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Axtel Industries Limited: A proxy to packaged food industry

Axtel industries Ltd. is engaged in the manufacture of custom designed food processing plants and machineries as per the requirements and specifications of food and pharmaceutical industries. The company was founded by Shri Ajay Nalin Parikh and Mr. Ajay Desai in 1992, both of who continue to be Executive directors with Axtel Industries Ltd. since its inception.

Industry Landscape: The process equipment industry for food can be categorized into two different kinds depending upon the complexity:

  • Standardized equipment: These are standardized equipment like flour mills which are more capacity driven and does not require much engineering skill.

  • Specialized custom equipment: These are specific equipment which requires highly specialized design and engineering capabilities. The equipment is built to specifications from client and requires deep understanding of food handling, flow engineering, electrical and automation capabilities. This is dominated by European and American players like Buhler, SPX, GEA Group, Russell Finex, Rockwell, CM-OPM etc. These companies specialize in certain equipment and a product line (e.g. a chocolate line for Nestle) would generally involve equipment from some of these. Most large food companies have internal design teams who work with these companies to come up with designs who work with these companies to develop the right process and equipment. The smaller companies can hire external consultants for this part.

Axtel manufactures highly specialized process equipment for food industry. They have capabilities right from Project advisory-> Process Systems->Process Equipment. The company provides process systems for the following food industries:

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Why Axtel?: Axtel operates in a field which is currently dominated by the European companies. For any large food company the cost of setting up a line is very low as compared to the impact a faulty/badly manufactured line can have. This results in orders going to the existing set of suppliers who have a proven track record of quality. This also creates large entry barriers for newer players and also explains why despite being in business for 28 years Axtel’s turnover is just 110 cr. Today though Axtel has a large range of both International and Indian food companies as its client including Nestle/Mondelez/Hershey’s/GSK/Puratos/ITC/HUL/Heinz/Kellog’s etc.

https://www.axtelindia.com/ourclients.

Axtel has a very large opportunity ahead as the packaged food industry/packaged chocolate is growing at over 15% in India and with Axtel having relationships with all large players in these segments it is well poised to exploit this opportunity. There is also an opportunity in automating the existing facilities to reduce manpower costs. The other large opportunity is the export market. Axtel with its high quality products, international relationships and large labor arbitrage vis a vis the European players can grow significantly in the export markets.

Financials:

(in Rs. Cr) FY19 FY18 FY17 FY16 FY15 FY14 FY13
Sales 111 82 76 67 40 48 60
PAT 13 6 7 5 -8 3 3
Gross Margin 50% 50% 52% 53% 50% 57% 41%
EBITDA Margin 20% 12% 14% 15% -6% 19% 11%
PAT Margin 12% 7% 9% 7% -19% 6% 6%
RoE 25% 15% 20% 17% -29% 11% 15%
Cash Conversion Cycle 69 70 80 87 156 98 84
Dividend (in Rs. Cr) 1.5 2.4 0 0 0 0
Domestic Sales 65 59 66 32 46 54
Export Sales 17 17 1 8 2 6
Inventory 21.7 17.8 12.2 13.7 17.8 10.8 7.65
Trade Receivables 19.4 20 18 18 13 17.6 17.2
Advances from Customers 11 11 6 6 11.7 1.7 4.2
OCF 9.1 11.8 15.1 -1.2 6.7 8.28 1.26
Debt 1 4 5 10 12.5 17 15
Cash + Investments 20 18 7 1 6.3 1.7 1.3
Net Block 16 17 18.3 18.3 21 24.2 16.8
CWIP 0.2 0 0.3 0 0.3 0.4 0.3
Intangible Assets 0.3 0.3 0.2 0.37 0.07 1.2 2.7
Discount/Debts Written off 1.3 0 0 0.18 0.7 0.13 0.35

As is evident from the financials Axtel’s sales have grown steadily from 40 cr to 111 cr in last 4 years. What is more heartening is the improvement in margins, operating cash flows and virtually zero debt. The company’s RoE today including the cash+investments is a healthy 25%. Axtel had one bad year in FY15 which was probably due to order cancelations from a significant client.

Risks: Axtel operates in cap goods and there can be significant volatility in QoQ and YoY performance depending upon demand supply to order execution. Axtel is a microcap with 110 cr sales and 180 cr market cap. Small caps have inherent profitability and business performance risks. Investing in small/micro caps comes with liquidity risks.

Disclosure: Invested with 5%+ holding. Views are biased please do your own due diligence. I am not a SEBI registered advisor and this is not a stock recommendation.

15 Likes

I want to share my personal experience as i had worked in SPM we were designing special purpose machines and supplying tor various FMCG Pharma companies .the problem is there are lots of puzzles and moving parts when you submit the quotation for any machinery . The Customer want to pay for small peanuts but hey want the Full cookies in return mainly in INDIA …
Once price finalise they want the best the trouble is the price negotiations and scope of waork .Which is always bone of contention between vendors and suppliers .

The small players dominate the play Mainly concentrated in Bombay ,Faridabad ,Ludhiana , Coimbatore and Calcutta. The machines are easy to copy they industry as such does not employed sophisticated control systems such as SCADA etc unless customer need .

Each machine is different so the efforts in creating SPM is high . Next they main cost which they recover is from wearable parts or change parts . But in full plants they are only few change parts and the life of the parts are high. So Only the repeat order can fetch them more money . The dependency on Metals is heavy .
There various bets in the market as the majority stock are beaten and are on discount

Next quest should be how big is the opportunity size in my opinion it is not quite big . Swiss and Italia machines dominate the place. Indian manufacturer they purchase scrape machines from Europe and they copy it and manufacture it very cheaply .

regards

6 Likes

Hi Anant,

The story looks good…But what has changed very recently to cause this sudden spurt in revenues and profitability which took long time to pick up? Have been in touch with the management? What is the current orderbook or the scale they can achieve in the next 2-3 yrs?

Regards.

Axtel results:

The nos posted look weak with sales falling both YoY and QoQ. Two things to note though:
a) Axtel has an order cycle of six months. So it is much better to look at half yearly nos.
b) The gross margins have gone up.

Discl.: Remain invested

1 Like

Looks like you have found a very good company. The turnaround on paper looks like poetry. Sales increasing, margin expansion, PAT growth resulting to be in multiples, better cash from operations, reduced debt to zero, in a difficult niche to get into.

Is there a chance that it is too good to be true?

Disclosure:- Not invested