The Curious Case Of GMM Pfaudler
There have been some very interesting developments at GMM Pfaudler in recent days. On Aug. 20, the company announced plans to buy a controlling stake in its parent, the global business (ex-India) of the Pfaudler Group, which holds 50.44% in GMM Pfaudler and is the global leader in glass-lined equipment technology. The ink was barely dry on that news when the announcement of an offer for sale of the Indian company’s shares hit the street on Sept. 21. The GMM Pfaudler OFS has been priced at Rs 3,500 versus the Sept. 21 closing price of Rs 5,241, a steep 33% discount.
Naturally, the knives were out on social media, especially from folks who possibly invested in the company recently, perhaps at a higher price, and are now worried that the stock will go lower and stay there.
Adding fuel to fire were the details of large borrowings through the Securities Lending and Borrowing Mechanism at the stock exchanges. Quick data analysis shows that GMM Pfaudler shares were borrowed at various price levels all through last week, totaling nearly 1.9 lakh shares. The SLB mechanism is one through which investors can borrow or lend shares to other market participants. Borrowers in SLB are usually short-sellers—i.e. traders who want to sell shares that they don’t own. Lenders on the other hand are those investors who have bought shares for long-term purposes and such shares are lying idle in their demat accounts. The fact that the OFS followed a large number of shares being bought on the SLB window could mean that someone may have known of the transaction and took to the SLB mechanism in order to make a quick buck.
However, much as the company’s investors would want to vent their frustration and blame losses on the OFS announcement, this whole sequence of the stock price up-move, the subsequent downtick, the borrowing of the shares in the SLB mechanism, and the OFS following that is not about the fundamentals of GMM Pfaudler at all.
It is, to my mind, entirely about investor behaviour, and about a set of people trading the stock on the SLB window, presumably with knowledge that other investors did not have. And yes, the regulator should try and assess the reasons for the same. It could well have been an intelligent trader’s sharpness, but could also have been awareness about a development not in the public domain.
However, from a larger investing perspective, if an investor bought the stock at around Rs 6,000 a piece or higher, where it was trading at 123 times or more, then the he has no one to blame but himself for buying a stock so expensive without assessing the downside risks. More so if its a relatively illiquid stock in which the chances of being able to exit easily on bad news days are very low.
There have been arguments made on social media questioning the the pricing of the OFS at a steep discount to the price, after the recent rally. That might be unfounded criticism and a tad lame.
Smart institutional investors look at valuations at the offered price and not at the price relative to earlier traded prices. It would be foolhardy to think that any large institutional investor would commit money in an OFS because the stock is available at a discount to an earlier traded price. Even at Rs 3,500 per share, where the demand for the OFS has come in from the institutional end, the stock trades at 72x FY20 earnings. Therefore, it would be a safe assumption that the promoters and the company didn’t have much choice when it comes to pricing the OFS at the kind of discount they did. A higher price would likely not have fetched the requisite number or quality of investors that they would have wanted.
Also, on the issue of promoters selling their stake in the OFS, it should be kept in mind that since the promoters have to fund the purchase of the parent’s stake that has been announced in Pfaudler Inc. (the aforesaid deal involves the promoters also putting in money in Pfaudler Inc. along with GMM Pfaudler), they would have probably had to sell this stake to raise the necessary funds for the purchase. It would be interesting to see if both the Patel family and the private equity firm DBAG have any kind of lock-ins after the OFS, which will enable them to show the street their commitment to the firm and that they have not wanted to ‘cash-out’.
GMM Pfaudler was in the limelight for all the right reasons in 2020. The management cited how business was looking strong for them even in the times of the pandemic. The Q1FY21 earnings vindicated the management commentary and investors queued up to buy the shares. In fact, the clamour for owning GMM was so loud that at a point of time in early August, the stock traded at valuations of 139X FY20 earnings!
While recent events sour the mood temporarily, there are some good things that emerge as learnings from this episode.
While it would hurt investor sentiment that the stock would revert to mean due to an OFS announcement, it would make them wary of the phenomenon of buying quality at any price, and would hopefully prompt people to research a company before putting in hard-earned money.
Mind you, unlike some permanent price damage events, this one could be a temporary setback to the price. If the management delivers the guided numbers of Rs 2,800 crore revenue at 16% EBIDTA for FY24, then it would be trading at 23x FY24PE at the OFS price of Rs 3,500. That won’t look outlandishly-priced, for a company which is the market leader in its segment. That is the bet that any retail investor who bought it at a higher price has to take.
Niraj Shah is Markets Editor at BloombergQuint.