ADORNSENovember 15, 2022

Ador Welding Limited

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16analyst exchanges

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Management on call

Aditya Malkani

MANAGING DIRECTOR

Vinayak Bhide

HEAD - HUMAN RESOURCES, COMPANY SECRETARY, LEGAL AND ADMINISTRATION

Surya Kant Sethia

CHIEF FINANCIAL OFFICER

Key numbers — 40 extracted

INR 145 crore

Jebel Ali. Lastly, we also won a very large order for our Flares and Process Equipment division, INR 145 crores, including GST and the timeline execution of thirty months. I know there will be many questions

INR 75 crore

his. They've asked a lot of questions overtime. What are the changes we've made? We have targeted INR 75 crores. Orders in hand is INR 134 crores. That takes the run order at the net value of INR 120 crores,

INR 134 crore

ions overtime. What are the changes we've made? We have targeted INR 75 crores. Orders in hand is INR 134 crores. That takes the run order at the net value of INR 120 crores, plus we guided another INR 20 cror

INR 120 crore

ted INR 75 crores. Orders in hand is INR 134 crores. That takes the run order at the net value of INR 120 crores, plus we guided another INR 20 crores, INR 25 crores of orders, and we've obviously executed som

INR 20 crore

R 134 crores. That takes the run order at the net value of INR 120 crores, plus we guided another INR 20 crores, INR 25 crores of orders, and we've obviously executed some through the year as well. I think mo

INR 25 crore

hat takes the run order at the net value of INR 120 crores, plus we guided another INR 20 crores, INR 25 crores of orders, and we've obviously executed some through the year as well. I think more INR 30 crore

rs,

er at the net value of INR 120 crores, plus we guided another INR 20 crores, INR 25 crores of orders, and we've obviously executed some through the year as well. I think more INR 30 crores of orders,

INR 30 crore

INR 25 crores of orders, and we've obviously executed some through the year as well. I think more INR 30 crores of orders, we have taken on this year in addition to that. So we're getting into a much stronger

INR 5.5 crore

ate over here to the Welding business. We have so far this year altogether incurred approximately INR 5.5 crores, and we have planned another INR 17.5 crores of capex. Of that, approximately 12.5 million is fu

INR 17.5 crore

ve so far this year altogether incurred approximately INR 5.5 crores, and we have planned another INR 17.5 crores of capex. Of that, approximately 12.5 million is fully -- INR 10 crores of the balance is relate

12.5 million

tely INR 5.5 crores, and we have planned another INR 17.5 crores of capex. Of that, approximately 12.5 million is fully -- INR 10 crores of the balance is related to the welding business, which has got to do

INR 10 crore

we have planned another INR 17.5 crores of capex. Of that, approximately 12.5 million is fully -- INR 10 crores of the balance is related to the welding business, which has got to do with a new production lin

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Guidance — 20 items

Aditya Malkani

opening

“As we said, the export market provides tremendous potential going forward and we start only taking the team but also the infrastructure and also opening up new markets.”

Aditya Malkani

opening

“I know there will be many questions regarding this, and we're happy to take those as we go along.”

Aditya Malkani

opening

“Our borrowing will pick up slightly going forward, which is why you're seeing that start to happen in Q2 onwards.”

Aditya Malkani

opening

“And lastly, demand stabilization since August and September, based on the price volatility has been fairly good and it seems to be indicating a fairly decent path going forward, August/September/October data.”

Aditya Malkani

opening

“If you look at the equipment, as the volumes start to pick up, you will see this start to get a lot better going forward from Q2 FY '23 onwards and that seems to be better placed at the moment as well.”

Aditya Malkani

opening

“But like any other project oriented business is pushes itself more towards Q3 and eventually Q4, a little bit more.”

Aditya Malkani

“So it's a combination of those three things, we work at all the time, and you will see that, that's our target, and we believe it's definitely achievable in the next two to four quarters.”

Aditya Malkani

“I hate giving forecast guys, I'm sorry, I can't give you guys forecast.”

Aditya Malkani

“I don't give forecast and it's simply because there's so many variables in place, but that's slightly above my internal numbers, it's close to that, but definitely slightly feasible, but slightly above my internal numbers, let's put it that way.”

Aditya Malkani

“I think that product mix might -- I think both those -- that pie will grow a little bit such that even the more commoditized range will grow going into HY2.”

Risks & concerns — 11 flagged

We track this, obviously, very regularly and what is happening and where the concern areas are etc.

— Aditya Malkani

What was a concern definitely in, I mean, all the way from December till July/August, it was just the volatility of steel prices that impacted.

— Aditya Malkani

I think the primary concern here is, if you look at the bottom right chart, the results as a percentage of revenue.

— Aditya Malkani

Whereas if you go into oil and gas and if you go into, for example, a pipeline or you go into something that is high high-pressure steels, so you're going to something nuclear-related.

— Aditya Malkani

My only concern comes in the last two, three years, given the sort of changes that have happened on a macro level, whether it's COVID, whether it's some more, whether it's the volatility of market supply chains being hit, volatility in commodities.

— Aditya Malkani

So I feel that is where a concern is, and we keep working on stabilizing this a little bit more.

— Aditya Malkani

So we're not yet, we have do concern lag at the moment.

— Aditya Malkani

Do you want to cap this business at certain percentage of our overall revenue in terms of risk mitigation measure?

— Dhwanil Desai

So like Saudi Arabia, Qatar and a few others where we have been weak.

— Aditya Malkani

And number two, how is our risk assessment strategy with respect to the projects business?

— Amit Anwani

So I'm all hoping it will happen, but I think the indicators are, no, it will drag a little beyond that.

— Aditya Malkani

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Q&A — 16 exchanges

We've done exceptionally well on the sales side with regard to this quarter, about 15%, 16% growth on the sales. But on the margins, I mean, you did allude to probably the raw material cost, the steel cost volatility, which could have affected our gross margins. So our gross margins are again below 30%. And more so on the consumables side, our EBITDA margins are again around 8%. So typically, if not for the steel on a normal environment, what margin do we envisage. We have been talking about a step-by-step improvement in margins for the last - more than 18 months now. And yes, there was some i

Aditya Malkani

Okay. Thanks, Mr. Jain. So I'll attempt to answer your questions first so that you avoid any repetition. Okay let's answer one by one. I'm not going to get into the volatility part, you also addressed that. You understand that's the part that happens. As a philosophy, as a company, as a team, we think that our margins are anywhere between, and the consumables front, anywhere between 100 to 150 to 200 basis points below where they should be at the very minimum. Like I keep saying, that's going to be a step-by-step progression and you will see that progression happen apart from any significant a

Thanks for the opportunity. Aditya if you can talk about how has been the volume growth during Q2 and Q1 and how much has been the inventory loss in Q2 because of reduction in prices?

Aditya Malkani

For the half year, in terms of welding equipment numbers and remember, numbers is not the best indicator on volume of equipment because you have a mix of equipment from very tiny one to large ones. But anyway, I'll give you the data. We are at approximately 36% versus 47%. So approximately anywhere in the region of 15% to 18% volume growth on equipment. So there's a product mix thing in there that you should always try and decipher a little bit. But definitely seems to be robust that we do see 15% to 18% is definitely very encouraging. On the electrode and the wires and fluxes and all of that,

My first question is continuing from the earlier participant, so the margins have been hit in 2Q for our primary segment, which stood at 11.1%. You already mentioned what's the reason for that? So just wanted to know if the margins can come back to that healthy trajectory of 15% going ahead for 2x? Can we expect that with a lot of the capex team already roaring and it's fairly decent uptick, as you mentioned. So do you see it going back to those 15% levels as we saw in Q1?

Aditya Malkani

Sorry, give me one second. I'm just studying the numbers to make sure I don't mean incorrect. We think, definitely come awfully close to it. Let's put it that way. We can definitely come awfully close to it. But it takes a little bit of a you've dipped down. It's not like it's going to happen tomorrow morning. But I think we definitely, internally are working towards ensure that happens. I think we're working towards it. It should get better. That -- very good. Sir, and just in a discussion, I just wanted to understand. So of course, welding is a very technical industry as such. And we, as fin

Aditya, my first question is regarding the volatility in margins. If I see – and of course, there is only just one listed peer for us to compare. So pardon for doing that, but the kind of volatility I saw in margins of both welding and Fontech doesn't match up both this quarter and earlier quarter compared to ESAB? What would you allure it to?

Aditya Malkani

I think you're right. And also, the growth was higher. So they grew 20% plus. Yes. So there are two elements here. As I said, I don't like to compare and talk about their business. I can only talk about what I read from the annual report which shows a post of service income. Like I said, I'm not going to keep going back into it, but I don't know what that plays out on a quarterly basis. I don't know what that is on a quarterly basis. I don't have that data. So that's one, but I'm not getting into it. I think if you ask me, I think they're smarter at managing their long-term rate contracts, pas

Just -- sorry to repeat maybe sounding repetitive. But as everybody was alluding in regards of margins basically. So just wanted and you also have iterated that definitely there is just hope for improvement. So just wanted to know what are the levers basically apart from the product mix? Are there any levers that you can talk about or give some color that how we -- the margins we are expecting to improve from here? So that would be the first question.

Aditya Malkani

Product mix is such a significant part of it and the way we sell the right products across the spectrum is a very big part of that. I think increasing our share of business in Ador International is very important towards that as well. We had certain product lines at work that we're going very slow for a few months that have now picked up, which should show encouraging margins also. I think it's just that, I think it's literally just basically simple like that. And I think structuring our sales team to be more geared towards selling higher value sort of products that are now range, which is nee

Yes. So one question on, one feedback that you gave on the volumes. I'm trying to connect that question with past calls. So you've always mentioned on the demand scenario for your product line is far better than what we would have ever seen in the last 8, 10 years. In the last cycle that you saw was about 10 years back, I was just perplexing why is the volume flat? And do you see the demand scenario panning out as of now, just what you saw in the last cycle? There are cases – are there any changes to that observation?

Aditya Malkani

No, there are no major changes to that observation. What has changed is I see the product mix as far as it goes in the demand, the volume has increased. So approximately, if you look at it, HY1, I don't know which period you want to look at, but let's look at... H1 to H1. H1 to H1 in terms of the right product mix of what we want to sell, it will be probably somewhere in the region of 5%, 6% growth in terms of the volumes of the right products that we want to do certain key products -- certain commoditized range, we've had a slight dip that has happened. And that's also going to happen in Q1.

So sir, firstly, on the flares side, as you mentioned that this ONGC project will start booking revenue from the Q4, 10%. Sir, in the Q4, you mentioned that the target revenue is INR 50 crores. So are we in line to achieve that in this year?

Aditya Malkani

INR 15 crores. Yes, INR 50 crores was the mentioned in the investor presentation. For the year, the sales for the year will be yes. We're on track for that. And secondly sir, since this is a very big project for us. So how are we covered on the commodity prices so that we don't take a margin hit? We've been working quite extensively on that. The sourcing team, the engineering team have been doing a lot of work on that. And so far, we've already started placing orders in fact for the bulk of the raw materials, and we remain within the limits at the moment in fact placing orders for almost a ver

Actually, I had a question regarding the demand scenario in this situation, which a lot of discussion has happened. But just to add to it, I would like to know which sector do we have a very strong demand from like infrastructure, oil and gas. So can you just identify in the clarity by set which sector, which we will get the demand for? And the other thing is when we have projects, so is there in the project specified the name of the company from which these consumables have to be sourced or is it through distributors, or how does that work?

Aditya Malkani

So heavy engineering contributes approximately 30%-odd of our sales. Automotive are approximately 20%. Construction, which I consider a part of heavy engineering and general intra, a full mix is another 10%, 11%. Railways is about 8% to 10% and growing a little bit from that. So I hope that helps answer a few questions on that. We do most of our sales. Approximately 65% of our sales happen through the distribution network of approximately 200 distributors. And the balance 30% to 35% would happen through direct sales, some large parties and some medium-sized parties depends on how structure, so

Just a couple of questions. I just wanted to know, let's say, what is the time line for completing the merger with Ador Fontech, part one? And second is that is there any, let's say, difficulty or delays do you anticipate at this point of time in that merger going through, given that there were certain opposition that came in and all?

Vinayak M. Bhide

So we take about a year or so for sure, from now on. And if it happens before that, we'll be lucky because that's the way NCLT is running, unfortunately, as of now. Aditya Malkani: As far as your question regarding any issues with minority shareholders, especially at the Fontech side, I don't think so. I don't know. I can't comment. I think most of them will see rationale and why we are doing this and also value appreciation why we're doing it. So I think as and when the time comes, we'll see at that time. But I'm fairly confident that we have a few significant minority shareholders who unders

Yes. So most of the questions have been asked and answered. Just two questions. The first one is on the project business. So we went through a tough phasing on the project business side. And our intention was to go to the INR 75 crores kind of an order book, and then we came across a very large order and took it. So, going forward, how do you think about this business? Do you want to cap this business at certain percentage of our overall revenue in terms of risk mitigation measure? How do you guys think about it?

Aditya Malkani

So I don't think we look at it from a -- I think it's a good question because if you look at the history of what we've come out of and where we're going towards and the opportunity is changing very fast in front of us, which is why we decided to take on this order. So I think the things we look at is the exposure that the company is going to take on. The engine -- first is the engineering capability and value edition the company provides to the order because at the end of the day, that translates into value for the company. So what are we doing in that regard? And that's why the teams being bu

Aditya, I’ve two questions. One, what is our current consumable capacity? And what is our margin improvement capacity. The last number which I had for consumables, it was 70,000 tons, I guess. And for welding equipment, it was 24,000 units. So what was it at the end of FY '22?

Aditya Malkani

Sorry, did you say the last part again? What is your... Welding equipment capacity? So, approximately for welding consumables would be in the region of 80,000 metric tons. See, again, past product mix, which is why we are debating it like that. But I'll tell you, it's basically around 80,000 is what you're looking at from that regard. That's why I say some product lines were at 60%, 65%, somewhere at 80%, 85% to 90% utilization. So it's very hard to give you a defined number and say, this is it. On the equipment front, again, it's a mix-related thing. But we should be in the region, like I sai

My question is again on the demand side. I understand that Q1, there was a volume growth, Q2, it was more flattish. So still we have a guidance of 10% to 15% volume growth on the edge, too. So what are the basically the levers or the ground situation which you feel that from a flattish growth in Q2, the Q3 and Q4, there will be a higher volume growth

Aditya Malkani

This demand indicators seem to indicate that there is a better growth opportunity that is coming. That's one. Secondly, like I keep saying, we had, if you saw that presentation in which we showed you how commodity prices went up, it is bound to sort of stifled demand and supply chains and stuff like that. So I think that had an impact for sure. Early, if you look at steel consumption data, we talk to steel mills, we talk to a few of those things, and I think it seems to be fairly robust in that regard. But like I keep saying, I can't look beyond three, four, five months. You can look at the lo

[inaudible 0:03:52]

Aditya Malkani

We can't hear you Mr. Purohit, but I think there's some message that comes regarding Indotec. Indotec is a partnership we have just signed on with for our welding and cutting automation division. I think they are a company based out of Scandinavia. And it is very early days still, which is looking at different opportunities to work together in how we can hire better solutions, better engineered solutions for our Automation division. Still very early days. That's it. Anyone else?

My question is with respect to the project business, in the past, we have already faced challenges in the projects business, and it took some good amount of time to clean up the books. Just wanted to understand more color on this INR 145 crores project business. You already mentioned about being more design engineering element and a slightly better margin than the history, so some more color on the customer and what exactly is the nature of this project? And number two, how is our risk assessment strategy with respect to the projects business? And lastly, what exactly is our strategy with resp

Aditya Malkani

Sure. So the project is actually part of ONGC's Uran project, which is not too far from Bombay, within Bombay and somewhere to Pune [inaudible 0:65:40] Uran. So it's fairly close by, in fact, the project that you're referring to where we had a certain error was -- project you're referring to, which you had to go through the entire cleanup was limited engineering and also being done abroad. So I think there are too many issues that we went into that entirely, but let's leave that in the past. Here, there's a lot of engineering work where we do the flares, the demountable flares. These are flare

Yes. Sir, thanks for taking my follow-up question. An earlier participant did ask for this -- for the margins on this Uran, the big project you have. Now you said that probably you can take it as a base margin, but actually in the projects business, there have been losses earlier. So just if you could just give some color on what exact -- I mean, a ballpark number of our margins, if possible. I just wanted to – just a ballpark number?

Aditya Malkani

I'm trying figure out how to answer your question, that's all. I think someone had indicated you have to look at peers in the process equipment and heavy fabrication industry and sort of look at that, I think that, that would be a fair. I don't want to give you guys a number and I'm agitating to give you a number for my own reasons. But it's significantly better than what you've seen in our track record. But if you – and you can also compare it to people who are in a similar sort of heavy engineering, fabrication kind of space. And sir, I just wanted to understand that, I mean, you set up -- s

Thank you for taking the time. Appreciate it.

Management

Will try to keep such kind of meetings. Yes, I think once every 6 months is what we plan right now, and then we'll do that accordingly. But thank you so much for your time. Thanks a lot. Thanks, everybody.

Speaking time

Aditya Malkani

Moderator

Jason

Pritesh Chheda

Vijay Karpe

Ankit Gupta

Chandresh Malpani

Viraj Mehta

Nikhil Jain

Rahul Jain

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Opening remarks

Aditya Malkani

Sorry about that. Because of some technical issues. Also, there's some construction going on in the building nearby. So in case you can't hear us, please put a note down in the comment section. In updates that we've had since the last time, I'm just going to cover three very quick updates that matter. One is, on the welding equipment front, we continue to extend the range of mak-in India products that we're manufacturing and looking to take on more and more imports. This is actually a brand- new welding equipment that's been in development for the last four or five months and actually feeds into a slightly lower value range. And we've just launched this product and touchwood, we have been seeing very good demand for it already. The second thing that is important is in approximately July of 2022 I've spoken about this earlier, but in July of this year, we finally opened up our new office in Jebel Ali Free-Trade Zone. As we said, the export market provides tremendous potential going forw

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