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IT’S ALL ABOUT MONEY, HONEY!

AnalystHirawati Pethe 5675 4479([email protected])

DealingSandeepa Arora 5669 3200Biren Patel 5677 5900

December 2004

GMM Pfaudler Ltd

Healthy Growth on the Horizon

December 09, 2004 2

GMM Pfaudler Ltd: Healthy Growth on the Horizon

Share Price Chart

Recommendation AccumulateCMP Rs273BSE Code 505255Face Value 10Market Cap Rs789mn52 Week H/L 320/95Equity Rs2.9mn

Shareholding pattern

Share Holders % holdingPfaudler Inc. 51Indian Promoter 23Persons acting in concert 2Institutional Investors 5Indian Public 15Others 4

GMM Pfaudler is a MNC company engaged in the manufacturer of glass linedequipment. It is the largest producer of glass lined equipment in India with itsmanufacturing unit located in Karamsad, Gujarat. Its flagship product is the glasslined reactor and the company is expected to produce 720 reactors this fiscal. Thecompany’s total capacity is in excess of 1,200 reactors.

GMM Pfaudler is the market leader in its niche segment of glass line equipmentmanufacturing. The total market size of glass lined equipment is about Rs1bn. Keyuser industries include pharmaceutical, fine chemicals, dyes and agro chemical industry.GMM has market share of over 50%. The other players in the category are Nile Ltdand Swiss Glascoat Ltd. The market demand for glass lined equipment grew by 15%yoy in FY04 and continues to be promising on the back of rising demand from thepharmaceutical and fine chemical industries. GMM is exploring new areas for mixingsystems in mining and petrochemical industries.

ValuationsGMM clocked a 12%yoy growth in net sales at Rs326mn in H1 FY05 and a netprofit growth of 38%yoy at Rs19mn in the same period. GMM is expected to registera 24% CAGR in sales and 28% CAGR in profit over the next 3 years, driven byrising domestic demand from pharmaceutical companies and outsourcing order fromparent. Net profit in H1 FY05 registered a 38% yoy growth. We expect net profit torise 22% yoy in FY06 and 34% yoy in FY07.

The stock has appreciated by 27% in the last one month (Nov 2004). At the CMP ofRs273, the stock is trading at a P/E of 10.9x FY06E and P/E of 8.1x FY07E earnings.Further, the company has liquid investments worth Rs141mn on its balance sheet,which translate into a per share value of Rs49. Excluding this from the CMP, thestock is available at attractive valuations of 9x FY06E and 6.6x FY07E earnings.

However FY05 net profit is likely to decline due to lower other income and a high taxincidence in the current year. Given good long-term growth prospects, we recommendinvestors to ACCUMULATE the stock on declines.

Financial snapshot(Rs mn) FY03 FY04 FY05E FY06E FY07ENet Sales(Rs mn) 522 590 752 874 1,151Net Profit (Rs mn) 24 62 60 73 98OPM(%) 8.1 8.3 12.5 13.5 14.0EPS(Rs) 8 21 21 25 34P/BV(x) 1.8 1.7 1.6 1.5 1.3ROCE(%) 17 24 27 29 34RONW (%) 5 13 12 13 16

December 09, 2004 3


Direct beneficiary of the pharma boomIndian pharmaceutical industry is in a boom fuelled by the huge global genericsopportunity where drugs over US$50bn are expected to go off patent in the next 2 to5 years and Indian potential for outsourcing of API’s and intermediates. Strongindicators of this boom is the increase in number of DMFs filed by Indian pharmaceuticalcompanies which constituted 38% of the total drug filings in Q2 FY05 as against 30%of total filings in FY03. Secondly, India has the largest number of US FDA approvedmanufacturing facilities outside US and the largest number of API manufacturing unitsin the world to the tune of about 20,000 units.GMM Pfaudler is the largest producer of glass lined equipment in the country and isa leader in the corrosion resistant chemical process equipment, which is extensivelyused by the pharmaceutical industry (bulk drug manufacturers in particular). Thereforethe company is one of the direct beneficiaries of this boom as it derives over 80% ofits revenues from the chemical process equipment and the pharma industry is its singlelargest customer, accounting for 50-60% of the company’s turnover. Its recentlyintroduced high value added products namely thermal control units and PPG alsopredominantly cater to the pharma industry.

Higher margins from reactor businessIn FY05, the demand for glass lined reactors (the chemical process equipment segment)increased, enabling GMM to take a price hike of 4-5% and thereby earn highermargins. EBIT margins from the chemical process equipment for H1 FY05 were at13% as against 9% in H1 FY04. Operating margin of the company in Q2 FY05 was14.9% as against 6.5% in the corresponding period previous year. These margins aresustainable in FY05 and the company expects to maintain 15% OPM in the future onthe back of its leadership position in glass lined reactors. Further, GMM’s collaborationwith Pfaudler vouches for superior quality and premium price for its products.

Outsourcing opportunity from parentPfaudler, which has a 51% stake in the company, is a global manufacturer of corrosionresistant glass line equipment and markets its products both domestically andworldwide. GMM has an India sourcing cell which exports components to Pfaudlerand Robbins & Myers. The parent company is exploring the possibility of buyingfabricated vessels from GMM.

Investment rationale

December 09, 2004 4


Exports to drive growthCurrently, exports constitute about 4% of total sales of the company. However, thecompany expects export revenues to constitute 15% of total sales by FY07. Apartfrom the outsourcing opportunity to Pfaudler, the company continues to focus onexpansion of exports of finished reactors. The company recently bagged an exportorder to supply finished reactors to one of the three main players in Japan, namelyShinko Pantec under their brand name “Kobelco”. GMM Pfaudler is in a 3 yearcontract with Shinko Pantec for the supply of glass line equipment and the companyhas so far supplied 12 reactors and will be selling another 5 reactors in FY05. Goingforward, the export orders from Shinko are likely to increase in value and volumes,which can then be leveraged to enter other overseas markets.

Strong balance sheet and free cashGMM is a virtually debt free company with low capex requirement. Glass linedequipment manufacturing is not a capital-intensive business. A capital expenditure ofonly Rs35mn would be required for capacity expansion of about 400 reactors tocater to Pfaudler’s outsourcing deal. The company would generate cash earnings ofRs60-80mn over the next 2 years. It also has free cash and investments worth Rs141mn(bank deposits and mutual fund investments) on its balance sheet.

Rich dividend payerThe company has been increasing its dividend payout every year. The dividend pershare increased from Rs2.5 in FY02 to Rs8 in FY04. GMM has already declared aninterim dividend of Rs5 per share in the current year. We expect the company tomaintain a high dividend payout of 40% or more in the future, given its strong cashflows.

8

21 2125

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58 10 11 12

0

10

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30

40

FY03 FY04 FY05P FY06P FY07P

(Rs

mn

)

EPS DPS

Chart: Earnings per share(EPS) & Dividend per share(DPS)

Source: Company annual report

December 09, 2004 5


Pending law suitThe company has acquired (along with its two subsidiaries) 21% equity in competitor- Nile Ltd, which has been contested by the latter. Nile has appealed to the AndhraPradesh High Court regarding the transfer of shares pertaining to GMM’s investmentsin Nile. Nile’s three main business segments are glass-lined equipment, lead & leadalloys and wind energy.

Investment in Millar India Ltd.The company has an investment of Rs2mn constituting 140,600 equity shares ofMillers India Ltd (formerly known as The Acme Manufacturing Co Ltd). This ispurely a long-term financial investment. Millars India Ltd is a BIFR company in thebusiness of construction and real estate. It has undertaken restructuring operations torepay its borrowings and the necessary application is pending for deregistration beforethe authority.

Rising raw material cost could dent marginsSteel (mild steel, stainless steel) constitutes 46% of the company’s raw material costs.In FY04, raw material costs pertaining to mild steel and stainless steel increased by26% yoy vis-à-vis a 13% yoy increase in net sales. Steel prices continue to remainfirm and this may have an adverse impact on the margins of the company.

Investment concerns

December 09, 2004 6


GMM Pfaudler’s Client List

International Clients Domestic ClientsShinko Pantec (Japan) Alembic Ltd.Glaxo Wellcome Manufacturing Pte. Ltd (Australia) Bayer India Ltd.Globe Pharmaceuticals Ltd. (Bangladesh) CiplaSchering - Plough Ltd. (Singapore) ClariantPurolite International Ltd. (Uk) GSK (India)General Electric Plastics (USA and Netherlands) NovartisRoche New Asiatic Vitamins Ltd. (China) Unichem LaboratoriesSynthomer Sdn. Bhd (Malaysia) Wyeth

BioconRanbaxyDr. Reddy’s Laboratories Ltd

Top Management

Name DesignationMr. Ashok J. Patel Chairman & Managing DirectorMr. Ashok Pillai VP, MarketingA. Sumantha VP, ManufacturingMr. Tarak Patel Manager, Business DevelopmentMr. A. N. Mohanty Financial ControllerMr. N.K. Agarwal Company Secretary

GMM Pfaudler formerly known as Gujarat Machinery Manufacturers is a MNCcompany engaged in the manufacturer of glass lined equipment. Incorporated in 1962,it is primarily engaged in manufacture of corrosion resistant glass-lined equipmentused in the pharmaceutical, chemical and allied industries. In 1987, Gujarat MachineryManufacturers entered into a technical know-how agreement with Pfaudler Inc of theUS, a world leader in glasslined equipment. In 1999, Pfaudler increased its stake inGMM to 51% and the company was renamed as GMM Pfaudler. The company alsomanufactures wiped film evaporators; agitated nutche filters hi efficiency-mixing systemsand PTFE lined equipment. The company recently expanded its product portfoliowith value added products such as thermal control unit and Pfaudler pharma glass(PPG) used by and large by the pharmaceutical industry.

Company background

December 09, 2004 7


About the parentPfaudler Inc established in 1884 and based in the US, is a unit of Robbins & Myers,Inc and is a leading supplier of glass lined equipment both domestically and worldwide.It has an annual turnover of US$200mn and eight manufacturing facilities across theglobe. Pfaudler supplies a complete line of Glasteel® equipment including reactors,storage vessels, columns, mixer systems, instrumentation, and reglassing services. Inaddition to the Glasteel® business, Pfaudler’s engineered systems group has beensupplying wiped film evaporators and skid-mounted systems for over 45 years.

Robbins & Myers, IncRobbins & Myers, Inc is an internationally recognized leader in designing, manufacturingand marketing superior quality, high-value fluid management products and services.Robbins & Myers is strategically positioned to serve its key markets with an expandedproduct portfolio, proprietary technology and a worldwide distribution network.Robbins & Myers hold the number one or two position in all of its served markets.

Technical Collaborations

Product CollaboratorCorrosion resistant fluoropolymer products Eldon Products, USCryolock technology for glasslined agitators Pfaudler Balfour Ltd, UK

ProductsThe company’s products are classified under three-business segment namely:Ø Chemical process equipmentØ Mixing systemsØ Filtration and separation equipment and others

Chemical process equipment accounts for 80% of the company’s revenues and includesthe flagship product glass lined reactors. The range of reactors comprise DIN 28136standard reactors, non-standard reactors to suit clients’ specific needs, glass-linedstainless steel reactors and lab reactors.

Revenue-breakup

80%

10%

10%

Chemical Process Equipment

Mixing SystemsFiltration/Separation Equipment & Others

Source: Company annual report

December 09, 2004 8


New Products introduced in FY05 are:Thermal Control UnitThermal control unit extensively used by the pharmaceutical industry is a productused for the controlled heating and cooling of equipment such as reactors and dryers,using a single thermal fluid to be used in jackets for all the heating and coolingrequirements. This product was launched in Q2 FY05 and caters primarily to thepharmaceutical industry. Thermal control units clocked revenues of about Rs100mnin H1 FY05.

Pfaudler Pharma Glass (PPG)PPG was developed to address two of the requirements of the pharmaceutical industrynamely increased purity in order to comply with the FDA and GMP requirements andalternating alkali/acid operation. The PPG has been developed free of heavy metals,with a smoother surface finish compared to the conventional glass and improvedalkali resistance. The smoother surface finish has anti-adhesive properties, to providefor faster cleaning resulting in cost and time saving. The surface quality is three timeshigher than of conventional glass types.

Research & DevelopmentThe company has an in house R&D center, approved by the Department of Science& Technology where research and development activities are undertaken forimprovement in the process of manufacturing glass lined vessels. The R&D centerfocuses on developing stainless steel equipment such as conical dryer, bayonet basefor ease of operation and for hygienic environment for agitated nutsche filters & filterdryers and fermentor agitators. The R&D center devised the Economix (a registeredtrademark of the company) range of specialty impeller designs in glass line constructionto improve mixing. The total R&D expenditure as a percentage of total turnover was0.29% in FY04.

December 09, 2004 9


Quarterly Financials:

Period to 09/04 09/03 Growth 09/04 09/03 Growth(Rs mn) (3) (3) (%) (6) (6) (%)Net Sales 188 157 19.4 326 291 12.0Expenditure (160) (147) 8.7 (291) (273) 6.8Operating profit 28 10 172.3 34 18 91.8Other income 4 8 (53.3) 10 11 (14.6)Interest (1) (1) - (2) (2) -Depreciation (5) (5) 1.2 (10) (10) 1.0PBT 25 12 114.3 32 17 86.4Tax (9) (1) 549.1 (12) (3) 306.5PAT 16 10 54.7 19 14 37.8OPM (%) 14.9 6.5 10.5 6.1 4.4Equity 29 29 29 29EPS (Rs) Annualized 22.0 14.2 13.2 9.6

Net sales grew by 19% yoy in Q2 FY05 though other income reduced by over 50%in Q2 FY05. While net profit rose by 55% yoy at Rs16mn in Q2 FY05, profit beforetax rose by a whopping 114% yoy at Rs25m in the same period. Tax outgo increasedfrom Rs1mn in Q2 FY04 to Rs9mn in Q2 FY05 and is likely to stay at these levels.There was a significant rise in operating margins from 6.5% in Q2 FY04 to 14.9% inQ2 FY05 due to efficient cost control. The annualized EPS jumped from Rs16 in Q2FY04 to Rs22 in Q2 FY05.

Financials

December 09, 2004 10


Projected Profit & Loss a/c

Period to FY03 FY04 FY05P FY06P FY07P(Rs in mn) (12) (12) (12) (12) (12)Net Sales 522 590 752 874 1,151Operating expenses (479) (541) (658) (756) (990)Operating profit 42 49 94 118 161Other income 14 49 25 24 23PBIDT 57 98 119 142 184Interest (4) (5) (3) (3) (3)Depreciation (18) (19) (20) (23) (25)Amortization 0 0Profit before tax (PBT) 35 74 96 116 156Tax (10) (12) (35) (43) (58)Profit after tax (PAT) 24 62 60 73 98Extraordinary / prior period items 0 0 0 0 0Adjusted profit after tax (APAT) 24 62 60 73 98OPM(%) 8.1 8.3 12.5 13.5 14.0NPM(%) 4.6 10.5 8.0 8.3 8.5

Projected Balance Sheet

FY03 FY04 FY05P FY06P FY07P(12) (12) (12) (12) (12)

SourcesShare Capital 29 29 29 29 29Reserves 422 460 487 524 583Net Worth 452 489 517 554 613Loan Funds 0 4 6 8 8Deferred Tax liability 39 32 32 32 32Total 491 525 555 594 653UsesGross Block 383 393 428 438 443Accd Depreciation (182) (200) (220) (243) (268)Net Block 201 193 208 195 175Capital WIP 3 10 12 12 12Total Fixed Assets 204 203 220 207 187Investments 72 162 162 162 162Total Current Assets 364 324 344 410 529Total Current Liabilities (165) (169) (176) (191) (231)Net Working Capital 199 155 168 219 298Miscellaneous expenditure 16 5 5 5 5Total 491 525 555 594 653

December 09, 2004 11


Ratios

FY03 FY04 FY05P FY06P FY07PPer share ratios (12) (12) (12) (12) (12)EPS (Rs) 8.2 21.2 20.7 25.0 33.9Div per share 5.0 7.5 10.0 11.0 12.0Book value per share 154.5 167.3 176.7 189.4 211.3Valuation ratiosP/E 33.1 12.8 13.2 10.9 8.1P/BV 1.8 1.6 1.5 1.4 1.3EV/sales 1.4 1.3 1.0 0.9 0.7EV/ PBIT 18.7 10.1 8.0 6.7 4.9EV/PBIDT 12.8 8.1 6.6 5.6 4.2Profitability ratiosOPM (%) 8.1 8.3 12.5 13.5 14.0PAT % 4.6 10.5 8.0 8.3 8.5ROCE 16.6 23.8 26.6 29.3 33.7RONW 5.3 12.7 11.7 13.2 16.0Liquidity ratiosCurrent ratio 2.2 1.9 2.0 2.1 2.3Debtors days 47.8 49.8 50.0 50.0 50.0Inventory days 116.4 108.7 108.0 108.0 108.0Creditors days 89.6 84.6 85.0 85.0 85.0Leverage ratiosDebt / Total equity 0.00 0.01 0.01 0.01 0.01Component ratiosRaw material 46.9 48.1 46.0 46.0 46.0Staff cost 22.4 22.1 22.0 22.0 22.0Other expenditure 22.5 21.5 19.5 18.5 18.0Payout ratiosDividend Payout Ratio 68.5 39.8 54.2 49.3 40.0

Published in December 2004. All rights reserved. © India Infoline Ltd 2003-4.This report is for information purposes only and does not construe to be any investment, legal or taxation advice. It is not intendedas an offer or solicitation for the purchase and sale of any financial instrument. Any action taken by you on the basis of theinformation contained herein is your responsibility alone and India Infoline Ltd (hereinafter referred as IIL) and its subsidiaries orits employees or directors, associates will not be liable in any manner for the consequences of such action taken by you.We have exercised due diligence in checking the correctness and authenticity of the information contained herein, but do notrepresent that it is accurate or complete. IIL or any of its subsidiaries or associates or employees shall not be in any wayresponsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in thispublication. The recipients of this report should rely on their own investigations. IIL and/or its subsidiaries and/or directors,employees or associates may have interests or positions, financial or otherwise in the securities mentioned in this report.India Infoline Ltd, 24 Nirlon Complex, Off Western Exp. Highway, Goregaon(E). Mumbai -63. Tel 5677 5900. Fax 2685 0451

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