Ador Welding Ltd Q4 FY2024 Concall Summary

Key Takeaways

• A year of two halves: Consumables volume grew ~10-11% for the full year, but H2 was subdued with Q4 at just 1-2% YoY as steel price declines pushed distributors to run lean inventories.
• Equipment margins collapsed, turnaround promised: Equipment EBIT margin fell to 4.6% in FY24 from 6.7% in FY23, with Q4 at just 2.5%, driven by automation cost overruns. Management targets a 60-70% increase from current levels.[23-24]
• Flares division is a show-me story: Cost overruns and conservative accounting drove a loss; revenue is expected to jump 2.5-3x next year on the ONGC order, but management is openly questioning whether the segment is a long-term strategic fit.
• Exports are the bright spot: Export growth doubled in FY24, and management sees a 35-40% growth rate as "definitely achievable" going forward, even if the 100% pace is not sustainable.
• What to watch next quarter: Whether the ONGC flare project execution stays on track from May-June, whether equipment margins begin their promised 60-70% recovery, and whether the NCLT finally approves the Fontech amalgamation.

Equipment: The Margin Problem

• The damage: Equipment EBIT margin dropped to 4.6% in FY24 from 6.7% in FY23, with Q4 sinking to 2.5%. Two drivers: a product mix that was not as rich as desired, tied to oil and gas and pipeline demand, and welding and cutting automation losses that grew even as sales rose, due to poorly executed models.[23-24]
• Automation is the culprit and the fix: Automation is only 12-13% of equipment revenue but contributes disproportionately to losses. The plan is to scale it to 25-30% of equipment revenue this year, at which point it should contribute positively at a good net margin if executed correctly. Automation is largely integration work: picking up welding or cutting and integrating it into a distribution line.
• The recovery target: Management expects to increase equipment margins by 60-70% from current levels by doing "few basics correctly and a few things to turn around." Getting to double-digit margins next year "will be a bit of a push, but we can get close to it." Steady-state margins should be closer to 7-9%.
• Growth fundamentals intact despite margin pain: Product gap versus imports has reduced significantly, preference for domestic product is increasing, serviceability advantages are real, and select large customers are buying in bulk. Fundamentals are in place for another good year on equipment, but margins need to improve first.

Aditya Malkani: "I think we should be in a position to at least increase it by 60%, 70% compared to where it is today at least. We should do few basics correctly and a few things to turn around and then I think we should be able to do it easily."

Flares & Process Equipment: Execution Test

• What went wrong: The segment took a hit from two factors: a slight cost overrun on the ONGC order that pulled gross margins down, and a very conservative accounting approach that front-loaded costs. Low revenue meant high overheads were not amortized over the year.
• The ONGC order is the make-or-break: Execution is expected to start moving "a lot more aggressively" from May-June. Revenue next year is projected at 2.5-3x this year's level, with margins similar to what was originally expected, only slightly lower due to the cost overruns.
• Strategic fit is now an open question: Management acknowledged learning that there are "many, many challenges" in running the flares business versus conventional welding, and said the focus is purely on executing the ONGC project correctly. After six to eight months, they will reassess "whether this makes sense as a long-term play in a large capacity or not."

Aditya Malkani: "I think where we are right now is just to keep our head down and execute this project correctly as per our commitment and as per our prior achieved margins we had planned to. And I think at that time, which is another six, eight months from now, to reassess exactly the question you asked whether this makes sense as a long-term play in a large capacity or not."

Consumables: Volume Growth, Price Headwinds

• Full-year volume was healthy, Q4 was not: Consumables volume grew approximately 10-11% for FY24, but Q4 was only 1-2% YoY. Management attributes the Q4 weakness to price corrections in the market and sector-specific factors, not market share loss, but says they will reassess if another 3-5 months show different trends.
• Channel inventory amplified the slowdown: Over the last six months as steel prices moved downward, distributors maintained more conservative stock positions, affecting reported sales. Channel inventory is currently slightly low, and steel prices are now moving back up.
• Sector mix explains some of the drag: General engineering, heavy engineering, and pressure vessels have been big drivers. Railways was good in the first six to nine months but not exuberant in the last three. Auto is not seeing volume growth. Renewable energy and wind are areas where Ador is not very strong. Shipbuilding is expected to be a big driver going forward, and oil and gas has started picking up.
• The product mix gap, not the price gap: Listed prices versus competitors are very similar, with only a 1-2% difference. The real gap is that competitors have a higher mix of exotic materials and specialized metals. Ador is investing in new lines to enhance its product mix into higher-grade steels and upper-tier applications.
• Domestic growth ambition: Management is working on "a few things to eke out a little more growth than the market in FY25," led by implementing one or two new product lines. Double-digit domestic consumables growth is "definitely possible" with elections aside and regular economy movement.

Aditya Malkani: "I think you have to keep in mind the points I'm talking about when you talk about price correction happening and the industries that they're working on. And I think keeping all of that in mind, I think we are fairly stagnant at the moment. There is not a loss of market share. As of now whatever I've seen I would not tend to believe so."

Exports: The Growth Engine

• FY24 performance: Exports doubled versus the prior year.
• Forward expectation: Management does not think it is realistic to expect 100% growth year-on-year throughout, but believes 35-40% is "definitely achievable." The company is adding two or three new geographies over the course of this year where it has already entered.

Aditya Malkani: "I do not think it is realistic to expect them to do 100% year-on-year throughout, but I definitely think that in the region of 35%, 40% is something that you can definitely put in."

Merger, Subsidiaries & Capital Allocation

• Fontech amalgamation: Still awaiting NCLT approval. Management was "very, very hopeful" the next meeting would pass it; both Ador Welding and Ador Fontech have declared dividends to ensure a clean process before the merger. Cost and revenue synergies have been identified from back-end services, management, production, and import benefits from scaling up, but management declined to put a number on them.
• Fontech growth profile: The M&R products business can hit 8-12% growth, while the services front has potential for exponential growth if executed correctly over the next two to three years. Overall, growth is expected to be in line with welding's growth plan for next year, with ability to push more over another two years.
• 3D printing subsidiary: Serves the dental market with clear aligners. Losses reduced significantly YoY, but the market has changed with larger funded organizations burning cash. There is no synergy with core welding operations. Management will watch industry changes over the next six to eight months and then make a call on direction.
• Dividend policy: Management will keep the payout ratio at the last three years' benchmark and go above when the opportunity arises, but declined to commit to a specific improvement.
• Capex: 70% of last year's capex plan will be executed this year, covering new lines, refurbishment, new product lines, and changing old lines. At least another 18 months of capex remains.

Aditya Malkani: "I think in the next 6-8 months, we'll see that industry also go through some changes and then we'll make a call on which way it should move."

Guidance & Commitments

Key Metrics