Great numbers with all time high margins!
Q1FY21.pdf (1.4 MB)
Increasing revenue with increasing margins makes a great combination. Stock price hitting lifetime highs before results had given the clue.
Would request @Anant to throw some light on sustainability of the numbers in forthcoming quarters.
We need to be aware of two things:
a) If one looks at the balance sheet of Q4FY20 one can see inventories going up by around 10 cr YoY. At Gross Margin of 50% (roughly) that could mean around 20 cr of sales. Since the company was shut since Mar 24 and the sales for previous quarter were not so great there could be a slippage from last quarter to this quarter.
b) The company also had the lock down for complete April and would have required sometime in May to come on stream so despite the above they have done well.
I think it is better to look at Q4FY20 & Q1FY21 combined looking at Q1FY21 alone would be a stretch. Assuming there is a slipover from Q4FY20 to Q1FY21, it also proves is that Axtelâs clients are high quality companies who have picked up their orders instead of canceling them or moving them forward which has happened in most of the capital goods space. A similar opinion also emerges on Axtelâs suppliers, sub contractors, employees etc.
Overall I think they have done well, my baseline assumptions would be Q4FY20+Q1FY21 averaged out.
Discl. Invested with significant allocation. No transactions post results.
My investment decisions are based on a longer term than say 3-4 years while making my decisions. From what I understand Axtel is an equipment manufacturer and a process engineering solution for food processing and pharmaceutical companies. I do not know much about pharmaceutical companies, but let me for now focus on the food processing and FMCG companies. And that too the biggest in the space - Nestle and HUL.
For Nestle, we can see the net fixed assets went down from 3000 crores to 2000 crores.
Similarly for HUL, the fixed assets over 10 years have hardly doubled.
We know that the whole moat of these companies come from the fact that they produce such high returns on these kind of net tangible assets by leveraging their brand. Their goal always is to get optimised in PP&E for long haul without spending too much.
Now coming back to axtel, they do help clients in process engineering. But by the definition of it for an industry like food processing, major dominant players are not looking to get more of PP&E. Rather, they are continuously focused on minimising it. Also once they make a purchase they would not make another for a significant amount of time. That tells me that players like Axtel have to sell durable machines on a competitive price going forward.
Machine manufacturers also cannot go for volumes but they should atleast have some service based solutions that ensures a steady stream of earnings. Axtelâs major sales seems to have come from selling of equipment.
I would have been more comfortable if Axtel operated in process solutions for a highly competitive industry that is levered on heavy machinery requirements and maintenance services for the same rather than the food processing industry.
Seems that Axtel might have enjoyed some benefits of a cyclical cycle in food processing. But again, that is not knowable.
Is my reasoning in anyway flawed? If so I would be delighted to be corrected by someone who shares a different perspective than mine.
My understanding of FMCG companies are that they setup a few manufacturing units for the product as a Model Factory, then outsource the production to contractors, who have to maintain the same standards (of production as well as final product) as aforementioned Model Factory.
That is because the product tends to be volumetric and transport costs are high in long distance. Hence they need to be produced at all corners of the country, which is a hassle for a company with itâs headquarters at Bombay, i.e, the executives do not want to travel around far flung areas of the country on a regular basis.
That is not the case with small FMCG companies whose products are consumed in a comparatively smaller area- they tend to own their factory.
As such, Axtel is selling their products to those contractors of FMCG companies - and itâs sales would be proportional to the total sales of FMCG in the country (by volume).
Nestle has in total only 8 plants. NESTLà India set up its first manufacturing facility at Moga (Punjab) in 1961 followed by its manufacturing facilities at Choladi (Tamil Nadu), in 1967; Nanjangud (Karnataka), in 1989; Samalkha (Haryana), in 1992; Ponda and Bicholim (Goa), in 1995 and 1997, respectively; and Pantnagar (Uttarakhand), in 2006. In 2012, Nestlé India set up its 8th manufacturing facility at Tahliwal (Himachal Pradesh). The small number itself helps them optimise durable processes without major requirements to keep adding PP&E in long run. They set up only 8 plants in almost 60 years. And there was only a lone contract manufacturer but nestle ended it in 2015. Britannia also ditched its contract manufacturer known as Shah foods. Now a days FMCGs are more focused on stricter controls and processes to drive quality.
That is essentially what makes the FMCGs an attractive business. What they rely on for distribution is a quality supply chain involving various warehousing or SAP related solutions. A company like Axtel with only machine equipment manufacturing cannot clock volumes in machinery in a domain like food processing. Maybe in mining. Its not like Nestle or HUL is setting up plants every year. Also small player also would require services for a short duration for which Axtel will provide. But again once they are set up, they can leverage supply chain solutions of Amazon if they are a startup. The very basis of FMCG economics is try to go for a one time setup and strengthen the distribution network and branding for the future as far as I can understand. I donât doubt that the demand will be there. But to say that âthe sales will be proportional to the total sales of FMCG in the country (by volume)â seems to be a farfetched speculation. Yes it will go up, but definitely not by the factor of FMCG sales volumes.
But again, I would have been more comfortable if Axtel operated in process solutions for a highly competitive industry that is levered on heavy machinery requirements and maintenance services for the same rather than the food processing industry. Or maybe if they provided supply chain or service based solutions to the food processing industry along with their equipments which would ensure a steady earnings stream for years to come.
Thanks for starting the thread. Given the fact, the customer base of AXTEL are not seeking repeat services of the company (which means not a steady flow of income) and big giants in FMCG space are not necessarily expanding their fixed assets, I donât see much value in investing in this company. Any alternate views?
I was chatting with @Anant offline to help understand Axtel and the opportunity size better. Here is my understanding:
Sahil: The core of the investment thesis seems to be centered around the 15% growth in packaged foods industry in India. Is there a way to track/verify these numbers? Any industry data? What is the granularity of the data?
Anant: You will hardly find those estimates. FMCG growth is 7-8%. Food is growing by 10%. Modernizing the factories for existing plants is another driver of growth. Adding all these up, 15% growth estimate seems like a good approximate.
Sahil: Some links I found for supporting similar claims: link1 (news), link2 (Ministry of food processing industries, search for âpackagedâ or âchocolateâ), link3 (news). From the Ministry link: âConfectionary Chocolate, Gum and Sugar Grew at a CAGR of 17.22% during the period 2011-16. Expected CAGR of 16.63% during the period 2016-21. Expected that for the period 2016-21 chocolate would grow at a CAGR of 18.57%, gum at 16.90% and sugar confectionery at 12.70%.â
Sahil: Do we have a sense for how much market share Axtel already has? Either in India or specially at global level? Since key drivers of value in international operations would be market share gain.
Anant: For a 100cr sales company, perhaps the market size is not that important. At a very rough level, we can probably estimate it to be 5,000-10,000cr (correct up to order of magnitude). We can look at Buhler Group: consumer food division for getting some estimates. What makes it difficult to get market size estimates is that Axtel is only into Semi solid and solid handling. They are not into liquid handling. They donât want to go into liquids. It is commoditized. Lot of investments go into milk handlings. All those need to be subtracted when estimating market size for Axtel.
Sahil: Buhler Group 2019 AR mentions that their revenue for FY19 was 880 million $ which is roughly 6600 cr INR. This gives a rough idea for a lower bound for market size.
Sahil: Related to the previous question, exports form 20% of revenues. It looks like exports are actually growing as a % of revenues. Exports went from being 14% of revenues in FY18 to 18% of revenues in FY19 to 20% of revenues in FY20. Did you get a sense from talking to management or from any other input sources that the company is trying to grow exports as a percent of revenues.
Anant: They are not doing it consciously. They donât want to take up export at the cost of domestic. From a long term perspective, you want to do that. Global FMCG companies have world wide sourcing so getting one order opens doors for repeat orders from other nestle manufacturing locations.
Sahil: Did you attend the AGM this year? Any key takeaways from the AGM?
Anant: Management does not give any growth guidance. Investors keep asking about Order book size. Key info the management gave was that the order book was higher by 20-35% compared to last year.
Certainly. The clients have no choice but to do Capital investment. The chocolates require plants and equipment and machines for making them. By optimizing, the clients can improve their asset turns and delay the capex, but it is impossible to eliminate. By same logic, none of capital goods companies are sound investments, but have a look at GMM Pfaudler, HLE glasscoat, Thermax. All of them are capital goods companies and sound investments.
Redesigned website with detailed information of products and services.
Do have a look!
Hello Everyone,
I have recently started tracking this company but I couldnât find any recent earnings calls / transcripts.
I have gone through the thread but I didnât find the answer to my below query or maybe missed it. Can anyone let me know if they have any info as to why (source :AR) ?
Total turnover during the year 2019-20 decreased by Rs. 1109.79 lac (decreased by 10.02%) compare to previous year 2018-19 and there is profit of Rs. 1089.06 lac (after tax) during the year 2019-20 against profit of Rs. 1295.92 lac (after tax) during the year 2018-19.
Was there any cancellation of orders from clients / any other significant turnover reduction event.
They donât do concalls.
Not sure, but one thing I have observed is that small/micro businesses can have some quarter on quarter variance since the business has not reached a scale wherein revenues can grow in a straight line. Besides this is definitely more likely for B2B businesses like axtel. Specially since their business is tied to capex by other companies, there would be some element of variance in business performance imo. Donât know the specifics of the YoY decline, but the broader direction for the business is quite clear to me looking at my previous post in the thread. And that forms the core of the investment thesis.
Disc: invested, not an investment advice.
How do you track its progress then ?
i.e. can we only depend on their quaterly result updates and AR.
@hitesh2710 Sir, I remember that you also track this company. Any info you can share regarding this .
Also in general, how do track small cap companies because they generally donât share a lot .
Very helpful thread. I have a few questions on the business and industry. Would be helpful if anyone can help me gain some insights on the following. Apologies in advance for some basic questions due to my limited understanding of the business so far
Basic question first - I am slightly confused about the positioning of the company. Is it a consulting company or a manufacturing company? Does the company need more consultants to scale up or more capacity?
1.What is the current situation of the industry? If we are saying that Axtel is the only indigenous manufacturer with 200 cr topline, is everything else then imported into the country? How much of their revenues come from standard vs customised equipment?
2. If a food manufacturer does 100 rupees of capex , land + utilities would generally be 35 - 40 rupees? How much of the remaining capex does a company like Axtel cater to?
3. Many FMCG players are looking at outsourcing manufacturing to players like Hindustan foods, bectar foods etc. These contract manufacturers work on very thin margins and have fixed ROE contracts. How much of Axtels revenue comes from contract manufacturers vs brands? Should the magins and ROCE not reduce structurally if Axtel is supplying to contract manufacturers and hence becomes a Tier 3 player?
4. How much of their revenue comes from Nestle? How has the company been able to expand its customer base as that might have been a big hole to fill given that there are only very limited number of companies of that scale in India? What is their revenue concentration like currently?
5. Nestle has announced 2500 cr capex over the next 3-4 years. Any sense on how Axtel is positioned to benefit from this?
6. There are many D2C brands emerging in the country - small start ups with niche products. How does Axtel plan to cater to them? I understand the resources required will be higher to cater to such small customers but how is the company looking at this opportunity?
7. They win projects through competitive bidding - fair to assume that the company would be competitive as compared to imports in most cases? Bidding is done on man hour basis?
8.Does the company pay any royalty/fee to Wenger Inc. ,Anutec ?
Another company Reico which is a fully owned subsidiary of Sudarshan Chemicals operates/competes in this vertical as well as in many others than Axtel does. They also have same clients. My guess is in capex cycle, FMCGs distribute their capex over more players. Also, this company is only in the manufacturing part of the entire value chain. So once done, all outcomes depends on further capex cycles. Also I find it hard to relate how pricing power can be a MOAT in this industry as Buhler Technologies seems to have a branded moat in comparison. And as mentioned above fear of shifting to tier 3 side of contract manufacturers bears the risk of low ROCE.
I feel if someone wants to play proxies in manufacturing sector or capex cycles, something like L&T Technology Services is a far better play.
Disc : Not invested. Still researching on how it can play out in long run.
Good tailwinds for the sector.
Snack & Bake Tec, an international trade fair on snacks, bakery and confectionery processing
and packaging technology & services is being held in Mumbai from August 26-28, 2021. Axtel is one of the many companies participating.
The increasing profits needs to support the sales as well. How much the demand will increase seems to be carefully notes. Moreover, the raw material costs needs to be controlled.
Well company showing improved sales and profit on 1 yr, 3yr, 5yr and looks good
Each individual has to deep dive to understand on how much future growth can it show
Bull mkt, price can run ahead of fundamentals
Any idea why receivable days has jumped in FY22 vs previous years?
increasing