Ador Welding Ltd Q2 FY2025 Concall Summary

Key Takeaways

• Margin reset, not a new normal: EBITDA margins dipped on higher fixed costs and a consumables clean-up; management calls Q2 an "aberration" and targets a 2% low-hanging-fruit improvement over the next year.
• Exceptional hit cleans the slate: A ₹41 cr exceptional charge, dominated by a ₹32 cr impairment on the 3DFT dental aligner subsidiary, absorbed merger costs and a legacy inventory provision.
• International push gains structure: The company entered the US and Australia with own-brand distributors and on-ground employees, branching beyond its traditional Middle East focus.
• Project business pivots to margin over scale: After a large ONGC site-work project, strategy shifts to smaller, higher-margin, plant-contained projects; services EBIT turned negative this quarter on conservative accounting for that project.
• What to watch next quarter: Whether the promised H2 margin recovery materializes, the pace of new product launches in December/January, and any demand follow-through from the "little signs of improvement" seen in the last two weeks.

Margin Walk & the Q2 Aberration

• Segment-level pain: Product margins fell to 10%, M&R to 15%, and services to negative 4%, all subdued by higher input cost and product mix.
• Consumables drove the dip: Consumables saw a bigger drop in both sale and margin than equipment, pulling overall margins down; management does not expect this to continue through the year.
• Clean-up amplified the move: Management was "slightly more aggressive in clearing inventory and doing certain clean-ups," which compounded the margin hit; nothing extraordinary remains to be written off.
• Steel pass-through compressed: Normally steel price changes pass through over a 4–6 week cycle, but demand dropped more significantly than expected in Q2, forcing a shorter timeline. On a steady-state basis, the mechanism is a complete pass-through.
• ROCE and PBT slipped: Excluding the exceptional hit, H1 PBT margin fell from 11% to 9% and ROCE from 21% to 19%.
• Working capital stretched: Operative working capital rose by nine days; inventory increased slightly from March, while receivables and payables were optimized to improve cash flows and ROCE.

Aditya T. Malkani: "It's not like we now recognize the Q2 margins to be the new level, it's an aberration on that perspective."

The 3DFT Write-off & Merger Clean-up

• What got charged: The ₹41 cr exceptional item comprised a ₹32 cr impairment on the 3DFT dental aligner subsidiary (revised valuation downward), ₹5.7 cr in merger-related stamp duty and legal fees, ₹3.8 cr in reward/recognition for non-service employees at Ador Fontech, and a ₹1 cr inventory provision for Ador Fontech, partly offset by a ₹0.5 cr gain on sale of a Cochin property.
• Why 3DFT was impaired: The dental aligner business environment changed drastically in the last 6–9 months, forcing business projections and reality to diverge. The merger process was taking long; the board re-evaluated the business scale, burn rate and potential, and decided to realign conservatively.
• No cash loss, but a live risk: The worry is that if the business continues running losses it could hit Ador Welding margins to a minor extent; the board is clear they would not like that to happen. The business will continue for now, with the board to decide on valuation and the future.
• Merger now effective: The merger was affected on 25th September; all known merger-related expenses have been provided for in this quarter. Divisions are already formed and work is moving on manufacturing and supply-chain synergies.

Aditya T. Malkani: "It's good you asked that question. It's a very, very valid question. So there are two, three elements here that you have to keep in mind. First is the nature of the dental aligner business in the last, I would say the last 6, 8, 9 months has changed quite drastically, which has obviously forced business projections and the reality on the ground is slightly different, number one."

Services & Project Business: The Pivot

• Services EBIT went negative: The loss is largely related to the large ONGC (OTC) project, where conservative accounting is being applied; traction has improved and management expects a different margin play over the next six to eight months.
• Back-end benefit expected: The OTC project is in its last six to eight months, a tight period; management expects back-end benefit as the project reaches close, with margins "significantly better than what has been seen."
• Strategy shift announced: The biggest learning, per management, is that the company is not in its DNA to manage projects with large site work. The order book will be rejigged toward smaller projects with higher margins, focused on manufacturing control within plants with minimal to no site work.
• FY26 services outlook: Some spillover billing from the current project will flow into FY26; the division may not see big growth, but the aim is to improve margin realization significantly.
• December billing plan: December has a fairly strong billing plan; a bigger billing plan has come forward.

Aditya T. Malkani: "What our learning basically has been, for those who have been shareholders for a while and over 10 years, is basic biggest learning has been that we don't believe it's in our DNA and either we were very good at managing projects which have large site work."

International Expansion & New Products

• US market entry: The company entered the US with its own brand, appointed two distributors and one on-ground employee.
• Australia entry: An employee and distribution have been added in Australia; the focus area is now branching beyond the Middle East.
• Saudi Arabia remains core: Participation in a very large exhibition in October generated very good traction; the market is expected to continue to play a very large role going forward.
• Battery-operated welder: Developed in-house, a first-time battery-operated welder has gained traction in select international markets, received CE approval, and now needs customer approvals. It is expected to play out quite well over the next financial year, subject to those approvals.
• UK Rail trials: Trials are underway at UK Rail, in the process of getting approved for track repair.
• New product pipeline: A higher range of welding equipment competing against imported products is being introduced; a new range of products will be released over the course of December and January, including the Champ 500 equipment product.

Demand Environment & Growth Levers

• H1 volume down, revenue disconnected: H1 volume was 2% down; the revenue dip was driven by steel prices dropping sharply. Steel prices are now bottoming out and flattish.
• Core sector softness: Core sector growth has not been as exuberant as expected in the last few months; there are little signs of improvement in the last two weeks.
• H2 hope, not exuberance: Management remains hopeful of showing some good growth on an HY2 basis, but indicators are not yet at an exuberant level to show tremendous growth.
• Product growth elastic to IIP: If IIP is flattish at 3%–4%, the company cannot give 2x growth; as IIP moves to 7%–9%, growth can go to 12%–14%.
• M&R growth anchored: The M&R business is not one that outperforms IIP; growth rate is expected in the region of 10%, up or down a little bit.
• International business outperformed: Half-yearly sales grew 5%, while international business grew 19%.
• FPED steady state: The Flare, Purge, and Exothermic Devices business is expected to reach a minimum steady state of ₹30–₹40 cr annually, and should be in a position to be beyond that next year.

Aditya T. Malkani: "Indicators are there that it's better right now than it was then, for sure. I don't know if you're yet at an exuberant level to show tremendous growth, but on an HY2 basis, we remain hopeful we will be able to show some good growth."

Margin Recovery Roadmap

• Internal target of 3%–4% over 2–3 years: About 2% is seen as low-hanging fruit to be worked on for the next year; beyond that, another 2% requires a harder push, with the total 3%–4% improvement discussed internally to play out over 2–3 years.
• Drivers are within control: The improvement levers are product mix, cutting fat from the system, smarter handling of the services division, exports growing with the right product mix, and domestic investments paying off in realizations. Six or seven things are being worked on that need to keep hitting.
• Welding margins to push upward: After the Q2 aberration, welding margins are expected to return fairly fast to a steady-state level and push upward a few percent.
• M&R margins to normalize: The Q2 dip was due to some expenses; margins are expected to be closer to Q1 levels going forward.

Aditya T. Malkani: "It's product mix, it's fat being cut out the system. It's being smarter about how you handle your services division. It's exports growing with the right product mix as well. It's about the investments that we have made in domestic that pay off in terms of realizations. So there's 6, 7 things that we are working on that need to keep hitting."

Guidance & Commitments

Key Metrics