Ador Welding Ltd

@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