Axtel Industries Limited: A proxy to packaged food industry

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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.

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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

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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.

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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

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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

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AGM Updates:

On dividend, capital and liquidity:

We want to conserve cash and hence the dividend is unchanged. The current liquidity situation might warrant that our creditor days might reduce as we have to support our suppliers as well. We don’t want to squeeze our vendors. Also, such situations throw opportunities of inorganic growth, although not an immediate priority for us. We can use the cash for that as well. We have not invested these funds in debt schemes. In our company, large portion of profits are converted to cash as working capital and capex requirements are low. Larger companies, our customers, are not affected by the liquidity crisis. They continue to do capex.

On the quarter gone by:

Being in capital goods segment it is not right to look at numbers on a quarterly basis. There could be some orders moving in/out due to shipping/pickup by customers. A half yearly/annual view woul give a better picture.

On Company, its divisions:

We have 3 verticals in our company:
Snack Food
Spices
Confectionery

Snacks and extruded snacks market is growing at a healthy pace. We are present across major processes except packaging. In chocolate manufacturing, we do everything except for 2 equipment where Buhler and 2 – 3 other companies have expertise. In Spices, we do end to end everything. In Snack foods, we do everything except cooking. In F&F segment, we supply end to end plants. Apart from green field capacities, there is also demand for automation.

We hardly have any service revenue. AMC is not our focus area as our customers have internal servicing and spares team.

Broadly we are focused more on powder, solid and semi-solid handling and are not too keen on liquid handling. We started our transformation journey from FY14 and investe din capacities, manpower and other capabilities. Over, the last 6 – 7 years, our designing capabilities have improved. Each order received by us is made to order. We have improved capability and capacity. We are now able to deliver machines in much less time.
In FY15 we had a major setback as one of our customers who had virtually finalized the order canceled it. Earlier we had one or two major customers but because of this experience we started diversifying our order book. We serve flavour & fragrance industry, spices and confectionery. In confectionery, we serve large chocolate companies of the world in both branded and industrial segment. We have big penetration in spices industry. We also supply machines to Snack Food companies.

On Growth, Competition and clients:

Many of our existing customers are taking us to their factories abroad. There isn’t much sales effort required for that. We have presence in 30 – 40 countries. We have even supplied machines to countries in Argentina and Brazil.
Although, exports are increasing for us but our domestic demand is increasing too. We don’t have any competitor in India with such reputed client base. We compete with European suppliers. Although, our prices compared to European peers are less but our quality is at par with them. It takes years to build relationship with clients like Mondelez, Nestle, Givaudan etc. However, we have now reached a stage where lot of new MNCs are looking at us. The key is to get into supply chains of these MNCs and start being considered for more and more orders because of our capabilities. A success at one large customer drives its competitor to look at us, a success at one location drives a customer to take us along to other locations.

We have become more critical to our customers’ supply chains. We are present across companies like Mondelez, Puratos, Hershey’s, Mars. Nestle etc at their multiple plants across globe.

Buhler Group (one of the largest food processing equipment manufacturing company – has been in existence for 150 years) is no more a company – its like an institution. They are ahead of everyone and a role model in some sense, there are certain equipment which only Buhler makes. In European competitors, employee costs/mfg costs are very high. Furthermore, European suppliers are very rigid and they make very less changes in the project. We are pretty flexible with our customers. Our technical capability is at par with our European counterparts. We are in unique position as our quality is at par with big suppliers, our costs are lower and we are an end to end solution supplier.

Key reason for losing an order

  • Price
  • Buyer’s perception about our quality
  • Too risky to shift from existing vendor

The growing Indian packaged food market, our ability to move into other geographies and our cost structure provide us significant growth opportunities. We have a strong inquiry pipeline from both Indian and MNC players.

On entry barriers and growth impediments:

We are focused on quality. Institutionalizing quality standard is important. It is extremely difficult to transfer this process to new workers. Having the right kind of people is probably the biggest impediment to growth. We have built process know how, engineering and design capability over the past many years. Barriers to entry in our business is quality and time taken for a new entrant to get entry into the customer relationship we have built. A testament of our quality is that we have supplied equipment for baby food/infant formulation in Europe. Infant formulation is an extremely critical product and cost of equipment is not a criteria. Its largely to do with quality of equipment. We don’t have any patent for our machines. Chinese folks can easily copy our products but quality is difficult to replicate. Some of our clients gave an order to s Chinese company but came back to us as they were not satisfied with the quality of product.

On capacity, margins and other nos.:

With very small capex we can do around 300 cr of sales. Our order cycle varies from 3 to 8 months. Depending upon customer we take significant advances and we only ship ones the payment is made. We will retain our margins with a little variance due to steel prices and will not let our margins dilute to take on additional orders.

Discl.: Invested

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Hi Rupesh, thanks a ton for sharing your notes. I have a few thoughts going through your hand-written notes in the deep dive template. Do you know what kinds of process equipment (Heat exchangers/crystallization or mixing equipment/sieves etc) are designed and manufactured by Axel? I’m also impressed by your insights. How did you find out that they lost Amul to EU competitor?

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You can check their website - it has some good photos of product catalog.

The credit to that insight goes to @Anant bhai, @Donald, @ankitgupta and others

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@basumallick do move this to Axtel thread.
@mohammedsaqib We met the mgmt during AGM and asked them this question. There were two or three different reasons:
a) Amul’s expectations did not meet our business expectations.
b) We did not want to allocate extensive resources to Amul.

The company did not partake in any negotiations with Amul for the same reasons. Instead of saying they lost Amul as per company they were not interested in Amul.

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Pretty interesting stuff. What these guys are making is essentially the assembly line for various manufactures and they are leaders and this looks niche

Few Q’s

  1. What it the total opportunity size? Basically at what rate new food industries are coming up.
  2. Who are the competitors?
  3. This assembly line that build is mostly a one time affair, is there any incremental revenue in terms of support, how much it is?
  4. What is the life of this assembly line a few years, 5-10 years?
  5. This is capex intenstive, can they really double the sales let say in 1-2 years?
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@Anant bhai, thanks for sharing the info and also for letting us know how you read between the lines. I am only used to reading publicly available info on companies. It’s nice to learn that you can get such useful insights in an AGM.

Disclosure: not invested

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Any idea what certifications they have? The certifications I’ve found MNC FMCG players frequently request for are ASME for stainless steel fabrication and CE certification for the electrical & controls. The CE certification is mandatory in Europe and I guess also in USA. Many equipment manufacturers get the CE certification done from other 3rd parties like TUV Nord if they don’t have the certification themselves.

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@bharat.jain
I’ve been working on projects in FMCG. Here’s what I can share: The niche in this space is usually process design. This involves understanding the need of the client and delivering process and equipment to meet the need. Most assembly line providers would subcontract portions of the line or equipment to other players who have more expertise or scale in manufacturing these smaller parts.

  1. What it the total opportunity size? Basically at what rate new food industries are coming up.
    The annual report does not mention numbers on the industry growth. But, I’d expect growth in developed markets is 1 to 4% and emerging markets like India have higher growth of 6 to 10% in the processed foods category.
  2. Who are the competitors?
    This is mentioned in the initial 2 posts. Do have a look.
  3. This assembly line that build is mostly a one time affair, is there any incremental revenue in terms of support, how much it is?
    The assembly line is usually a one-time affair. Additional capital would only be invested by their clients if their volumes or demand goes up or if they want to make changes to their food product or launch new products which would require new or modified process changes which can’t be served by the old equipment. I expect that the manufacturers would also have to replenish spare parts for the machines which I expect to cost between 1 to 3% of the equipment value per year.
  4. What is the life of this assembly line a few years, 5-10 years?
    I expect life to be between 10 to 20 years.
  5. This is capex intenstive, can they really double the sales let say in 1-2 years?
    Asset turnover is 4.3 to 6.7. I see it as a capital light business. They should be able to scale up to deliver increased revenues without investing too much capital. The constaints would be
    A. Bagging the increased orders - this is more a function of relation with clients & skills involved in the bidding or negotiation process.
    B. Increasing their skilled workforce on the shopfloor to deliver on productivity and quality in line with the old experience workforce.

Disclosure: not invested

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Superb work Saqib, exactly why VP stands out. They do have the required certifications, a question that I had asked them, can ask them more specifically on the certifications that you have mentioned.

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I just wish you read the whole thread. A lot of your questions will get answered.

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Rating update: ISSUER NOT COOPERATING
CARE has been seeking information from Axtel Industries Limited (AIL) to monitor the ratings vide e-mail communications/letters dated September 23, 2019, November 04, 2019, December 04, 2019, January 24, 2020, February 24, 2020, February28, 2020, March 02, 2020, March 13, 2020, March 19, 2020 and numerous phone calls. However, despite our repeated requests, the company has not provided the requisite information for monitoring the ratings. In line with the extant SEBI
guidelines, CARE has reviewed the ratings on the basis of the best available information which however, in CARE’s opinion is not sufficient to arrive at a fair rating. The ratings on AIL’s bank facilities will now be denoted as CARE BBB; Stable/ CARE A3+; ISSUER NOT COOPERATING*.

Disclosure: Not invested

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Thank you for the excellent insights @Anant and @mohammedsaqib
Following is my take on the same:

1. Financial Health

  • FCF positive (as a benchmark, FCF/Revenue ratio is also good)
  • Consistent Net Margins of 15-20% are also good
  • No debt
  • Good ROE (3-year avg = 22% & 5-year avg = 13.5%)
  • Sales growth = 18% YoY for past 5 years

  • ROCE 5-year avg = 16.6%

    Note: Numbers are weaker for 5-year averages because of FY15 being bad for the company when a major client cancelled orders

2. Management -

  • In my opinion, the management seems to have done a great job with the company financially in the past 5 years, however the thing that concerns me is the ‘candor’: Why is the MD&A and Risk Management Policy the exact same in the past 5 year annual reports and why are there not much insights into the business (things like how much business is received from what clients and even more specifically, what kind of machines are they selling to each of them etc.)

    3. Moat/Competitive Advantage

  • Expertise in process design and highly valuable relationships with clients and monopoly type position in India
  • First mover advantage in India since there is no competition
  • Low cost benefits due to cheaper manpower etc. in India
  • Repeat business from existing clients because of trust being established
  • Food industry is a growing one so the company has good odds, growth should also come from capturing a larger piece of pie of existing client’s business and forging new relationships

4. Risks -

5. Unclear

Are ‘process design’ and ‘client relationship’ the only reasons why:
a) Chinese companies can’t replicate the quality too? (Considering the fact that China is the manufacturing hub of the world)
b) They have no competition in India? (If it’s such a profitable industry with huge potential, soon it’ll attract players)

Would love to hear other’s views and anything I’ve missed/wrongly interpreted

Disclosure: Closely observing, not yet invested

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@rupeshtatiya and others who have researched this, could you help me understand this business a little better. I went through the conversations and research. Since this is a design consultancy and engineering type of business with services, scaling is a function of corresponding scaling of headcount ? Between 2016-20 how does the sales almost double with same headcount of about 150 ? was it operating below capacity ?

Is high operational leverage not correlated with higher fixed cost vs variable cost in manufacturing type companies ? In Axtel variable cost seems >60% of the total cost. Gross margin has remained stable around 50% from past 5 yrs. Since it is a design consultancy type of company should employee costs be considered more a variable cost ? Clearly there is no economies of scale & no high capex/fixed assets requirements. So is leverage just coming from lower growth of employee cost compared to sales ? Am i missing something ? why is operational leverage not stable, and varying year on year.

I read in some employee feedbacks on net. people complained that commissioning takes 6-7 months of onsite work in remote locations. So for special / large orders sales to delivery cycle could window could atleast be 12-18 months considering 6 months of sales cycle, 6 months of manufacturing and 6 months to implement. This means that the company usually might have order book visibility rolling into next financial year. So if the management is projecting 200 cr sales guidance in 2-3 yrs , do they have this order pipeline visibility ? What be the impact of the current pause in the economy (covid-19) on the order book ?

if it participates on project basis with competitive bidding & without bargaining power, it means that axtel competes with the vendors that do not have specialization, who copy designs and implement at low cost. Then why do customer pay upfront for projects yet be executed ? The management talks about ‘getting into the customer’s supply chain being key to growth for axtel’. Does this means that they expect to partner / engage with customers and work on shared supply chain problems and solutions at early stage of the projects resulting at higher margins ? Is there a sign they are already doing this or is this a wishlist ?

I took a quick look at Buhler financial report just to get an idea, though these companies cannot be directly compared . Assuming a common sized fin statement & similar raw material costs, buhler sales is 2.4 times its raw material cost compared to 2 times for axtel. Hence for buhler topline pricing seems to be on an average 20% higher than axtel. Their employee cost on average is 30% of sales compared to around 20% for axtel. do we have an understanding of sales and margin realization for international projects for Axtel ?

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It is more like design partnership with the in house design team that all large FMCG clients have along with Axtel team. The headcount has gone up from 115 to 150 in last 3 years as per epfo data.

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The above from screener makes it clear that almost all costs reative to sales are coming down. If one looks at P&L alone dep. too has come down from 5% of sales to 2.5% of sales. Employee costs have fallen despite mgmt taking steep salary hike last year.

The mgmt is hesitant to give short term guidance. Not all projects are big most of them are relatively small around 2/3 cr and are generally an expansion of line capacity or new brownfield lines. Covid 19 impact is not known on the demand side.

As mentioned earlier in the thread the competition is not with Indian/Chinese players it is mainly with established European players. The bargaining power in any competitive bidding is limited to how low your competitors can go.

Axtel clearly has around 30% labour arbitrage when compared to its European peers. The mgmt did not give any indication on margins of domestic vs international players but it clearly said that once you supply something to a large international vendor you cannot charge differently for different locations since the client already has the pricing info.

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