GMM Pfaudler (GMM), a leading supplier of critical process equipment and systems to the global chemical and pharmaceutical industries, rose from Rs 90 in November 2009 to Rs 1,450 on November 8, 2019, which translates to 1,500 percent rise in 10 years.

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GMM leads the Indian market in glass-lined (GL) steel equipment used in corrosive chemical processes of agrochemicals, specialty chemicals, and the pharma sector.

This smallcap company has tremendous growth potential. Its debt-free status, healthy operating cash-flow, and a strong order book business make it a preferred buy among the analyst community.

Buy rating

AnandRathi maintained a buy rating on GMM Pfaudler at a target of Rs 1,849, which is 25X FY21e EPS. The company commands a 60 percent market share, and will be a major beneficiary as vast prospects in agro and specialty chemicals open up.

“Its stellar execution capability and about 45 percent y/y order-book growth assure us of GMM’s strong FY20 revenue growth. The debt-free status, healthy operating cash-flow, with strong prospects and profitability would lead us to retain our Buy rating at a higher target,” it said in a report.

The company has diversified into heavy engineering and drying and mixing, which would add to the revenue. Its strong fundamentals are substantiated by the company’s record of positive operating cash-flows, even during economic crises.

The company is seeing strong order inflow from the user industries, which is likely to provide over 20 percent growth outlook for the next couple of years, say experts.

Angel Broking, which has a buy rating, with a target price of Rs 1,740, is of the view that GMM is likely to maintain the 20 percent growth trajectory over FY19-21, backed by capacity expansion and cross-selling of non-GL products to its clients.

“GMM has also increased focus on the non-GL business, which includes mixing equipment, filtration and drying equipment for the chemical-processing industry. It is expecting to increase its share of non-GL business gradually over the medium term,” it said.

Strong visibility

With capacity addition in specialty chemicals and agro in full swing, demand for Pfaudler equipment will surge, said the AnandRathi report. The current order boom offers revenue assurance for FY20.

With pharma picking up in southern regions like Hyderabad, traction for GLE will be good. User industries such as pharma, specialty chemicals, and agro-chemicals are expected to clock a 15 percent CAGR over the next five years.

Strong non-GLE business

The focus on heavy engineering (orders of 100m-150m where competition from giants is less) has increased, said the report. Also, the proprietary division is likely to see strong growth, since much of its demand stems from the GLE division (complementary demand).

Better margins

With more than 90 percent capacity utilisation, higher operating leverage will help margins expand, say experts. The demand-supply imbalance in GLE gives suppliers great bargaining power.

Hence, prices have been increased in the last two quarters; management expects this to stabilise at the current high levels. Also, large margin-accretive export orders would improve margins, the report added.

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