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OVERVIEW: Industry: Specialty Chemicals: The chemical sector is one of the essential pillars for the overall economic growth and development of the country. The chemical sector has passed through a very rough phase, the sluggishness lasted for nearly a decade; however, the worst seems to be over. Over the past five years, the industry has delivered a growth of only 12-13%. However, going forward, some of the major factors that will contribute to the unprecedented growth in this segment include, growth in population which will lead to increased consumption of natural resources, urbanization, economic growth, increased purchasing power, increasing disposable income, awareness about industrial pollution, increased demand for water and energy resources, the Make in India project, reduced commodity prices, flow of FDI in this segment to mention a few. Various analysts are estimating Indian share in the global chemical industry to grow to nearly 4.98% by 2017 as compared to 3.46% in the year 2015. As per Market Research and its team, the market for specialty chemicals is set to grow at CARG of 5.4% over the projected period of 2020, to reach a value of nearly USD475bn. The reach of market related to specialty chemicals is spread across all possible sectors involving adhesives and sealants, advanced ceramic materials, agrochemicals, cleaning chemicals, construction chemicals, electronic chemicals, food additives, homecare & specialty surfactants, lubricants, oil field chemicals & fuel additives, mining chemicals, paints & coatings, leather and textile chemicals, pesticides, polymers & plastic additives, printing inks, pulp & paper chemicals, rubber processing chemicals, specialty coatings, specialty polymers, textile chemicals, water management chemicals and many more. The market for specialty chemicals will be dominated by Asia Pacific where strong demand is expected from India and China with CAGR of 6.35% between the period of 2015 to 2020. The need for development of eco-friendly specialty chemicals at highly competitive rates is poised to create new opportunities in this segment. India will be benefitted due to the strict implementation of environmental norms and safety standards against Chinese firms. This has also led to shutting-down of many unorganized and small players in China. As a result of this, imports of specialty chemicals from China to India have declined letting Indian companies to explore the possibilities of capturing a part of the Chinese market share. Asia Pacific is then followed by North America and Europe. The demand for the same is also expected to increase from the regions of Latin America and Middle East & Africa. The overall outlook for the chemical industry looks to be promising over the long term for India as Government of India (GOI) has started introducing a number of measures to improve the chemical sector as a whole. Pharmaceuticals: As per a report by Equity Master, in terms of volumes, the Indian Pharmaceutical market is the third largest and in terms of value it ranks thirteenth largest; where branded generics dominate the market with a whopping 70-80% of the market. It is estimated, nearly 20% of the global generic exports to come from India alone. Analysts are expecting the industry to grow at a CAGR of 20% during the period 2015 to 2020. If one takes a look at the biotechnology industry of India, the same is expected to grow at an average growth rate of 30% per annum to reach USD100bn by 2025. Biopharma which is the largest subdivision contributes nearly 62% of the total revenues at USD1.9bn. As per different research reports, India's formulation export is poised to grow at a CAGR of 14-16% between 2014 and 2019. India's bulk drug exports are likely to grow at a CAGR of 12-14% till 2019, as per a study by Assocham along with Yes Bank. As per IBEF, India is expected to be among the top three pharmaceutical markets by 2020 and sixth largest in absolute size. The domestic Indian pharmaceutical industry is expected to reach nearly USD50bn in 2020.

July 7, 2016 PICK OF THE MONTH VOL-2, NO-11

GMM Pfaudler Limited.GMM Pfaudler Limited.GMM Pfaudler Limited.GMM Pfaudler Limited. BUY

CMP: Rs. 332CMP: Rs. 332CMP: Rs. 332CMP: Rs. 332 TARGET PRICE: Rs. 500TARGET PRICE: Rs. 500TARGET PRICE: Rs. 500TARGET PRICE: Rs. 500 TIME : 12 monthsTIME : 12 monthsTIME : 12 monthsTIME : 12 months

SNAPSHOT

52 week H / L Mcap (INR mn)

341 / 216 4852

BSE Code NSE CODE

505255 -

Face value: 2

(Rs mn) FY14 FY15 FY16 FY17E

Sales (Net) 2005.1 2240.1 2296.0 2525.6

EBITDA 268.8 313.6 320.4 378.8

EBITDA (%) 13.4 14.0 14.0 15.0

Annual Performance

Other Income 29.3 33.5 32.4 32.4

Interest 10.6 5.2 6.9 6.9

Depreciation 70.8 80.9 67.4 94.4

PBT 216.7 261.0 278.6 310.0

EPS (INR) 9.8 11.8 12.6 14.2

PAT 142.9 172.0 184.1 207.7

Equity 29.2 29.2 29.2 29.2

Parameters (Rs mn) FY14 FY15 FY16 FY17E

EV/EBITDA (x) 17.5 14.5 12.1 11.2

EV/Net Sales (x) 2.4 2.0 1.8 1.7

M Cap/Sales (x) 2.4 2.2 1.9 1.8

M Cap/EBITDA (x) 18.1 15.5 12.8 12.0

Debt/Equity (x) 0.0 0.0 0.0 0.0

ROCE (%) 11.4 12.4 13.8 13.1

Price/Book Value (x) 4.2 3.8 3.0 2.7

P/E (x) 34.0 28.2 26.4 23.4

Ratio Analysis

Share Holding Pattern as on 31st March 2016

Parameters No of Shares %

Promoters 10,965,867 75.0

Institutions - -

Public 3,651,633 25.0

TOTAL 14,617,500 100

Parameters (Rs mn) Jun–15 Sept-15 Dec-15 Mar-16

Sales (Net) 546.5 547.7 605.3 596.5

EBITDA 49.6 79.2 91.0 99.4

EBITDA ( %) 9.1 14.5 15.0 16.7

Quarterly Performance

Other Income 13.1 7.8 4.7 7.7

Interest 1.0 1.7 1.6 2.5

Depreciation 17.5 17.0 16.0 16.8

PAT 29.0 45.8 50.9 57.9

Equity ( Rs mn) 29.2 29.2 29.2 29.2

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Note: All the data is as per closing on 5th July 2016. Please Turn Over

OVERVIEW: Industry:(contd.) By 2017, a large number of drugs which generate sales of about USD130bn are likely to go off-patent and thus exposed to generic competition. The sales of generics are expected to grow at a CAGR of 7-9%. The same will also provide opportunities to mid-sized and small-sized Indian formulation manufacturers. Major factors that will drive the growth in this industry include changes in socio- economic factors, growth in number of people suffering from diabetes, obesity, cardiac diseases, rise in sedentary lifestyle, other healthcare related issues, need for better diagnostic infrastructure, volume growth for other healthcare products and new product introductions. The cost of production of drugs in India is significantly lower as compared to many developed nations. This clearly invites many foreign investments and collaboration. Moreover, complying with USFDA will further auger exports from India companies. Agrochemicals: Marketsandmarkets research team is estimating the global agrochemicals market which was valued at USD214bn in 2015 likely to reach a value of USD250bn by 2020 with a CAGR (compound annual growth rate) of 3.2% from 2015 to 2020. The countries of Asia-Pacific (APAC) will once again become one of the most eligible candidates for the potential growth of agrochemical market. In a market like India, where, insecticides dominate nearly 60-65% of the agrochemical space; some of the major factors that will contribute to this increase in demand for agrochemicals in India are growing population, scarcity of arable land, increasing demand of food grains, availability of cheap labour, low processing costs, opportunities for MNCs to setup their manufacturing hubs in India, opportunities for contract manufacturing and research (CRAMS), very low consumption of crop protection products in India (which is 0.6 kg/ha as compared to world average of 3 kg/ha), availability of credit facilities to purchase agrochemicals, increase in popularity of genetically modified crops (GMOs) etc. In order to cater to these demands, market for Agrochemicals is bound to grow at an exponential rate. As per some research houses, the market for Bioreactors is estimated to exceed a value of USD470mn by 2023 and is likely to grow at a CAGR of 18% from 2016 to 2023. European and North American bioreactor market is estimated to have largest industry share which is due to the presence of some of the leading biopharmaceutical manufacturing companies in this region. In the long run, the Asian Pacific bioreactor market is expected to exhibit substantial growth due to a large number of investment opportunities offered in this region. Glass-lined steel equipment is a pressure vessel made up of high quality carbon steel which is lined with special ciliate glass by fritting at a high temperature. These are used in almost all processes related to pharmaceutical manufacturing, chemical, petrochemical, pesticide, metallurgical and food industries. Many of these processes involve exposure to acids, alkalis, chemical solutions and many other such corrosive chemicals. The key reasons why glass-lined steel equipment’s are used as they provide resistance to corrosion, they are inert to contamination, cost efficient solution (if well maintained), have many applications in batch processing of drug manufacturing. About the Company: GMM Pfaudler Limited (GMM) is a leading supplier of engineered equipment and systems which have critical applications in the pharmaceutical and chemical market. The company pioneers in manufacturing Glass-lined steel equipment’s which have applications in pharmaceutical, chemical, petrochemical, pesticide and food industries. The company is also involved in designing, manufacturing and marketing of glass-lined reactor vessels, storage tanks, valves and pipe & fittings.GMM is an ISO 9001:2008 company. The company has also been approved by Special Equipment Licensing Office (SELO) for the supply of pressure vessels to the Peoples Republic of China. GMM has its manufacturing plant located at Karamsad in Gujarat.

In the world of Pharma and Specialty chemicals, the company has its wings spread in almost all the processes necessary in the entire value chain including engineered systems, mixing, filtration, reactor systems, biotech & fermentation, process intensification, drying, etc. The company is capable of manufacturing tailor made products as per customer’s requirement. GMM enjoys a very sturdy and stable customer base with relationship of more than 15 years with each customer. These customers are spread in various industry segments like Agrochem, Pharma, and Specialty Chemicals & Dyes etc. The customers base includes stalwarts like Bayer, Rallis, GSFC, UPL, Excel and many more in the Agrochem sector; Cipla, Lupin, Sun Pharma, Ranbaxy, Glenmark, IPCA etc. in the pharmaceuticals segment and customers like CRODA, Ion Exchange, Thermax, Clariant, Auchel, Heubach etc. from the world of specialty chemicals and dyes. This is not only restricted to India, but the company exports glass lined products and parts to various developed countries like USA, Germany, Netherlands, Australia, Japan etc and leading companies in Israel, China, Malaysia, Indonesia and Thailand. Since these products are accepted by major multinational companies across the globe, it clearly indicates the high standards and quality of products manufactured by the company.




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Source: Company

Source: http://money.livemint.com/news/sector/outlook/growing-

population-and-land-scarcity-to-drive-indian-agrochemicals-industry-

446991.aspx

INVESTMENT RATIONALE (A) Strong foundations: Gujarat Machinery Manufacturers (GMM) was established in 1962. Later in 1987, it entered into a joint venture with Pfaudler Inc, USA (the world leader in Glass Lined Equipment) who subscribed to 40% equity of GMM. In 1991, Pfaudler Inc, further increased their stake to 51% and the company was rechristened as GMM Pfaudler Ltd. In 2008, GMM Pfaudler acquired Mavag AG, Switzerland, which supplies highly engineered equipment required for filtration, drying and mixing applications related to the pharmaceutical and biotech industries. In 2015, Deutsche Beteiligungs AG (DBAG) a leading German private equity company acquired Pfaudler Inc, USA. GMM is the market leader in India, while enjoying a market share of more than 50% in Glass lined equipment. The company has been constantly diversifying its product portfolio and the basket of products now includes mixing systems, filtration & drying equipments, engineered systems and other tailor made process equipment. Moreover, the company also offers a complete annual maintenance contract (AMCs) which ensures trouble free working of the equipments. The company also has a dedicated Spares & Service network and a dedicated team which ensures smooth working of the equipments.

(B) A touch of specialty- Opportunity through industry pick-up: The chemical sector which has passed through a rough and sluggish phase appears to be in a recovery mode now. This will be a market which will be dominated by Asia Pacific. The need for development of eco-friendly specialty chemicals at highly competitive rates is poised to create new opportunities in this segment. In the current scenario, India will be benefitted due to the strict implementation of environmental norms and safety standards against Chinese firms and providing an opportunity to Indian companies to explore the possibilities of capturing a part of Chinese market share. By 2017, a large number of drugs which generate sales of about USD130bn are likely to go off-patent and will be exposed to generic competition. The same will provide opportunities to mid-sized and small-sized Indian formulation manufacturers. Moreover, the cost of production of drugs in India is significantly lower as compared to many developed nations which will invite many foreign investments and collaboration. The domestic Indian pharmaceutical industry is expected to reach nearly USD50bn in 2020. The blend of all these factors indirectly associated to increase in demand for chemical and Pharma products will lead to increase in the demand for biological bioreactors. The same also provides visibility of the sales of glass lined equipments’/ reactors and its allied services. (C) Telangana- The Next Pharma Hub: The government of Telangana is contemplating setting up of a Pharma City in Rangareddy and Mahbubnagar districts of the state. The approximate area of this land parcel is 12,500 acres. Several major manufacturing & services industries have already flourished its operations in and around the area around Hyderabad and some more are yet to flourish. In no time, Hyderabad has become a major hub for healthcare industries including hospitals and pharmaceutical organizations. Nearly one third of the total production (in value terms) of bulk drugs comes from Telangana. Despite been the leader in this segment, the government of Telangana, now intends to set-up some of the most modern facilities with all necessary requirements. The government has ambitious ideas to set up a state of the art Pharma city. The proposed park will be catering to activities related to antibiotics, vaccines, formulation of drugs, fermentation products, synthetic drugs, chemical intermediaries, cosmetics, specialty chemicals, nutraceuticals, herbal medicinal products etc. in order to achieve this, the same will require an influx of R&D centers, testing facilities related to clinical trials, contract research etc. The vision is to make Telangana, a one stop shop for Pharma, biotech and life sciences companies and related companies. All these activities and their further requirements provide a clear sense of the upcoming demand for reactors and glass lined equipments used in Pharma and Specialty Chemical segments. Moreover, in order to avoid the issues related to USFDA and other regulatory norms, the focus would be to install equipments which match international standards at inception itself. Thus, GMM Pfaudler which is one stop solution for all chemical engineered equipments will be one of the biggest beneficiaries of the Telangana Pharma hub, which is subject to as and when the project kick starts.




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Source: Company

INVESTMENT RATIONALE (D) Government Push: The GOI has made a number of provisions and is trying to boost the Chemical & Pharma sector in India. Some of the key triggers to provide activation energy to the segment as a whole are mentioned below.

• The Union Cabinet has given its nod to allow FDI up to 100% under automatic route for manufacturing of medical devices which are subject to certain clauses.

• The Government of India (GOI) has unveiled the project called Pharma Vision 2020 to boost the Indian Pharma industry. The main goal of this project is to make India a global leader in manufacture of drugs.

• Furthermore, GOI has also introduced Drug Price Control Order and the National Pharmaceutical Pricing Authority which will deal with the issue of affordability and availability of medicines.

• GOI has some more plans to provide incentives to bulk drug manufacturers and encourage the Make in India programme in order to reduce the dependence on imports of active pharmaceutical ingredients (API).

• In order to boost and support the start-ups in R&D in the Pharma & Biotech industry, Department of Pharmaceuticals has planned to launch a venture capital fund of approximately Rs10,000mn. Many companies have already shown interest in the pharmaceutical sector of Gujarat.

• Mr. Ananth Kumar, Minister of Fertiliser and Chemicals had announced that six pharmaceutical parks will be approved and established in 2016 at the launch of Cluster Development Programme of pharmaceutical sector.

All these factors will further augur the need and the growth for Pharma and Chemical based glass lined reactors and equipments and thereby fuel the growth of the company.

Financials: The last couple of years have been almost stagnant for the company in absolute terms. However the best thing is that the company has been able maintain its operating margins under these circumstances. The chemical sector worldwide is expected to grow in the coming years and India in particular may grow faster than the world averages. We expect this to bring in a growth in capacity creation for the sector. GMM Pfaudler, a debt free company is fully geared to capitalize this situation in the coming years. The impending growth will be very much apparent from the second half of FY17. Risks and concerns: The company is involved in exports to many countries, slowing down of the global economy and industrial output can adversely affect the company. Moreover, the company is exposed to forex fluctuations. The major raw material for the company is steel, is subject to price fluctuations. Rising cost of power and electricity affects the company. The company is also exposed to interest rate fluctuations as some part of their investments are in fixed deposits with banks and in mutual funds.

Outlook and valuations: At CMP of Rs332, the valuations appear to be a little expensive but given the strong growth visibility and better operating margins one can expect the company to become attractive on future projections. We recommend a BUY on the stock with a target price of Rs500 with a horizon of 12 months.




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