HLE Glascoat Ltd is one of the largest manufacturers of filtration and drying equipment on the globe. It is based in the western part of India and is engaged in the business of:
A) Glass Lined Equipment (GLE)
B) Filter & Dryers
In the GLE segment, it is the second-largest player after GMM Pfaudler and commands a 30% market share.
In filtration & driation equipment, they are the market leader with a 60% Market share. The end-user industry for both segments are common as these equipments form part of manufacturing plants of API, chemical companies etc.
Complete fundamental Analysis of the stock is done in this 20 min video explaining the business model in greater length.So readers are requested to watch the video:
Background of HLE Glascoat Ltd
HLE Glascoat is a resultant entity post-merger of Swiss Glascoat Equipments Limited (SGEL) and HLE Engineers Private Limited (HEPL).
Let us first understand SGEL’s business
It was incorporated in 1991 as Swiss Glascoat Equipments Limited (SGEL) by Mr. Kanubhai Patel and Mr. Sudarshan Amin, who have extensive experience in the glass lining industry spanning more than two decades.
In December 2016, the promoters of SGEL sold 35.3% of equity shares to HLE Engineers Pvt. Ltd. (HEPL), a part of Surat-based Patel group, pursuant to which HEPL and its directors have become promoters of SGEL.
Furthermore, SGEL has issued 15 lacs equity shares to HEPL and it holds 49.63% of equity shares as of March 31, 2017.
The aim of acquisition by HEPL was to diversify its product portfolio at the group level and enhance operational and marketing synergies
Reason of Merger
Equity infusion of Rs. 17.55 crore by HEPL, the expected benefit accruing post planned capacity expansion through the funds raised, given capacity utilization was close to 90% before the merger.
Post this merger, HLE Glascoat Ltd (HGL) also has a business of filtration, drying and process equipment, manufacturing of agrochemical
In 2019, the Company increased the installed capacity by almost 40% by implementing a CAPEX program.
SGEL has an established position in the glass-lined equipment (GLE) industry. Glass-lined chemical processing equipment requires a high level of precision as glass prevents the chemicals from corroding the base metal hence the industry has inherently high entry barriers.
The customer profile of the company comprises reputed players in pharmaceutical (API & intermediaries), specialty chemicals, agrochemicals, dyes, pigments, food processing industry. Key benefits of using GLE are following
- High Corrosion resistant
- Glass-lined Equipment is inert so low risk of contamination, however, it can react with certain highly concentrated acids (HF, Conc Phosphoric acid) which are rarely used.
- Easy to clean (good for Pharma)
- Highly durable (life of 10 years)
However, on the flip side of the business, there is a high degree of working capital is involved in the business operations
The other risk is the vulnerability of profitability to volatility in steel prices (key raw material) which may exert downward pressure on margins
Market Analysis of GLE Business
SGEL controls ~30% market share of the Indian GLE market whereas the market leader GMM Pfaudler owns 55% of the domestic market
The Company has developed technical expertise in the GLE segment through consistent investment in research and development activities.SGEL faces competition from Chinese imports in the industry.
The main growth driver of this business is – Huge CAPEX plan announced by Indian pharma and specialty chemical players due to supply chain disruption due to China Plus 1 policy being adopted by many developed countries.
HLE Engineers Private Limited (HEPL)
HEPL is the market leader with a 60% Market share in Filters & Dryers. HEPL is a family-owned business managed by the second and third generations of the family.
Mr. Himanshu Patel, chairman and managing director of HEPL, looks after the overall operations of the company and have 40 years’ experience in the field of process engineering
Over the period, the company had installed over 3000 installations worldwide (including USA, Canada, Israel, Iran and developed the technology to meet stringent process requirements.
It also specializes in exotic metal equipment and has the distinction of commissioning Hastelloy® Agitated Nutsche Filters and Filter-Dryers in business.
HEPL offers the customized solutions of agitated filters and dryers with Agitated Nutsche Filters (ANF) and Agitated Nutsche Filters Dryer (ANFD) being the flagship products along with Rotary Vacuum Paddle Dryer (RVPD), Filter-Dryers.
The Company also manufactures standardized/off-shelf version of ANFDs. The products of HEPL are the critical components of Pharmaceutical (API), Chemical and agrochemical applications.
HEPL also holds “U” authorization certifications issued by the American Society of Mechanical Engineers (ASME) to penetrate the export market (ASME product certification mark complies with the laws and regulations of nearly 100 countries as a means of meeting their government safety regulations).
Filtration & Driation Business of HLE Glascoat
The key customer of these products is Pharmaceutical (API), Chemical and agrochemical companies where these filters and dryers separate solid and liquid by filtration and ensure odorless, contamination-free and non-polluting working conditions maintaining product purity and hygiene.
Key benefits of using Filters and dryers are following :
- Minimal contamination of the cake which is used to extract solvent out from pharma/chemical manufacturing process.
- Very high solvent recovery
- The significant squeezing of the filter cake is possible, thereby resulting in considerably lower residual moisture in the cake, resulting in a reduction in energy requirement for drying of filter cake by up to 40%
- Solvents are in closed systems, so no toxic vapors are let off in the atmosphere and Personal safety is maintained
This business is akin to a typical Engineering / Capital Goods business as the order execution cycle normally ranges from 4 to 6 months.
Further, each order is backed by 10 to 15% advance payment and 10-15% before delivery and remaining payment after the delivery and installation of the Machine.
HEPL has inventories of approx. 90 to 120 days for engineering goods due to the high degree of customization involved.
FOr HLE Glascoat Ltd, the steel and related products constitute ~40% of the raw material cost and each GLE takes around 3 months to 6 months times to manufacture, thereby exposing the margins to adverse fluctuation in raw material price
Management Quality of HLE Glascoat Ltd
The promoters of HGL are also the promoter of a chemical company named Yashashvi Rasayan Private Limited.
On digging further I found out that this company is rated very low at CARE B (Under Credit watch with Negative Implications).
The reason for the low Credit rating: The sole manufacturing facility (located at Dahej, Gujarat) of YRPL was closed due to a major accident involving a fire on June 03, 2020, resulting in damage to its plant as well as the loss of life of some personnel present at the plant. This mishap was caused by human negligence.
The company had to deposit Rs. 25 crore with the national green tribunal. Also continued support from promoters for ensuring the adequacy of cash flows during the period of disruption was required.
The bottom line: Since the promoter has burnt their fingers in the chemical business hence it shows a lack of focus on their part and raises a red flag.
However, since they have been exiting the chemical biz in HGL and also the operation of this promoter company is stalled, hence it can be surmised that their focus should not stray from the core operation post this mishap.
Financial Analysis of HLE Glascoat Ltd
First, let us understand the segmental break up of the core operation of the company.
It may be noted that the company has a third segment of Chemical which contributed the remainder of the topline and have been contributing to the bottom line.
However, the company has defocussed this segment to focus on the core 2 segments hence we shall not dig deeper into the chemical segment here.
Revenue of HLE Glascoat
Post-merger, the past 2 years’ financials of the merged entities are comparable hence we shall restrict our financial analysis to 2019 & 2020 only.
(Rs in cr)
(Rs in cr)
Return on Equity
Cash Flow of HLE Glascoat
As evident from the charts above, the financial state of the company is healthy post-merger and the synergetic benefits are expected to flow in the future.
HLE Glascoat vs GMM Pfaudler
As we can notice from the comparison with GMM Pfaudler that the company almost commands similar gross margins and operating margins indicating a good market presence.
It confirms the presence of duopoly in the GLE segment and leadership in HEPL core operating segments catering to the same customers.
While GMM Pfaudler even after correction does not seem to offer valuation comfort due to 65 PE TTM, this company is priced at @45 PE offering a little margin of safety.
Hence one should have a minor portion of exposure to HLE Glascoat Ltd and shall buy on dips.
Here the main call is on the sector of API & specialty chemical where China’s story, Import Substitution and Production Linked Incentives to pharma have definite roles to play.
Watch: Fundamental Analysis of HLE GLascoat Ltd
Disclaimer: This article is for educational purposes and not a stock recommendation.