Ador Fontech: Quality small company for the Long Term

L&T sells EWAC at 2.5× sales.

Q3 results
c49da9fa-8f9e-4ffd-a495-e3a27182cbdb.pdf (856.9 KB)

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Hi,
Anybody has any updates about 3d future technologies and flashorthodontics, the subsidiaries of Ador fontech
regards

I found this in the 3dft subsidiary’s AR. Its interesting… but the bet is still with the main industrial segment.

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Notes from Colfax 2017 concall ,post EWAC acquisition :

EWAC is the leading welding repair and maintenance product and service provider in India. This product range is often called hardfacing and expands ESAB’s aftermarket reach in diversified industries such as cement, steel, mining, rail, power, and sugar.

As we complete the EWAC acquisition, we will have a very strong leadership position in India that sets us up well for the exciting growth ahead as the country continues to industrialize and build out infrastructure.

in EWAC, it’s across a diversified set of end use segments that are going to have very healthy growth in India

As part of the Fabrication Technology segment, EWAC provides repair & maintenance products and services that maximize customers’ operating uptime, extend life cycles and reduce operating costs.

On the price multiple paid :
The EWAC acquisition in India will bring us tremendous position and growth future there. And we think we paid a very fair multiple (2.5Xsales)

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5b0be40e-7a48-4ff7-952d-e7d0462de64d.pdf (2.1 MB)

Good results.

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Any new updates on 3D future technologies which is a subsidiary of ador fontech?

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They are conducting certification courses in different cities, reaching out to more orthodontists. Its still at investment stage.

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Repair welding / life enhancement services for cement industry.
adfl-les-cement.pdf (1.5 MB)

Repair welding / life enhancement services for steel industry.
adfl-les-steel.pdf (1.1 MB)

Once capacity utilization improves in these core sectors AFL will be directly benefited.

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Good Q1FY19 result by Ador fontech.
Revenue increased by 51% to 42.5cr v/s 28 cr yoy
cost of raw material 9.9 cr v/s 7.3cr
PBT increased to 3.6 cr v/s loss of 2.8 cr
EPS for Q1FY19 is Rs.1.4 v/s -1.4 in Q1fy18
.Q1FY19 .pdf (589.4 KB)
last year low base of Q1 was due GST implementation as indicated by management during interaction/agm. will post notes once I prepare.
discl:invested

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I attended the Ador fontech shareholders meet yesterday.
Following are the key points discussed.

Chairman’s speech

  1. Noticing a upstick in economy , expect it to be good going forward. Company to post robust growth this year.

  2. Improved working capital management.
    Talks about esab acquisition of ewac. Ewac was going through turbulence , after going through acquisition we expect a strong competitor. We will take them on.

  3. People capability being enhanced. ERM , IT systems being implemented.

  4. Plans to increase capacity over the two years. To consolidate its 3 manufacturing units to one world class unit.

  5. 2020 growth roadmap is still on.

  6. 3d subsidiary : needs more funding for 2 years. Some more investment will be sunk in.

Analyst questions :

On operative leverage from sales growth?
Yes. What matters more is product mix. It depends on economic cycle. Focusing on high margin product mixes.

In the past capex cycle growth, AFL did well, will this prove the same in this cycle?
Last capex cycle was exponential. Such a capex cycle is not feasible.

Where do services business sales come from? Breakup?
Services is 15-16 cr. Growing share of railways. We intend to push to 20%.

Capacity utilization levels?
Service business is not about capacity utilization. Its about capability. People and technical capability. Capacity is not a constraint. We will be adding CAPABILITIES.

About the industry in the last 5-6 years?
Industry size is 2500-4000cr. Reclamation is 500-800cr. Industry has not grown in the last 5 years. Our industry is linked to steel, have a look at that market. It will grow in line with IIP.
Smaller people have faded out.

What went wrong with Malaysia JV? Will the same happen with 3d ?
The uptick in Malaysia is no where near India’s business. We realized that we do not have the technical bandwidth to meet both the Indian and Malaysian market.

2012-13: capacity expanded 4× for service business? What’s the utilization level now?
People, technical capability oriented . We will grow capabilities. Capacity utilization level is at 25%30% , but that’s not the way to look at it.

Trading activity ? What’s the plan moving forward ?
The push is toward own manufacturing. Traded products mostly wear products based on cost effectiveness.

Revenue contributions from different sectors ?
Cement
Steel
Power
Railways
Engineering

Cannot share percentages.

Documentation centre?
Documentation allows us to replicate a successful work elsewhere. Very important to us.

Increasing operating costs in last 5-6 years? Will this provide operating leverage in future ?
Yes.

Possible to grow in a low capex environment ?
Linked to the capex cycle and capacity utilization. It cannot be delinked.

Difference between ador welding and ador fontech?
Fabrication vs repair/reclamation. The way you sell the product is different for the two companies.
We are driven by growth and profitability. No consolidation.

In trading are we exclusive distributors?
Yes we push for exclusivity.

Reason for entering non core 3D ?
Very dependent on industrial cycle. The intent was to diversify .
The market was at a nascent stage. Dental was fast growing. Proving to be not easy. 25-30 people with us. 400 orthodontists empanelled. 600 completed cases.

Are we trying to make aligners cheap , as its currently in the premium segment?
Value player. Not focusing on economic segment.

How long we will put up with 3d ?
Maximum investment is 15cr. 2-3 cr a year. We will not take it to a level to affect the operations of the core business. We will never allow it.

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Chairman’s speech

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Unable to read. Is it possible to provide a readable image , may be with white background. Thank u.

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Thanks @Lynchfan for posting detailed updates from AGM.
Few points from my recent interaction with company and at AGM.

Ador will grow at industry/IIP growth. Margins will grow better than topline due to operating leverage. Witnessing economy improvement and demand after many years.

Cement industry players are major customers 35 to 40% revenue. Steel industry around 30%…others like power,railways…etc contributes the rest.

Target is to reach 250cr revenue by 2021. Lot of changes have been made including division of business into units . R&D developments/marketing activities. Recruited many new people from L&T(ewac alloys) . Many new recruits are through third party which is reflected in increase in professional charges.

Promoters focus: Ador fontech is important for the promoters along with Ador wielding ltd. Even though they are based out at Mumbai, they do have monthly business reviews/meetings. Mr Aditya in office regularly and overviews the things.

Business strategy and division: In fy 17 business was divided into different units headed by senior persons with experience, technical knowledge and contact with customers in particular geographies. Its been positive for the company and results are visible now. Personally I interacted with Heads of business units and they are all happy with business divisions which has given them free hand to take decisions. One SBU head said he is positive on the business after many years, seeing good demand and enquiries from customers.

Competitors: One is Eutectic ltd(EWAC ALLOYS) which is acquired by L&T, subsequently sold to ESAB holdings. They have paid premium for acquisition.Even though we have benefited from the turbulence happening in their business in getting business and recruiting people from L&T, they are going to come back and compete aggressively in the market. Other competitor is Diffusion ltd.

Capacity and expansion: Capacity utilisation in existing electrode manufacturing plant is around 30%. Its easy to add capacity but building market is different. Its wrong to look at Ador in terms of capacity. We have to look at capabilities of company. New factory at Dabuspet in another two three years to consolidate existing operations, reduce cost, enhance capabilities for service and manufacturing, adding new products and more in-house manufacturing. Land is yet to be procured . Will give more details once plan is finalized.

Trading: mainly equipments involved in wielding for conversion of current and to small extent few specialised electrodes are trade… We import from countries like Germany/Australia and China. We cannot manufacture everything due to technology issue. Cannot compete with Chinese manufacturers. Obviously traded products have lesser gross margins of around 25%. Intention is to have more our manufacturing but it’s not economically viable and technically not possible to manufacture everything. Manufactured goods have higher margins.

On reducing receivables and working capital: We started selling through dealers as receiving money from steel players was an issue. Our receivables and inventory has come down with this . we may have to share some margin with dealers. We have given specific responsibility to people to sell and collect money. They can’t just show the sales without collecting money.

Raw materials: Main raw materials for Ador includes steel, copper, zinc and iron. Passing on raw material cost is not difficult.

Working with customers : Very few customers have long term contracts. Most of the times its based on case to case basis. Our employee visit the place and after assessing the work invoice will be raised. Its not easy job to do. We have to train new employee for one month before assigning work to them. As we have to give performance guarantee of about 12 to 18 months for many of our work, we may have to reject the work sometime if it’s not viable. Most of cement companies/BHEL/SAIL are some of our customers.

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That’s very comprehensive. Thanks for sharing it.

India’s investment cycle

News article :

RBI paper :
https://m.rbi.org.in//Scripts/PublicationsView.aspx?id=18716

Capacity utilization and investment chart :

The capacity utilization indicator has reached above average levels, helping the investment/capex cycle is taking a definitive upturn after a prolonged trough.
The coming cycle would be moderate, with more brown field expansion than green field projects.
Good times ahead.

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00a9f62d-cd2b-4802-bb65-618349a90dcb.pdf (1.6 MB)

Good results. Visible turnaround.

Particulars(Crs.) Q2FY19 Q2FY18 Y-0-Y Change H1FY19 H1FY18 Y-0-Y Change
Income from operation 49.1 39.6 24.0 91.6 67.7 35.3
raw materials 11.2 8.5 31.8 21.2 15.8 34.2
employee expense 6.1 5.8 5.2 12.6 11.1 13.5
others expenses 5.1 4.1 24.4 10.6 8.2 29.3
op expenses 3.9 2.6 50.0 7 4.4 59.1
total expenses 44.4 35.8 24.0 83.9 67.3 24.7
PBT 5.3 4.3 23.3 8.9 1.3 584.6
PBT Margin% 10.8 10.9 -0.6 9.7 1.9 406.0
other Income 0.6 0.4 50.0 1.2 1 20.0
Tax expense 1.1 0.9 22.2 2.4 0.6 300.0
PAT 4.2 3.5 20.0 6.4 0.7 814.3
PAT margin% 8.6 8.8 -3.2 7.0 1.0 575.7
EPS 2.4 2 20.0 3.8 0.6 533.3

Ador Q2 FY19 results are good with growth in both topline and net profit. Next few quarters should be interesting to see further growth in sales and improvement in margins:

Have put some efforts to learn more about Ador. Here is brief notes:

Plant1 is spread over 1.5 acres where it manufacture of tig mig wires used in welding. Major end user industries are cement,steel,sugar factories and mining. Raw material is imported + indigenous (80%)source. Material in the form of cable goes through machine which cuts into desired size and packed and sold through dealers. Majority of sales happen through dealers not directly.

Presently utilising full capacity on single shift basis.Can run two shifts.

For continuous weddings it’s packed as coil.

Manufactures welding wires used in certain defence applications which is based on Ador own technology.

Same plant has storage area used for imported machines and training area for new recruits where they will be trained for about a month regarding various repair works done by Ador.They will be absorbed into company.

Welding equipment manufacturing: Ador has variety of machines compared to competitor ESAB. Esab does most of the the business through limited products. Ador has more variety compared to them .Esab dealer penetration and reach is much better than Ador as they are doing it from 2 decades. Ador also increasing dealer network.Plan to increase equipment business started from last few yrs.Next three yrs equipment growth should be good.

Welding machines manufactured by Ador are superior and approved by govt agencies/railways. Ador has cleared technical test required by Govt agencies.Railways and other Govt agencies prefer Ador due to technical superiority and we get good pricing in Govt tenders. In-house R&D to develope equipements,also gets support from Ador welding. Ador has good suppliers to whom it outsources machines and parts as specified. Due to non availability of certain parts manufacturing everything in India is not possible (Esab also imports machines)

Second plant is spread over 0.5 acre where electrodes are manufactured.
Electrode imported (various metal based :steel,nickel…etc)+ powder made of? converted into cake( its Ador technology) which is coated on to electrodes.It is baked at 400 degree Celsius and packed. Quality testing is done by machines during the process.

Capacity of 2 tons/day,currently utilising 75%.Electrodes 2 to 3 months of inventory is maintained at the factory.

Others:
Company has well experienced managers/ employees who are with the company from many years. Presently upbeat about business and orders they are getting.Will easily reach the target revenue of company.Core machine activities are managed by company employee.Rest of the job is by contract workers.

Rupee depreciation affects all the players. Most of it will be passed on to customers.

Industrial area will be converted to residential slowly. Govt has plan to move all the factories to Dabaspet. We have acquired land acres for new plant. Expansion and setting up new plant will take 2yrs. Existing machines can be used in new plant.

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STANDALONE CONSOLIDATED
Particulars(Crs.) Q3FY19 Q3FY18 Y-0-Y Change Q3FY19 Q3FY18 Y-0-Y Change 9MFY19 9MFY18 Y-0-Y Change
Income from operation 47 38 23.7 47.4 38.5 23.1 139 106 31.1
total expenses 42.3 34.3 23.3 43.5 35 24.3 127.4 102.5 24.3
PBT 5 4.4 13.6 4.3 3.9 10.3 13.2 5.3 149.1
PBT Margin% 10.6 11.6 -8.1 9.1 10.1 -10.4 9.5 5.0 89.9
other Income 0.4 0.6 -33.3 0.4 0.6 -33.3 1.6 1.6 0.0
Tax expense 1.8 1.7 5.9 1.8 1.7 5.9 4.3 2.5 72.0
PAT 3.2 2.7 18.5 2.5 2.2 13.6 8.9 2.8 217.9
PAT margin% 6.8 7.1 -4.2 5.3 5.7 -7.7 6.4 2.6 142.4
EPS 2 1.6 25.0 1.5 1.3 15.4 5.3 1.8 194.4

On standalone basis Ador has come out with good set of results. Unrelated subsidiary 3D future technology ltd is spoiling the consolidated results. Q3 alone for revenue of 40 lac from 3DFT they have spent 1.2 Cr as expense( employee expense of 40 lac,other expenses of 0.5 cr). Hope management take some decision on this loss making subsidiary soon.

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