Ladies and gentlemen, good day. Welcome to GMM Pfaudler Limited Q3 and nine months FY 2023 earnings conference call. As a reminder, all participant lines will be in the listen only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star then 0 on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Priyanka Daga from GMM Pfaudler. Thank you. Over to you, Ms. Daga.
Thank you, Niraj. Good afternoon, ladies and gentlemen. A very warm welcome to all of you into the quarter three 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, our CFO of International Business, Mr. Alexander Pompner, and our 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 happen now, contains or may have certain forward-looking statements regarding our business prospects and profitability, which are subject to several 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.
Thank you, Priyanka. Good afternoon, everyone. I am pleased to report another good quarter driven by strong execution across geographies. Our overall performance remains on track, and we are confident of meeting our FY 2025 guidance. In terms of financial performance this quarter, we reported a revenue of INR 792 crores, which is a growth of about 23% odd. An EBITDA of INR 118 crores, translating to a growth of 43% with an EBITDA margin of 14.9%. I would like to also highlight here that there are two one-time exceptional items. One is on the basis of an inventory provision, where we were actually going to supply a large reactor from U.K. to China, and the application of this export license was rejected by the U.K. government.
Obviously, we have taken the most conservative approach and provided for the entire order. However, we will be reapplying for this the export license, and there is a good chance that this export license will come through and obviously at that point of time, we would then provide for this in a positive manner. The other option for this equipment is obviously to sell it to somebody else. If this export license is rejected again, we would then look at selling to somebody else or then finding another way where we could probably remove the glass and then sell it to China and have it reglassed over there. There are multiple options there. The other one is for the acquisition related expenses, again one time, and that is to the tune of about INR 8 crore.
The PAT was also impacted by a one-time mark-to-market forex loss. This is a non-cash item. Obviously in the first two quarters we had a forex gain, but in this quarter, because of intercompany loan, we had a forex net loss. In terms of our business performance, our shipment and order intake for the year is ahead of plan. The outlook remains positive. Our technologies and services platforms are seeing good traction across geographies. Our systems business, the opportunity pipeline remains quite strong. The order backlog as it stands today is about 2,247 crores, which gives us about a 6 to 9 months of revenue visibility. We've also done a large stock-in-sale order has been fulfilled. 24 vessels have been shipped to Germany.
Out of these, seven have been sold and the reordering of these remains are in process. At the same time, I would still like to mention that commodity and energy costs do remain a concern. However, we are working on cost control measures across geographies, and hopefully that will help mitigate some of these costs. In terms of other updates, we recently, as of this morning, completed the acquisition of Mixel France SAS, and its wholly owned subsidiary, Mixel Agitator Co. Ltd. in China, in France and in China. The total consideration for this was about EUR 7 million. Mixel has a revenue of 13.2 million with an EBITDA margin of about 12%. The backlog and the business visibility remains quite strong.
This is a good acquisition for us as it helps us improve our mixing portfolio, gives us access to new industries and to new technologies. Lastly, I would also like to make a statement regarding the recent liquidity event. DBAG is a responsible shareholder and has been a strong supporter of our business and management team since 2014. The lock-in agreement was between Patel family and DBAG, so that DBAG would not exit until the successful integration of the Pfaudler International was completed.
This was estimated to be around three years, as many of you know, we actually outperformed and completed our 2020 guidance one year ahead of plan. It was hence decided that it was the right time to start off DBAG divestment. The recent liquidity event and sale of nearly 17.3% stake held by DBAG to high quality investors shows the strong demand and interest in our business. The Patel family is now the largest single shareholder and has continually increased our stake since 2020. We have also agreed to purchase an additional 1% in the business from DBAG at a price of INR 1,700. Regarding the balance stake of DBAG, it will be sold to the right set of investors at the right time.
At this point of time, I would like to now pass on this to Manish, our CFO of the India business, and he will take you through the numbers in more detail. Thank you.
Thank you, Tarak. Good afternoon, all. We start with the consolidated numbers. Revenue for Q3 of FY 2023 stood at INR 792 crores, a decent 26% growth Y-o-Y. EBITDA margin stood at 15% at INR 118 crores. This is a 2% increase in the margin Y-o-Y. PAT also is up Y-o-Y. In the current quarter, we were hit by a couple of exceptional items worth INR 22 crores. First one was the inventory provision of INR 13 crores, as Tarak explained. This was a delay in shipment plan from U.K. to China, because of the suspension of the export license, we could not ship it out.
Therefore, we took a conservative view of providing 100% of the booking provision. The second exceptional item was on the legal cost on the recent acquisitions, we had one paid back the full for INR 8 crore. Apart from these two exceptional items, we also had a forex MTM loss of INR 18 crore, which is a non-cash item on the foreign currency borrowing. This is on the intercompany loans in Euro, as you know, this quarter, Euro appreciated, hence this liability under the resulting loss for interest. Again, this is a non-cash item. Likewise, on the YTD performance, revenue stood at INR 2,300 crore, up 26%. EBITDA stands at 14.5% at INR 335 crore, up 3% margin Y-o-Y.
PAT also stands at INR 199 crores, up two and a half times versus last year. Therefore, you will observe that we are on track to achieve our guidance for FY25, which is INR 3,700 crores of top line and INR 630 crores of EBITDA. Over to you, Priyanka.
Thank you, Manish. Clear, we can now open the line for questions.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Participants, you may press star and 1 to ask a question. The first question is from the line of Utsav Mehta from Edelweiss Asset Management. Please go ahead.
Hi, team. Good afternoon. Thank you for taking my questions. First one, what is the gross debt as it stands currently, and how much of that is in foreign currency?
Utsav, hi. The gross debt stands at something like INR 800 crores, and INR 400 crores is in international business, which is obviously all in foreign currency, local currency and those currencies. Another $5 million of ECB, which is there in India. Apart from that, we of course have some $25 million of cash, so net debt will be less than that.
Okay. This excludes the employee liabilities, right? Pension liabilities.
Yeah. This is the total debt. This is only the debt to the bank.
Okay. I just wanted to understand the INR 18 crore foreign currency translation loss on an international debt of INR 400 crores. That's almost 5% for a quarter.
Okay. Okay. This is not on the bank's debt. This is an intercompany loan, a legacy loan out of the previous, you know, once we acquired the business from DBAG itself. This is a loan from a Euro entity to a dollar entity. The loan is in Euro. While the debt gets knocked off, as we consolidate between a loan received and a loan paid, the forex fluctuation gets impacted because the dollar entity has to pay things in Euros. You would have seen Q1 and Q2, we had a positive impact of INR 22.2 crore each quarter because the Euro depreciated. This quarter, Euro appreciated, there is a loss of INR 18 crore. This is not.
How much
on the INR 400 crores of Pfaudler debt.
Okay. Sorry. How much was the gains that were booked in the earlier quarters?
22 plus 22, something like INR 44 crores in H1 of this year. Maybe you want to add over the nine months, we are still positive. There is gain. Still some INR 24-25 crores of gain, net gain is still there.
That gain is in other income, is it?
Yeah. This entire sits in the other income.
Perfect. Great.
Sorry. Just to clarify this one. Therefore, you see the other income for nine months is INR 37 crores versus INR 5 crores. Majority of that is, as Tarak mentioned, is the effect of the gain that we have.
Okay, great. Tarak, you guys have given a sort of a guidepost in terms of the EBITDA that you want to achieve. I also wanted to understand this INR 800 crores of debt, sort of, what is the target in terms of bringing this number down, and how will you go about achieving it over the next three years?
Hi, sir. We have a plan in place. The actual number is not INR 800 because we have cash on hand as well, so it's lower than that. We do have a plan to be debt free by FY 2028. We believe that it will be sooner than that. We do have some small acquisitions lined up, but nothing significant. Most of the cash that we will generate now, and our cash generation is, you know, the L-sat letter of generating good cash flows. I think over time you will see that the debt number will reduce significantly. We obviously have a plan to remain below the 1x EBITDA debt, and hopefully it was lower and it will be acquired.
Obviously, the 46% held by DBAG very recently, and then we made this new acquisition in Mixel. I think over time you will see that the number will start to reduce and come significantly below the 1 time mark.
From this INR 800 crore number, should I assume will be a peak number? From here on in, it should decline.
Yeah. I think that is around where we will be. I don't think this number is gonna increase significantly at all. If anything, you'll see it going down over time.
Okay, wonderful. One last question from my side.
Just to clarify, net debt today is how much? minus INR 300. Net debt will be something like INR 500. INR 500 because we have cash on hand. The net debt is about INR 500 also.
Understood. One last question from my side. At the analyst meet, you had mentioned that high cost inventory, especially in India, will be sort of done by the second quarter, and in the third quarter itself you'll start seeing some benefits of that. The standalone business in India this quarter has still shown a sort of 50% gross margin and 15% EBITDA margin. Just wanted to understand, you know, how this number will trend over the next few quarters.
Sure. Let me just start off by saying that you're absolutely right. We were hoping for some impact, positive impact of metal pricing reducing and the old inventory actually moving out. Again, this quarter we had a very large shipment of one specific job for heavy engineering. There is a significant change in product mix. The India team, Aseem and Manish are both working on improving our the margins here in India. You know, obviously material costs still remain a concern. They are still about twice the amount it was about 12 to 18 months ago. There has been significant increases. We try and pass on as much as we can to customers.
The heavy engineering business, as you know, is definitely not as lucrative as the Glass-Lined side of the business, and the product mix itself is having an impact on margin. We do believe that we have taken some actions over the last few months where the order intake in heavy engineering obviously is more profitable. We are working on increasing prices in the Glass-Lined business. Our, you know, the proprietary products obviously did quite well. We do have a plan that over the next maybe few quarters we will start seeing improvement in margin. Maybe, Aseem, you wanna jump in and just kind of talk a little bit more about.
Sure.
What really impacted the Q3 margins here in India and how we see them going forward?
Yeah. Thanks, Tarak. Yeah, so I think Tarak covered most of the points. I think I'll just elaborate on heavy engineering a little bit. As you know, this is a line of business that has really, you know, activated this year given the backlog we had. You know, in the last three to six months, as we've shared earlier, we've been a lot more selective about the kind of orders we take in this business. I'm, you know, happy to see the change in the margin and the backlog, profile of this business, I think we should. We expect the benefits of that to come, really in the next, in the current financial year.
At the same time, our Filtration & Drying Systems business, you know, both continue to ramp up very, as well as the mixing business continue to ramp up very nicely. We start to see profitability there. I think Manish will just add a couple more points.
Sir, just to give you perspective, heavy engineering was more than 25% of the business this time in this quarter. Therefore you see this sudden slope in the Q1, sorry, Q3, standalone numbers to INR 276 crores compared INR 266 crores in Q2. On top of it, the major order that we had, the INR 100 crore order that we had, INR 30 crores were shipped out this quarter in Q3. We expect the balance left order of something like INR 20 crores to be shipped out in current quarter Q4. Then we are done with that this order where it was really margin dilutive. We did got something like 1% of material reduction impact as a positive impact in our P&L.
However, this was, you know, more than done by this higher share of the heavy engineering business. If we actually take out internally, if we take out when we did the calculation, if we take out the heavy engineering business, the rest of the business, the rest of the standalone business stands at 20-plus % EBITDA margins. Therefore. Maybe just to add in terms of business strategy, we've also kind of taken a relook at heavy engineering. We are kind of thinking of reducing our exposure there, keeping the revenues to a smaller number while filling that factory up with other products like mixing, like proprietary. Hopefully that will help us also kind of improve the margins coming out of the new facility in Bangalore.
Yeah. Sorry, last question. It was just a follow-up to this one. Is there a difference in working capital between the HE business and the glass lining business?
Yes. It does consume significantly higher amounts of working capital, both on the inventory and on the receivables side, simply because, on the inventory side, the manufacturing cycle is that much larger.
Longer.
Yeah, longer. You know, GLE would have a normally 3-month manufacturing cycle. HE may do from 6 months up to 9 months as well.
Got it. Got it. I've taken up too much of your time. Thank you so much.
Thank you.
Thank you. Ladies and gentlemen, you may press star one to ask a question. Next question is from line of Sandeep Tulsiyan from JM Financial. Please go ahead.
Very good evening. I'm just following up on the margin question on international side. I think when we had guided originally to improve our margins to somewhere about 16%, the expectation was that although we maintain standard margins around 20%, there would be a significant step up in the international margins, which has kind of played out in the first nine month period. Just want to understand where all do you further see scope of improvement in international margins from this 12.7% what you reported in the current quarter? Or do you think largely all of those improvement plan has materialized and this is where steady-state margins should sustain?
Hi, Sandeep. I think the, you know, international business today is par with our India business. You know, in the past, India business was accounting to nearly 70 odd percent of our total profits, while today the international business is nearly as big and as strong as the India business. That's definitely a very kind of a heartening situation for us. We also see that this margin in the international business will continue. Some of the new acquisitions that we've done will only help us kind of improve and maybe grow this margin as well. One of the recent acquisitions that we've done with Mixel, again, mixing is a business that we really are focusing on. We're trying to create mixing as one of, you know, a new kind of business line for us.
Because one, it's very much, it really has good margins. It's a technology play, it really helps our customers improve, let's say, batch time, heat transfer, reduce power consumption. It's really becoming more and more popular. We don't have too much competition again, it's a very, it cross sells with glass lining very well, right? Across the board it ticks all the boxes. It opens up a wide new set of industries, metals and minerals, water, waste treatment, cosmetics, food and beverages, besides chemical and pharma, right? Mixing for us is something that we really wanna focus on. We really wanna create a brand, a global brand, where we can really be one of the top three players in mixing globally, that's what we are working towards.
We are looking at, you know, some small acquisitions that will help us, you know, reach this kind of size and scale. Hopefully that's something that we can announce shortly. Generally, in the international business, the acquisitions that we've made will only help us improve the margins. Hydro Air we said again, has done quite well. They've seen significant order intake. Again, a very kind of good technology product. Again, with high margins. The services business has started growing. Again, high margin. Interseal is doing quite well. Again, very high margin. Overall, we feel quite confident that the international business margins should sustain. You'll also note that now internationally in Europe, especially in Germany, we are now seeing prices of the gas and electricity coming down.
That's only gonna have the positive impact. We've already taken cost reduction measures. For example, we've gone down to a four-day workweek in Germany, which has helped us. We are working on a lot of different things. Generally, to answer your question, yes, I do believe the International Business will continue to perform and maybe even do a little bit better. We have our CEO of International Business here with us today, so maybe he wants to jump in and just say a few words on this.
Yes. Thank you very much, Niraj. The international business is going quite well. We're seeing good, strong order intake. The inquiries are still at a very high level, and we don't see any projects being postponed or canceled anything by our customers and market base. The fact that we have taken a lot of actions, countering the cost increases in material energy prices. However, the overall energy consumption and the cost of energy is less than 5% of the total revenue. So the impact is unforeseeable. With energy prices coming down now, will positively impact us because the current margin already includes higher energy costs that we have been absorbing. So far we are looking into a, let's say good, foreseeable future on that front.
Overall business internationally is intact. Also in the Americas, we have good business activities. A lot of activities going on in inquiries and order intake, especially in service side is pretty good.
Understood. That's quite elaborative. Thank you so much for that answer. Second question that I have was on these acquisitions that we had done in India. That is specifically the De Dietrich facility, the Hindustan or the Libero facility. If you could give us some color how those acquisitions have panned out in terms of ramp-up in production. What are the capacity utilization rates at these manufacturing plants? Where are they in terms of what you envisioned three years back? You know, to the scale and size that you can grow these businesses which you acquired. A bit more color with some quantification should help over there.
Sure. This is I'll take this one. There are two acquisitions that we've done in recent times in India. The De Dietrich plant in Hyderabad and the ACO HINDUSTAN plant in Vatwa, Ahmedabad. We're actually very pleased with the way both these facilities are ramping up. First, the plant in Hyderabad, this is a large timing plant. The idea was to be able to be local to the Ankleshwar and Telangana belt, where we have a key set of customers. I'm happy to report that, you know, over the last two years, we have ramped up production to a point where we're doing roughly 2.5 times what that plant had achieved in the past in terms of revenue output. We're very pleased with the way that's developed.
We continue to ensure that, you know, our processes are standardized, streamlined, and work just like a GMM product plant. At the same time, in our Vatwa facility, which is a heavy engineering factory, again, that's ramped up very nicely. While we have had, you know, the margin dilutive issue related to the order, the production itself has come up very nicely. From an operations standpoint, we see results with the way this factory has ramped up as well. Tarak, anything to add?
I mean, maybe just we've added a furnace in Hyderabad, a new furnace in Hyderabad, where we've expanded capacity there. We've added some factory space as well. We also are manufacturing some agitators, metal agitators for Mixion in Hyderabad. We've also manufactured new products in Vatwa. We're really using all the real estate as much as possible. We also at the same time just commissioned our big, big furnace here in Karamsad, 80,000 liters. We have received 6 orders for 80,000 liters tanks. These are the biggest vessels that can be made in India. The timing was perfect. Just when we started this new furnace, we actually got these orders for CPBT project. Timing was good, and we do have the capabilities now to make super large vessels here in India.
Thank you. Sandeep, may I request to come back in the question queue for a follow-up question?
Sure. Thank you.
Thank you. Participants, you may press star and one to ask the question. Next question is from the line of Salil Desai from Marcellus Investment Managers. Please go ahead.
Hi, team. I have a question. Manish, if you can help me understand this. If I look at EBITDA in the International Business, this is the number on slide 21 of your presentation. It is about INR 71 odd crores, right, which is the International Businesses.
Right.
EBITDA, right? If you look at the EBIT in the overseas business, I'm assuming these are like-to-like comparisons, right? The EBIT is close to INR 14 odd crores, INR 14.15. The part of the difference, I think, is depreciation, which I
Sorry, Salil, we can't hear you very clearly. Can you maybe just slow it down a little bit and just speak up a little bit so we can hear you a little bit more clearly?
Sure, sure. I'll do that. I think the EBIT in the international business is INR 71 crores. Sorry, the EBITDA is INR 71 crores. The EBIT in the overseas business, right, which is part of the segment results, is some INR 14.15 crores. I'm just trying to see how do we get from INR 71 to INR 14, right? I saw some depreciation could be about INR 20 odd crores. If you could help understand, you know, the rest of the bridge, it would be really helpful. This seems like a pretty large difference.
Right. Salil, you're right. If we start with the segmental EBIT of INR 14 crores in Q3.
Mm-hmm.
From that, we add another inventory provision of INR 14 crores. We add legal cost, excessive legal cost of INR 8 crores, so that's INR 22 crores. We add this effect on the intra-company loan of INR 18 crores. 14 plus 22 plus 18 makes it INR 54 crores, right?
Okay.
That's the basic construct of this Q3. Likewise, if we see back to like Q2, EBIT said INR 69 crores, right?
Mm-hmm.
Now INR 69 crores had a INR 22 crore effect gain, right?
Okay.
That 69 minus 22 actually makes it 47 on a like-to-like business basis performance perspective. Q2 EBIT adjusted would be INR 47 crores.
Mm-hmm.
Q3 adjusted EBIT will be INR 54 crores.
Okay. All right.
Yeah.
All right. That helps. That helps. Okay, great. The next question, Tarak, this is for you now. When you said that you have some more acquisitions, you know, some planned or thought of, you looking to add, products, geographies? If you can just explain how, I mean, how much more- We need to acquire before, say, what do you think is the complete order?
This is part of our strategy. When I spoke about mixing and mixing becoming a business, a standalone business that we really wanna focus on. With the Mixel acquisition, we have now presence in Europe. Mixel has a factory in China, so we have a presence automatically in China. Through our Mixion business line here in India, we have a business here in India. India, China, Europe taken care of. That leaves only the Americas as the place where we don't have a presence. That's something, but it's in the same space as mixing. We wanna kind of combine these four geographies and have a global mixing platform that we can go out and we can sell, or we can brand under one umbrella. We have one focused person.
We've actually just hired a person who's gonna take over as the head of the mixing business of the company eventually. We're giving mixing a focus and the ability to grow. Like I mentioned to you, the market size of mixing is much, much bigger than Glass-Lined. It's a technology play, high margin business. It's something that involves a lot of simulation, software technology, proven track record. Companies who have supplied equipment in the past, you know, that automatically qualifies you with large oil and gas projects, licensor projects. It really opens up a really wide range of application and the industries that we can cater to. It's very much complementary to Glass-Lined. It's also very important today that companies are looking at ways to reduce batch time, power consumption, improve heat transfer, improve product quality and yield.
Mixing is becoming a very, very important part of their, the efficiency improvement program, right? Most of the Indian companies have 300, 400 reactors. If you can reduce the power consumption of each reactor from let's say 25 horsepower to 15 horsepower, you have tremendous saving be possible, right? Mixing is something we are focusing on. Mixel acquisition was the first step. We have something planned as well, something smaller and something not too large. Again, our size of acquisitions are not that big, between the $5 million-$10 million range, but some of these acquisitions can double or triple in size very quickly. Our eventual goal in mixing is to be at least in the top three in the world, and that would put us in the $100 million-$150 million mark, right?
That will happen eventually, three to five years from now, and that's what we're aiming for.
Understood. Great. Thank you so much.
Thank you. Next question is from the line of Jonas Bhutta from Aditya Birla Sun Life Mutual Fund. Please go ahead.
Hi, hi, team. Just a question on, you know, just trying to put in place, you know, the commentary to the numbers. Basically what we've seen is in the last two quarters, our order intake has sequentially declined from a peak of almost INR 990 odd crores down to INR 770 crores. On the other hand, we also heard your comment where you said inquiries seem to be still robust. How should we think about this in terms of is this largely a timing issue where clients seem to be taking longer or, you know, you're seeing genuine slowdown, while people seem to be talking to you, but there is a general slowdown happening, particularly in Europe?
I think it's a combination of multiple things. Generally business environment is a bit subdued over the last maybe two quarters. I think the Ukraine war, you know, the global inflationary issues and problems going on. The inquiries still continue. Maybe the time that it takes to finalize has kind of increased. We are seeing again some kind of a reversal in those trends. We have over the last quarter seen significant projects here in the Glass-Lined, part of our business here in India. Like I mentioned to you, yes, we've seen some slowdown in the systems business internationally, but the opportunity pipeline remains strong. We do expect some large orders to come in in the 4th quarter.
Luckily for us, we have a large backlog in most geographies, six-nine months, in some cases even more than that. That gives us good revenue visibility. We also have the ability now to kind of target some orders which usually or earlier we could not target. Now with India being part of the global sourcing program, we have the ability to enter new markets like Eastern Europe, Southeast Asia, some parts of Spain and Africa. You know, there's a lot of opportunities available. Generally, we have also been kind of selective in terms of what we take. I think one of the things in India especially that we've done is we've kind of been selective both in HE and in Glass-Lined.
Glass-Lined has picked up last month, and we expect that to pick up as well. I think the other thing to keep in mind as well is that last couple of quarters, we had large orders from heavy engineering, but because of the large backlog that we have in that business, new orders will take some time because we already have our factories full for nine months. We expect orders in HE to come in the next few quarters. With Mavale for example, our fifth facility has a backlog of close to nearly 15-18 months, right? Generally the activity is there. They're still finalizing new orders, so there is activity going on in Europe and in the U.S. India is also picking up.
maybe Thomas, again, you wanna add something on what you're seeing in Europe and in India?
I'm looking at, you know, I think it's Thomas. I'm looking at the European and the American activities as I said before. I think they are quite normal on a high level still. Demand is not really slowing down. I think we have seen the last couple of years a slightly overheated situation, but it's coming now back to a normal situation. The decision-making process of customers are not slowing down more than they have been before. They were extremely fast over the last 2 years, and that couldn't hold forever. We are not concerned about order intake or about the demand that is seen in Europe or in America at this point.
Yeah. you know, we are seeing, as Tarak mentioned, a lot of activity, especially in the specialty chemicals space. you know, order book there is actually growing quite nicely on the Glass-Lined equipment particularly. While pharma continues to remain somewhat subdued. Overall, you know, we are pretty satisfied with the way our Glass-Lined backlog is doing. Yes.
Got it. Just from a given that we don't have too much of a history of, you know, how, you know, order books used to behave for Pfaudler before it came in. Given that we are sitting on a backlog of about INR 20-50 odd crores, and even if we sort of conservatively grow our sales next year by about 10%, we're talking roughly INR 3,300 kind of number. You know, with this kind of backlog, you know, what kind of order intake that you think that you'll have to pull through so that you can comfortably sort of reach, you know, at least a 10%?
you know, has typically order book to sales coverage been 0.7x or, you know, this seems to be on the lower side, just from a historical perspective.
No, I think from a historical perspective, I think this is record order books. They need to be much, much lower. In India, obviously, you know, we do try and start the year with at least half the order book of what the year's target is. Let's say if, for example, if we have a INR 1,000 crore revenue target, we should have at least INR 500 crores of revenue on hand. From that standpoint, half the revenue, sorry, half the order backlog is already on our books. We will book new orders in Q4. Also what you probably don't consider in this is spares and services, right? These are ongoing and these are short delivery items and get booked continuously. That will only add to it. I think we are quite comfortable from order backlog standpoint.
That's why I mentioned we have about six to nine months visibility. We don't have any kind of urgency in terms of bringing in orders or dropping prices. We can hold pricing. We know there are large orders in the pipeline. We know large projects here in India that are currently happening. We have good projects on hand in Europe as well. Overall, I think we are in a strong position. Like you know, there is typically volatility in the market. There will be ups and downs, but our current backlog gives us a strong kind of a base to build on.
Got it. The last one that I had was on margins. You know, you mentioned that the heavy engineering piece still has a legacy order book of INR 20-30 crores, which probably will get executed in the fourth quarter. Is it fair to assume that the fourth quarter margins of the standalone piece could sort of be similar to the Q3, or there are levers there also which, you know, you think, they will help us better margins there?
You know, obviously we are looking at internal measures to reduce costs, but I will stick with the current margins that we have been delivering. You know, obviously there will be new orders coming in, but again, you know, metal prices again have kind of stabilized now. There's been some talk that it might even go up. We have to be a little bit careful, but I think we definitely have opportunity to reduce costs internally. I think Manish are working on that. There's currently a procurement activity going on with the help of a consultant to look at large, you know, contracts and to find ways of buying them more efficiently. All those things will be ongoing. Right now I don't want to really give you a number or, you know, change that number from last quarter.
You know, we do always try. Next year hopefully we have some actions in place where we can see some improvement in margin generally in their standalone numbers.
Sure. Thanks a lot and all the best.
Thank you very much. Next question is from the line of Bhavesh from JD Investments. Please go ahead.
Hi sir, can you hear me?
Yes, loud and clear.
I just wanted to understand on the valuations front. Can you just give me a brief on the valuations, what we like acquired the pending or the remaining 46% which we acquired on that front?
Manish.
Valuation
Valuation of the 46%.
I think, we have a detailed presentation sent out for this at the time of acquisition, and it compares all about the, I think, if we talk about the EV, EBITDA multiple, it's 4x, 6x, 6.5x. That was the valuation multiple, if that's what you're looking to see.
Okay. Okay. Just on the 2014, DBAG one.
DBAG had acquired, in 2014 they acquired the Pfaudler Group. I'm not sure at that point because it was done directly with another company. What DBAG ended up paying, I have no idea. That's something that is not in the public domain. That was done between NOV, who is an American company, and DBAG. Not sure of those numbers. The 2020 numbers as well as the 2022 numbers, both have been compared and they are on our website. You can have a look and all the details in terms of EV valuation multiples are all part of that presentation.
Okay. Okay. Just one another question that, in the chemical side, are we catering to only like, is there any segment which we are not catering to other than like agro and specialty chemicals? Is there some another sector or profile?
Obviously agrochemicals and specialty chemicals are the big ones. We also do dyes and paints for Glass-Lined equipment. In pharma we do API, basically bulk drug and API. We don't do formulations really. There are certain applications like chlorination. Anytime you use chlorine, you can't use Glass-Lined because it reacts to glass. Besides that, all major applications in chemical and pharma, sorry, and when I say chemical, agrochemical and specialty chemicals will require some kind of Glass-Lined equipment in their plants.
Okay. Okay. Thank you. Thanks a lot.
Thank you.
Thank you. Next question is from the line of Venkatesh Balasubramaniam from Axis Capital. Please go ahead.
Yeah. I actually had one question for Manish and one question for Tarak. Firstly, Manish, last year, if you actually see the fourth quarter results, fourth quarter last year, effective tax rate was almost 60% odd in the fourth quarter. Are we expecting similar level of effective tax rate in the fourth quarter? This is a question for Manish.
Hi, Venkatesh.
Yeah.
Effective tax rate for the organization stands at 27%. However, there have been fluctuations, you know, on the positive and the negative side, through the quarters, as we've seen. There have been deferred tax reversals and also credits in last quarter as we saw. Similarly, this quarter as well. Hello, can you hear me, Venkatesh?
Yeah, I can.
Venkatesh, may I request you to mute your line from your side when you're not talking because there's a lot of echo from your line. Sir, you may go ahead now.
Sure. Similarly, if you see for the current quarter Q3, you have an PAT of INR 19 crores, the reported number. If you add 27% of normal tax rate, you add up, give up INR 5 crores of taxes. Then the Forex MTM that we spoke about, that's INR 18 crores. That will obviously is non-tax deductible, so that's a INR 6 crore impact. Rest are the minor deferred tax accruals and deferrals. Because of that, we come to the number that we have as scheduled for.
Okay. The other question is to Tarak. Obviously you are planning to buy 1% from DBAG Fund, and I believe that you need some regulatory approval. What exactly is this regulatory approval which you're waiting for, and when does this come through? That is first part of the question. When will this happen, this 1% stake purchase? Secondly, I guess when you actually buy from DBAG, it's an interstate purchase, it doesn't trigger an open offer. Does it also mean that then the next round of, you know, the remaining 13% odd of DBAG, whenever that comes to the market, you will be looking to buy more? If you don't buy from them and you buy from the open market, it might end up causing an open offer.
Are you thinking about increasing the stake even further in the next round? If you could provide some color on that would be useful.
Sure. Venkatesh, let me start off first with the approvals required. There are 3 approvals required: U.K. FDI, French FDI, and Italian FDI. These three approvals are only getting triggered because we are crossing the 25% mark when we acquire this 1% stake from DBAG. Those applications have already been made, and we expect that and the CCI approval to come sometime in the mid of March. We expect the transaction to be completed in the March month, end of March, something like that. When we acquire this 1%, we will cross from 24.2% odd to 25.2%. We would have crossed that threshold. After crossing the 25% mark threshold, we can then free from the market, we can buy from the market.
Any more acquisitions of shares will not trigger any open offer because we've crossed that 25%. Do I plan to buy more from DBAG? You know, obviously, when that time comes and, you know, DBAG is looking to sell that stake, we will think about it. Right now my first goal was to cross the 25% mark. I've also mentioned in the past that, yes, as the dominant promoter, we would like to be somewhere around the 28%-20% mark. If that is possible, I would like to do that. Timing, I'm not really sure. If there's an opportunity to buy something from DBAG, sure, we'll consider it.
Okay. Thanks. Thanks for those answers. All the very best.
Thank you.
Thank you. Next question is from the line of Ronak Vora from AUM Fund Advisors. Please go ahead.
Hi, sir. When we say our hands are full with the order book of six to nine months, what kind of capacities do we have in hand currently? As in what kind of utilizations are we at and where can we reach?
I would definitely say that in our India Glass-Lined business we are not at full capacity. India has a backlog of about 6 months. There is definitely potential to kind of improve the capacity in India and take more orders. Like I mentioned to you, we've been choosing and picking orders carefully to make sure that we do a good margin business. In Europe and the other geographies, we do have higher capacity utilization. I think the order backlog there is much stronger. They have about 9 months in most of the glass-lined factories, so their utilization rates are much higher.
I also mentioned that we have kind of reduced, we've taken some, you know, steps to reduce stock in Germany, where we've gone to a four-day workweek, but we are still producing the same amount, the amount of equipment. Their utilization has actually improved. We are also working on a global operation excellence program. We have seen significant improvement in our China facility. China is really an area where we want to grow market share. We have a brand new facility there. We have new furnaces there. We've just recently also finished manufacturing a 140,000 liter glass-lined vessel, which is the first time it's been done in the group. We have really big plans for the China facility and hopefully market share in China can increase significantly.
Just to add, as a recall from our investor guidance that we gave, we do not expect to make any significant CapEx for our guidance of INR 3,700 crores. We actually think that we should be able to do something like INR 4,000-4,500 crores out of the current CapEx. If that answers your question.
Basically, currently your gross block, which is at INR 3,000 crores can do INR 4,000 crores-INR 4,500 crores of top end, right?
Yeah.
Okay.
Of course, there will be maintenance CapEx throughout, as we mentioned in the guidance period, in our guidance presentation as well. There you should expect that 2.5%-3% of CapEx in order to do that.
Yeah, yeah. That's... I'm just getting rough figures. I don't want anything. Ballpark is fine with me. Secondly, you said that India is underutilized and we are picking orders. Is it something because, you know, the pharma industry in India has been dull. The chemical has been pretty worse. Is it something that, you know, there are lack of orders in the market which is leading to this six months of order backlog?
It's a combination of multiple things. I think one is that most of our furnaces in Gujarat are on gas, we try not to use the gas furnaces and use it at spot rate basis. We try and consume the gas which is at the lower prices, we don't need to over kind of extend and use these furnaces 24/7. We've been a little cautious about that. We now have the Hyderabad facility which also has capacity. You rightly said, there has been little bit of a slowdown when it comes to pharmaceuticals. The agrochemical and specialty chemical sectors are making up for that shortfall, right? There are large projects in the pipeline. PI Industries, MVP 12 and 13 is coming. Ekkar just announced a new agrochemical plant.
Maksun is putting a PP, a PPVP project. These are all large reactors. Deccan Fine Chemicals is expanding as well. There's no shortage of orders. Expansions are happening. India will continue to invest in chemical and pharma. In the past or earlier on, maybe if you look back 10 years, pharma used to account for nearly 60% of our last time business. Today only account for 20%. Pharma has definitely slowed down, which has been replaced by chemicals. Hopefully, pharma will start coming back, and that will also add more orders coming into the market, and it will definitely mean more business for us as well.
Okay. Thank you.
Thank you. Next question is from the line of Rohit Ohri from Progressive Shares. Please go ahead.
Hi, Tarak and team. Two questions. The first one is related to this holding of Pfaudler IMC. Is there any binding clause or binding agreement or contract? We had some of these contracts in the past for three years. Are there any more contracts or are they willing to extend it going forward?
No. there's no clear contract in place. Again, I mentioned that DBAG is a responsible shareholder. We will only sell and they will only sell when the time is right and to the right set of investors. Again, there is no specific time frame. You know, as and when the demand is there, the right price and the right set of investors, we would like to do the transaction. Obviously these private equity investors, they have a financial time frame. They've been around since 2014. It's already now nearly nine years. You know, the time frame is probably at the end of their time frame. When we find the right solution for them, I'm sure they will be, you know, looking to exit and at the right time.
If you can just share like, what is the timeline? Is it like September, October or...?
I can't really say any timelines right now. There is no specific timeline. Again, it all depends on, you know, what happens in terms of the demand, the interest levels. As I said, at the right time to the right set of investors, we will then, you know, plan that sale accordingly.
Okay. My second question is related to the split if you do in the segments and sub-segments. We see that the standalone and International has been reducing in terms of the percentages for technologies. On the same hand, the systems and each everything is growing and it is inching slightly more towards the north side. Any guidance you would like to give on this? Or will this trend continue with technologies becoming slightly weaker and system services growing towards the north?
This, maybe, Tarak and Ateek and Pankaj can explain. Just to give a perspective, our technologies is growing naturally slower than systems and services, because systems and services are the new businesses that we have. It's all relative because ultimately the pie has to stack up to 100.
I think you said it very well, Manish. Thank you. This is our core business where we have high market share in all the regions and therefore we grow consciously with the market. We're not growing the market share at any price. We are making selective decisions on what orders we take and what orders we're not going to take. The other segments are our pure core segments, where we are investing extensively and also in MEA. Those are the segments where we are looking for growing the pie and getting a bigger piece of the pie. Where naturally, as Manish said very well, the growth rates to be expected are significantly high.
Okay. These service contracts.
Rohit, can I interrupt? I'll request you to come back for a follow-up question.
Okay.
Thank you. Next question is from the line of Jaiveer Shekhawat from Ambit Capital. Please go ahead.
Hi, team. Thanks for taking my question. One question. If I remember right, I mean, the previous call you had mentioned that the reason why you're not participating, especially in the kind of orders that your domestic competitor usually gets into, is because these are on the lower end of the F&D. When I look at their margins, whether be the gross margin or the EBITDA margin. They seem much better despite having the higher mix of that lower end of F&D. Could you just help me understand and probably provide your perspective as to how probably they are able to make better margins despite being on the lower end?
I'm not sure what you're speaking about, but in terms of Glass-Lined, obviously we are the market leader. In F&D, Filtration and Drying, we are definitely not the market leader, and we focus on the high end of any kind of, you know, Filtration and Drying which requires technology. That's what we really focus on. I don't have access to. I mean, I have access to my competitors' numbers. I don't really know how and why those numbers are, you know, the way they are. What we can do tell you is that being a market leader, we drive price. Price is important for us, and we make sure that we will only do business in the Glass-Lined segment at the price that makes sense to us as the price, the leader.
We do command a premium when it comes to Glass-Lined because of our quality and our technology. Even in the F&D business that we do, we have specific products like the Spherical Dryer, like Glass-Lined ANFDs, like BTDs. Again, very specific, very kind of critical, hence again the margin profile there is significantly better, and that's what we really focus on.
Got it. Sure. That's helpful. Thanks a lot.
Thank you very much. I now hand the conference over to Mr. Tarak Patel from GMM Pfaudler for closing comments.
Thank you very much everybody for joining this call. Have a nice weekend, and we will talk to you know, after our Q4 results. Thank you very much.
Thank you very much. On behalf of GMM Pfaudler Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.