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Focusing on core welding business to regain growth...

We recently attended the analyst meet of Ador Welding (AWL). AWL aims to focus on core welding business, reduce legacy costs while streamlining projects business to regain growth momentum and improve profitability. In the domestic welding business, it aims to focus on improving margins, realisations with reconfiguration of manufacturing systems, cost rationalisation, advanced product developments, reduction of logistics costs and optimised product mix. In welding automation business, it aims to focus on improving strike ratio of orders, enhance product portfolio. In projects business, it aims to focus on flares, process equipment business, stable revenue growth, increase margins, better cash flows and reduced costs.

Consumable, equipment business to drive long term growth…

In Q4FY21, consumables segment revenue came in at | 122.2 crore (which contributes ~76% to revenue), up 14.3% YoY, 14% QoQ while equipment segment grew 49.6% to | 26.6 crore YoY. Consumables segment is expected to sustain EBIT margins in the ~15-16% range and RoCE in the 35- 40% range aided by mix of operating efficiencies, product mix and execution ramp-up in infrastructure and manufacturing sectors amid economic recovery. For FY21, consumable segment volumes declined ~15% YoY to ~37736 MT. We expect consumables volumes to grow at ~8% CAGR to 43525 MT in FY23E. Also, equipment segment EBIT margin improved to 17.4% aided by demand revival.

Clean-up of projects business to aid PAT, RoCE…

While projects business revenue declined 19.2% to | 13.1 crore, it is EBIT positive with 7.8% margin (vs. | 8.2 crore EBIT loss in Q3FY21) indicating a turnaround. In FY21, this segment reported revenue at | 24.7 crore, down 47.4%, YoY badly affected by project headwinds. However, we expect projects business focus to be on project closures of legacy projects and focus only on profitable projects in flares and process equipment, going forward. AWL has provided | 15.5 crore as provision for doubtful debt and bad debt written off in projects business as one-time clean-up of books. The provision was made towards cost overrun in a few international projects.

Valuation & Outlook

AWL reported a consistent performance in the consumables segment while equipment business rebounded with margin improvement and projects business registered positive EBIT, indicating a better performance, going ahead. Debt, working capital position improved further. We believe better sales volumes in consumables, rebound in equipment sales and projects business turnaround would drive growth and profitability in coming years. We value AWL on 20x FY23E EPS and arrive at a revised target price of | 735 (earlier | 590) and maintain our BUY rating.

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