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Strong traction from user industries, outlook bright; maintaining a Buy

Strong execution and sturdy demand at its businesses and regions enabled GMM Pfaudler to post ~34%/~24% y/y growth in consolidated revenue/ orders in Q1. Its German and Chinese plants have been ramping up well, bringing better operational efficiencies at its international business. High commodity and energy prices, however, partially curbed margins to 13.2%. Though improving q/q, the EBITDA margin should hold at the similar level, with upward potential if energy costs abate. Successful integration of its international business, cross-selling efforts, value-sourcing and a strong demand outlook keep us upbeat on GMM’s business momentum. We retain our Buy rating, with a revised TP of Rs1,929 (37x FY24e EPS).

Robust performance. Q1 FY23 consolidated revenue was Rs7.4bn (up ~34% y/y); standalone revenue, Rs2.5bn (up ~45% y/y). Domestic and export revenue grew 40% and 31% y/y. The standalone EBITDA margin was 16.3% (25.5% a year ago, hit by higher commodity prices. The consolidated margin (13.2%) rose q/q, and would sustain at similar levels through FY23. Accordingly, we have adjusted margin estimates. We expect ~20% revenue CAGR over FY22- 24, led by the strong OB and robust demand outlook.

Efforts toward gaining share. Acquisitions is last two-year have made GMM a stronger global player with efforts in cross-selling and enhanced capabilities. Levering this should help it capture greater wallet share of customers and add others. Further, the value-sourcing from India enables it to gain customers due to cost competitiveness. With this, the overall market has expanded and GMM’s enhanced abilities support it in catering to this demand.

Valuations. Led by its domestic and international businesses, we expect ~20% revenue CAGR over FY22-24. We expect margins of 13.1%/14% in FY23/ FY24, with potential benefits from reduced commodity prices and any breather in energy prices critical to the manufacturing processes. At the CMP, the stock trades at 39x/31x FY23e/FY24e EPS. Risks: Less-than-expected demand.

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