Ador Welding Ltd

[ankitgupta]

About the company
Ador Welding Limited (AWL) is the second largest player in welding consumable and equipment market in India behind Esab India. The company was incorporated in 1951 as Advani Oerlikon as JV between Advani group. During 2002-03, Advani group acquired shareholding of the Oerlikon group and became a majority shareholder in the company.

Industry
Welding industry is estimated at Rs.5,100 crore (source: Ador Welding AR - FY22) and is structured in following way:

(source: Ador Welding AR FY22)

There has been increasing focus of government of India to increase the share of manufacturing in overall GDP to around 28 - 29% in 2025 from 20.10% in 2022 which augurs well for the welding industry. Manufacturing, automotive and infrastructure growth are expected to spur growth in the welding industry. Major markets for welding industry are oil & gas, power, heavy engineering, shipbuilding, automotive etc. Industry wise end user break up of sales of welding industry:

(source: Ador Welding invesor presentation dated June 10, 2021)

Competition

(source: source: Ador Welding invesor presentation dated June 10, 2021)

Esab India, the largest player in the Indian market, is a part of Esab group owned by Colfax corporation. Esab group is one of the largest player in the welding industry globally.

Segments - Ador Welding
The company has primarily three segments - welding consumables, welding equipment and flares & project engineering business (PEB). Prior to FY21, welding equipment and PEB business were clubbed together in a single segment. The performance of the three segments for the period FY20 - 9MFY23 is given below:

Consumables
Consumables segments contributes around 75 - 80% of the total topline of the company. Consumables are sold through distributors all over the country as well as to large customers directly. The segment has had operating margins of around 15 - 16% which had declined in the post COVID due to increase in prices of steel which too time to pass on to the customer as well as time taken by new management (more on this later in the post) in understanding the dynamics of the business. The consumable volumes crossed pre covid levels in FY22. The volume for the period FY18 - FY22 is given below:

(Source: Ador Welding PPT dated June 7, 2022)

Equipment
Welding equipment is the second largest segment of the company with it contributing around 15% of the sales. Management claims that most of the welding equipments available in the domestic markets including of the large players in the market are imported while they manufacture most of their equipments in India. With the growth in manufacturing and uptick in capex cycle, the equipment segment’s growth is expected to pick up in the near to medium term. The equipment segment margins over the past 2 - 3 years have been mid single digits primarily due to supply chain issues for some of the raw materials which are imported. Management has aspirations that the segment can clock mid teens kind of operating margins.

Flares and project engineering business
The company has been into the flare business for decades. However, the company entered EPC work for unrelated areas as well as bagged contracts in middle east for work like laying of pipelines and subcontracted it to other companies. The same led to company incurring losses in the segment during FY18 - FY22 period. The same also impacted the overall profitability of the company:

(Source: Ador Welding PPT dated June 10, 2021)

Change in management
The company was earlier run by professional management with Mr. SM Bhatt running day to day operations of the company and members of Advani family (promoters) being part of the board as non executive directors. In September, 2020, SM Bhatt, was removed as the MD of the company and one of the members of the promoter family, Aditya Malakani, replaced him and joined the company to run its day to day affairs. These was primarily done due to issues in the project engineering business incurring losses and impacting the operations of the company. Some of the measures taken by the new management to turn around the project engineering business and improve the performance of the welding business are as under:

• Took entire write offs in the project engineering business in FY21 and focused on core business in the segment: The new management took write off of Rs.25 crore in FY21 primarily driven by write off of receivables and liquidated damages of the Kuwait project. The same led to company starting FY22 and beyond from a clean slate in the division. Furthermore, the company focused on its core expertise in the division which is primarily flares and more on engineering and designing expertise. In addition, the company hired new team to run operations of the company. Some of these new recruits include people from large MNCs. The same led to the division breaking even in FY22 (marginal loss of Rs.1 crore at PBIT level) from loss of Rs.25 crore in FY21 and turning profitable in 9MFY23 and reporting PBIT margins of around 10%. The company even won a large contract of Rs.145 crore in July, 2022 for flare stock project from ONGC. The same is expected to be largely executed in FY24. Management in concalls has indicated about healthy profitability and healthy cash flows from the project with working capital in check.

• Improvement in welding business with strengthening of brand, efficient us of IT systems, improvement in distribution, reduction in logistics cost and sale of non core assets

• Improvement in working capital intensity of the business: The management has focused on cash flows and improved the working capital intensity of business by reducing the credit period being offered to customers. The same has led to reducing in borrowing of the company as well.
  

  

(Source: Ador Welding Q3FY23 presentation)

• Focus on exports for welding consumables: Management in their AGM speech and concalls has been indicating about potential of exports for cosumable business as they have a decent brand especially in the middle east markets. They had revamped the team for export markets in FY22 which has started showing some improvement in 9MFY23. Exports had long been stuck around Rs.30 crore. However, in 9MFY23, company has already done export of Rs.39 crore.

(Source: Ador Welding Q3FY23 presentation)

Merger of Ador Welding with Ador Fontech
In May 2022, the company announced merger of Ador Welding Limited (AWL) with Ador Fontech Limited (AFL). 5 equity shares of AWL having a face value of INR 10/- each fully paid up shall be issued for every 46 equity shares held in AFL having a face value of INR 2/- each fully paid up. Both the companies have Advani family as the promoter of the company. Many investors had in the past asked management about the need for having two different welding companies and requested management for merger of both the entities. AFL is primarily into repair and reclamation welding. Management expects some synergies post merger of both the companies. Some reasons highlighted for merger in Ador Welding’s presentation:

Financials:
Ador Welding Limited

P&L

Balance Sheet

Ador Fontech
P&L

Balance Sheet

Valuations

AWL has started seeing improvement in margins from Q3FY23 onwards with consumable PBIT margins touching 15% during the quarter. Equipment margins continue to remain subdued primarily due to supply chain issues. Flares and project division has also reported 10% margins in 9MFY23. Management in the Q3FY23 concall seemed pretty confident of maintaining consumable margins and improve equipment margins. FY24 can see decent growth in both consumable and equipment segment while flare division will see execution of ONGC project which should lead to healthy growth in overall topline of the company. Furthermore, margins, even if sustained at Q3FY23 levels, can lead to healthy growth in bottom line during FY24.
There is huge difference in valuations between Esab and Ador (group or Welding) primarily due to higher margins, cash flows, return rations and MNC parentage of Esab. Furthermore, Esab’s parentage gives it advantage in terms of introduction of new age products in Indian markets for the first time. However, Ador’s management is also taking efforts to improve their margins and cash flows. Furthermore, Ador Welding started giving out dividend from FY22 onwards and management has plans to maintain healthy dividend payout of around 30 - 40% of net profits going forward as well.

Key Strengths

• High ROCE, healthy cash flow generation and dividend payout

• Consumable business is relatively less impacted by downcycle compared to product/equipment business

• Capex cycle being in favour leading to higher demand

Key Risks

• Flares and project engineering business can face challenges like earlier times despite new management being risk averse: Although, the management has become cautious on project engineering business, the new ONGC contract or any large contract can have some challenges like earlier times especially on working capital management as well as margins. The same can impact the performance of the overall company.

• Headwinds in capex cycle: The capex cycle in India has picked up steam over the past year. Almost a decade 2011 - 2021 saw subdued capex cycle which impacted most of the capital goods companies. Although, unlike product business, consumable business is relatively less impacted by downturn in capex cycle, the overall growth for Ador will be impacted.

• Margin improvement in the business is not as per expectations: The growth in earnings of the company and playing out of the thesis is not just dependent on topline growth but also on improvement in EBITDA margins of the company. Significant increase in steel prices might impact ability of the company to fully pass on prices to the company and can impact its profitability margins.

(Disclosure: Invested since last 2 years. Please do your own research and due diligence as I am not SEBI registered investment advisor and this post is purely for educational purpose.)

[desaidhwanil]

@ankitgupta thanks for a detailed write up on Ador welding. Few additional points that I really found interesting

• Welding industry globally is around USD 20 billion and even in developed countries the industry has been growing at mid-high single digits in terms of volume. This year most industry players have grown in low to mid teens and 8-10% growth is attributed to pricing improvement (I think it is related to increase in steel price)
• Major players like Esab and Lincoln have reasonable scale and have business close to few billion dollars (USD 2-3 billion dollars) though players like Esab has other division like cutting tools too (though they are smaller in size). More importantly these players are operating at very decent margins of 16-18% and are quite capital efficient (core ROCE upward of 20%) and have strong cash flows.
• Even smaller players like ITW have scale of around USD 500 million in welding segment and operate at very high margins (upward of 25%). However we need to get better understanding of why player like ITW operate at much better margins at lower scale.
• If you look at the historical margins of Ador welding across product segments, consumables in good cycle has been able to do around 15-16% EBIT margins and Equipments around low teens kind of margins even at much lower scale. If capex cycle plays out and if mgmt focust on better product mix and operational efficiencies, there is room for margin improvement in both these segment. Flares though has been quite disappointing due to goof un in one large export project, management has indicated that they are focusing on project where engineering value add is quite high and hence margins in this segment can be quite decent (my estimate is low to mid teens is possible).
• As @ankitgupta indicated export seems to be focus area. In fact in one of the conference calls management had mentioned that Ador was doing 50 Cr sales in export few years back on welding products side, however in last few years that focus got diluted under old management and hence export numbers were on lower side. With focus on building markets in middle east (where management has brand recognition and empanelment), they intend to take export business to 100 Crore over next few years. At their scale this can decent growth.
• In my view management has used last couple of years (after taking over) to put right systems and priorities in place to take company to next level and if overall industrial growth remains decent, company will grow at good pace with potential of margin expansion across all segments. This combined with very good core RoCE (they can do 25% RoCE), good cash flows and 35% plus dividend pay out the valuation gap between them and Esab may come down.

Disclosure: Invested since last 2 years and significant allocation. This is not an investment advise and I am not a registered investment advisor. Please do your due diligence before making investment decision

[tushar24]

Anyone looking to acquire AWL for long term, may want to look at this arbitrage opportunity -

Swap ratio as of today is 5:46 for AWL:AFL

5 * 863 = 4,315 for AWL
46 * 83.5 = 3,841 for AFL

Arbitrage opportunity of ~11% at CMP if you buy AFL and hold till merger completion (might take ~1 year as per last concall) so strictly for long term holders.

Key risks to this strategy -

1. Ratio might get changed as NCLT approval is pending.

2. The discount might get wider as AWL surges but AFL doesn’t surge as much so you might not get full benefits of the rally in medium term however if your intent is to hold till merger and beyond then it will converge at some point.

[ankitgupta]

I had attended the 2022 AGM of Ador Welding. Some snippets of the AGM are given below:

• Higher ever turnover and profits during FY22. Confident of growth going forward as well. Every financial parameter improved last year. Company became debt free last year.
• FY23 outlook: Company well placed to mitigate risks. FY23 to be another good year with increasing investment from public sector. Risk factors – erratic RM prices, Russia Ukraine war, supply chain issues and competitive markets. Continue to face this risk but well prepared to face the risk. Opened new office in Dubai. Focus on key international market. Key business priorities – 1. Prudent cash flow 2. Supply Chain 3. Product launches. 4 Improve efficiencies. 5 International market.
• Developing new products – R&D team introduced new products. Due to improved reliability, we could gain customer confidence.
• Welding industry – inherent demand is strong. IIP growth also reflects. Power, heavy engineering, ship building etc all showing good growth. Infrastructure development is major focus of government. Good growth prospects. Increasing export competitiveness and reduced imports due to weakening of rupee.
• Approved amalgamation of Ador Fontech with Ador Welding. Apart from cost optimization, synergies in HR, manufacturing, brand building, R&D etc. Complete game changer for the industry. Ahead of competition. Ultimate aim is to improve customer experience.
• Merger: Timeline – minimum of a year from now. All depends on NCLT approval. As we move along we can give a timeline.
• Dividend – company has a dividend policy and also look at earnings and other factors. We gave good dividend despite headwinds last year
• Distributors – most of our distributors are not exclusive while handful of them are exclusive.
• Post-merger promoter holding with 53%.
• Welding business – capex revival – we are seeing revival. Some waiting was there about steel prices but normalized now. Things stabilizing now and slight revival.
• Operating margins of welding business? QoQ will keep on improving. There is scope of improvement. Not just product improvement but the way one sells. In general, able to pass on prices to end customers.
• Capex – automation? Scope of growth there and that we are doing too
• Exports? Critical part going forward. Steel prices difference between us and other countries. Want to grow it. Acceptance of Indian products there.
• Capex of the company? Regular maintenance, replacement of old lines. Second part is for rejigging operations. Second part many changes. Post H1 we will do analyst meet and will update more on capex.
• Kuwait status? Following due process as per local laws. Local laws will favour us. 12 – 18 months from now. Hopefully, recovery will happen.
• Flare and process equipment? Seeing a turnaround. It was a restructuring of the product line. We have gone into different product groups. Flare has lot of engineering. We have got new team. Design, engineering lot of confidence. This division has lot of potential. Order that we have got is pretty interesting. Margin will keep on improving. That will happen over time. Turnaround is more or less done. We have got a very healthy order book. We must execute well now.
• Merger? Nothing will change. Merger will have tremendous value. Cross customer sales – lot of benefits we see going forward. We look forward to that.
• Competitors? Esab, local players like GEE, Modi. International players like Lincoln. Most of the competitors there. Cant comment on Esab. Trying to narrow the gap with Esab. As we keep doing the turnaround, our ambition is to create tremendous value creation for shareholders. Product mix differentiation is there slightly but not much. They also do engineering services which we don’t do. Product mix gap isn’t much – around 10 – 15%. They do simple things better which we will also do now. Manufacturing rejigging we are doing will also help us.
• Impact of rupee on the business? As we are net exporter, it will benefit us. Rupee benefit will be quite good. Benefit of Make In India product. Required more business development work and marketing work. Enquiry base is growing in exports.
• Property monetization? Looking at case to case basis. Sold 24 crore worth of property – majorly 2 we sold last year. Nothing large left now but keep on doing it.
• Working capital – will keep improving on welding equipment, flare division will see improvement. Flare division will see some elevation due to ONGC project. Engineered flare is our forte. Kuwait was more of construction. Working capital exposure, engineered flare, margins, deliverables etc totally different compared to Kuwait experience. Contract is favorable. Board also played a big role in its supervision.
• Volumes of consumable last year 50,000 MT last year. Grow that this year. Last year did 10,000 – 12,000 units for equipment last year. Will grow it this year.
• Capacity utilization varies from 50 – 55% to 90 – 95% for different product segments.
• R&D – two or three things: 1.Import substitution 2. Changes in steel for better product. 3. Cost or process improvement. Fairly in line with last year.

(Disclosure: Invested since last 2 years. Please do your own research and due diligence as I am not SEBI registered investment advisor and this post is purely for educational purpose.)

[nikhil_chowdhary]

Discussion with an Employee of Ador

Demand ?

Demand of welding electrodes is booming, robust demand one will see in Auto/Power/Defence. Defense one needs lot of certifications.

LT biggest supplier is us. We supply in all their divisions.

We have good order book but not able to fulfill and we get it contract manufactured also. Flux and wire we send and they process only.

Making in India giving lot of benefits in consumables and equipment.

Most of PSUs buy 70% of RM buy from Indian source. No guidelines, but nowadays e procurement and hence tender is not passed if 70% is not Indian sourced.

ESAB India has some specialized consumables and equipments which no one makes in India. Hence there ESAB enters or else we are seeing good demand.

In Equipments only Indian manufacture to manufacture in India rest all other players import. We manufacture in Pune.

We have ISI mark for all equipments

ISI mark for Chinese company is impossible. ISI mark, give manufacturer address. Why no one else takes ISI mark,? since they have to give manufacturer location, if they give then customers directly procure from there hence many dont take ISI mark.

We have ISI for 50 products, we will soon have it for 150 products

Added advantage from GOI in ISI mark.

Competition :

Competition : DH secheron is doing well. GEE sells very cheap and in low grade electrodes.

We will cross ESABs turnover soon.

We dont believe in breaking ESAB. We focus on our growth vs market potential (mkt share grow).

Hyundai struggling in own country due to small players (small players also have good quality)

Local competition ?

Say orange sells for 75 we sell for 90.

We buy electrode quality steel, orange uses “Killa banne wala steel”, then when u weld, it will be fumes around. Our electrodes, welder will not need mask also.

LT will not ask for 75 Rs product, welder will not use also, this is where approvals comes.

If you are registered with LT. If LT is giving contract, they name us buy specifically from us.

Defense equipment : specialized 3 welding electrodes companies, we need to take quotation from them only.

Flares business + Aditya sir ?

How Flares businesses turned profitable? It was after Aditya joined in. Aditya Malkhani : Turnover company increased due to him. We are increasing portfolio in special electrodes after Aditya sir. At one stage Ador fontech was also competing. Fontech is more in specialized electrodes, 35-40% margin. Some is 100% depends on how u play with nickel, chromium and mangnese powder. 250 crores is specialized electrodes in Ador. Ador fontech merger: cost savings, one management team.

Our forte was flares we were picking other products : pressure vessels, heat exchangers that is with LT, Vijay Tanks, Anup industries. We tried doing Clading . There is one specialized welding called as strip clading, entire heat exchanger used to be claded and not welded (nobody in india has that technology).

Flares no clading needed. What are Flares ? When refining crude into petrol/diesel, poisonous gases are emitted, knockout drums pulls moisture out of gas and it emits out of the chimney.

We used to called it PEB and now Flares and process equipments. Past contracts written off. We started this division and making profit since 1 year.

ONGc 145 crores making one of a kind Flare biggest project. Competitor Zico (MNC).

Competitive advantage?

Electrodes can be made in 100 sq feet area electrodes for Grills, trolly(6013 grade) we dont make that. We are not focussed there.

We are focussed in stainless steel electrodes. Formulae based product, better ur formulae cheaper ur product is and of better quality. We need very robust RD, continuously inventing new, changing RM setup, making it more cost effective.

Entire low cost welding, you can enter, but need formulae for high end welding. I take care of my RD guys We take care of key positions, dont let them go.

Thoughts on Chinese supply + Flux ?

At once import on our brand from China 600TPM now manufacture 150TPM. It is now in short supply and hence better margin.

Chinese Flux is out, need ISI mark.

Now many cant import but cant manufacture like us need formulae (very technical product)

Flux wire : Many cant manufacture and then use alternates when engineers suggest alternate but then not as cheap and easy to use.

Flux wire : if u compare MS electrodes with Flux, similar price wise.

End user focus ?

15-17% growth in general infra, refineries and mainly in railways. We are approved in railways, all approvals of Rites in place. Rites is very stringent and come and inspect every lot, strong demand in railways.

Price pass on?

We pass on in a month.

Capacities?

Capacities we have imported for Italy, Germany. Now we are atomizing all of that, we dont need lot of that, we can debottle neck for medium term. This industry is labor intensive.

Consolidation ?

Everyone in welding now has businesses so much work in India, small players have work no need for consolidation.

Exports?

We have own export division. Export is now focus area for us. Export market Ador sells on name, price is also are quite good vs Chinese + quality vs Chinese. When it goes to US, they cant give at similar quality.

We are competing with worlds largest Atlantic in Middle East they want us to manufacture for them they will sell in their name.

Some random disc:

We prefer to do businesses with dealers better receivables, dealer financing is also in lints. Credit Limits are set for dealers depends on their performance

Stainless steel no one can compete with us, Infact European players take SS from here Make electrodes and then export to India. Hence SS players have to pay duties on export to Europe.

We have hypertherm experience centre in pune and are sole selling agents for them.

Our biggest property in Chinchwad. One more division we manufacture Car dispensers, Oxygen and Gas regulators. We have one more dental aligners division.

We have expertise in sub arc welding which is for big oil pipes. Lincoln is global champion.

Picture of beautiful Heritage building

[nikhil_chowdhary]

Some more checks with Ex industry guy (senior industry management level guy, retired 7 years ago).**

Since he retired, some points maybe outdated. However I have tried penning down the conversation as is. Good insights on overall industry, competition, various products. Some points are basic.

Welding is joining of metals.

Size of this market : Welding industry has welding products (some commodity type).

Total market size usually 80:20 ratio in favor of consumables.

Industry will grow 5-7%.

Companies growth related to growth of industry.

It has unorganized and organized.

Welding with electrodes mostly in unorganized. So many names like Orange, Royal arc, Best Arc etc. Managalam electrodes is there.

MNCs include : ESAB, Lincoln, Bohler, Hyundai. Hyundai product which is being sold is best int the world. Manufactures in South Korea. Nobody could match Hyundai even Lincoln.

Electrodes : layman language : Rod with a masala.

Metallurgical part is important here.

Continuous consumables : Mig wire.

Then flux core wire. It is not a success story in India. China makes a lot of Flux. (This data is old, now players like Ador have started as indicated in above writeup)

Equipment : lowest is called transformer, rectifier and so on.

Grill : use lowest level of transformer/rectifier.

SubArc welding : used in pipe manufacturing, Gas pipes in welspun.

Customers : big fabricators like LT, petroleum industry, Pipe manufacturers (Lincoln dominates this market).

Welding productivity measured in the minutes welding taking place. This is the differentiator organized players products.

ESAB :

ESAB India. Followed a method of acquisition and growth (e.g. welding division of Phillips ). Global Group was a Swedish venture, pioneers in welding industry. It was bought by UK then to American company. Company has factories in Chennai, Nagpur, Kolkata. LT welding division was sold to ESAB.

LT had peculiarity in repairs and maintenance electrodes, margin was 60% in that business, total monopoly. Whether ESAB is able to do, need to check. Why sold? Got more in major equipments of the nation, this was becoming too small to focus (important point since industry size will not entice any large player in the industry and could be concentrated in the hands of top 4/5 large players).

Lincoln is also there, but technical expertise was lacking in repairs and Maintenance.

Ador is a good company. Ador is a family controlled company. They tried to get people like Bhatt, it didn’t work but now, entire management has changed and person who is now running is family guy. He was running chronojig unit for someone else.

Adani Orlikon (Swiss). The person who started it was Mirchandani. This JV happened in aircraft he brought Orlikon in India. Orlikon sold off to Lincoln Electric.

Aruna Adani couldn’t run much that is time, ESAB, Lincoln, Bohler.

They had seperate company Ador Fontech, did very well, margins 40% in equipment very difficult.

With merger : cut off management levels.

Aditya Makhani is very serious and aggressive. He is giving tough to ESAB.

DH Secheron Run by Maheshwari family. They are very credit and growth focussed. Secheron (Sweden) guys.

DH India : Indore running on one product which is copy of DH Secheron DH india cannot

Welding : Formulation is stolen in this industry. That is how unorganized has grown.

30-40% of top products is still imported. Area which is dominant is pipe welding electrodes. ESAB tried it failed Ador tried. This is Stick electrodes. When one is doing cross country pipe. Pipe manufacture (Gas) needs expertise (Ador does this but need to see how large they can become in this market).

Flux Code Wire : comes from China or US.

Flux core wire : difficult since making gets pores and welding fails. All Foreign companies can make it. Anything that is technology oriented is high margin.

Why to use Flux : for precision. Oxidization to not make metal porous.

We are always joining metals. The flux has to have compatibility with material.

SubArc welding (copper wire) : Ador does it but lower grades. Used in saw pipes.

Supreme technology for pipe making. Alternative Electrodes, flux.

Flux manufacturer : ESAB and Ador can do it (as discussed it was a thing of past, Ador already does Flux). Lincoln India doesn’t have facility. Investment is high. Flux big process and technology intensive.

Flux wire big market. DH India and Schereon cant do it.

Kirbi in Hyderabad, they were doing pre fabricated factories. Flux used here, within 1 week factory setup. They needed precision sheets, everything needs to be welded.

Industry trend : Normal welding electrodes replaced by continuous wires (Mic wires). Everyone is there.

Fabrication, pipe welding, shipping, ISRO areas of demand.

GEE : originally handled by some other person, sold to Agarwal.

DH India : marketing not able to crack. Marketing is weak.

Flux core wire : no idea about investment but could be 4x of mic wire investment (only machinery cost).

Thanks

[nirajshah85]

More details on the merger can be found in this article but I am not able to find a serious competitor

[mmpcse]

Very Well Scuttlebutt Nikhil. Appreciate your Effort.

[ashishk]

Below is some previous years’ data on Ador Welding’s revenues & OPM split by consumables & non-consumables segments.

The consumables parts of their business has been around & over the 15 percent OPM mark about 50% of the time in this period (crossing 20% in the '05-06 period of huge capex cycle led demand). While the non-consumable part has been sub 10% since the past ten years - even before the losses incurred in Kuwait project.

To me atleast, it seems that for Ador Welding to outperform in next 2-3 years, the dependency is almost fully on consumables. To get a 15% overall OPM consumables have to fire at close to 20%.

There are some early signs indicating that this might happen. The 9MFY 23 data shows a 14% consumables OPM (after a tough start to the year). The per kg. realizations are inching upwards close to early 2000 levels.

FY	2022	2021	2020	2019	2018	2017	2016	No data found	2012	2011	2010	2009	2008	2007	2006	2005	2004	2003
Realization (Rs./kg)	107	93	91	96	82	86	81		86	89	89	109	107	112	132	130	103	86

(based on data shared in company ARs & PPTs)

Disc: Not invested yet as current valuations feel high.

[nikhil_chowdhary]

great set from Ador. margin expansion too.

[Pravin_Ranjan]

Ador Welding Ltd had a strong performance in the March quarter 2023, with a significant increase in net profit from 131.9 million rupees to 225.5 million rupees compared to the same quarter last year. The company also achieved growth in revenue from operations, with 2.35 billion rupees generated in the March quarter, up from 2 billion rupees in the previous year’s quarter. This positive financial performance led to an improved earnings per share (EPS) of 16.58 compared to 9.70 in the previous year’s quarter. Additionally, the company announced a dividend of 17.50 rupees per share. Furthermore, Aditya T. Malkani has been re-appointed as the Managing Director, providing continuity in leadership for the company.

[cvp]

Source : https://www.bseindia.com/xml-data/corpfiling/AttachHis/7be702ed-b251-4882-98eb-1287ad5cc76b.pdf

[Jose]

Contingent liabilities of the company

BIS has agreed to accept the compounding application wrt import of items that doesn’t meet it’s standards, subject to payment of 36.43 crores. The company is currently seeking legal opinion to file an appeal. However, the company may have to start provisioning towards it.
Ador-PH-Order.pdf (861.5 KB)

Discl Ador compounding.pdf (571.9 KB)
It seems like BIS has passed an order on this matter on 26.08.22. As per the order BIS seems to be against releasing the seized inventory. Has the company written down the inventory seized by BIS?. The company has written down 38 lakhs of inventory in FY 22 as per AR. I don’t know if the seized inventory is written down earlier

[ashishk]

I interacted with a few dealers/traders in the welding consumables space, operating in Gurgaon & Faridabad area. Their main customers are from construction and auto parts industries. Below are the inputs I got from them.

Note: This might not be new info for seniors on this thread. However I’m still posting as it might help some others (who are at the same stage as me) to get a tad bit more understanding of the industry.

Local/unorganised players

• In this market the ratio of local vs branded players in consumables by volume is 50:50.
• Local players use lower grade materials for manufacturing & coating (if needed) consumables.
• This obviously impacts the weld quality and appearance (like bead, ripple formation etc.) however it is still good enough for many parts supplied to various OEMs, especially for which they use Tier 2/3 suppliers.
• Harmful fumes is also another side effect of low cost materials used, but there are no strict Govt. regulations on that yet.
• Local players do various other things to be more cost efficient like: directly dealing with factories/customers (saving channel partner margins), re-using packing materials like spool for MIG wires (new spool costs ~Rs.65, they buy it back from factories for ~Rs.30) and so on.
• Not using channel partners has a negative though, of them not being able to pass on the credit risk, which led to many local players going out of business during peak Covid years when they couldn’t recover receivables.
• Now with increasing demand, some local players are again trying to enter into the business.
• As an approximation a local player can produce 0.8mm MIG wire at around Rs. 85/kg. and sell at around Rs. 100-105/kg. This leaves them with an approx. 7-10% net profit after covering other costs.
• These days there is a 10-12% delta in prices of local vs branded for high volume consumables.
• Apart from electrodes (sticks, wires, powder etc.), consumables also include parts of welding torch like tip, nozzle diffuser etc.

Large/Branded players

• Since the retail market is so competitive, there is hardly a 2-3% delta in prices among top branded players for high volume items.
• Since product differentiation is low, channel partners/on-ground sales force play a key role in pushing sales.
• Big players have a disadvantage in transportation costs, to tackle that they at times get into contractual agreements with local players to get some of the consumables manufactured from them (recently ESAB has tied up with a local player in this area for MIG wire production).
• Of late increasing demand has led to more branded players wanting to enter the market. Recently representatives of Gedik (a Turkish company) were scouting in this market for distributors saying that they now want to enter India and set up plant for consumables.
• The dealers felt that in general, mid-large B2B accounts are a more amenable segment to focus on for these larger consumable players since in that segment quality norms are quite stringent and regular audits happen.

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Basis the above information, the hypothesis that I formed is as follows:-
(I might be totally wrong and this might change with more information)

(a) It is very hard to have a product or technology advantage in the welding consumables space.
From whatever I have gathered previously, in welding equipment it might still be possible for a company to have an edge on tech side (laser, automation, robotics etc.) – but right now Ador is not that company.

(b) Having a strong channel (B2C/B2B) and local presence can be a good tactical advantage.

(c) Does a company like Ador have any sustainable advantage? If so, what? My limited understanding could only point to scale as a possible answer worth exploring more i.e. being quite a big player large player and that too of Indian origin. Though I have my doubts as to how much bigger this scale can get (i.e. market share growth) given intensively competitive nature of the market.

[cvp]

Rating update

https://www.crisil.com/mnt/winshare/Ratings/RatingList/RatingDocs/AdorWeldingLimited_April%2018,%202023_RR_317693.html

[JARUTIR]

Thank you @ashishk for this scuttlebutt !

While the welding consumables space is highly fragmented, there are only two sizeable players of Rs 500 Crore and above annual revenue: ESAB & Ador Welding. Both of them have double digit OPM as well. The rest listed players: GEE, D&H and Rasi Electrodes are much smaller and have single digit OPM.

From below comparison of financials of the top 5 players, it seems that this market is growing mainly by customer acquisition from unorganized/smaller/unlisted players to all the top five players, since their share of revenue has remained more or less constant in last few years.

With this info, I would choose the top 2 players (ESAB & Ador) for further deep dive and comparison of their MOAT (if any) and future business outlook.

Disclaimer: Invested in Ador Welding, hence my views may be biased. DYOR

[saket105]

Meeting with shareholder scheduled on 10 Aug as per NCLT directives for Fontech - Welding amalgamation.
https://www.bseindia.com/xml-data/corpfiling/AttachLive/a44358b2-dfdd-46f2-851f-4e90cdd94440.pdf

Arbitrage opportunity exists for Ador Fontech (AF) basis merger ratio, 5 shares of Ador Welding (AW) for 46 AF shares… so AF better bet till AW / AF ratio >9.2, current ratio ~11 as AW CMP ~1,200 and AF CMP ~110

[cvp]

affcbaea-a304-4124-aa02-90086649510f.pdf