Ador Fontech: Quality small company for the Long Term

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This is one company loved by many of my conservative friends. And good money made in the counter too in 2008-2009 timeframes!

I remember this company used to feature prominently in ValuePickr early Screeners and got us many of our first readers. I never could understand where the growth would come for this company and always skipped giving it the good look it deserves.

Nudged by well-meaning friends and someone doing the spadework with Management, we finally visited the company’s factories and also interacted with the MD Mr H P Ledwani, at length.

Will be updating the Ador Fontech Management Q&A soon.

Its probably fairly valued at current levels, but no reason why we should not keep the homework ready…

Please help take the discussion forward.

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Ador Fontech Stock Story updated, for your perusal.

While it may not be cheap at current levels, it’s not expensive either. Considering that the Management seems to have shrugged off its ultra-conservative garb - it augmented its Reclamation Service facility at Nagpur to 4x capacity - by investing 12 crs in Capex in FY11. Capex in earlier years has been between 1cr to 2.5 cr at most!

Do you think Ador Fontech may spring a surprise in FY12?

While you wait for the Ador Fontech Management Q&A to be updated, please carry the discussion forward!

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Ador Fontech Management Q&A uploaded.

This is a high-quality small company with excellent returns and margins. Questions remain on its growth prospects, though.

There are some interesting developments in the company, like capacity expansion of 4x for the Services segment. Services segment is currently 12-13% of overall revenues and is higher-margin business.

At what levels would you like to invest ion a company of this pedigree?Please carry the discussion forward.

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Thanks.

This gives a lot of insights into the company. It is a quality small company. The infrastructure story in India also has to pan out in the next 5 years - our politicians aren’t making things easy though.

I am still undecided if the company can do a 20-25% CAGR from here, given the small market size. But their aggressive expansion of service facility by 4x - is encouraging. is that telling us a story.

Will be good if we can get the answers for some of the questions - left as TBD.

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IF the size of the market currently is only 450 Cr, why should we look at this company?

opportunities for growth are not that much, isn’t it? why should I be excited by it, even though I agree margins and profits look good.

But I think the Management Q&A, the kind of questions put, and the way Management answered the questions was superb. Really appreciate.

Pls keep educating newbies like us. Hope someone will answer my top of the mind question as put above.

rgds

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Good job again donald with the q&a with management.

Ador Fontech seems to be a good company to keep on the radar if the stock prices were to really correct.

Although I cant see any spectacular growth looking at the market it operates in.

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Yes on the most important criteria of size of opportunity the company appears to be on a weak footing.

Thats might be the reason of co remaining eternally cheap.

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Donald,Hitesh

What is your take on Ador after not so good results?

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I think with the lacklustre results, stock may not go places. Only risk seems to be opportunity cost.

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For me, Ador Fontech is not on the radar in normal situations - because of the absence of near-term growth, especially when compared to many other opportunities in the basket.

Only if there is a big correction sometime, it may be good to consider any entry. Otherwise a solidly managed business, and opportunities may open up when the infrastructure sector finally starts moving at a rapid pace …some day in the future, who knows!

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ADOR FONTECH AR (2016-17) Highlights.

Sales is stagnant at 146cr. OPM has shrunk to 8% from 10%. Dividend this year has been reduced to Rs 3 per share from 3.5 last year.

  1. Reasons for loss or inadequate profits: Stagnation in external business environment, particularly in respect of repair welding segment.

  2. Expected increase in productivity and profits in measurable terms: Target for 2020

The Company is targeting increase in manpower productivity in two tranches

(i) 1.5 crores and then
(ii) 2 crores per annum/per sales person by 2020

with a profitability target of 12-15% on revenues.

Much depends on the economy, industrial growth and the organisation’s leverage in respect of the same.

My Note : In 2011, sales force strength was 150 people.

  1. On Repairs and Reclamation Business :
    Welding market for repairs and refurbishment is basically dependent on core sector industries .
    Their spend in terms of availability of capex for improvement projects, deferment of new purchases, life cycle of the components and subscription to repair based on
    (a) rationality
    (b) time frame/bottleneck
    © ease of replacement
    (d) Nature and kind of breakdown
    (e) Periodicity of usage etc., largely determines availability of business opportunities for the industry.

When prima facie performance of general industries
goes up, ipso-facto (Inevitably) activities for repair will also follow the general trend of incline.

It is opined that in the near future, this industry will slowly transition from stagnation to growth, keeping pace with the economy.

  1. Current year outlook:
    Current year outlook seems fairly good. Much depends on the robustness of the economy and the upscale movement in the industry.

My note: Previous year commentary “Last
couple of years have been quite challenging coupled with slow economic growth. This is expected to continue for another year or two”

  1. Opportunities in repair and reclamation :
    Lot of opportunities exists in terms of job work repairs. However, it is essential to understand the requirements and facilitate impeccable execution. It is the latter which offers lot many challenges including locating the right contractors, ensuring compliances etc. While there are plethora of opportunities in this sector, there are corresponding risks associated and it becomes essential to tread with care.
    While it is essential to scale higher, it is all the more essential to ensure that the basic tenets of business remains well insulated.

  2. Challenges in the business:

The first biggest challenge is getting to know the user and understand the individual user’s process and finish requirements, so that best possible recommendation can be made.

The second biggest challenge with customers is getting them to truly understand the best products to use for their applications and the value addition that can happen.

Once these two are done, Customers often seek for performance guarantees. While organisations may provide warranties based on past experiences, potential risk factors have to be reckoned, as metals and metallic properties would have undergone structural changes with usage. Hence prediction with certainty cannot be
ensured and the risk perception will continue to remain as a perennial phenomena.

  1. On increasing Working capital

Working capital of the Company has been on an increase in the recent. Nonetheless, business of Ador Fontech Limited is primarily in the B2B segment and more oriented towards public sector undertakings and large business conglomerates. While there may be
some possible delays, reliability in collection remains intact.

  1. On 3D future technologies

3D Future Technologies is sill at its nascent stage and has a capital base of rupees four crores. Two crores of equity contribution from Adon fontech and has extended corporate guarantees . 3D future in turn has invested 50lakhs in The CENTER for TECHNOLOGY ASSISTED RECONSTRUCTIVE SURGERY (CTARS) .
http://www.ctars.in/
Mainly dealing in Oro-maxillofacial reconstruction surgeries, involving 3D custom printing. Its a chennai based start up. It seems to be in partnership with Ador .

Import of equipment – capital intensive and deployment of manpower – labour intensive, have both been the necessary payouts in the initial phase of business formation.

  1. Reducing dividends :
    More capex & working capital requirements this year. Need to fund 3D future. FD(cash) a hedge for annual employees compensation.

  2. GST impact :
    Short term negative. Long term positive.

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EWAC a 100% subsidiary of L & T ,is ador fontechs biggest competitor.

From 2017 L&T annual report

Sales : 210cr
Net profit : 35 cr

They have higher margin than Ador ,probably Ewac uses L&Ts marketing team at zero cost.

Top line at stand still for both companies from 2011.

A core sector(steel, power, mining,infra, sugar) revival can bring back the growth.

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Your update is quite timely as the stock shows signs of coming out of a very long onsolidation. Expecting the stock to move much higher in the next 2 - 4 quarters.

Disc…not invested

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Hi,
The timing of your post was awesome as charts says something exiting is coming. I was searching valuepikr for a post regarding this company when i came to now that the promoters were aggressively buying from open market for the last few qtrs. can have a look at this link
https://stockarchitect.com/tools/insider_trading?security_name=ADOR+FONTECH+LTD.-%24
recently it got a coverage in valuable gem blog
http://valueablegem.blogspot.in/2017/07/ador-fontech-ltd-530431-safe-bet.html
if http://www.ctars.in/ partnership with ador fontec is true, it can take ador fontec to skies…
invstd around 90/- seeing promoter buying, planing to add more on chart breakout above 120/-

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Hi,
While there are some faint signs of revival . GST has put a dampner over the capital goods space.
Results and Management commentary from other capital goods players like Thermax, Elecon show a marked contraction in Q1 and expected to affect Q2 too.
Ador is yet to announce Q1 results. Some more pain left in the stock IMO.

Adors 3d future technologies is still at a very nascent stage. Its main focus area is ‘aligners’ for orthodontic treatment. You can read about it here
http://www.flashorthodontics.in/
Aligners are widely used in the west (US, Europe), its yet to be widely uses here in India. Its early days.

Its the capital goods segment , which includes welding consumables and reclamation services which will determine the medium term. In Donald sirs interview in 2011, management spoke about taking the high margin service segment to 20%. They still talk about it ! ( 2017/chairman’s speech)

Its only at 9% now. If conditions improve it could reach that 20% mark. That would take care of the margins.

One in depth analysis on Ador fontech : https://www.investorwhiz.com/stock-ideas//ador-fontech-analysis

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Hi,
Again timing was awesome. I went through the topic about dental aligners last week in a dental journal from my sister(she is a dentist). and was thinking about finding new stock investing opprtunities in dental field with her help. Visited the site http://www.3dfuturetechnologies.com/ and went to the link flashorthodontics. In their contact page http://www.flashorthodontics.in/contact-us ador welding’s address given in the site map. so my doubt is whose subsidiary will be it, ador welding,s or ador fontech’s.
I feel that there is a point in taking a small allocation on this, betting on the 3dfuturetechnologies even if it is in very nascent stages.(any way i am planing to give a good %age of my holdings in ador fontech as a gift to my dentist sister for guiding me to dental aligners)

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3d future technologies & flash orthodontics is a part of Ador fontech.

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hi, thanks for the fast and prompt reply. will try to keep updates about dental alligners.

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Ador fontech Q1 results - sales down at 29cr, 2 crore loss.Probably first loss in 10 or more years. Expected GST impact. We may get a good opportunity to accumulate tomorrow.

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Interesting presentation on industrial segment