GMM Pfaudler Limited: A Concealed Monopoly

“The revenues for Q3 of FY ’23 stood at Rs. 792 crores, a decent 23% growth YoY. EBITDA margin stood at 15% at Rs. 118 crores. This is a 2% increase in the margins YoY. PAT also is up YoY. We are on track to achieve our guidance for FY ’25, which is Rs. 3,700 crores of top line and Rs. 630 crores of EBITDA.”

– Mr. Manish Poddar, CFO

*As of 04.04.2023

GMM Pfaudler primarily deals with the manufacturing of corrosion resistant glass-lined equipment. It is a prominent supplier of process equipment to the chemical and pharmaceutical sectors. Mixing Systems, Filtration & Drying Equipment, Engineered Systems, and Heavy Engineering Equipments are now all part of GMMP’s comprehensive product line.

With a market share of more than 50%, GMM Pfaudler (GMM) is the industry pioneer for glass-lined equipment in India. Several domestic players pose fierce rivalry in the small vessel market for it. The firm, however, essentially controls the market for large vessels (those with capacity greater than 16,000 litres).

Key Strengths of the Company:

• Loyalty within customer dealings: The majority of the major Indian companies in the pharmaceutical, chemical, and petrochemical industries have trusted GMM Pfaudler as their key supplier for nearly five decades. GMM has gained repeat engagement and established enduring partnerships with all of its major clients by utilising its technological edge and providing high-quality reactors.  According to certain customer accounts in the pharma/chemicals industry, GMM has been their first choice when purchasing glass-lined vessels over the years. Almost 90% of the installed equipment base of these businesses is GMM.Only when customers had urgent needs and GMM had a little longer delivery schedule due to being overloaded with orders, did they consider using another supplier. GMM increases its capacity, it is likely to once again take the lead as the supplier for these customers.

• Strategic control of company capital: The management team of GMM has continuously demonstrated good capital control abilities. The company has prioritised organic expansion, using the free cash generated by the business to boost capacity by more than 50% over the previous three years. Additionally, they have acquired three significant companies, each to diversify their product portfolio and increase their share of customers’ capital expenditures. In 2008, the company made its first acquisition of  Mavag AG, a manufacturer of machinery used in downstream processes in the chemicals and pharmaceuticals industries and based in Switzerland . Mavag’s operations have been successfully turned around by GMM, with EBITDA increasing from negative levels at the time of acquisition to an operating margin of 13% currently.The industrial mixing division of Sudarshan Chemicals was GMM’s second acquisition in 2019, which lead to the expansion of its lineup of Mavag products in India. The assets of De Dietrich Process Systems (DDPS), another international manufacturer of glass-lined equipment based in India, were later acquired by GMM in 2020. Following the departure of DDPS, GMM has cemented its position as the country’s technological leader. Following this, GMM acquired Pfaudler Group’s non-Indian business.

• Technological Advantage: For two reasons, the quality of glass-lining is a major difference in this industry. The first is that there can be no compromise on the purity of these items during the production process since the end products manufactured by customers must have extremely particular chemical qualities. Second, because of the propensity for chemical processes to damage the reactor vessels and because of the poor quality of the glass lining, the reactors would need to be replaced or rebuilt more frequently, raising the cost to the consumers. The fact that Pfaudler owns a majority of GMM provides it a certain technological edge, which gives it a strong competitive advantage in the Indian market. Pfaudler, the creator of glass-lining technology, has consistently raised the standard for creativity and breakthroughs in the sector around the world. For instance, they created Pharma Glass, a patented enamel designed especially for the manufacturing of active pharma ingredients (APIs), vitamins, etc., which has become the industry standard worldwide. Pfaudler currently holds a global market share of over 20% in an oligopolistic industry that is expected to continue to grow. This bodes well for GMM too because the company will continue to have access to cutting-edge technology, which is crucial to its operations.

• Acquiring Pfaudler’s global (ex-India) business: TWith Pfadler’s acquisition, GMM now has direct access to its important technological foundation and innovation capabilities for the rest of its lifespan. Additionally, it enables the firm to coordinate manufacturing between Pfaudler’s global facilities and GMM’s plants in India, maximising the value of every stage of the production process. Furthermore, the acquisition gives GMM access to other products of the company as well as foreign markets where Pfaudler was either not present or could not compete with regard to price. Transition and integration are not likely to be a significant difficulty because Pfaudler management will go on to remain on board, and DBAG will continue to be shareholders.

• Advantage of Scale: By far, GMM is the biggest manufacturer of glass-lined equipment in India. GMM has increased its capacity by 50% between FY17 and FY20 by utilising their technological edge, execution expertise, and local customer relationships. The corporation now has a 48% revenue share of the industry and generates more than double the revenue of its second-largest competitor. Because of the significant scale advantages brought forth by the dominant market share, the company is more profitable. Both the EBITDA and RoCE margins of GMM are almost twice as high as those of its closest rival. The importance of the scale advantages GMM has developed is evident in its dominance of the industry’s profit share; from FY16 to FY19, GMM generated 80% of the market’s EBITDA.