Text Transcript of Conference Call:GMM Pfaudler Acquisition of Majority Stake in Parent Firm
Moderator: I now hand the conference over to Mr. Diwakar Pingle from Christensen IR. Thank you. And over to you, sir.
Diwakar Pingle: Thank you, Rio. Good afternoon, good morning, good evening to all the participants depending on the geography you are. Before we proceed on the call, let me remind you the discussion may contain forward-looking statements that may involve known or unknown risks, uncertainties and other factors. It must be viewed in conjunction with the business risk that could cause future results performance or achievements to differ significantly from what is expressed or implied by such forward-looking statements. Please note that we have mailed the presentation deck on the transaction and the same is also available on the company's website. However, to maximize interaction with investors, we have decided not to go through the presentation page-by-page, instead Tarak would possibly run you through the key aspect of the transaction and should you require any specific doubts in the presentation to be clarified, you can either write to us or to the company secretary, GMM, and we'll be happy to answer the queries.
To take us through the key highlights of the transaction and answer your questions today, we have the top management of GMM Pfaudler represented by Tarak Patel -- Managing Director; Ashok Pillai -- COO and Jugal Sahu -- CFO. We also have the top management of the Pfaudler international group represented by Thomas Kehl, CEO and Alexander Pompner, CFO.
We will start the call with the brief overview of the transaction given by Tarak which will be followed by Mr. Thomas who will give a brief outlook of his view of the transaction, after which we will throw open the floor to Q&A.
With that said, I now have the pleasure of handing the call over to Tarak. Over to you, Tarak.
Tarak Patel: Thank you, Diwakar. Ladies and gentlemen, thank you very much for participating in the conference call this afternoon, where I will take you the recent acquisition that we just completed of the Global Pfaudler businesses. I know many of you have many questions, and we will try our best to answer them through this call.
Honestly, for us at GMM today really is a historic day. It is very rarely that an Indian subsidiary and Indian joint venture gets to buy out the controlling stake in its global business of the parent. It is really something to be proud about. And for me, personally, being the third-generation of a family business, to finally take GMM Pfaudler to the international stage, is a very proud moment for me. It is also something that as a country as we move toward a more self-reliant India, I think it puts us in a very good position. And now finally, after being with Pfaudler for so many years, we now can control our destiny.
This transaction is very unique from the standpoint that it combines the strength of three very different partners -- private equity, who brings in efficiency, cost optimization, a promoter family that brings in focus and entrepreneurship and then obviously the professional management of Pfaudler who bring in their specific skill set and ability.
Further, as you will shortly see, all three partners remain invested in the business, all three of us are completely aligned when it comes to creating value in both international and then that business will flow into the GMM Pfaudler business. As you all must have already seen GMM Pfaudler does become the ultimate holding company with the revenues of the entire global Pfaudler business flowing into GMM Pfaudler.
So once again, very proud day for us, after being associated with Pfaudler since 1988, finally, we have been able to complete this transaction and take the destiny of this company into our own hands, and over the next few years, we hope we can create value both internationally and in India.
“A Quick Update on the Transaction.” It is absolutely a transformation and game changer for us. It makes GMM Pfaudler the undisputed global leader when it comes to the highly attractive glass line market. It has basically given us access to 12 factories in eight countries over four continents with more than 1,500 employees. We build on the 30-years of relationship between GMM Pfaudler and the rest of the Pfaudler group. We know most of the Pfaudler unit very, very closely. We know many of the employees that work in this group as well.
Over the past five years since I took over as managing director of GMM, I work closely with the new management of Pfaudler International, the management that came in after DBAG the private equity fund brought Pfaudler International from NOV and we've been working very, very closely. Thomas has been on our board since the start. And we closely work together to complete some of the main initiatives of the group and we will continue to work together to take the group in the right direction.
We have also over the last five years here at GMM shown our ability to scale up to ramp up operations. As many of you know have been following the company, we have shown incredible progress when it comes to both growth as well as improvement in our margin profile.
“A Broad Quick Overview about the Economics of the Transaction.”
So the stake that GMM Pfaudler will acquire in the global business amounts to about 54% which will be worth about $27.4 million, this will be about $17.4 million of debt and $10 million coming from internal accrual. The stake acquired by the Patel family will be 26% for amount of $13.2 million. This is done on a pro rata basis. Together GMM Pfaudler and Patel family will have 80% control of the international business of the Pfaudler Group. The last 20% remain with DBAG which is a private equity player. So, as you can see, all three parties are invested in the global business, all three parties are clearly aligned to create as much value as we can in the international business of the Pfaudler group.
The SPV that we have already floated will be made out of Luxembourg. And obviously this transaction is subject to shareholder as well as anti-fraud approval over a specific jurisdiction. We expect the transaction to close in about four months time and hopefully we can hit the ground running. Like I mentioned earlier, integration is something that we do not really have to worry about. We have been working together for quite some time. So from day one, we can start building initiatives that we planned.
The combined entity will have revenue around Rs.2,000 crores and an EBITDA margin of close to Rs.260 crores for the 12-months completing year. And going forward we expect the revenue by 2024 of about Rs.2,800 crores with an EBITDA margin of close to 16%.
This is without synergy, and there are plenty of synergies that this transaction bring to the table and let me spend a minute talking about that. The reason this is the right time from our side to purchase Pfaudler group is DBAG and the Pfaudler management itself spent the last two and three years really modernizing the factories around the world. Pfaudler now has new facilities in Germany. They closed out a 100-year-old factory in the middle of the city and moved to a much more efficient, smaller footprint a few kilometers away. So they have a brand new facility in Germany, they have a brand new facility in Italy and maybe about a few weeks ago, they just started their brand new facility in China. So before the improvements start flowing into the group, we thought that this was the right time to acquire Pfaudler so that we can benefit from the improvements that are going to come in the coming quarter.
Further, Pfaudler also over the last few years has done about five bolt-on acquisitions. They have expanded the product ranges, companies like Interseal, Normag and new technology like asset recovery have also been added. There are obviously also capabilities of beneficial low cost sourcing from India. This is something that we are working on. We have already shown over the last few years that that model has been very successful in our Swiss subsidiary, Mavag were about 80% of the manufacturing done here locally and then the final finishing techniques can be done in Switzerland. The customer gets the best of both worlds and get the much better and cheaper product, but at the same time Mavag has been able to increase market share and profitability. If some of you who have been following this company when we bought Mavag in 2008, it was a CHF5 million company and today it is CHF15 million company and making good margins as well.
We also aim to implement GMM operational excellence model across the Pfaudler factory added with cross-selling of some of the GMM Pfaudler products, we believe that both the product ranges will be enhanced significantly and the Pfaudler network will now have much better access to both products of both groups of companies.
We also will then have access to Pfaudler innovation and technology. As many of you know, Pfaudler has been the market leader for quite some time. When it comes to glass lining technology, they have a very strong R&D department where they do develop new glasses, all that will now be available to us. We will also not have any restrictions when it came to exports and certain markets which are value-driven can be directly catered by GMM Pfaudler as well. There will be no significantly royalty payment between the group now and everything is going to be consolidated at GMM’s level, that will not be required.
Just to close out before I open this up to Q&A, I also just want to tell you that the timing again is quite well-timed because we used the month of the global pandemic to complete this deal. As you all know, there is significant tailwinds in both the chemicals and pharmaceutical sector not only here in India, but we believe that a lot of new investments will come back into Europe and US. Those countries have realized that they were too heavily dependent on India and China and hence we believe that investment will drive growth for the Pfaudler group as well. Thomas has also worked along with DBAG to really change the culture of the Pfaudler group in Europe for the last few years, we brought in a lot of new people as well, a lot of professionals. I think that also bodes well for the future of the company. And all in all, we believe that we are now set to really start benefiting from many of these initiatives that are going to come in. And if we continue to work together, we will remain the undisputed leader, but we do aspire to become the world leader in the chemical processing equipment space, there's a lot of work to be done, but there's definitely a lot of scope for a company like ours to really take advantage of the situation.
So with that, let me introduce my colleague from Germany, Thomas Kehl; Thomas is the CEO, has been on the GMM Pfaudler board for quite some time. Alex has joined maybe a few months ago as the CFO of the Pfaudler group. And together with them, we will be spending a lot of time to making sure that all the synergy and revenue as well as cost improvements are seen in the coming months. Thomas, over to you.
Thomas Kehl: Thank you very much for the nice introductory roles and explaining the deal structure and what we do here. And let me say I'm so happy to be on board and the CEO of the Pfaudler group, and we are very, very excited about the deal, it is going to be extremely positive for us. We are working well together as Tarak said since several years. We are strategically 100% aligned and this is a great opportunity on a global basis to really implement our ideas. In the recent years, Tarak already mentioned, we're focused majorly on three things; one thing was modernization of our manufacturing footprint, especially in Europe and in China and pretty much we are through this installation and new site and ramping up phase and the benefits of not only cost benefit, but also having the right capacity, the right space will be benefiting our businesses in the future. Parallel, we also built up a portfolio of products and equipments that suit our core competence quite nicely. So, our core competence and nature of business is still what we call the tactical space or the glass lined reactors and mixers. But in addition, we have quiet companies that bring to the party adjacent products what is glass for silicate, so there is for the PGAC special polymer for corrosion resistant, or whether it's Interseal creating seal, every vessel that's being sold and used, has to have a seal and we got our own technology and it's a patent technology and we have a great USP there. And we have already installed in plants that this will also manufacture in India for the Indian market, and we are very certain to capture market share in this business as well. At the same time, we also created not only a better Pfaudler plant, the Pfaudler plant is a very old and established brand, but we had a branding strategy implemented where all our product lines are part of the branding family. So we call up our friends for special applications, for example, Pfaudler Interseal, Pfaudler Normag, Pfaudler Edlon and it's very well received this in the market. Since we've created what we call a one-stop shopping environment for our customers. We have also started to build up our engineering group in order to sell more systems. This is where we also offer to our customers and sell to our customers process know-how and the entire plant will be designed and can be designed if the customer desire. And this is a good service that our customers want from us and we can provide that in the future.
We have a strong order pipeline in the new field of asset recovery. We have quite a lot of projects offered and we will receive significant orders in the next couple of months and certain of that.
One of the differences between the Pfaudler and international group and GMM Pfaudler is over the years and the cultures in the western world is much, much more service-related and aftermarket related. We are selling a lot of our customers services and parts and maintaining their business. In the meantime, more than 30% of our revenue is coming from service. And the reason why that is so interesting is because service is providing us with superior margins compared to some other products. And I think that this knowledge and the way how to service, there will be opportunities also given in the areas that GMM Pfaudler is serving so far.
So again, we are happy to be here, or we are looking in an exciting, bright future and we are fully committed and working hard to bring it to a success. Thank you, Thomas, thank you very much for that. So, ladies and gentlemen, let's now open it up for Q&A and we'd be happy to answer any of the questions that you may have.
Moderator: Thank you very much. We will now begin the question-and-answer session. The first question is from the line or Sanjay Shah from KSA Securities. Please go ahead.
Sanjay Shah: Tarak, my question is we have acquired is a very value and earning accretive. We have been through the valuation metrics and understanding. We are still not coming out of the stock, how we could do this acquisition and further valuation where the earnings and growth are ready for us and the future growth, process are lying in (Inaudible) 18:43. Can you explain how are we going to turn around Pfaudler because margins for international are low and you pointed out that the manufacturing will be brought to India and how is your strategy, we would like to know?
Tarak Patel: Sure, so I think from a valuation standpoint, let me just tell a point for important for people to understand; DBAG still remain invested in GMM Pfaudler, they still own more than 50%. So it's important that this transaction was done at arm's length transaction because it's a related party transaction. I think DBAG also understand that their value in GMM Pfaudler is significantly higher than what they're valuing Pfaudler would be. So at no point would they want to compromise their value here at GMM on. So this deal was done on valuation based on a very pragmatic approach from both sides. At the same time, we believe that we did get a deal that is going to be helpful for us, and we believe at the end of the day that we are quite high, I'll be happy with the valuation. The valuation also be assumed that there is some debt level, there is a small or the pension liability as well in the Pfaudler group and the enterprise value is closer to around 150 million mark. However, the equity value, like I mentioned to you, is about $15.8 million. So, all in all, we are quite happy with the valuation, if you go through the document again on the website, it will give you some more clarity in terms of the different items considered in the valuation and that will give you some clarity as well. So now in terms of margin, definitely for GMM Pfaudler, it has a higher margin profile than the Pfaudler group. However, having said that, there is definitely scope for improvement. One of the major reasons why we believe the scope of improvement is going to come is because we are already seeing improvement in the three facilities that have just been launched. The Pfaudler Germany facility is already showing profitability and China just came on line right now, Italian has been showing some profitable improvement already. Along with the profit improvement plan that Pfaudler has in place, we believe that will start improving. You know at the first level, if I today were to be honest with you, if I told you that both GMM Pfaudler and Pfaudler as a standalone company without any synergies were to hit their plans that would be significant and quite good for the group. But on top of that, we are going to also build synergies which will be additional improvements in profitability. So we believe at a very, very conservative rate that we can be up to 16% EBITDA level in about four years time as a group, and I think that will be something that will be quite easily possible, I think the hard work that has already gone in, will start bearing fruit in the coming quarters.
Sanjay Shah: Sir, are we going to bring the manufacturing from Europe to India and then export or how it will work because all their manufacturing costs would be high? And adding to that, even certain norms are that even European nation want locally procured materially, correct me if I'm wrong, how you handle this both?
Tarak Patel: So, you are absolutely right and like I mentioned to you Mavag is the prime example of this success, where 80%, 70% of the labor-intensive work is done here locally in India and the final finishing testing is done there, right. So, this allows them to increase output. For us, we are also willing to do the metal work. So, if you think about glass lined reactor, we can do the complete fabrication of the metal body here in India, and then supply to them and then they can do the glass lining locally there. So the customer at the end of the day get the local German, Italian, American quality; however, the fabrication work which is the most labor-intensive part can be done here locally. Having said that, we can also look at spare parts, smaller components to be exported from India. And then lastly, there are certain markets where Pfaudler doesn't have much of a presence where their pricing strategy is quite high, in those markets like Southeast Asia, Middle East, Eastern Europe, that's where GMM Pfaudler can sell directly to the engineering equipment as well, but through the Pfaudler network.
Moderator: Thank you. The next question is from the line of Nishant Navin from Temasek. Please go ahead.
Nishant Navin: Hey, Tarak. Thanks again for taking time and listening our questions. I think I just want to have a quick follow up on the valuation question. In terms of we talked about this deal about 150 million, how does the GMM Pfaudler valuation fit into this, if you can explain that a little bit more?
Tarak Patel: Right. So just to clarify GMM Pfaudler valuation does not fit in. We've only bought the global assets of the Pfaudler group as a standalone entity ex-GMM, GMM valuation, revenue profitability is not included in the valuation at all. GMM shareholding does not change. However, GMM has basically bought 54% of the global business along with 26% from the Patel family side and the balance 20% remaining with DBAG the private equity fund.
Moderator: Thank you. The next question is from the line of Manish Sharma, who's an individual investor. Please go ahead.
Manish Sharma: Can you tell me about how much debt will be there in the company post the acquisition including if there's debt in the entities we're acquiring?
Tarak Patel: Right, so maybe Alex, do you want to take this question?
Alexander Pompner: Yes, yes. Hello, I'm Alex, CEO of the Pfaudler international group. Happy to meet you here in the call. Pfaudler international group has currently bank debt of around US$55 million. And this will be rolled over and taken by the GMM group. And then also, we GMM is in the discussion of partly finances and acquisition with part of debt, and part of existing funds. But the key the 55 million of Pfaudler international will be taken over.
Tarak Patel: And Alex, there's also some cash on the balance sheet, right?
Alexander Pompner: That's also yes. And we expect cash to be around 30 to 32 million. So in fact, the net debt is slightly above 20 million.
Tarak Patel: Yeah, what the bank in Europe agreed to is the rollover the lead banks who are quite happy with the way the business has performed, have allowed us to roll up the current debt into the new SPV and that debt is going to be ring fenced from India. And like I mentioned in the beginning, India debt level will be ($70 million) 26:00 for the acquisition.
Manish Sharma: I also read in your press release that the target entities will also be paying a million dollars of interest to Pfaudler UK. What is this for?
Tarak Patel: Between signing and closing, so we signed last week obviously (Inaudible) 26:24 closed in October, November. So during this period $1 million of EBITDA will be paid to DBAG.
Moderator: Thank you. The next question is from the line of Bhavya Joshi from (Chris Portfolio) 26:45. Please go ahead.
Bhavya Joshi: I was just trying to like make sense what was the trigger for the acquisition like is it DBAG had some closure nearing like, is it the closure of the fund, it was near that led to you buying out the stake or like was there anything else?
Tarak Patel: So it has nothing to do with because the fund which has been invested in business still has a six to seven year horizon left, so there's no pressure from their side, they remain completely committed to the business. But I think the reason why we did this transaction now is obviously they have always seen as a strategic investor, they always realize that we are the natural and the logical, the persons to buy this company. And I would also like to say that our performance over the past five years has given them a lot of faith in our capability to allow to do this transaction. And then over the last few months, I did go to them multiple times with multiple different structures and then we finally agreed on something that we all found was really-really good in terms of alignment, was right in terms of pricing and valuation and we decided to go ahead and over the last two or three months when the global pandemic was hitting, we had some intense, intense round of discussions, negotiations, lawyers and then finally ended up signing last week. So all in all, it was quite a good process, something that we are quite proud of. And I think from both sides, we are both happy owners who continue to remain invested and committed in the business.
Moderator: Thank you. The next question is from the line of (Haspo Kara) 28:35 from Finvest Advisors. Please go ahead.
(Haspo Kara): Hi, Mr. Tarak Patel, congratulations for the great news, which we never expected. Just two questions from my side. One question is what happens to the 50% equity stake that currently held by Pfaudler UK in GMM Pfaudler?
Tarak Patel: It is actually held by Pfaudler Inc. That has been carved out and it remain with DBAG. They remain invested at the GMM level completely. As you know, they are financial investors and in some point they would look to dilute their stake, but as of right now, they're completely invested in the company going forward.
(Haspo Kara): Okay, so that stake will remain with them only?
Tarak Patel: Yes.
(Haspo Kara): My second question is, in the press release, you've mentioned that Tom as the managing director of DBAG has said that “As a former board member of GMM, I can say that we have built a strong relationship with Patel family and remain committed to support, now it is important.” The business through expansion of the product portfolio by add-on acquisitions. So are we planning any further inorganic opportunities now in a group?
Tarak Patel: So we always are looking at opportunity. And the DBAG is always very, very supportive. We really want to emerge and make this company really the world's leader when it comes to not only corrosion resistant equipment but really chemical process equipment. I don't think there is a single company in the world today that can really be a one-stop-shop. It's a very fragmented market. And I think if we can make some good acquisitions going forward, it can very nicely enhance our product portfolio. And just to add here, I think maybe Thomas can say a word or two on what his thoughts are as well.
Thomas Kehl: Yes, we always had in our mind to buy and build this company. And as I said before, the first five years of DBAG involvement and ownership focus was on a couple of restructuring and modernizations of the business. By manufacturing we have implemented a new sales force, we brought in new people having in our closer to-date to poach more than in the past. The subject of cross-selling that all the sales people can really feel the sales channel with all the products that we are offering is a basis for a portfolio strategy and for buying more and acquiring more companies that are adjacent to all the business and have a nice fit. And we have a couple of nice ideas. We have started discussions and approaches, but of course, the stages that we are in, we cannot be more specific but the further ideas and we want to call the company inorganically as (Inaudible) 31:22.
Moderator: Thank you. The next question is from the line of Kiran Naik from Modi Fincap. Please go ahead.
Kiran Naik: How much is the Pfaudler’s market share in the world market?
Tarak Patel: So Pfaudler international global market share for glass lined equipment is about 40%, GMM Pfaudler in India is obviously a little bit higher; 55% and I think we can also look to increase the market share globally with the use of GMM and Pfaudler joining us, that's quite possible.
Kiran Naik: And in the international market, who is our close competitor?
Tarak Patel: I did mention we are the undisputed market leader with a size close to $260 million. The next competitor is a French company called DDPS which have revenue of close to $116 million on a like-to-like basis and then there is no real significant player after that.
Kiran Naik: And in India who is our competitor?
Tarak Patel: In India, there is a company called HLE Glascoat which is the biggest competitor here. We had a French company called DDPS they're here in India as well. However, they have recently sold their Hyderabad factory to GMM Pfaudler and are now exiting India as we speak.
Moderator: Thank you. The next question is from Shrinivas Aiyer from Rockfort Consulting. Please go ahead.
Shrinivas Aiyer: What kind of growth prospect do you see with the other subsidiaries? Since our company has become a global company, do you have any plans to list GMM Pfaudler in US?
Tarak Patel: No, so obviously, on the first part of our growth rates, growth rate in European, Western countries are not the same here in India. However, we do believe that we will see now some improvement in those growth rates, especially with local manufacturing coming back to the shores. We've been seeing a lot of traction in Europe and in the US, China, India continue to remain strong. So we are quite optimistic of growing. There are no other plans right now to list this business in any other jurisdiction. And Thomas, maybe you want to add a word or two what's the growth rate in Europe and the US?
Thomas Kehl: Of course, we have seen the chemical industry with steady growth anywhere between 3% and 5% over the course of the year, of course, some regional differences, the Americas came back strongly the last few years since they are investing in their own country, and manufacturing much more than the years before. Pharmaceuticals, we're seeing a steady growth of 6% in those regions. And I think after the corona, it's fair to say that we see movements in discussions of our customers where they are building redundancies back in Europe, back in US and making more investment locally than they did in the past. So I think for quite a while we see better growth rates.
Moderator: Thank you. The next question is from the line of (Ronak Vora from AUM Advisors). Please go ahead.
Saurabh Shah: Tarak, this is Saurabh Shah. A couple of questions, Tarak. You mentioned the asset recovery, like non-glass vendor, processes and equipment, what is your sense of how large that market is? And really what kind of growth are you seeing with the new management structure consolidated with ordering, I mean, for the Germany in the next few years – do you see a very aggressive kind of market share plan over there, or is it more likely to be just for existing businesses… for next three to five years, what kind of growth rate would you think you could get?
Tarak Patel: So, we definitely are looking at a double digit growth rate in some markets and some geography. We have seen possibility that that could be achieved… but again, like I told you earlier, we have been a little bit conservative with the numbers, but I don't see any reason why we can't achieve the growth rate. The idea here was to stabilize the manufacturing facilities. I think that's something that has already been done; the new facilities in Germany and Italy have already shown significant improvements. If we can implement some of our operational excellence models into those factories and really ramp up production that would give the sales force much clear, more visibility and in turn reduce the delivery times and then again get market share. Like Thomas mentioned, there are other complementary product lines like asset recovery, where we are very, very, very close to winning some business, that same asset recovery is something that we have now also implemented in India, we are going out quite aggressively. We have closed here in India as well. Pfaudler group have recently purchased an Interseal, a sealing mechanism company. We are now localizing the seal to make it ready for the Indian market. So we are really working together. And I think now there is clear alignment in terms of where the revenues and profitability would be flowing into, right. So going after market share, going after some businesses which Pfaudler was not currently going after, there is clear alignment from that standpoint so that everything flows into GMM and value is created at GMM level.
Saurabh Shah: And also just give us your current margins, 16% I know you have facilities now I guess in other European countries, but do you think three, four years 16% is being a bit conservative given the synergy that you expect and better utilization of the new plants in Europe?
Tarak Patel: Yes, so to be honest with you, these numbers are a bit conservative. We always felt that we should give you numbers that we are sure of, as GMM as well, I've always been very forthcoming when it came to numbers and margins. So I think it's always better to target a little bit conservative number but then outperform that. And again, the synergy is even though we've done it in the past, it will take some time because right now in India, we are very busy, we need to add a little bit of capacity when it comes to fabrication. Not too hard to do, but now with our new Hyderabad facility that opens up another more capacity as well. So all in all, we are quite well suited to cater to the European market. We have to get the mindset and culture that the salespeople can really go and sell any product from all over the world rather than just trying to fill up a local factory. Thomas, you want to add something on this?
Thomas Kehl: Well, absolutely, we have made sure that the new salespeople came in some because of retirement, but we had installed a global sales management that Pfaudler group did not have before the years of 2015. This ensures actually our capability and usage of the trade channel and also the technical background to sell all kinds of products that we are bringing to the table. And you have nowadays people asking management or when getting new products that we can sell them. We want to sell more and broader and I think there are a lot of opportunities out there.
Moderator: Thank you. The next question is from the line of Gowri Srinivas from A2Z Financial Services. Please go ahead.
Gowri Srinivas: The shareholding pattern is a bit confusing with Mavag and DMM for that matter out there; 54% in Pfaudler and further around 50% in DMM Pfaudler. This is a circular pattern. Can you make it a linear structure for easy understanding?
Tarak Patel: It is not very difficult, it just seems difficult; GMM Pfaudler has 100% subsidiary, Mavag, so together GMM Pfaudler and Mavag will own 54% of the global business; the GMM Pfaudler shareholding is not part of the structure at all, it has been carved out and it remains with DBAG, It has nothing to do with this current structure.
Moderator: Thank you. Next question is from the line of Bhavya Shah, who's an individual investor Please go ahead.
Bhavya Shah: You are saying that most of the manufacturing work will be done at offshore in India to benefit from this acquisition. But in India, we are already constrained with the capacity. So how GMM management is planning to address this challenge?
Tarak Patel: Good question. I just mentioned it that recently we acquired DBAG facility in Hyderabad which would give us definitely a more capacity here locally. And again, it's not going to be overnight we switch over everything to India. There are manufacturing facilities all over the world. They really continue to manufacture; however, we find some way of reducing costs there either through certain components coming from India fabricated body and try to find really the best kind of model which keeps the local factories running as well, at the same time reduce our total cost. But at the same time, we will also look at creating capacity here… and when I say capacity here, does not have to be glass lining capacity, we should really look at fabrication capacity where some of the labor intensive work can be done here locally and then like I told you more of the final finishing, tenting, completion glass lining can be done in the local facilities and then ship to the customer.
Moderator: Thank you. The next question is from the line of Sunil Jain from Nirmal Bang Equities. Please go ahead.
Sunil Jain: Sir, you said that the overall valuation of acquisition is around $150 million and 55 million is equity and 23 million net debt is there. So balance 75 million is what, can you explain?
Tarak Patel: So 70 million is pension liabilities, pension liability is spread over three geographies -- US, UK and Germany. The US and the UK pensions are fully funded, the German pension is not funded, German law allows pension liability to remain unfunded. So German pension is a closed plan. No new employees are joining that plan. The average age of the employees on that plan is about 79, 80-years-old and the interest rate to calculate the pension is about 0.9%, historically, the lowest has ever been, any increase in improvement in interest rates will see the pension going much, much lower over the coming years.
Sunil Jain: So you mean to say that for the 70 million liability, how much liability can come to the company if it is fully funded then why are computing it as a part of consideration?
Tarak Patel: Because it's a debt line item, but there is no liability that it had come to the company. Alex, do you want to jump in and maybe spend a minute or two on the pension?
Alexander Pompner: Yes, I could. It's for the acquisition purposes is what considered in the enterprise federation. However, usually, if it comes to the leverage calculation for the Pfaudler international group with our banks, we don't consider it. But yes, it's on our balance sheet and as Tarak mentioned, especially the pensions that we have in (Inaudible) entity were considered and they are fully dependent on the interest rate development. And as Tarak mentioned, currently, the interest rate is really low, and therefore the pension value on our balance sheet is high. And if the interest rates increase again, our pension liabilities drop significantly.
Moderator: Thank you. The next question is from Vijay Chawla from Oracle Wealth Creators. Please go ahead.
Vijay Chawla: My only single question is after the consolidation is done, after the acquisition is done, what would be the debt level of the consolidated entity after the four months?
Tarak Patel: I can give you a broad level number; the consolidated net debt-to-EBITDA would be about 2.4x. Alan, do you want to jump in and just maybe give them what the total number is?
Alexander Pompner: This is as Tarak mentioned the debt-to-EBITDA is 2.4x.
Vijay Chawla: Debt to equity?
Alexander Pompner: Debt to equity is around one time. It's a little bit higher if we consider the minority interest.
Moderator: Thank you. The next question is from the line of Tanush Mehta from Dalal & Broacha. Please go ahead.
Tanush Mehta: I have a few questions. Sir, my first question would be that when we say that our consolidated top line will be around $200 million, for GMM Pfaudler as a consolidated entity, we would be having only 54% of the share, am I understanding that…?
Tarak Patel: We will be owning a majority interest in Pfaudler group and by that account, all the total revenues of Pfaudler group and the profitability will flow into GMM Pfaudler. So our total 12 months consolidated numbers will be around $260 million mark. We are basically going from about a Rs.600 crores company to a Rs.2,000 crore company with this transaction
Tanush Mehta: Promoters also holding their as well and even Indian entity as well, so we could have had a straight holding by GMM Pfaudler into Pfaudler?
Tarak Patel: So that's a good question. And the reason we wanted to actually do it this way to also show to investors and to show to the market that we are basically committed, and we believe in the business and we're going to put our own money into it. You are right, eventually we will find some mechanism by which GMM Pfaudler itself will hold the entire piece at a later date we think of something there, but right now, we didn't also want to leverage GMM Pfaudler to such a high level hence we felt that coming in as a family and showing our commitment to the business also, will be an important message to send.
Moderator: Thank you. The next question is from the line of Omkar Kulkarni from Shri Investments. Please go ahead.
Omkar Kulkarni: Just now you mentioned you will be moving from a 600 crores company to 2,000 crores company. So what would be the approx EBITDA figure for that and what are your targets for both top line as well as bottom line if you can say for next three to five years?
Tarak Patel: I have already mentioned that. The combined entity in FY’21 on a 12 month basis should be about Rs.2,000 crores and about Rs.260 crores of EBITDA which is around 13% and by 2024 we should have an expected revenue of 2,800 crores and EBITDA margin close to 16%. This is without synergy. This is a number that we believe we can strongly achieve and improve upon.
Omkar Kulkarni: So for FY’21, it would be around 2,000 crores?
Tarak Patel: Yes, on a 12-month basis. So it just depends on when the transaction will flow, but yes, on a proforma basis, it would be that number.
Omkar Kulkarni: On the consolidated basis, you would be expecting around Rs.2,800 crores by FY’24?
Tarak Patel: Yes, FY'24 with the 16% EBITDA margin.
Omkar Kulkarni: You are already having 55% market share. So, like, how do you plan to grow this because you already have significant chunk of this?
Tarak Patel: Yes, so in India we are 55%. Globally, we are closer to 40%. But even in India, I am not sure if you follow the company but one of our main competitors has now left the country and sold us the facility in Hyderabad, I think that will give us additional capacity and will also help us capture additional market share in the south region and grow our presence there. And in India also things are changing quite significantly. People are now looking at building world-class facilities where branded equipment, high quality equipment are very, very important. GMM Pfaudler is the market leader and is known second really market leader when it comes to technology. If all things are equal, if we can pretty much give them the right timeframe in terms of delivery, most customers would like to buy it from us.
Omkar Kulkarni: A follow up to that is because of this corona, you are seeing significant upside in your demand. But how sustainable is this demand say next two, five years from chemical as well as from pharma point of view?
Tarak Patel: So that is something I think we are quite bullish on, we believe chemical, pharma will do significantly well over the next few years. People are looking at alternatives to China. People have already started investing heavily here. Pharma is still not picked up and we think that pharma will pick up with the government norms coming in around making intermediate locally, with the pharma city coming up the new clutters be redefined. So, all in all, we're quite confident. This is one industry that has stood the test of time when it comes to the pandemic and you know how well the pharma companies are doing now. So I think it's only a matter of time before any investment coming in.
Moderator: Thank you. The next question is from Dhruv Bhatia from BOI AXA Mutual Fund. Please go ahead.
Dhruv Bhatia: You talked about FY'24 expected revenue target of Rs.2,800 crores. You've currently talked about combined entity there'll be Rs.2,000 crores. Is there an incremental amount of CAPEX that will be required to keep this incremental Rs.2,800 crores?
Tarak Patel: No, so most of the CAPEX that has already gone in, has already been done, like I mentioned Pfaudler group has spent close to $25 million over the last two years modernizing the German, Italian and Chinese facilities, brand new state-of-the-art facilities in GMM Pfaudler India as well, we've already completed the acquisition of DDPSI plus two new furnaces are on its way here which have already been accounted for and they should be starting maybe in a month time. So there's no significant CAPEX to reach this number required.
Dhruv Bhatia: In India you do talk about that there will be absolute amount of replacement market which is coming up last time it was felt, but my understanding would be that the international markets would be anyway saturated in terms of fresh CAPEX that will be all replacement-led. Is my assumption correct?
Tarak Patel: Yes, it's a combination of both. I think India is seeing some improvement in replacement. Europeans do deal with demand significantly. However, we believe that will switch slightly, I think we will see some new investments coming in, in Europe. Maybe Thomas, you want to jump in and just maybe spend a minute or so here?
Thomas Kehl: Yes, I think Tarak, you're right that in Europe and America for many years, a lot of replacement business even though there was significant size of replacement business. The maintenance business and service businesses are quite significant and growing. We see more and more customers doing reglassing approach and addition incrementally we will see new plants… new sites coming up that haven't been there before while customers here in these areas are changing their minds to work, not moving from one country to the other and moving back, but they're going to build redundancies, additional capacities that are required that in crisis times, countries and regions are properly serviced.
Moderator: Thank you. The next question is from the line of S A Narayanan from Capricorn Research. Please go ahead.
S A Narayanan: Tarak, question one, what will be the broad shareholding pattern of DMM Pfaudler?
Tarak Patel: The broad shareholding pattern remains unchanged; there will be 50.4% held by DBAG; 24.6% I think held by the Patel family; and the balance with the public shareholders. So there is no dilution increase in share capital, nothing, everything remains the same.
S A Narayanan: My question two is, what is the debt-equity ratio of GMM Pfaudler after acquisition?
Tarak Patel: I know we are borrowing close to $17 million between GMM and Mavag, our subsidiary, we are going to use $10 million of internal accrual plus we are borrowing about Rs.40 crores for the DDPSI. Jugal, do you have that number handy with you?
Jugal Sahu: Yes, our net worth is about Rs.275 crores and our borrowing is about Rs.160 crores, so that's the ratio of 160 and 275.
Moderator: Thank you. The next question is from the line of Ankit Gupta from Bamboo Capital. Please go ahead.
Ankit Gupta: I have two questions. First on this pension liabilities of $70 million, if you can elaborate on that and what are the chances of this falling on the combined entity?
Tarak Patel: So again, like I mentioned to you, the US and the UK pensions are fully funded, we have done actuarial valuation, there is no liability there. The German pension is very, very normal for German company to have unfunded pension. This is a closed plan. So no new employees are joining. The bank don't even consider this as debt when they look at the borrowing. Currently the people in the plan are close to 70 or 80 years old and the interest rate has historically low that they ever paid 0.9% with every 100 bps improvement in the interest, you will see a $7 to $8 million reduction in pensions. So going forward we expect the pension in Germany they're likely to reduce significantly, but it will never have any impact on P&L, it's only a balance sheet item and has no further effect.
Ankit Gupta: And secondly, on the Pfaudler Inc. financials, in that their revenues have remained stagnant at around $175 million for the past three years, EBITDA margins have seen some improvement during FY’20 with EBITDA margin improving to 8.2% from around 5% in FY’18 and FY’19 and the gross margins have also been pretty low at around 22%, 23%. So if you can highlight what kind of improvement you see in Pfaudler over the next few years, I mean, what kind of steps are we going to take to improve their margins and growth going forward?
Tarak Patel: Right. So I think we spoke about this a little bit. So basically we are counting on the fact that we have three new modern facilities, which are now just coming online. The German one just started a couple of months ago and is already showing profitability. The Chinese one started a few weeks ago and had good backlog. The Italian one as well, is a brand new facility. So these are much-much more efficient, restructured, lower number of people, lower number of overhead. So we will see significant improvement coming from there. We also see new products, cross-selling, new technologies coming in which will definitely add to revenue and profit improvement and then if we add cross-selling and look for sourcing from India, from China we can definitely look at further improving profitability as well as revenue and market share.
Ankit Gupta: The Chinese facility that we have, that that is 100% subsidiary of Pfaudler or it is a JV with some local company?
Tarak Patel: No-no, all the Pfaudler units across the world are 100% owned by Pfaudler, GMM Pfaudler was the only joint venture that they have, all the other units are 100% and they all will now belong under the GMM Pfaudler umbrella.
Moderator: Thank you. The next question is from the line of Vivek Gautam from GS Investment. Please go ahead.
Vivek Gautam: Thanks for creating huge amount of wealth for Indian investors over the last few years, sir. I just wanted to know about the opportunity size for this acquisition? Are the tailwinds strong for our company in India only or worldwide as well?
Tarak Patel: So I would like to say two things. Obviously every business has risk, but we as management need to mitigate those risks. I think if you have strong ethics and good integrity and you work hard, I think most things will fall into play. I think that's something that we've shown here in India. I think that we have been very forthcoming and transparent when it comes to sharing information. We strongly believe that there is global tailwind when it comes to chemical and pharmaceutical not only in India, we believe that the Pfaudler team that is now onboard is very, very capable, we really believe that the company is really at the crux of really building on the foundation that DBAG has put in over the last few years, and I do believe the next few years for this company will be really, really good. So I think all in all, I believe that this story will continue. Sometimes in life, you have to take a little bit of risk, you have to go outside your comfort zone. And this really puts us into the global bracket for an Indian company, moment to be very proud of. And this was a natural and logical thing for us to do. And like I said earlier, to control our own destiny, and we will make sure that we work and put in our blood, sweat and tears over the next few years to make sure that although all the initiatives are implemented and all the synergies are extracted.
Vivek Gautam: If you can highlight about the sustainability of the current tailwinds being enjoyed by India pharma sector, chemicals sector, API sector which is benefiting us also sir?
Tarak Patel: I think India is going to remain strong. The government has recently launched the 59 KSM or the intermediate. We know that many of the chemical companies have been spoken to by the government they are looking at moving into pharmaceuticals. Many of the smaller pharma guys are also buying many, many more equipments. So, there are definitely tailwinds here. You must have seen the performance of numbers of the companies like Divi's Labs, Laurus Labs, everybody's doing exceedingly well. And I think that will translate into more investments coming in.
Moderator: Thank you. The next question is from the line of Jason Soans from Monarch Networth Capital. Please go ahead.
Jason Soans: Just wanted to know, in terms of synergies, obviously, glass lined equipment is one thing, how does it impact other segments like heavy engineering and proprietary products, some outlook on that?
Tarak Patel: Those are new products also continue to do quite well like I started the year of Q1 I told you heavy engineering will have a great talk this year because we started the year with a very good backlog. I think what's also important is that the Pfaudler network has already picked up on the GMM for the heavy engineering business. I think they are very excited to sell the business as well for us across the world and we're seeing a lot of traction there. But all our business lines compete to be quite strong. And maybe Thomas, can you jump in and maybe talk a little bit about your order backlog as well and just explain to them in terms of what you see in Europe and the US?
Thomas Kehl: Yes. And as you said that we have focused on the modernization and building blocks in order for implementing our strategy. We already see commercial success in terms of great order backlog, end of May was way beyond US$100 million already and orders are coming in still strongly. And even the COVID crisis did really slow down the order intake, was very, very beneficial, and it seems to be a great success. And from that point of view, the commercial success and the turnaround from that point of view order intake is to see.
Jason Soans: Just a confirmation, first the shareholding pattern 50.44% was held by Pfaudler Inc. which has now gone to DBAG, Is that right?
Tarak Patel: Yes, exactly, actually the whole company was owned by DBAG. And as part of this transaction, they will begin at 50% through Pfaudler Inc. It is just a financial holding that they will have which we carve out in the group, all the operating companies will move under the GMM Pfaudler umbrella.
Moderator: Thank you. We'll be able to take one last question; we take the last question from the line of Satyan Dariwal, who's an individual shareholder. Please go ahead.
Satyan Dariwal: Hi, Tarak, congratulations for this acquisition. I have two questions. How much of the turnover is coming from GMM by 2024? You said it is 2,800 crores.
Tarak Patel: That's a good question. I don't have maybe the full revenue split here. I don't have it in front of me, but if you remember we had a plan for Udaan and we have set Rs.2000 crores by 2025. So, if you use that as a yardstick, you can then calculate. So maybe Rs.1200 crores will be coming from GMM Pfaudler.
Satyan Dariwal: Of late you have done very well on the heavy engineering equipment front and mostly it has been in the oil and petroleum sector. So, have you any plans of this integrating into your global setup now?
Tarak Patel: Yes, absolutely. So as I mentioned earlier, we've seen a lot of traction, the last few orders that we got to the Pfaudler network, one was for (PLOR) in the Middle East to the Pfaudler Italian office, we got a couple of orders in Spain through the Pfaudler American office and we also supplied really, really heavy engineering equipments, high value, high margin business to the US market as well.
Moderator: Thank you very much. We will take that as the last question. I would now like to hand the conference back to the management team for closing comments.
Tarak Patel: So again, thank you, everybody for logging on to the conference call. I know that the transaction itself came as a surprise and it is a bit complicated. Again, I think once you understand it clearly, you will understand the nuances, I think it's important to understand that the alignment between the three partners remain. I think that's very important. You need to also understand that GMM Pfaudler become the ultimate holding company. The idea of all the partners to create as much value as we can at a GMM Pfaudler level. So we will always look out for the best interests of GMM in terms of product enhancement between the two groups, there'll be a lot of synergies, there'll be a lot of synergies when it comes to manufacturing as well, GMM Pfaudler's lean production model can be implemented around the world as well. And with the current tailwinds that are there in the industry, chemicals and pharma, we believe at least the next three to five years is something that we can show significant improvement. Many of you might even join our AGM which is planned on the 27th if you're a shareholder, and obviously, we will continue to update you. If you have any specific questions that you need answer, you can reach out to our company secretary, and we can then answer those for you. But otherwise, thank you very much again, and we look forward to speaking to you very soon. Thank you.
Moderator: Thank you very much. On behalf of GMM Pfaudler that concludes the conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.