Why Shares Of GMM Pfaudler Surged Near 300% In Pandemic-Hit Year

Shares of the Gujarat-based company rose to a fresh record of Rs 6,900 on Aug. 12 compared with Rs 1,818 on March 19. While it eased off the peak, the stock's stellar gains also came on the back of steady earnings growth, rising market share and growth in its non-core business.

Here’s what drove the rally for the Indian joint venture of U.S.-based Pfaudler Inc:

Business And Revenue

GMM Pfaudler’s business grew in the last five years as demand from pharma and chemical makers increased. Its revenue, operating profit and net profit rose at an annualised rate of 15%, 26% and 29%, respectively, during the same period, while Ebitda margin expanded from 12% to 18.8%.

The company operates in three key segments but nearly 70% of its total revenue comes from its glass-lined equipment business.

The glass-lined equipment industry in India comprises three main players that control 75% of industry revenue, according to JM Financial, with GMM Pfaudler accounting for nearly half of it.

HLE Glascoat Ltd., formerly known as Swiss Glascoat Equipments Ltd., is the second-largest player.

Analysts expect GMM Pfaudler to benefit from the shift from China to India by drugmakers and chemical producers following the Covid-19 outbreak, the U.S.-China trade war and Indian curbs on imports from Asia’s largest economy.

“Our backlogs continue to remain quite strong and the industry segment that we cater to, pharmaceuticals and chemicals, continue to show a lot of traction,” Tarak Patel, managing director of GMM Pfaudler, said at the earnings call for the quarter ended June. “Our order book across our product lines remain quite strong and our outlook for this financial year remains very positive.”

The company is expanding capacity to meet the increased demand. It has nearly doubled its manufacturing capacity in the last three years to 2,000 equivalent units a year in the fiscal ended March 2020. It plans to expand it further to 2,900 EUs by March 2022.

The company acquired De Dietrich Process Systems India’s glass manufacturing facility in the last quarter. “This facility will be most likely handed over to us on Sept. 1,” Patel said at the earnings call. “This gives us readymade glass-line capacity in Hyderabad. It will improve our presence in the region and help serve our customers in a much quicker and prompter manner.”

Additionally, it plans to scale up its non-glass lined equipment business as it witnesses growth in niche segments like heavy engineering and proprietary products which together contribute to around a third of revenue.

“GMM is pursuing an aggressive strategy to increase its non-GL business share. We believe this is a right strategy as it will open opportunities in various sectors and eventually become immune to the cyclicality of GL business,” JM Financial said in a research note. “The proprietary products industry in India remains highly unorganised and is seeing a continuous shift to organised players to avoid any regulatory hurdles at manufacturing unit.”

Cyclical Business A Risk

A risk factor for the company is that it's into a cyclical business and is highly dependent on end-user industry expansion for revenue. Up to 85% of the glass-lined industry, according to JM Financial, is dependent on new capex by pharma and chemical manufacturers. Any negative positioning in these industries can lead to delay or reduction in capex, impacting growth in the future, the brokerage said.

Expensive Valuation

Even as analysts remain bullish over the company’s long-term prospects, the sharp rally in its stock means its valuations have surged. GMM trades at 102 times its FY21 estimated earnings compared to its five-year average of 37.2 times. The stock has run ahead of their expectations. The average of 12-month target prices tracked by Bloomberg stands at Rs 3,556, nearly half of the current price. Yet, three out of the five analysts tracking the stock suggest ‘Hold’, with one each recommending ‘Buy’ and ‘Sell’.