This company does not add much value to what it produces
A long and uneventful history
The name ADOR in Ador Welding is an acronym for Advani Oerlikon. The latter half of the name is a Switzerland based company which was originally known as Oerlikon Buhrle. It was the erstwhile collaborators of ADOR. ADOR, then known as Advani Oerlikon-is a pioneer in India in welding equipment manufacture having been incorporated in 1951. It made a splash in the markets by making a public issue of capital sometime in the latter half of the 1980's. But, post listing, it never quite made its mark in the secondary markets. The situation is no different today. One reason for this state of affairs is that it has preferred to stay close to its knittings all along.
The company today boasts a paid up equity capital of Rs 136 m, made up of 1, 35, 98, 467 shares of Rs 10 each. The reserves and surplus are almost 12 times more. (The promoters control some 57% of the paid up equity-Reliance Capital Trustee Co. has made it to the status of one of the two promoters. The main promoters JB Advani & Company Pvt. Ltd hold a very strategically thought out 50.01% of the outstanding voting capital. The erstwhile Swiss collaborators have extinguished their holding in the company). The monthly trading pattern at the Bombay Stock Exchange where it is listed for trading shows for dismal volumes of trade. In most months it averaged total trades of well below 50,000 shares, though trading volumes peaked at 5.94 lac shares in July 2011. And for some reason, within this dismal volume of trade, the share price also managed a cart wheel of sorts by scaling a high of Rs 203 and touching a low of Rs 109 during the financial year.
Its revenue streams
Its business is apparently divided into three segments. The primary segment, as the name plate implies, is the welding equipment division, the second is the project engineering business, and followed by the welding application and technical centre. The gross revenues from operations amounted to Rs 3.7 bn during the year against Rs 3.2 bn previously. Besides the domestic market, the company is also an exporter of sorts. The foreign exchange revenues during the year amounted to Rs 340 m against Rs 278 m previously. The company makes do with five manufacturing plants located in four states, and one union territory. The company states that the traditional growth engines for the welding industry are in the industrial sectors of power projects, construction, infrastructure, and the automotive sector. The report adds that a major slowdown was observed in all these industries during the last financial year.
The company is suffering from a severe disability to generate value from the products that it hawks. This could be because of the niche market that it caters to, or even the point that it probably suffers severe competition from other domestic producers. Its market share within the industry is also unknown. The fact of the matter is that it suffers from the lack of pricing power arising from its inability to keep a tab on surging material input costs. It is more than unable to increase the end price of its products in line with the increase in material input costs. It is not known whether the exports that it affects are more profitable than its domestic sales, as companies are unfortunately not required to give a separate costing of its export sales.
Take a look at some of the figures on display. The net revenues from operations rose 15.5% to Rs 3.4 bn. But the cost of materials consumed, the largest item in the consumption basket by far rose much more sharply-by 24% to Rs 2.18 bn. Consequently the pre-tax profits fell sharply to Rs 281 m from Rs 357 m previously. Other income has a very minor play in the revenue schedule and amounted to Rs 35 m, inspite of the fact that the company is rolling all its surplus funds into debt instruments to garner dividend income streams, and also generate surpluses from the purchase/ sale of such securities. During the year it bought securities valued at Rs 757 m, and sold securities valued at Rs 661 m. To the company's credit it is completely debt free, but for which the bottom-line would have been a bit muddier. It manages its fixed asset acquisition entirely from funds generated from operating activities, which makes the risk return more favourable to the company. To be sure the sums that it spent on the topping up of its fixed assets during the year are fairly pedestrian.
But there are other factors at play which hinge on the company's ability to generate better margins, probably because of the type of business that it operates in. The various constituents to its revenues are electrodes, wires and fluxes, equipment and spares, and project engineering business. Finally there is a very small contribution from traded goods. Revenues from 'electrodes' accounted for 53% of all manufactured sales, followed by 'wires and fluxes' with another 24%. 'Equipment and spares' brought in another 17%, with 'project engineering' bringing in the balance 6% or Rs 192 m against Rs 130 m previously. The directors' report avers that the project business slipped to Rs 10 m from Rs 80 m previously. These figures differ widely from the revenues derived from projects in the breakup of revenues given earlier. One is unable to reconcile this anomaly.
For segmental revenue purposes the revenues are derived under two heads. There is the head under 'consumables'(consisting of electrodes, wires and agency items) which accounted for 77% of all revenues, and 'Equipments and Project Engineering' brought in the balance 23%. Excluding unallocable expenses of Rs 84 m the consumables business generated a net margin of only 10.8% against 16% previously. The equipment division also lost money in a sense. The margins were down to 11.5% from 12.5% previously. The prime reason for the decline in margins as stated earlier is the sharp rise in the input cost of materials. (The biggest cost increases here were recorded in 'wires and rods' which on the face of it grew 24.2%, and in 'titanium dioxide and ruffle sand' which rocketed 306%). The point is also that the outflow on account of forex jumped to Rs 197 m from Rs 116 m previously. This outflow was primarily towards the import of raw materials and components among other items, and the sharp fall in the rupee dollar parity would have added to its woes.
If on the one hand the company is facing a dead end in its effort to cobble together an adequate mark-up on its production costs, then there are other very pertinent factors too which weigh it down. On the one hand is the value of the gross block that it has to maintain to generate its revenues. The gross block at year end added up to Rs 2.05 bn. This gross block just about supported 'sales net of excise' of Rs 3.4 bn. The two major constituents of the gross block are 'plant and machinery' and 'buildings'. Plant and machinery for some reason is shown separately twice over in the fixed assets schedule. In one grouping the gross value is Rs 1.1 bn and in another grouping it is valued at Rs 93 m. The value of buildings is placed at Rs 531 m. These two items alone accounted for 86% of gross tangible fixed assets. The point is that the buildings per se do not generate revenues and the value is fairly substantial in the overall valuation.
Its working capital
The second point is the high level of current assets relative to current liabilities. The 'gross current assets' - excluding the holding in current investments stands at Rs 1.14 bn, against 'current liabilities including provisions' of Rs 562 m. Separately, the 'current investments' weighs in at Rs 328 m. The inventories valued at Rs 532 m accounts for a sizeable 47% of gross current assets, and trade receivables of Rs 366 m accounts for another 32%. (Trade receivables however accounted for only 10% of gross revenues generated from operations). More importantly, the trade payables at Rs 211 m were significantly lower than the trade receivables. Locking up working capital in this manner leads to less liquidity.
In this masala mix the company does have some minor inter-se deals with group companies. It purchased 'goods and agency items' worth Rs 130 m from its holding company JB Advani & Co Pvt. Ltd. It also sold minor value worth goods to the holding company and a slightly larger quantum to other group companies. Thankfully enough, it does not have any direct shareholding in any of its group companies - there are five such companies besides the holding company that is.
All in all this company represents very insipid fare
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.