capital cycle, leading to moderation in the debt to EBITDA ratio beyond 4 times (net debt to EBITDA ratio 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 20 manufacturing facilities with 3 in India, 2 in China, 6 in the Americas and 9in Europe.

 

During 2020-22, GMM Pfaudler acquired 100% stake in its parent company, Pfaudler International. Furthermore, in fiscal 23 and fiscal 24, DBAG sold 17% stake of the company, after which the Patel family has become the single largest promoter shareholder in the company.

Key Financial Indicators

Particulars	Unit	2023	2022
Revenue	Rs crore	3178	2541
Profit after tax (PAT)	Rs crore	214	75
PAT margin	%	6.7	2.9
Adjusted debt/adjusted networth	Times	1.47	1.37
Interest coverage	Times	7.25	13.68

CRISIL Ratings-adjusted

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	158.98	NA	CRISIL AA-/Positive
NA	Cash credit^	NA	NA	NA	20.00	NA	CRISIL AA-/Positive
NA	Cash credit&	NA	NA	NA	11.00	NA	CRISIL AA-/Positive
NA	Cash credit%	NA	NA	NA	25.00	NA	CRISIL AA-/Positive
NA	Bank guarantee	NA	NA	NA	102.12	NA	CRISIL A1+
NA	Working capital demand loan$	NA	NA	NA	30.00	NA	CRISIL AA-/Positive
NA	Term loan	NA	NA	30-Sep-2027	176.4	NA	CRISIL AA-/Positive
NA	Letter of credit	NA	NA	NA	76.50	NA	CRISIL A1+

$- With sublimit of bank guarantee up to Rs 30 crore, letter of credit Rs 30 crore and overdraft facility Rs 12 crore.

^- With sublimit of letter of credit up to Rs 17 crore

%-With sublimit of bank guarantee up to Rs 25 crore and letter of credit Rs 20 crore

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