Rating Rationale
November 20, 2020 | Mumbai
GMM Pfaudler Limited
  Ratings continues on 'Watch Developing'  
 
Rating Action
Total Bank Loan Facilities Rated Rs.100 Crore
Long Term Rating CRISIL AA- (Continues on 'Rating Watch with Developing Implications') 
Short Term Rating CRISIL A1+ (Continues on 'Rating Watch with Developing Implications') 
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL's ratings on the bank facilities of GMM Pfaudler Limited (GMM Pfaudler) continue to be on 'Rating Watch with Developing Implications'.
 
On August 20, 2020, CRISIL had placed its ratings on bank facilities and debt instruments of GMM Pfaudler on 'Watch with developing implications', after the company made an announcement on its acquisition of 54% stake in 9 Pfaudler group companies (target entities) across USA, Europe, Brazil and China, from the current holding company, Pfaudler UK Ltd. GMM Pfaudler will acquire 34.4% in these entities by itself, and the balance 19.6% through its wholly-owned subsidiary, Mavag AG. The consideration for the acquisition stands at Rs 205 crore (US $ 27.4 million), which is to be funded through fresh debt of Rs 130 crore (US $ 17.4 million) and balance through internal accrual and cash surplus.
 
This acquisition would consolidate the company's businesses globally and make GMM Pfaudler the market leader in corrosion-resistance technologies, systems and services. However, the consolidated debt position is also expected to rise to over Rs 550 crore post acquisition, given the sizeable debt in the books of the target entities which will be taken over, coupled with debt to be availed to partly fund the acquisition.
 
Nonetheless, the target entities also hold cash and bank balances of about Rs 230 crore (US $32 million), which would partly offset the impact on leverage. Besides, the debt at target entities will be rolled-over prior to closure of the transaction. Further, repayment obligations in the next 3-4 years are expected to be low with bulk of the amount due after 4 years.  This should in turn support the liquidity position as well.   
 
The company is currently awaiting regulatory and statutory approvals for the transaction, which is expected to be received in the next few months.
 
CRISIL will continue to monitor the developments around receipt of statutory approvals to complete the acquisition, expected synergies from the acquisition and the management's strategies to integrate and grow the acquired businesses. 
 
The ratings on bank facilities of GMM Pfaudler continue to reflect its leadership position in the glass lined equipment (GLE) market. The ratings also factor in its strong financial risk profile, aided by the conservative capital structure and comfortable liquid surplus. The business risk profile is backed by strong technological expertise and market presence of the Pfaudler Group (Pfaudler) in the overseas markets. These strengths are partially offset by modest growth prospects for the domestic GLE market, and large working capital requirement.
 
For the six months ended September 30, 2020, revenue grew 13% to Rs 341 crore, from Rs 303 crore the previous fiscal, primarily driven by growth in the GLE and heavy engineering segments. Operating margin was also high at 19.4% in the first six months of the current fiscal, driven by a favourable product mix and healthy operating efficiencies. Besides, the financial risk profile remains strong, marked by a net debt-free balance sheet and healthy cash surplus of about Rs 150 crore as on September 30, 2020.
 
The company should sustain its growth momentum and maintain profitability at over 15%, driven by stable demand from end-user industries such as pharmaceuticals, despite the Covid-19 pandemic.

Analytical Approach

CRISIL has combined the credit risk profiles of GMM Pfaudler Ltd and its subsidiaries, GMM Mavag AG, and Mavag AG, collectively referred to as GMM Pfaudler. CRISIL has also amortised the goodwill on the acquisition of Mavag AG over 10 years through fiscal 2019.

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 domestic GLE industry: Strong product quality and large production capacities have made GMM Pfaudler a market leader in the domestic GLE industry, with a market share of around 55%. It faces intense competition in the small vessel segment from other domestic players. However, the group has a near monopoly in the large vessels (with capacities of over 16,000 litre) segment.
 
* Strong financial risk profile: The company is net debt-free and its networth has grown steadily (Rs 382 crore as on September 30, 2020) supported by steady accretion to reserves. Consequently, gearing remains comfortable at sub 0.1 time along with comfortable credit metrics. Cash and bank balance (including current investments) was Rs 151 crore as on September 30, 2020.
 
* Strong technological expertise and market presence of Pfaudler Inc in global markets: GMM Pfaudler's 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 (R&D) capabilities of Pfaudler and other group companies. Besides, the group also has a strong global reach with manufacturing facilities in four continents.
 
Weaknesses:
* Moderate growth prospects constrained by small size of domestic GLE market: Though growth prospects are restricted due to the small size of the domestic GLE market, GMM Pfaudler has been making attempts to diversify into the non-GLE segment both organically and inorganically, via acquisition of Mavag AG in 2008. The non-GLE segment contributed about 32% of revenue to the standalone entity in fiscal 2020, and its share may improve gradually over the medium term. Improved presence in export markets, will also help partially offset challenges in the domestic market.
 
* Working capital-intensive operations: The long lead time in production and high cost of specialised raw materials lead to large working capital requirement. Gross current assets were 190 days as on March 31, 2020, with average inventory turnover of up to 120 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

Liquidity is strong, marked by net debt-free balance sheet and healthy cash surplus of over Rs 100 crore, adequate to cover the entire capital expenditure and debt obligation over the next 2-3 years. Modest albeit improving cash accrual and minimal capital spending in the recent past led to the build-up in GMM Pfaudler's cash surplus, enhancing liquidity. Furthermore, bank limit utilisation has also been low in the past five years.

Rating Sensitivity factors
Upward factors:
* Consistent annual revenue growth of 25%, along with sustenance of operating margin over 20%
* Efficient working capital management coupled with a healthy financial risk profile
 
Downward factors:
* Decline in revenues by over 10% on sustained basis, with operating margin below 12%
* Any larger-than-expected debt availed to fund the acquisition, leading to steeper moderation in credit metrics, for instance, net debt to EBITDA increasing beyond 2 times
About the Company

GMM Pfaudler was originally incorporated as Gujarat Machinery Manufacturers Ltd (GMM) in 1962. The company manufactures GLE, heavy engineering and proprietary products. In 1987, Pfaudler Inc, the world leader in GLE and glass-lining technology, acquired a 40% stake in the company, and increased its stake to 51% in 1999, following which GMM was renamed as GMM Pfaudler. The parent of Pfaudler Inc 'Robbins and Myers Inc' was acquired by National Oilwell Varco, Inc (NOV) in February 2013; NOV sold its stake in Pfaudler to Deutsche Beteiligungs AG (DB AG), a German private equity firm in December 2014. GMM Pfaudler's products are used primarily in the chemical, pharmaceutical, and allied industries. Its facilities are at Karamsad, in Gujarat, and in Pune.

GMM Pfaudler is listed on the Bombay Stock Exchange and the National Stock Exchange. As on September 30, 2020, the promoter and the group entities held about 54.95% stake and the general public holding the remaining.

For the six months ended September 2020, company's operating income and profit after tax (PAT) stood at Rs 341 crore and Rs 46 crore, respectively, against Rs 303 crore and Rs 38 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators*
Particulars Unit 2020 2019
Revenue Rs.Crore 591 503
Profit After Tax (PAT) Rs.Crore 71 51
PAT Margin % 12 10.1
Adjusted debt/Adjusted Networth Times 0.04 NA
Adjusted interest coverage Times 33.15 71.79
*CRISIL Adjusted numbers

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
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 20 NA CRISIL AA-/Watch Developing
NA Bank Guarantee* NA NA NA 30 NA CRISIL A1+/Watch Developing
NA Bank Guarantee NA NA NA 30 NA CRISIL A1+/Watch Developing
NA Letter of Credit* NA NA NA 20 NA CRISIL A1+/Watch Developing
*Fully interchangeable with each other
 
Annexure - List of entities consolidated
Names of entities consolidated Extent of consolidation Rationale for consolidation
GMM Mavag AG Full Subsidiary
Mavag AG Full Subsidiary
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST    --    --  30-09-19  Withdrawal  29-09-18  CRISIL A1+  29-09-17  CRISIL A1+  CRISIL A1+ 
                    23-02-17  CRISIL A1+   
Fund-based Bank Facilities  LT/ST  20.00  CRISIL AA-/(Watch) Developing  31-08-20  CRISIL AA-/Watch Developing  30-09-19  CRISIL AA-/Stable  29-09-18  CRISIL AA-/Stable  29-09-17  CRISIL AA-/Stable  CRISIL AA-/Stable 
                    23-02-17  CRISIL AA-/Stable   
Non Fund-based Bank Facilities  LT/ST  80.00  CRISIL A1+/(Watch) Developing  31-08-20  CRISIL A1+/Watch Developing  30-09-19  CRISIL A1+  29-09-18  CRISIL A1+  29-09-17  CRISIL A1+  CRISIL A1+ 
                    23-02-17  CRISIL A1+   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee* 30 CRISIL A1+/Watch Developing Bank Guarantee* 30 CRISIL A1+/Watch Developing
Bank Guarantee 30 CRISIL A1+/Watch Developing Bank Guarantee 30 CRISIL A1+/Watch Developing
Cash Credit 20 CRISIL AA-/Watch Developing Cash Credit 20 CRISIL AA-/Watch Developing
Letter of Credit* 20 CRISIL A1+/Watch Developing Letter of Credit* 20 CRISIL A1+/Watch Developing
Total 100 -- Total 100 --
*Fully interchangeable with each other
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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