Aarvi Encon Ltd

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Aarvi Encon is a technical staffing solutions company. They provide engineers/designers/technicians right from conceptualization of the project to design to construction to pre-commissioning & commissioning to operations & maintenance of the plant.

They have two divisions

Their customers include Vedanta, L&T, Reliance Industries, HPCL, BPCL, IOCL, Cairn, Gujarat State Petronet, GNFC, GSFC and Engineers India.

Their end user industries include oil & gas, power, LNG, PNG, refinery, petrochemical, pipeline, wind power, solar power, offshore, E&P, infrastructure, ports & terminals, telecom, fertilizers, cement, automobile, metro & monorail, railway, metals and minerals, and information technology.

They have expanded their operations internationally. They have created a new step-down subsidiary, Aarvi Encon LLC (under Aarvi Encon FZE) to cater to Oman; a direct subsidiary, Aarvi Encon Services to cater to the UK; Aarvi Encon Staffing Services to cater to Qatar. They are also targeting Indonesia and Malaysia as potential markets

Margins are higher in international business

As of Q3FY22, promoter holding was 73.47%. Promoters are highly experienced.

They were featured in Business Today magazine

The industry is highly fragmented

They have recently been receiving many new orders


They added five new clients in Q3FY22

Disc- no holdings as of now
Edit- added a small tracking position

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Hi, thanks for the detailed note and for capturing the industry dynamics and the company’s corporate relationships.

The company seems to be growing at a fair clip ~12% CAGR over 5 years, was flattish during COVID, but LTM numbers have shown ~20% growth.

EBITDA margins are sub-5%, with employee cost forming most of the cost base. I did not find this encouraging. My hypothesis is that most employees are ‘consultants on payrolls’ - have seen this model in animation industry as well, that leads to low operating margins as the consultants take up most of the revenue. Compare this with IT services, where employees are true employees, and EBITDA margins end up being higher.

Working capital cycle is also elongated at 140-150 days with trade receivables at 90 days+. It seems the company did not generate much free cashflow during the growth years from FY16-FY19 as the company needed to fund working capital. When growth slowed in FY20 & FY21, the cashflow generation improved with working capital being fully funded.

Overall, while the business has marquee relationships and is growing, it seems that the space is hyper-competitive leading to low margins and elongated working capital cycles.

It would be good to understand:

  1. What are the ‘moats’ for AEL - e.g. any services that it offers that smaller / fragmented / individual consultants cannot provide. Are they competing only on price or quality of service? Are there any industry standards / certifications that fragmented consultants cannot match?
  2. Are there any comps which have higher margins?
  3. How scalable is the foreign clients story? Why is the present a good time to foray abroad?

Disclosure - Not Invested

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any update on company’s middle east operations

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The company has done an acquisition in UAE in May 2023 https://archives.nseindia.com/corporate/AARVI_29052023204059_NSE20232405Acquisition.pdf

The latest investor presntation covers the operational highlights, hinting at better business prospects in coming months.

Aarvi
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Disclaimer- Invested.