Strong Q4 despite disruption

Utilisation inching towards pre-Covid levels!

Business restructuring to aid margin improvement

Reasonable performance with an unreasonable valuation:  Revise to Sell GMM Pfaudler Ltd (GMM), for Q4FY20, reported a decent set of numbers. Revenue de-grew by 5.3% YoY to INR 1318mn (est INR 1593mn) mainly due to a revenue loss of INR 300mn led by the nationwide lockdown. EBITDA showed growth of 13.4% YoY to INR225mn (est INR323mn) with 280ps YoY improvement in margin from 14.2% in Q4FY19 to 17.1% in Q4FY20, due to favourable product mix mainly led by Glass-lined business, where EBIT margin improved by 463bps on YoY basis with 63% contribution in consolidated revenue. However, the Heavy engineering business has dragged growth momentum with 59.5% de-growth in revenue and -18.6% EBIT margin (vs 2.1%YoY) in Q4FY20. The loss came up as GMM couldn't ship the order to their Middle East client due to lockdown followed by higher fixed overheads. As per the management, heavy engineering can add strong growth on the back of a healthy order book with improved margin profile going forward. Proprietary products also reported weak performance with a 4% decline in revenue and 737bps contraction in EBIT margin compared to last year's same quarter. Current order book stands at INR 3,500mn (~60% of FY20 revenue), of which 90% pertains to new orders, and 10% pertains to replacement demand. Net profit declined by 12.8% to INR 116mn (est. INR218mn) due to lower other income (INR 7mn vs INR 24mn), higher depreciation and finance cost. GMM's Swiss-based subsidiary Mavag AG posted revenue of INR184mn (est 187mn) with EBITDA of INR23mn (est INR29mn), and profit came at INR16mn (est 23mn). Muted performance in Mavag AG is due to the poor demand environment in the European market. However, management believes momentum will regain in coming quarters. For FY21, Management has guided revenue of Swiss franc 12mn (INR936mn) with the margin improvement. Glass-lined Equipment business to remain a mainstay of growth The management is targeting to increase Glass-lined equipment capacity from 2,400 equivalent units (EUs) to 2800 EUs by the end of FY21 with the installation of two more natural gas furnace from Japan, which is expected to get installed by September 2020. As management expects a recovery in the pharmaceuticals sector due to the capex cycle is poised to witness better pace, getting ready with additional capacity will help the company to grab this opportunity. Moreover, GMM is also looking to set up a new unit dedicated to glass-lined lined equipment near Hyderabad Pharma city at the cost of INR500mn (funding through internal accruals ) which would add 500 EUs to the overall capacity. As per management, It will take 10-12 months to commission Hyderabad plant. We modelled additional INR500mn revenue from the new Hyderabad facility in FY22e to overall GL revenue. Given the above factors, we expect GMM’s GL revenue to grow at a CAGR of 21.1% over FY20- 22E, with similar overall revenue growth of 21% during the same period.   Valuation and Outlook GMM has a leadership position in GL reactors (~60% Market share) with strong pricing power in the domestic market. The company is well-positioned to witness steady revenue and profitability growth over the next two years on the back of growing domestic demand. We believe GMM is well placed to capture the opportunity from increasing demand through brown field expansion and higher capacity utilization. GMM is likely to leverage its deep-rooted relationship with GL customers to cross-sell its non-GL equipment. We estimate consolidated Revenue/EBITDA/PAT to clock 21%/28%/28% CAGR during FY20-22E. We believe with the strong brand name, sticky client base, and superior growth in non-GL deserves a premium valuation. We had initiated a coverage report on GMM at INR 717 click (21/12/2017) which played out very well with strong operational performance plus re-rating in valuations multiple. With the stock now trading at P/E 46x(FY22E) multiples, we see risk-reward as less compelling from here as it is trading beyon

Focus on import substitution and OBR

COVID-19 disrupts healthy growth trajectory

Health & hygiene new buzzwords…

Numbers mixed; speciality, domestic promising

Focusing on reducing cost structure…

Near term impact on premiumisation trend…