GMM Pfaudler Limited (GMMPFAUDLR) Q4 FY23 Earnings Concall Transcript

GMM Pfaudler Limited (NSE: GMMPFAUDLR) Q4 FY23 Earnings Concall dated May. 26, 2023

Corporate Participants:

Priyanka Daga — Deputy General Manager

Tarak Patel — Managing Director

Manish Poddar — Chief Financial Officer, India Business

Aseem Joshi — Chief Executive Officer, India Business

Thomas Kehl — Chief Executive Officer International Business

Alexander Pompner — Chief Financial Officer, International Business

Analysts:

Venkatesh Balasubramaniam — Axis Capital — Analyst

Sandeep Tulsiyan — JM Financial — Analyst

Nitin Agarwal — DAM Capital Advisors — Analyst

Rohit Ohri — Progressive Share Brokers Pvt. Ltd. — Analyst

Ashit Koti — Investor — Analyst

Sanjay Shah — KSA Shares & Securities Pvt. Ltd. — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the GMM Pfaudler Q4 FY23 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions]. I now hand the conference over to Ms. Priyanka Daga from GMM Pfaudler. Thank you, and over to you.

Priyanka Daga — DGM Strategic Finance

Thank you, Ryan. Good afternoon ladies and gentlemen. A very warm welcome to all of you into the quarter four FY23 earnings call of GMM Pfaudler Limited. The earnings presentation was uploaded on the stock exchanges last evening and is also available on our website. Hope all of you had a chance to go through it.

From the management, we have with us our Managing Director, Mr. Tarak Patel; our CEO of International Business, Mr. Thomas Kehl; our CEO of India Business, Mr. Aseem Joshi; CFO of International Business, Mr. Alexander Pompner; and CFO of India Business, Mr. Manish Poddar. We will give you a brief overview of the performance of the Company, after which we will get into the Q&A.

Before we begin with the overview, a brief disclaimer. The presentation which we uploaded on the stock exchange and our website, including our call discussions that will have happen now, contains or may have certain forward-looking statements regarding our business prospects and profitability which is subject to certain risks and uncertainties. The actual results could materially differ from those in such forward-looking statements.

I will now hand over the call to Mr. Patel to provide an overview of the performance. Over to you, Tarak.

Tarak Patel — Managing Director

Thank you, Priyanka. So let me start-off with by giving you a snapshot for the financial year that we’ve completed. We closed the year at INR3,178 crores of revenue, a significant increase over the previous year number; INR431 crores of EBITDA, which translates to a 13.6%, a big [Phonetic] jump in margin; INR235 crores of profit after tax which translates to a 7.4% PAT margin; EPS of about INR43 or so.

The order intake for the year also was quite strong, and we did about INR3,392 crores of order intake which translates to a current backlog on April 1st, 2023 of INR2,152 crores. This backlog is quite evenly spread between the international and the India business. The international business has a current visibility of about eight to nine months in most geographies with certain geographies having even a longer backlog.

For the India business, we have about six to seven months backlog of the India business, and we are quite confident that going forward we will be able to also, from what we’ve seen in the beginning of this year, the order intake continues to remain quite strong. Like I mentioned, the revenue growth was in excess of 20%, which was driven by the international business, which grew at 21% and the India business which grew at 32%. The main drivers of the order intake were basically a technology platform, which include glass-lined equipment, filtration and drying, mixing and heavy engineering and also on the services business.

Our systems business, which had very strong opportunity pipeline, continues to remain behind the budget, but we expect that in the coming months some of these orders which were actually going to be finalized will now get finalized, and that will give us a nice bump to our order intake as well. The profitability in the international business has been a significant improvement. It is now close to about 11%-odd. When we acquired the international business, we had an EBITDA margin of close to 7.5% to 8.00%, so the international business has performed quite well.

The Indian margins obviously had remained quite stable, 16%-odd, and we have seen some pressure on the India margins mainly driven by higher input costs and a slight slowdown in investments in both chemical and pharmaceutical. Some of the other highlights for the year, we obviously — the both our factories in Vatva and Hyderabad are fully up and running now. These facilities accounted for more than INR300 crores of revenue. Do keep in mind that very — not a very long time ago, both these factories was zero in terms of revenue, so we’re quite happy with the startup. We completed an operational excellence program in Vatva, and we now plan to — we have actually started one more operational efficiency program in Hyderabad as well.

Cost reduction measures continue across geographies. We have seen some stabilization in India, especially on the metal prices. We’ve also seen a steep reduction in energy cost starting this quarter as well, mainly in natural gas. So that’s going to give us a nice positive outlook for the year. And one of the higher kind of material that goes into glass-lining which is the lithium carbonate has also seen a 50% reduction in cost. So, if these costs continue to remain at this level, that could obviously have a positive impact on profitability as well.

In terms of some manufacturing highlights, we recently manufactured India’s biggest glass-line vessel of 80,000 liters. We have a backlog of more than five or six of these large sizes currently in our factory. And our Chinese facility also manufactured probably the world’s biggest glass-line vessel which is about 140,000 liters. From a corporate perspective, we completed the acquisition — or the balance acquisition of the 46% of GMM International, 100% is now owned by GMM Pfaudler Limited, and all the profits now accrue to the shareholders of GMM Pfaudler. During the year, we also completed the acquisition of Hydro Air Research in Italy, JDS Manufacturing in USA, and Mixel Group which has factories in France and China.

With that, let me — one more point here, so in terms of outlook, we are quite positive with our outlook forecast. We expect the growth rates to continue in the same region of maybe about 15%-odd. From a margin perspective, we also do plan and we do hope to see an improvement in the current margin, which currently stood at 13.6%. We do plan to increase this margin, which will be driven by both improvement in margins in the international business as well as in the India business as well.

Manish, over to you please.

Manish Poddar — Chief Financial Officer, India Business

Thank you, Tarak. Good afternoon, ladies and gentlemen. On the results, as Tarak mentioned, we ended the year on a strong note with INR3,178 crores of revenue, 25% higher YoY, and an EBITDA of INR431 crores, 52% higher YoY. We also achieved an EBITDA margin of 13.6%, which is 1.5% higher than last year, last year we were at 11.2%.

On the quarter FY [Phonetic] — Q4 ended-up with a decent 24% higher revenues YoY at INR866 crores, and 34% higher EBITDA at INR96 crores. On international business, the EBITDA margins would improve by 0.5% if we exclude the three new acquisition entities performance of HARI, JDS and Mixel. Therefore, we are absolutely on-track to surpass our FY’25 target of INR3,700 crores of revenue, EBITDA of INR630 crores, and ROCE of 25%.

For the quarter specifically, payroll cost was higher for the international business. This is an accumulation of three factors. There were three new acquisitions, like we just spoke about. The annual increment cycle on the International business starts from 1st of January. So therefore you’ll expect increment on Q4 over Q3 and there were a few one-time payment systems.

On the similar line, other expenses were higher due to the new entities and the annual catch-up of the facilities expenses payroll. Order intake, I think Tarak has spoken about. On cash-flow, specifically on slide number 11 in our presentation, there are a couple of call-outs I just wanted to share with you. As part of the global POC [Phonetic] alignment, there is an increase in the unbilled revenue for this year. This is a major portion in the negative INR248 crores working capital number that you seen in slide number 11.

The second piece is due to the addition of the three new entities, the profit accumulated were only for two to three months. However, working capital being a balance sheet item were added for the full year as in closing balance sheet item. So these two items are distorting the cash generation picture as we see in the numbers. If you eliminate these two items, we have a healthy free-cash flow of 50% vis-a-vis the EBITDA.

On the similar line, on the standalone cash flow, refer slide number 25, we have shown the annual cash flow into two halves to reflect upon the improvement in the working capital in India in second half, and we believe that we can continue this journey of improving the working capital for additional three to four days in the upcoming year.

Over to you, Priyanka.

Priyanka Daga — DGM Strategic Finance

Thank you. Thank you, Manish. Hi, Ryan, we can probably now open the Q&A session.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question is from Venkatesh Balasubramaniam with Axis Capital. Please go ahead.

Venkatesh Balasubramaniam — Axis Capital — Analyst

Yeah. Thanks for the opportunity. I had a few questions. So, the first one is, in the fourth quarter, there was a dip in the international margins quarter-on-quarter, I think, last quarter, I think you were at 12.7%. We have moved down to 8.9%. That’s a sharp decrease. Now this dip, is this like a cyclical thing that every year we will have a dip in the fourth quarter on the international side or is it just like we had something specifically negative in this quarter, which pulled down the margins? So, that is the first question.

Tarak Patel — Managing Director

Sure. So, Venkatesh, let me start-off and then both the CFOs are here who can also jump in. But yes, so I think the way that you should look at it or somebody should look at it, that internationally, historically, fourth quarter has always been weak in terms of margin. Usually there are two reasons for this. One is obviously as Manish mentioned, that the new increment cycle in the international business starts on January 4th, so you will always see that kind of bump-up happening. But also, there is sometimes the catch-up cost that you have in some of the factories which get allocated right at the end-of-the year in Q4.

So our expectation is that the international business margins will stabilize to the earlier numbers in Q1 and Q2 and so on and so forth. This is obviously a phenomena that will continue, and you can always kind of probably build in to the fact that Q4 in the international business will always be slightly lower than the past three quarters. Maybe, Alex, you want to jump-in and just…[Speech Overlap]

Alexander Pompner — Chief Financial Officer, International Business

Hello. No, exactly like what just Tarak said, as in general, if you look on a let me say, 12 months basis, we definitely confirm that we are on-track with our gross guidance margin business.

Venkatesh Balasubramaniam — Axis Capital — Analyst

Okay, okay, the second question, I think what you said that this year you’re expecting around roughly 15% kind of topline growth. Do you have like a margin guidance target whatever you know what you can get to this year in terms of consolidated margins?

Tarak Patel — Managing Director

So, I would say that the international business it’s currently tracking between 11% to 12% or so. We would expect 100 bps improvement there somewhere in between that, at least, that’s the minimum that we are targeting and we are quite confident that we can achieve. India is around 15% to 16%. We are also hoping or expecting an improvement there in the same kind of range. These are conservative estimates.

Obviously, if our cost-efficiency energy costs, metal cost continue to go down, if there is a kind of an improved I guess investment cycle that gets kicked in, this will obviously add to that. But there are currently quite a few measures that we have taken both in India and internationally to make sure that margin improvement is a prime focus within the Group.

And looking at the order inflow in Q1, and our expectations for our Q1 shipment as well, we are quite confident that margins would normalize to earlier levels, if not improve upon them.

Venkatesh Balasubramaniam — Axis Capital — Analyst

Okay. Okay, now just some — if you could spare some thought in this, on this aspect, I think you had guided for around INR3,700 crores topline for FY25 and around INR630 crores EBITDA, that basically means 17% EBITDA margins in FY25. We are currently at 13.6%. Looking at your numbers, it looks like the topline — achieving the topline guidance will be very easy, whereas the margin guidance looks a tad bit tougher, 13.6% to 17.0%. Is it more like you know, given that the topline is higher, we don’t need to get to 17% margins to get to that 6 [Phonetic] — and that is what is the plan, or we will get to the 17% margin irrespective of the higher topline, which we might end-up achieving.

Tarak Patel — Managing Director

Yeah. So the idea and when we did put out the guidance was a revenue number of INR3,700 crores like you rightly said, and a INR630 crore EBITDA number, and a 25% ROCE. I think we are on-target to achieve all three of them. Obviously, the INR630 crores is not going to mean that our margin can be as low as let’s say 10%, and we do like INR6,000 crores of revenue, so that’s not going to happen. But, is it going to be exactly 17% or not, that’s something that really is — I can’t really comment. But INR630 crores is something that we will definitely do. How much of revenue that requires, we obviously hope that it requires something very close to INR3,700 crores, because that’s our internal plan and that’s the target.

We do have some challenges that we’re facing currently in the market in chemical and pharma here in India. But we are quite confident that when the cycle will turn, and we have enough of visibility to make sure that we have a few quarters before the cycle needs to turn, and the kind of action plans that we have for the next financial year, we believe that we will be very close to all these three numbers.

Having said that, the good opportunity for me right now to also to give you a little bit of outlook in terms of what we are hearing from both chemical and pharma. So, chemical and pharma, both are seeing challenging environment some headwinds. But we do expect a strong recovery at the end of this financial year — end of this year rather, the calendar year. Many of our pharma customers are now looking at large capex for the investment and most of these will start sometime in the end of 2023, early 2024, because a lot of them are planning for the cycle, the ordering cycle to turn which is expected sometime in mid-2024, 2025, right. So, I think that’s something that we will see.

Chemical is seeing slightly slower order intake right now, here in India, but we do have a large opportunity pipeline. So we believe Chemicals will also start ordering again. And with the backlog that we have, obviously, we believe that we are quite in a comfortable position. Internationally, both Chemical and Pharma have remained kind of stable, but Thomas, if you could just jump in and give an overview of the German market as well.

Thomas Kehl — Chief Executive Officer, International Business

Thank you, Tarak. This is Thomas Kehl. Yes, I think I can only second that the markets, chemicals and pharmaceutical in Germany and in Europe especially are pretty strong. So going on, we are experiencing not only in Germany but in other countries in Europe still a shortage of basic medical especially treating children that drives the government to motivate and incentivize pharmaceutical industries to invest locally in Germany and in other European countries. And that will go on for quite a while. That will be seen this year, next year and maybe years after. And this is something that we feel very strong about. We are well positioned to serve those markets and industries, and expect that demand to be strong.

In Chemical, we are seeing some chemical companies making plans to move in other regions like BSF [Phonetic] with some of their products. However, those products that they’re making in China in the future are not related to the equipment that we make for [Indecipherable]. In the chemicals that we serve, the demand is right now it is normal to — normal plus level, I would say.

Venkatesh Balasubramaniam — Axis Capital — Analyst

Okay. Now, just a couple of other data questions. I think first two quarters of this year, you had like a INR22 crore, INR22 crore kind of FX gain in the other income. Third quarter, you had an INR18.5 crore loss, in the fourth quarter did you have a gain or a loss?

Tarak Patel — Managing Director

I don’t think this was a substantial number, I think so.

Manish Poddar — Chief Financial Officer, India Business

I think it was kind of small, nothing significant.

Tarak Patel — Managing Director

Nothing significant because the Euro-Dollar didn’t move and that was the biggest lever in the first three quarters actually. And therefore it was — and that’s why we didn’t want to call it out separately, because it was business as usual.

Venkatesh Balasubramaniam — Axis Capital — Analyst

Okay. One last question from my side. What is the expected effective tax-rate for the overall consolidated entity for the next year? Some kind of broad range would be helpful.

Tarak Patel — Managing Director

So, on a go-forward basis, it should be somewhere like 26% — 26% to 27%.

Venkatesh Balasubramaniam — Axis Capital — Analyst

Okay. Thanks a lot. All the very best.

Tarak Patel — Managing Director

Yes.

Operator

Thank you. [Operator Instructions]. Our next question comes from Sandeep Tulsiyan with JM Financial. Please go ahead.

Sandeep Tulsiyan — JM Financial — Analyst

Yeah. Good evening. First question is regarding all these acquisitions that we made in the last financial year like JDS, Mixel and Hydro Air. If you could give some sense of where are the capacity utilization across these plants today when we acquired. And over the next two to three years, what kind of additional revenue generation capacity these plants have. And out of that, how much you look to add within the INR3,700 crores target that has been mentioned.

Tarak Patel — Managing Director

Right. So, hi, Sandeep. So let’s just go to quickly the acquisition. So, like I mentioned earlier, we closed three acquisitions this year. Hydro Air was kind of done earlier during the year. And that company currently does about $7 million $8 million of revenue, has been performing quite well. And we expect that company to at least double over in the next three years.

This company in terms of manufacturing capacity — it’s an engineering company, so it doesn’t really have or need any kind of capacity or capacity utilization numbers because they basically just order these from different vendors, put the entire thing together and then sell it to the customer. So no real factory [Phonetic] that is linked to this acquisition.

We bought a small company in the South part of the United States, near Houston, this is a glass-lining, a spare part and re-glass facility. We want it to be closer to the chemical zone in Texas, and this was just very near to that. That is currently under the start-up phase, and we expect that over the next few months we will get that started up and that we will able to cater to that local market as well and improve our spares and service business from that site.

Lastly, the Mixel acquisition was completed only in February this year. So, we only have two months of revenue that we have accounted for. Having said that, the backlog in that business continues to remain strong. Mixel is an important opportunity for us because it fits into our overall global strategy of really growing our mixing business into something or a something as big as glass-line. So that fits in quite well. We are already seeing synergies between some of our units and Mixel as well. The idea is to now to kind of put it under one global brand umbrella and launch that brand as the mixing platform right for us.

So that company currently does about — Thomas, how big is the Mixel in revenue about EUR15 million? So EUR15 million, has a strong backlog, and again we expect that this business will at least double over the next three to five years, and that’s the idea. And that’s pretty much how these three acquisitions are going. What we’re also doing is, we’re not adding a lot of capacity or new people. We want to use the same kind of factories across new geographies, but have more throughput. And we have more material moving to these factories by moving some of the production either to India, but also moving a lot of the engineering, documentation, calculations and stuff to India.

So one of the things that we are just starting and we have just recently launched it in the company is that India engineering office, where we are going to now look at bringing in people to take-off and do some of the non-value add — not non-value add, but non-critical maybe work that is done in some of these western companies which will also help us improve our cost.

Sandeep Tulsiyan — JM Financial — Analyst

Got it. Second question is on the related-party transactions which you disclosed. When we look at the same, it’s gone up materially in the last year somewhere in excess of INR500 crores [Indecipherable] other group entities. And of course, there was an overall plan to shift some of the manufacturing to India factories which were underutilized at that point in time. So, if you could just give us a sense of how this ramp-up has happened? How should we re-introduce more this whole phenomena where you’re shifting manufacturing from China, Germany and the US to India and try to take advantage of the low cost manufacturing. And from INR500 crores, how should this number pan-out over the next one to two years, if you could give us some broader outlook. Thanks.

Tarak Patel — Managing Director

Yeah. So the related-party numbers do include a lot of intercompany sales that we do within the group as well, obviously our stock and sale program that we currently have with Germany, I think that’s a key driver to that. We are also doing a lot of job work or orders for some of the other Pfaudler units. Only this year in this financial year in Q1 we received a large order from the US, a company called Cargill [Phonetic]. This is for heavy engineering equipment that is going to be made here in India. So, there is quite a bit of work that’s being done.

We also now do work for Mavag, about 80% of Mavag’s manufacturing is done locally here in India. On-top of that, we have also supplied quite a few, [Speech Overlap] yeah, but that was earlier, but we’ve also supplied to other units as well. I’m not sure, I don’t have the breakup with all the related party transactions with me, but if you want an exact number in terms of what it used to be, and where it’s increasing, we can give that to you, just offline, we can take that along and just have that send across.

Maybe Aseem, you want to just talk a little about the India sourcing program right now, and some of the stuff that we’re working on?

Aseem Joshi — Chief Executive Officer, India Business

Sure. Hi, Sandeep. As far as sourcing from India is concerned, I think Tarak talked about it. Let’s take a minute to explain how we are thinking about expanding that portfolio. As we have discussed in the past for our glass-line footprint, we have over the past 1.5 year started exports from India for two things, one is to cover under-penetrated geographies, especially Southern Europe, Eastern Europe, South East Asia kind of locations, as well as have a stock and sale program, which Tarak has talked about in the past, right. So that has started. That’s gone up successfully with a number of equipment that have shipped, and we have a standard cadence going of things manufactured in and dispatched to Europe.

In addition, for our other product lines, is that covered [Phonetic] systems and non glass-lined portfolios, we also find opportunity to manufacture in India and sell into other geographies. And a good example is oil and gas opportunities we had in China, fairly large, about $7 [Phonetic] million, I believe in sales value where the relationship is in China, the manufacturing is in India, but the engineering is in the US in this instance.

So, it’s a good example of where we can leverage our global strength, wherever they range now, wherever they exist, to be able to serve our customers better. And we’ll continue to drive that.

Sandeep Tulsiyan — JM Financial — Analyst

Got it. Just lastly if you could quickly give some perspective on this bad capital allocation of course you’ve been very aggressive in acquiring companies as well as adding capacity here in India for last three years. How should we look at the capex number going forward for the next three years on an annual basis? Will it be more acquisitive, or will it be more expanding given [Indecipherable] opportunities?

Tarak Patel — Managing Director

Sure. So Sandeep, last two years — yeah, last two, three years, we have acquired capacity in Hyderabad and Vatva as you know. And for a direct period of FY25 for achieving INR3,700 crores we have sufficient capex. And we generally believe that we can probably do closer to INR4,000 crores, INR4,000 crores-plus of the turnover, out of the existing capex infrastructure that we have.

Of course maybe 2.0%, 2.5% of maintenance capex every year just to — on sustenance basis will definitely be needed. But no enhancement capex is planned for any deliveries up to FY’25.

Operator

Thank you. Our next question comes from Nitin Agarwal with DAM Capital Advisors. Please go ahead.

Nitin Agarwal — DAM Capital Advisors — Analyst

Hi. Thanks for taking the question. Just couple of questions on the Q4 results. Two line items, one is on the cost of goods and the other expenses, there is a meaningful change on a QoQ basis. Is there a seasonality element to either both of these elements, if you can just help us explain those two elements. I mean, the COGS has gone up quite a bit and other expenses are also up quite a bit on a QoQ basis.

Tarak Patel — Managing Director

Yeah. So like I mentioned, there is seasonality, there is probably some margin reduction, if you look at the last year numbers as well, the Q4 numbers were lower by about 100 bps to 200 bps, because of the seasonality, we have an increment cycle that kicks in on January 1st, so that’s something we had a couple of one-off payments that we had to make, and yeah, basically that’s on the payroll side. And of course the three new entities come up and their expenses do distort the picture on a comparative quarterly basis. And, on the other expenses side, like we said there are annual facilities catch-up extensions that happened. And therefore probably the full-year is a right reflection to see on a consistent basis how do we expect these numbers to go ahead.

Nitin Agarwal — DAM Capital Advisors — Analyst

And in GPMs, how do we account for rather what is the impact of the metal price movement that typically gets passed through as inventory loss or gain, typically in a gross margin line for the quarter.

Tarak Patel — Managing Director

So, there is a concept called MAUC, Moving Average Unit Cost. So every time you purchase a inventory, the existing inventory gets re-rated to the new pricing, and therefore you see that there was, I mean, last year we had that lag of — we had a price benefit in the first half and the price and reality starting in H2. And therefore, you had a margin improvement — increase in the H1 last year, and H2 in the subsequent period. So, every time you buy a new material, the inventory gets impacted by the total cost on the average basis.

Nitin Agarwal — DAM Capital Advisors — Analyst

Okay. And lastly, in terms of the recent acquisitions we’ve done. They fully accounted for it from the Q4 or there is some element which is yet to be captured in the number?

Tarak Patel — Managing Director

Yeah. They have been fully accounted for in this year. Of course, the PPA, as the accounting concept allow us for a one year period to do the PPA revision. We don’t expect anything, any material numbers coming out of that from either of the three acquisitions. But otherwise, yeah, they’re now pretty much part and parcel of our revenues and assets and aggregate and the expenses and all.

Manish Poddar — Chief Financial Officer, India Business

Revenue is only two months, for…[Speech Overlap]

Tarak Patel — Managing Director

Yeah. Mixel is just two months, HARI started in first week of August, JDS end November.

Manish Poddar — Chief Financial Officer, India Business

But it was now only started production, so it is not hitting any revenue, cost but no revenue coming in, that should now get in…[Speech Overlap]

Tarak Patel — Managing Director

Exactly. And that is the reason that on a like-to-like basis, if we exclude these three entities where the international margin is higher by half of [Indecipherable].

Nitin Agarwal — DAM Capital Advisors — Analyst

And lastly, what is our interests for annual — annualized interest cost now in the current environment?

Tarak Patel — Managing Director

Yeah. So, I think we have been because of the healthier financials that we enjoy, the weighted-average cost-of-capital is at 7.7%, sub-8% on a global basis and India also is at 8.3%.

Nitin Agarwal — DAM Capital Advisors — Analyst

So about 8.0%, 8.5% on average for on a gross…[Speech Overlap]

Tarak Patel — Managing Director

Yeah. On a global basis, we are at 7.7%. India, we are at 8.3%.

Nitin Agarwal — DAM Capital Advisors — Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from Rohit Ohri with Progressive Share. Please go ahead.

Rohit Ohri — Progressive Share Brokers Pvt. Ltd. — Analyst

Hi, Tarak. Two questions, and two-parts to that. The first one being, we’ve been speaking about our bioplastic, bio proteins and certain [Indecipherable] which are currently small industries have a lot of potential to grow. So what is GMM Pfaudler doing over there in that domain?

And secondly, if you could share some more details on the EV space and GMM Pfaudler playing a role in that.

Tarak Patel — Managing Director

Yeah. I think Aseem, hi…[Speech Overlap]

Aseem Joshi — Chief Executive Officer, India Business

Yeah. So, Rohit, this is Aseem and I’ll take your question. So yes, we are closely watching these and other megatrends. You mentioned two of them bio protein and then lithium. We have actually have opportunities in both those areas. As far as bioproteins go, the HARI acquisition that we made last year had some very interesting membrane separation technology that is applicable there. In fact, we have already worked with a couple of leading players in that space in Europe.

And we are very hopeful that we can expand that certainly [Speech Overlap] sorry, in US, not in Europe. As far as lithium is concerned, there too, we have a play we are actually exploring what else we can do. But we already have a large project, I think it was about $10 million of asset recovery which is where — it falls in our system business. This was a project we won in Korea for asset recovery for a lithium plant.

So, our asset recovery solutions traditionally have gone into chemical, explosives kind of applications, minerals kind of application. But thanks to lithium, thanks to some of the environmental norms that are coming in that apply to the power industry, we see additional segments where we can apply these technologies.

We have, for example in India, an order that we are executing now for Hindalco for a power plant. This is a flue gas desulfurization application where sulfur is moved out flue gases and that weak sulfuric acid that comes out of it is then compensated up so that it can be reused or it could be used or sold into the market.

So, that’s an exciting area for us and we’re keenly following the development in this space.

Rohit Ohri — Progressive Share Brokers Pvt. Ltd. — Analyst

Okay, okay thanks Aseem. Tarak, GMM has become a global organization with 16 manufacturing units across the globe. Somehow if you see the world map, we see GMM everywhere except for Japan and a [Indecipherable] so do you think that these markets are not lucrative for our portfolio since we don’t have a presence over there?

Tarak Patel — Managing Director

So okay, so firstly, let me just clarify that even though we have a lot of dots around the map, all of them are not manufacturing facilities. There are about eight key manufacturing facilities, some of the other sites are small kind of engineering offices or kind of centers where we kind of bring in stuff and just kind of assemble and things like that.

So yeah, so eight is really big — not big size, but really true manufacturing sites around the world, three of which are in India and one of which is in China, so four really for the rest of world. Now in Japan, we already have a relationship and have had a very strong relationship with a Japanese manufacturer of glass-lined equipment, a company called Kobelco Eco-Solutions, in the past, and we currently have also supplies that we supplied to them which we buy from India and we sell in the local Japanese market.

Keep in mind that Japan historically has been a very close market, they usually buy only Japanese equipment, and there are currently three manufacturers. So there is no real need for us to penetrate, and it’s quite — it’s kind of tough also to penetrate the Japanese market. Having said that, because of our relationship in Japan, some of our products have already been sold there. The Japanese company also buys the pharma glass, the glass that we actually spray on to the reactors from us, it’s a Pfaudler glass that they sell in Japan. So the Pfaudler brand-name is quite popular in Japan as well.

So indirectly, we are there in Japan. Directly it doesn’t make really a lot of sense for us to kind of go in and try to takeover or be a part of the Japanese market. Our real focus now in terms of glass-lined growth is going to be really the China market. The China market for us is something that we probably have a much lower market share than the rest the world. The China factory was started about 1.5 year ago, it’s fully operational now. It’s fully up and running. The momentum is very strong. We have good people there, a good site director as well. So China really can double or triple in the next few years. And that’s really our focus and hope.

Rohit Ohri — Progressive Share Brokers Pvt. Ltd. — Analyst

Okay, okay. My last question is probably, Manish can take it. You did touch up on the fact that with the current capacity, we can be around INR4,000 crore or so. And your target is INR3,700 crores. My question is, are you looking at INR5,000 crore by ’27, ’28 growing at around 14%, 15% CAGR?

Manish Poddar — Chief Financial Officer, India Business

Tarak, you want to take that?

Tarak Patel — Managing Director

So unfortunately, since the guidance has already given the 2025, I think the first order of business for us is to achieve that, and then re-guide. We obviously have internal targets. We have built some kind of internal plans right now, too early to share what those numbers are. But I believe that, as a Company we would like to obviously grow and continue to grow. We would also like to improve the margin and really look at both of these as opportunities, both through organic, as well as inorganic growth. So that’s really the idea.

And, we are keeping a close eye on our markets. We also are looking to diversify so if one or two industries were to slowdown, we always have buckled in place. I think one of the things that you will also see now and this is a question that I used to get quite a bit about acquiring international businesses because most Indian companies who bought international businesses haven’t done so well, but I think this year, you will also see that the [Indecipherable] business is helping us significantly, both in terms of revenue and the profitability, right. So let’s say, for example, if India were to slowdown for the next six months, nine months, I’m still confident that the numbers will be met, because the international business with such a larger part of it coming from services and aftermarket will still continue to make those numbers, right? So we have a kind of buckles in place, we have derisked only from India-focused to now having really a global focus which make a little bit more comfort around the fact that these numbers will be made either through some certain geographies or business lines, if one or the other one were to slowdown.

Rohit Ohri — Progressive Share Brokers Pvt. Ltd. — Analyst

Okay, okay. Thank you, Tarak. Thank you for answering. I’ll fall back in the queue. Thanks.

Tarak Patel — Managing Director

Thank you.

Operator

Thank you. Our next question comes from Ashit Koti with Investor. Please go ahead.

Ashit Koti — Investor — Analyst

Good evening, Tarak sir. Thanks for the opportunity. Just two questions, one is, Hydro Air you said, it is more of a assembling unit. So, is it that, that kind of activity would get transferred totally to India? That is one. And we have shown, I think around INR333 crores or odd amount as a debt, which is majorly used towards increasing the stake of 46%, mining of that 46%.

Tarak Patel — Managing Director

Yeah. So, let me first answer the Hydro Air question, and then you can take the debt question. The Hydro Air question the idea obviously for Hydro Air, it’s $7 million $8 million company, it’s very localized, it caters to certain parts of Europe, Italy, Germany, Switzerland. The idea of this acquisition was obviously to bring Hydro into our stable, so we increase our product portfolio, we add new businesses and new industry that we can cater to. However, the real benefit will come now because Hydro Air has access to the Pfaudler’s global network.

We won’t probably — so the European business will still continue to cater to the Europe and US markets. However, for India and China, we will now do the manufacturing locally. The technology and the engineering will be done by the Hydro Air guide in Italy. However, the local cost structure of manufacturing assembly will be done in India and China, so that we can obviously compete more with the kind of local competitors that we would have and bring our cost down significantly, right.

So that’s the idea. We have also quoted recently some of these Hydro Air skits [Phonetic] to Biocon and other biotech industries as well. And that will all be manufactured locally. The engineering will be done in Italy. Manish, on the debt?

Manish Poddar — Chief Financial Officer, India Business

Sure. On the debt yes, they will see a limit. One was as you all know the 46% acquisition led to a debt of something like INR175 crores. And then in India, we had a short-term working capital debt of INR50 crores and the third piece was for Mixel, we have taken some EUR8 million, EUR8.5 million of debt in the international business. So collectively, these were the three elements which led to the increase in the debt. And currently our debt ratios, maybe you can spend a minute and just…[Speech Overlap]

Tarak Patel — Managing Director

Sure. I think as we mentioned, we continue to enjoy a healthy balance sheet from that perspective. On a consol basis, from net-debt to EBITDA, we are at 1. And at India, we are at 1.7. Net-debt to equity, we are at 0.5 only. So this is absolutely healthy and comfortable from a debt perspective.

Manish Poddar — Chief Financial Officer, India Business

And I think maybe also for the benefit of the Group, I think most of the acquisitions that we have planned have been completed. The large acquisitions, right. I don’t think there is any significant kind of major acquisitions that we have planned for the foreseeable future. So the focus will obviously be now on reducing and repaying debt.

I mean, we have pretty much repaid quite a bit of it. But then we had to take some more for the acquisition of the 100% which is now done, and you’ll see over the next two to three years that the debt will be reduced.

Tarak Patel — Managing Director

And the interest coverage ratio is at 6.5 times, and DSCR is at 1.7 [Phonetic] times, on the consol basis. [Speech Overlap]. And maybe you want to give the update numbers on the pension plan as well, the debt-like items and maybe…[Speech Overlap]

Manish Poddar — Chief Financial Officer, India Business

Yes. So the pension plans, when we started the year, we had something like INR373 crores, and now we have it at INR280 crores primarily because of the interest-rate increase, the present value of the liabilities have gone down. So that helped us in the OCI or Other Comprehensive Income. And that is to an extent. [Speech Overlap] These are as we mentioned earlier, these are the closed pension plans, so there’s no new additions and these were closed quite a few years back. The average age is something like 79, 80 years. So there is a natural progression to exit to these plans. And the US funded plan was there, and that, the asset and liabilities have been locked off. And so that volatility in the P&L has been taken care of in this year.

Ashit Koti — Investor — Analyst

So we assume that INR283 crores what is there over a period of maybe five, seven years, would reduce by maybe 50% or, or…[Speech Overlap]

Manish Poddar — Chief Financial Officer, India Business

INR283 crores probably will have a much longer period. But, kindly appreciate as the interest-rate cycle turns, and — so then you’ll have a reversed movement as well. However, the time value, it’s a combination of the… [Speech Overlap]

Tarak Patel — Managing Director

No, he’s asking you a different question he’s not asking you for the pension liabilities, he’s asking about the other debt when will you believe retaining [Phonetic] the other debt. He said 5 to 12 years or something like that.

Manish Poddar — Chief Financial Officer, India Business

No, so debt of this INR800 crores broadly, although we have INR300 crores of cash, but the gross debt of INR800 crores, we have the original payment schedule till FY28, but we feel in next two to three years, we should generate enough cash, if we don’t do any further acquisitions and all that, we should be able to pay-off our debt in next three years.

Ashit Koti — Investor — Analyst

Okay, thank you. I’ll come in queue.

Operator

Thank you. [Operator Instructions]. Our next question comes from Sanjay Shah with KSA Securities Pvt. Ltd. Please go-ahead.

Sanjay Shah — KSA Shares & Securities Pvt. Ltd. — Analyst

Good evening, gentlemen. Thanks for the opportunity. Sir, my — just to get some understanding about our vertical wise business, in India, majority Q2 are the technology side, and when we see international, I understand it’s because of Pfaudler, but it’s well equally divided among technologies, services, systems and all.

So, Tarak sir, can you help me how do you see that coming in next two, three years? How you see that opportunity of improving our business on system side services side in India too?

Aseem Joshi — Chief Executive Officer, India Business

So Sanjay, this is Aseem, I’ll take it. So you’re right, when you look at the spike, certainly in India, our — more — the bulk of our revenue comes from the technology segment both glass-line and non-glass line. Now, we do recognize the benefit of having a more rate of balance with more systems and more service, and that’s the focus. The services piece, we have increased our emphasis on that, that segment. That’s currently less than 10% of our revenue, and we are focused on growing that. As you know, India is still a strongly growing market, so the installed-base is being built out. In the next five to eight years as this installed base matures, there is definitely a need for service [Indecipherable] and we anticipate people will be looking for quality service for which GMM Pfaudler will be ready.

And as far as systems is concerned, this too I think will follow the installed base and sort of as the market starts maturing, we will be able to grow our systems business. We are certainly improving our capacity in India as far as engineering is concerned and sale is concerned to drive growth. So overtime, we expect to improve this balance.

Sanjay Shah — KSA Shares & Securities Pvt. Ltd. — Analyst

Sir, in technology side, how was the progress in our non glass-line segment? Could we do any good inroads into it?

Aseem Joshi — Chief Executive Officer, India Business

Yes, very much so. So, we have delivered very strong results in our mixing business, our — actually our engineered systems, those Wiped Film Evaporators kind of business has done well. And also our EQUILLOY business which also falls in technology has grown really well as well. We’re actually quite pleased with the kind of growth rates, very high double-digit growth rates that we witnessed across non-glass-line technologies portfolio.

Tarak Patel — Managing Director

Yeah. So let me just add to this. Our mixing business in India we used to be totally INR25 crores to INR30 crores this year, we nearly closed that — we were at INR150 crores-odd of revenue just from mixing itself, right. Again, very technology-focused product range, quite high in terms of profitability, we had large orders for fermentation reactors from three key main customers here in India, we’re going to manufacture Benjie [Phonetic] that really boosted our growth for next year as well. We have a strong backlog in mixing, the acquisition of Mixel, I think that mixing business is really going to be a nice growth area for us and also adds to our profitability, but also is very complementary in nature to our glass-lined business.

Let me also step one step back and talk a little bit about Heavy Engineering. So last year keep in mind, so this financial year that we just completed, our heavy engineering business was pretty much breakeven. We had some struggles there with higher input costs, materials rising and some of the large orders that we had INR100 crores worth of orders that we received from one single-vendor were not lucrative in terms of margins.

So, having said that, the backlog now for the next financial year is definitely more accretive in terms of margin. We’ve been very careful in terms of our strategy, what we’re trying to book and how we book it. We have a good mix of export business as well and have heavy engineering business as well. So all-in all, we are quite confident that the growth in heavy engineering will continue whilst the margin improvement in Heavy Engineering will be significantly better than previous years. That’s another kind of a positive aspect of the business.

So that’s something that we are watching quite carefully, and we hope that, that will continue as well. And our ability to maintain and differentiate our sales will be able to improve margins as well.

Sanjay Shah — KSA Shares & Securities Pvt. Ltd. — Analyst

Thank you sir. It’s really helpful to understand. Thank you very much.

Aseem Joshi — Chief Executive Officer, India Business

Thank you, Sanjay.

Operator

Thank you. Our next question comes from the line of Nitin Agarwal with DAM Capital Advisors. Please go ahead.

Nitin Agarwal — DAM Capital Advisors — Analyst

Thanks for the follow-up. Just one housekeeping on the international business what would be our organic growth this year, excluding the consolidation that we made for this year, the acquisition we made this year?

Tarak Patel — Managing Director

So, it’s pretty much all organic, except for about $5 million or $6 million of revenue…[Speech Overlap]

Aseem Joshi — Chief Executive Officer, India Business

$7 million is the revenue that we… [Speech Overlap]

Tarak Patel — Managing Director

Yeah, if you were to add basically Hydro Air for about seven, eight months and two months of Mixel should be in the range of $5 million to $7 million. JDS has normally started, so everything else is really organic coming from within the Pfaudler portfolio. And obviously next year going forward, once these businesses — the new businesses start producing and growing, they will pay the bigger share they will have in terms of the growth.

Sanjay Shah — KSA Shares & Securities Pvt. Ltd. — Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Rohit Ohri with Progressive Shares. Please go ahead.

Rohit Ohri — Progressive Share Brokers Pvt. Ltd. — Analyst

Hi. Thank you for the follow up. Tarak, I just wanted to know if there is any increase or decrease in the market share for GLE, non-GLE or mixing?

Tarak Patel — Managing Director

So mixing, definitely an improvement in market share as I mentioned INR30 crores of revenue few years ago, now it’s INR150 crores, definitely growth in market share. In China, we’ve also probably grown market share in glass-line. In India with the two factories that we have now, I would say, our market share is stable. We had spoken about smarter sales strategy in glass-line where we were really kind of going after high margin business. And obviously that is something that we continue to do. However, we also now are being a little bit more aggressive in the market. But otherwise generally, I think globally if you see our market share would have remained around the same. Keeping everything equal markets would be pretty much down [Phonetic] except for China where glass-lined market has increased.

Rohit Ohri — Progressive Share Brokers Pvt. Ltd. — Analyst

Is it possible to put a number there as per your estimates what is the market share, maybe like 45% or 50%, if you can put a number.

Tarak Patel — Managing Director

Yeah. I would say China is up 10%, India more than 50%, Europe about 40%, US anywhere between 30%, 35%, something like that.

Rohit Ohri — Progressive Share Brokers Pvt. Ltd. — Analyst

Okay. Last question is related to Hydro Air or HARI. Do you think that GMM has an opportunity open in the water treatment, because it is membrane treatment at the end of the day. So do you think that there are certain opportunities with the help of ion exchange and water treatment as such?

Tarak Patel — Managing Director

Yeah. So that technology as you rightly pointed out is certainly applicable to water treatment both fresh as well as you know, waste. However, we will carefully evaluate the commercial of such deal because, we have to make sure that they make sense for us. And sometimes in the water area, they are not perhaps as attractive as some of the other segments that HARI currently serves.

Thomas Kehl — Chief Executive Officer, International Business

This is Thomas here. The HARI acquisition was mainly driven by adding companies and order that have technology and process know-how that is somewhat superior and the water treatment basically is what we would call a commodity in this industry. We can serve it, but it is not necessarily our major target. But we look at it more, highly more demanding specialized application.

Rohit Ohri — Progressive Share Brokers Pvt. Ltd. — Analyst

Okay, thank you Aseem. Thank you Thomas. Thanks for that.

Thomas Kehl — Chief Executive Officer, International Business

Welcome.

Operator

Thank you. Our next question comes from Ashit Koti with Investor. Please go ahead.

Ashit Koti — Investor — Analyst

Yes, sir. Thanks. Pfaudler Limited is still holding 14% sir, and will there be any again in dis-investment [Phonetic] in next one year or so?

Tarak Patel — Managing Director

Yeah. So DBAG as the private-equity fund through Pfaudler Inc continues to own 14% out of which we have disclosed — the family had disclosed that we would acquire 1%. We are waiting for the final clearances from FDI France for the clearance on that and then we will acquire 1% from DBAG through Pfaudler Inc, which will then put the primary in excess of 25%. The balance sheet of DBAG of 13%, like you know, DBAG has been now around for about nine years or so. And I think the time has come that they will eventually exit, the exact date and time of that exit and the way of the exit also has not been decided yet. And that’s something that’s still open. Do keep in mind that again they’ve been very strong supporters of the business, they have been part of the business and supported business for now nine to ten years.

We have very strong relationship with them and they are responsible investors as well. So, as and when we find the right solution, they will consider selling their last little bit and then de-promoter [Phonetic] themselves as well.

Ashit Koti — Investor — Analyst

And sir, as a promoter is there a plan to not immediately, but in a foreseeable future again go back to your the way you used to hold shares? I mean, more than 50% or so. So do you plan to do that?

Tarak Patel — Managing Director

So I had officially and probably in the public domain said that being in at least foreseeable future, closer to the 30% mark is something that I would like to do. Again, there is a lot of dependence on a lot of things, but that is a goal that I do have in mind. Having said that, how long that takes, I really can’t give you a timeline, but the first and the most important thing for us as promoters is to cross the 25% mark, that obviously kind of helped us in terms of our [Indecipherable] gives us more right-sized promotors and also allows us to buy from the market up to 5% every year, without triggering the [Indecipherable] right. So we think that’s something that we would likely do as it’s a good opportunity for us to do it and that’s what we will do. And then let’s see if the time and if everything is great and the [Indecipherable] all align, we would then look at increasing our stake even further.

Rohit Ohri — Progressive Share Brokers Pvt. Ltd. — Analyst

Thank you sir. And then just last question with regards to the market-share, what earlier what do you what was responded by and like US, we have got 25% and China 10%, so we would be more keen on increasing say market-share in China or in US?

Tarak Patel — Managing Director

No, sorry. Just to clarify again in both Europe and any western market which are basically with the United States and Europe, we have somewhere between 35% to 40%. So that kind of fluctuates, but we are the number one market-leader in both these geographies. In India, we have a market-share in excess of 50%, so we are definitely the market leader here.

In China, it’s a slightly different situation. We have a new factory that just came online at 1.5 years ago. The first idea was to stabilize and get it up and running, which we have done now and now the focus is to really go after-market share and build our market-share in China which we expect to do. Market share in China is below 10%, so the ability to grow market share there is significantly better than the rest of the world where we already have very high market share.

So China is definitely the focus area.

Rohit Ohri — Progressive Share Brokers Pvt. Ltd. — Analyst

Thank you, sir.

Operator

Thank you. Ladies and gentlemen, we have reached to the end-of-the question-and-answer session. I would now like to hand the conference over to Ms. Priyanka Daga for closing comments.

Priyanka Daga — DGM Strategic Finance

Thank you. Thank you everybody for joining us today. It was a pleasure interacting with you and we look forward to many more such interactions during the course of the quarter. Thank you. Take care, and see you soon.

Tarak Patel — Managing Director

Thank you.

Aseem Joshi — Chief Executive Officer, India Business

Thank you, bye.

Operator

[Operator Closing Remarks].