GMM Pfaudler OFS Analysis | Lower Circuit Reasons

GMM Pfaudler hits 10% lower circuit| Reasons for crash and Offer for Sale (OFS) Analysis

Introduction

GMM Pfaudler is a supplier of process equipment for pharmaceutical and chemical industries, having more than 70% market share . Its shares hit 10% lower circuit for the second consecutive day today. This is mainly because of the news that promoter’s decision to undertake offer for sale to reduce their stake in the company. Let us analyze this offer for sale and take a look at how it will impact the stock valuations.

Offer for sale analysis

GMM Pfaudler OFS

• Promoters of the company to sell up to 40.93 lakh shares at a floor price of INR 3500 per share for INR 1433 crore.
• This price is at discount of 33% to the closing prices on 21 ^st September’20.
• This Offer for Sale (OFS) is at 53 x PE of FY21 EPS.
• Promoters Pfaudler Inc, Millars Machinery and Urmi Patel are the sellers.
• With this stake sale, the promoter holding of the company will come down to 47% from current 75%.
• Also, company is set to acquire 26% in its parent US company, Pfaudler. Currently the parent company, Pfaudler owns a stake of ~50.44% in GMM Pfaudler. This acquisition would be worth ~INR 2740 crore, which would be funded by debt of INR 1740 crore and accruals worth INR 1000 crore.
• The main objective of this offer for sale (OFS) is to raise urgent funds.

GMM Pfaudler valuation

• If we take a look at the 52-week high/low it is evident that the stock has displayed a stellar rally in this year.
• The highest PE that the company was trading at is ~149 x, however, post the announcement of OFS, the stock hit 10% lower circuit continuously for two days.
• Currently it is trading at PE of ~108 x, which is also a euphoric valuation if we take the look at the sales and profit CAGR over 10 years.

Shareholding pattern of GMM Pfaudler

• If we take a look at the recent shareholding pattern of the company (as of June’20), it is evident that institutional investors have very low shareholding.

Road ahead for the company

• The company is correcting from its euphoric valuations due to this OFS news.
• Apart from this, the company seems good fundamentally given the margins and profitability ratios.
• Now, everything depends upon how the company’s results turn out for the upcoming quarters.
• If the results turn out bad, the stock will decline as promoters have already reduced their stake.