Ador Fontech

Background

Ador Fontech, an associate company of Ador Welding (formerly Advani Oerlikon), was incorporated in August 1974, as Cosmics Fontech. It subsequently changed its name to Ador Fontech. In 1992, it acquired Fist India (P) Ltd and Kostech India Pvt Ltd. These companies were subsequently merged with the company. The company was listed on BSE in 1995.

Ador Fontech focuses on preventive maintenance and repair of industrial machinery, which is a niche segment requiring specialised skills. It offers products and solutions for reclamation welding and recycling of vital machinery components. The company operates 2 manufacturing plants in Peenya, Bangalore and a Reclamation Service Center in MIDC, Nagpur.

Ador exclusively represents many reclamation and surfacing product/solution partners such as Sulzer Metco, Alloy Steel International, Dellero Stellite, EWM, Microtherm, Protector, Cepro, CEA, Gasflux, York and Euromate products in India.


Main Products/Segments

The company’s product basket includes filler wires, welding equipment/accessories, wire feeders, wearplates and cladded pipes. Apart from manufacturing these products, Ador Fontech also acts as a value-added reseller for Alloy Steel International, Australia; Berkenhoff, Germany; CEA, Italy; Cepro, Netherlands; Degussa, Germany; Euromate, Netherlands; Gasflux, US; Protector, Australia/Singapore; and Sulzer Metco, Swiss /US, Bedra and Woka, Germany for their products in India. It also offers a high temperature process for maintenance products from Aremco, US.


Main Markets/Customers

Ador Fontech supplies products and services to almost all the core sectors and several engineering industries. The focus of its activities is to provide metal joining, reclamation welding and surfacing solutions for improving, updating and reworking parts so that they equal or exceed the useful life of the original part.

Its major customer base includes mining industries, steel and other metallurgical complexes, power plants, railways, road transport workshops, shipping industries, sugar mills, cement plants, fertilizer and chemical plants, oil drilling and refining sector, defence units and a number of engineering industries.


Bullish Viewpoints

  • Consistent Growth – Sales have grown at a steady 5yr CAGR of 16% plus to reach ~150 Cr in FY11 from about 80 Crs in FY07 . But Net profits have galloped away at a 5yr CAGr of over 37%. This has been possible on the back of consistent improved performance by the company in last 2 years.
  • Big Margin Improvements – The track record on the Margins front has been spectacular. Operating margins were ~12% in FY07 and has now climbed to over 18% in FY11. And Net Margins have almost doubled going upto over 12% in FY11 from ~6.5% in FY07
  • Debt Free – This is one of those rare completely debt-free companies!
  • Free Cash Flows – The company generates very healthy free cash flows. Capex requirements have always been mimimal for the company -between 1-3 Cr. In FY11 the company has made the largest investment in Capex in bolstering its Service centre in Nagpur again completely from cash flows generated. FY11 Cash flow/Sales was at 3.5% while traditionally it has hovered between 7-11% of Sales
  • Good Dividend Payouts – The company maintains a dividend payout ratio between 20-35% in the last 5 years till FY11. The company used to maintain a much higher dividend payout ratio in the earlier years
  • Duopoly – The Repair & refurbishment market for Industrial machinery is dominated by mainly 2 players. Ador Fontech and the unlisted EWAC Alloys. Players like Esab and Ador Welding (a group company) cater mainly to the Fabrication market who do nopt have the expertise to cater to the Repair & Refurbishment market (specialised knowhow, specialised metallurgical skills, specialised alloys and welding equipments)
  • Huge Investment in Reclamation Service Centre – This Nagpur facility has seen huge capital investment of Rs. 12 Cr plus in FY11. The whoile set-up has been modernised and recreated, with new facilities added. As per the company the capacity to service is now 4x what existed hitherto.
  • Promoter share going up – Promoter share in the company has been going up steadily in the company in the last 5 years from abbout 24% to about 35% in FY11

Bearish Viewpoints

  • Sales growth is muted – This has been the main objection against Ador Fontech so far that Sales growth is not in the same league as other small companies of similar size. It did not seem capable of growing Sales at more than 15% CAGR
  • Margin Growths cannot compensate forever – While expanding margins have taken care of the relatively poor Sales growth, this picture may not be sustainable, if the company does not find a way to accelerate Sales.
  • Exclusive relationships at risk _ The bulk of company’s sales comes through consumables sales for many of its exclusive distributor relationships. This poses a significant risk. Some of these majors do have India presence and may decide to enter the Indian market for consumables by themselves.
  • Keeping pace with technology improvements – This is a niche technology field requiring one to keep abreast with Advances in Metallurgy and Alloys and Refurbishing equipment. Keeping pace with the same and moving up the value chain may require increasing investments from the company.

Barriers to entry

  • Niche Segment – This is a highly specialised field requiring years of experience in the preventive maintenance and repair of industrial machinery. An  ever-growing knowledge on metallurgy and wear phenomena coupled with  a broad range of product/solutions to wear-related problems is needed to effectively service the industrial customer base. Very few players in organised sector. Only known competitor is  EWAC Alloys Limited, a joint venture of the Larsen & Toubro, India & the Messer Eutectic Castolin Group, Germany.
  • Long-Term Customer relationships – Customer relationships are built over years here. Industrial machinery serviced many times are mission-critical in nature and customers are reluctant/wary of changing service providers.
  • Exclusive Reclamation & Surfacing Product Relationships – Access to specialised solutions is restricted. Ador Fontech has invested and built-up these relationships over the lat 25 years and more. It enjoys exclusivity with some 12 major reclamation and surfacing product partners.
  • Industrial Certifications – A number of certifications are necessary before one can participate in industrial scale reclamation projects.

Interesting Viewpoints

  • Improving Operating Margins – This consistent upward trend in operating margins is worth noting, as the company has moved from over 11% OPM in FY07 to over 18% in FY11, step by step in the last 5 years. Unlisted competitors like EWAC reportedly enjoy OPMs in the 24-25% range.
  • Reclamation Services Center enjoys superior margins – Located at Nagpur, this facility has been continuously expanding its capacity of taking up customer-specific and heavy duty reclamation jobs. State-of-the-art welding and metal spray processes are used to repair, reclaim and rebuild vital machinery parts for thermal power stations, cement plants, mining, steel and several other core industries. The capacity has been augmented 4x in FY11 by incurring Capex of over 12 Cr. This seems a significant bet taken by a normally conservative company.
  • Industrial Growth in India – Long Term growth in Power, Mining, Shipping and other Industries in India augurs well for Ador Fontech

Disclosure(s)

Donald Francis: No Holdings in the Company;


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