Ador Welding Ltd

Q2FY24 Concall Notes

General Notes:
• Q2 rev. at 229cr, highest second quarter sales. There was some margin expansion. Pushed a lot due to bad Q1, coming to normal where Ador wants to be and will improve from here.
• Launched India’s first battery powered welder. Spending 5% of profits for make, research and create in India initiative. There is a strong demand for it. Official launch should be in Jan-Feb ‘24.
• Merger going through NCLT process, and voting has gone in the offer of amalgamation. Timeline of merger is early Q4FY24.
• Volume growth on the consumables in the quarter was 22% and in the equipment was 35%. Q2 is more reflective of future path and expect volume to continually pick up and allow to keep going. Should be in a position to sustain Q2 performance.
• Revenue split is 85% standard range of products and 15% higher value products. Plan to get to 80-20 ratio. Gross margins would differ by 3-4%.
• ONGC order: Involves large execution of a flare job. Will start in Dec/Jan and June/July will be where most of the execution will happen.
• Current capacity utilization in consumables is 75-80% and looking to add another 9000-10000 tons over next six months.
• For flux core wire product line, running at a capacity of 90-95% and will be adding a lot of capacity in coming months.
• Bidding on other flare orders similar to ONGC, but haven’t won any order yet
• Current order pipeline is app 35-40cr for next year and the bid pipelone will be 100cr beyond that.
• Demand is not a problem but management is selectively picking the right order which meet the criteria of good cash flows, ROC.
• Equipment has a little bit of more room for scale margins to come in. Benefits of merger will allow that.
• Product mix improvement is happening but it will take some time. Automation is another reason for margin expansion but that needs to be scaled.
• There are 180 distributors and a sales team of appx. 90 people. Ador Fontech have 80-90 distributors and sales team of 60-70 people. There are around 5000 SKUs
• Can’t give any growth guidance, but hope to completely outperform IIB.
• Getting to 14-15% kind of margins in the equipment side depends upon ability to ramp up automation very quick and make that a significant contributor. But it won’t happen on a monthly basis. It will take some time, but it will happen.

BIS Impact:
• Earlier had a with BIS due to import of products that were not BIS certified (BIS suddenly had this certification needed and Ador stopped importing, but didn’t stop selling. So, BIS sued them and charged way more than Ador anticipated.
• Stand to gain a lot due to BIS being more and more proactive. Have good relation with BIS, work with BIS on a regular basis, and everything else on that account.

Exports:
• Seeing a lot of opportunities in Saudi Arabia and South America. Middle east is 80% of export sales.
• Brand is known in Saudi and there is a lot of oil and gas capex happening over there including UAE especially Abu Dhabi.
• Europe is a not a focus area right now. US is a little bit area of focus, but mostly focus is on South America
• Have to enter new markets smartly and correctly and ensure there are right partners to do that.
• It’s longer period due to long gestation cycles because of approvals, testing, and validation
• Have to prove the value addition in the products offered and it takes a 6-8 months to break.

Company’s right to win over competitors:
• In a market where Ador was already present (like Middle east, Saudi), they are getting a lot more structured in their customer approach, choosing right distribution partners, building and getting appreciation to the brand and learning how to better service the customers
• This approach led them to compete against other players in the world and helped them become tier1/2 player.
• There is entry barrier for new players to fit into the existing supply chain and once you become an important part, you get regular orders. Getting opportunities as china +1 suppliers as well
• Don’t have to compete with cheaper competitors. In India, there are 5 competitors who have cheaper products, but Ador doesn’t fight with them as it may not be sustainable.

What’s driving growth and its sustainability:

• Volume growth has been solid and higher revenue is not because of better realization but because of solid volume growth
• In Indian market, general Infra, railway, and auto sectors are driving growth. Auto, power plants, cement is also helping.
• This momentum continues in next quarter as well and looking to build on it.

Disc: Invested