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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.

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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

8 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

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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