Ador Welding Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Record quarter, volume-light growth: Q4 was the best ever, but consumables revenue grew 15% on flattish volumes, so the lift came from price and mix rather than unit expansion.
• Equipment margins lag on Make-in-India bet: Equipment volumes hit an all-time high, yet margins disappointed because Ador deliberately manufactures 50–65% domestically while competitors import, a conscious trade-off management accepts.
• Export engine restarted: Export volumes finally crossed the 2006–2007 peak after a management overhaul, and the company is now entering the Americas with a 20% export growth target for FY24.
• Working capital needs work: Inventory ended the year at levels management was not happy with, and receivables ticked up on end-user and large-contractor business; both are flagged for improvement this year.
• What to watch next quarter: Whether the ONGC flare order begins converting to revenue in H2 as planned, whether equipment margins start the promised climb toward 14–15% EBIT, and whether the 10% volume growth target proves as conservative as management hints.

The Quarter: Record Revenue, Mixed Quality

• Best-ever Q4: Strong market conditions and resilient economic growth in Ador's end sectors drove the highest quarterly performance on record.
• Consumables: price, not volume: Revenue grew ~15% while volumes were nearly flat. H1 benefited from passing through commodity inflation; H2 saw better product mix as the company entered more specialized segments and high-specialization metallized techniques.
• Equipment: record sales, margin miss: Welding equipment sales hit their highest ever by far, but supply chain issues kept margins below expectations. Prior-year comparisons are distorted because equipment and flare/process equipment were reported as one segment until FY20–21.
• Flexible process equipment turning the corner: The division did quite well in Q4, with the Uran project and other projects providing momentum going forward.
• Automation cleanup: The automation division carried a few items that needed cleaning up over the last year, resulting in slightly lower margins than expected.
• Capacity utilization: Consumables plants are running at 75–80% on average, varying by product line, leaving headroom for the volume push management is planning.

Malkani: "there is definitely an upside but it's not going to happen tomorrow morning. It's a long story and we keep playing this out."

Equipment Strategy: The Make-in-India Margin Trade-off

• A deliberate margin sacrifice: Ador manufactures 50% to 65% of the 20% of Indian-manufactured welding equipment, a conscious Make-in-India decision that delivers strategic benefits but carries structurally lower margins than competitors who import a large bulk through global sourcing.
• Recovery path, not a leap: Management does not expect to hit 14–15% EBIT this year but believes it will get "definitely closer." Improvement is expected over the course of the year as supply chain conditions normalize.
• Supply chain comfort: After a difficult period, supply chain conditions have normalized a lot; management is more comfortable now than at any point over the last year.
• Volume growth aligned with consumables: Equipment volume growth is expected to track at a similar level to consumables in terms of quantities going forward, with ~30% growth having occurred, and management states it is fairly feasible under current economic conditions though no formal forecast is given.

Malkani: "One thing that we keep talking about, it's a very confident decision by Ador, is that we want to do a Make in India part. And Make in India part allows us certain benefits, but at the same time, has a slightly lower margin than I expect leading players who are importing a very large bulk of global sourcing will do. So, that's the sort of conscientiousness that we take."

Exports: Restructured and Reaccelerating

• Post-peak recovery: Export volumes have now crossed the 2006–2007 peak and gone beyond, driven by massive management changes in the export business and a full restructuring of how the company is set up in those markets.
• FY24 growth target: Management is targeting at least 20% export growth in FY24, with a five-year aspiration to get exports close to 20% of total sales.
• Priority markets: The Middle East (Saudi, UAE, Oman, oil & gas economies), North Africa, and the Americas are the focus. The EU is not a priority at the moment.
• Americas entry: A different ballgame versus the Middle East, but global headwinds favoring the Indian supply chain are creating a more open-door policy. Results will play out over the next two to three years.
• Addressable market: Management sees the export opportunity as a couple of multiples of where Ador is today, with the Americas, Middle East, and North Africa sufficient to deliver the 20% aspiration without needing to create new far-away geographies every year.
• International spending: FY24 will be a bigger-ticket year for business development spending (exhibitions, new product lines, trial and error, technical development, people costs), but management does not expect a tremendous margin impact and believes margin should be visible this year itself.

Malkani: "I don't think it's a market size question. What is the addressable market size that you can look at? And that's a couple of X of where we are today."

Margins: Operating Leverage, Mix Shift, and the Realization Gap

• Margin improvement driven by operating leverage: Cost rationalization has come more from volume-driven operating leverage than from discrete cost-efficiency programs, though incremental improvements are ongoing quarter-on-quarter and will not happen overnight.
• Blended margin ambition: Management is working toward increasing blended margins to the 13–15% range over a year or two, combining consumables recovery, equipment and flare scope, and Ador Fontech (which runs at 18–20% margins).
• The 15–20% realization gap: Ador's product realizations are 15–20% below the largest player. Management attributes the competitor's advantage to an engineering-outpost business model, acquisitions in specialized metals, and global sourcing benefits, and states bridging this gap "for sure" will happen through the cycle, though not overnight.
• Product mix improvement is incremental: Moving into more specialized segments and high-specialization metallized techniques happens in small stages; it cannot happen in a very large space at once.
• Cost investments absorbed: The potential exists to absorb international market development costs, new product lines, and people investments within the margin levels the company needs to maintain.
• HR overhaul underway: A new variable pay structure links 15–40% of variable compensation to company profit for all employees (minimum 10% variable), driving an ownership culture in what management describes as a 70-year-old company that is a "big shift" to turn.

Malkani: "For sure. It's just not going to happen overnight. It's going to be, it will play out. But for sure."

Orders and End-Market Demand

• ONGC flare order: Execution of 60–70% will happen in FY24, mostly tilted toward H2. The project is tracking in line with the 18–20% gross margin expectation.
• Pipeline building: Advanced-stage inquiries exist for large orders similar in size and product profile to the ONGC order; the team is working to convert them.
• Railways as the biggest driver: Wagon manufacturing and heavy infrastructure around railway lines are seen as the biggest growth driver currently, followed by general heavy engineering and EPC contractors.
• Shipbuilding cycle emerging: The cycle for commercial shipbuilding, beyond naval, is about to start picking up.
• Power plants: Ador is involved wherever contractors are doing capacity expansion or related work.
• India welding mix transition: India will keep transitioning toward more continuous welding processes as labor costs rise and automation increases, though it will stop at a certain level due to application constraints.

Subsidiaries: Fontech and the Automation Gap

• Fontech performance: Results have improved steadily since changes made in H1 FY16. Q4 FY23 sales were a tad below potential due to product-line changes, specifically a plasma cutting base effect.
• Fontech outlook: FY24 is expected to be quite in line with industry expectations, if not better. Growth is more about value than volume; the engineering of the company is oriented toward value growth.
• Fontech product gaps: Massive product gaps do not exist in the portfolio. One specific area related to spray technology application is being looked at.
• Automation gap: The automation space is a large gap where Ador is lagging, but this is more about capability to execute larger and more sophisticated projects rather than a specific missing product line. Other gaps are small and incrementally plugged via technical velocity.

Guidance & Commitments

Key Metrics