WEDNESDAY TELE FOLIO

CAPITA TELE RECOMMENDATION DT:08.08.07Ador Fontech

Adorable and affordable

In spite of being a niche engineering company growing sales, profits and dividends consistently every year, the company is available at a forward P/E of just 5.1

Buy
Ador Fontech

BSE Code
530431

NSE Code
Not listed

Bloomberg
CSFT@IN

Reuter
ADOF.BO

52-week High/Low
Rs 110 / Rs 62

Current Price
Rs 96 (as on 8th August 2007)


Ador Fontech (AFL) is an associate company of Ador Welding. It focuses on niche maintenance welding segment.

AFL was incorporated in August 1974, as Cosmics Fontech. It subsequently changed its name to Ador Fontech. In 1992, it acquired Fist India (P) Ltd and Kostech India Pvt Ltd. These companies were subsequently merged with the company as a division.

Sharp growth rates during lean season

The company has registered strong 19% growth in sales, 56% jump in operating profits and a whopping 117% growth in net profits for the first quarter ended June 2007.

While sales rose 19% to Rs 15.97 crore, OPM jumped by 180 basis points to 7.6%. Thus, operating profit jumped by 56% to Rs 1.22 crore.

PBT was up by 82% to Rs 1.09 crore. PAT soared 117% to Rs 65 lakh. June quarter is seasonally lean quarter for the company.

Revenues from the Products Division rose 14% to Rs 14.84 crore. It accounted for 92% of the company’s revenues for the quarter. PBIT from the same increased by 11% to Rs 2.07 crore. It accounted for 80% of the company’s PBIT.

Revenues from the Services Division rose 111% to Rs 1.29 crore. It accounted for 8% of the company’s revenues for the quarter. PBIT from the same increased by 300% to Rs 52 lakh. It accounted for 20% of the company’s PBIT.

Operational and financial efficiency lead growth

Factors that contributed to the growth include benign economic environment, major thrust on key product portfolios like repair welding and ceramics, focused training imparted by foreign principals and the Company's in-house training division ‘DOTES’ (Documentation, Training and educational Services), besides an overall improvement in the KSAO’s (Knowledge, Skill, Attitudes and Other attributes) of the employees.

On the financial front, the company repaid its entire borrowing on working capital, amounting to rupees three crores and forty lakhs (classified under secured loans). This may be deemed to be a major step in the area of operational efficiency.

Niche business on a consistent growth platform

Ador Fontech focuses on maintenance welding, which is a niche segment requiring specialised skills. It offers products and solutions for reclamation welding and recycling of vital machinery components.

The company caters to the ‘Life Enhancement of Vital Machinery Components’. The domain expertise in this sector calls for application of high level of skills covering metallurgy, chemical and repair welding processes. There are quite a few players in this market and competition is keen. Nonetheless, the underlying fact is the contribution that this segment offers to the world at large, in terms of conservation of depleting natural resources, which is substantial. Further, industries in general are benefited by way of greater productivity, resulting from lesser downtime. This unique predisposition, places the organisation on a consistent growth platform.

The company’s product basket includes filler wires, welding equipment/accessori es, wire feeders, wearplates and cladded pipes. Apart from manufacturing the said products the company also acts as a value added reseller for Alloy Steel International, Australia; Berkenhoff, Germany; CEA, Italy; Cepro, Netherlands; Degussa, Germany; Delora Stellite, Germany; Euromate, Netherlands; Gasflux, USA; Protector, Australia/Singapore ; Sulzer Metco, Swiz /USA for their products in India. It also offers high temperature process for maintenance products from AREMCO, USA for the repair and corrosion protection of metal and refractory materials. Ador Fontech supplies products and services to almost all the core sector and several engineering industries. The focus of its activities is to provide metal joining, reclamation welding and surfacing solutions.

Caters to almost all the core sectors and several engineering industries

Ador Fontech supplies products and services to almost all the core sectors and several engineering industries. Weld repair is commonly used to improve, update, and rework parts so that they equal or exceed the usefulness of the original part. Its major customer base includes mining industries, steel and other metallurgical complexes, power plants, railways, road transport workshops, shipping industries, sugar mills, cement plants, fertilizer and chemical plants, oil drilling and refining sector, defence units and numerous engineering industries.

Almost all its customers now have optimistic growth plans. Worldwide, the demand for metals, alloys and mineral resources is on the rise. This augurs well for Ador Fontech. The other opportunities are in the fields of high productivity welding and cutting systems, welding fume extraction systems, specialised surfacing and hard-facing alloys and deposition equipment.

High dividend yield

In FY 2007, the company gave dividend of Rs 5 per share. During the last 10 years, the company has never missed on dividends and in fact its dividend payout ratio has hovered in between 33% and 68%. This makes the company a high dividend yield stock.

Outlook

Strong growth in manufacturing, shipping and oil industries have increased the requirements of maintenance welding to make best use of available resources (machinery, ships and rigs). Moreover, better demand scenario has lead to old machinery and old factories to get back to operation, increasing the demand for maintenance welding. Increased activity in ship building industry also boosts demand for specialized and reclamation welding.

Further the number of steps initiated by the company to improve customer focus and continuous addition of world class brands to its product spectrum will help it fully capitalise on the better demand scenario.

An important segment of life enhancement solutions is repair and refurbishment, many organisations are strategically outsourcing these business functions. This offers great opportunities for growth and development. Further, technological developments are transforming business processes and operations at phenomenal speed. New product additions, ease in handling of machines/equipment etc. are providing new dimensions towards value added business solutions.

Looking ahead, the company plans to increase its value chain in the manufacture of low heat input welding alloys. The management believes that this coupled with other allied businesses, would provide the necessary growth momentum, that has been set in pace.

Valuation

On the financial front, the company has been a consistent performer with respectable sales and profitability right since 1992. Notably, even during the adverse times, it has never made losses and has always paid dividends.

The company has declared a dividend of 50% for the year ended March 2007 as against 40% in FY 2007. The company has increased dividend rate consecutively for the past four years. Going by the trend one can expect dividend of 60% for FY 2008, giving a dividend yield of 6.25% at the current price.

One can expect the company to report sales and net profit of Rs 92.31 crore and Rs 6.57 crore for FY 08. On a small equity of Rs 3.50 crore and face value of Rs 10 per share, EPS works out to a solid Rs 18.8.

Current price of Rs 96 discounts the FY 2007 actual EPS of Rs 14.6 just 6.6 times. P/E on FY 2008 EPS of Rs 18.8 falls to even more attractive 5.1 times. This means the company is available at a market cap of Rs 33.60 crore, which is only one-third of its expected FY 2008 revenues.

Ador Fontech: Financials





0403 (12)
0503 (12)
0603 (12)
0703 (12)
0803 (12 P)

Net sales
40.36
54.62
68.95
79.61
92.31

OPM (%)
6.7
7.9
11.2
10.8
11.3

OP
2.70
4.31
7.71
8.62
10.41

Other Inc.
0.91
0.93
1.06
1.11
1.16

PBIDT
3.61
5.24
8.77
9.73
11.57

Interest
0.50
0.44
0.32
0.34
0.14

PBDT
3.11
4.80
8.45
9.39
11.43

Dep.
0.79
0.92
1.06
1.04
1.10

PBT
2.32
3.88
7.39
8.35
10.33

Tax
0.81
0.99
2.94
3.23
3.77

PAT
1.51
2.89
4.45
5.12
6.57

EO
0.00
-0.99
0.00
0.00
0.00

PAT after EO
1.51
1.90
4.45
5.12
6.57

EPS* (Rs)
4.3
8.3
12.7
14.6
18.8

* Annualised on current equity of Rs 3.50 crore; Face Value: Rs 10
EPS is calculated on PAT without considering EO
Figures in Rs crore
EO: Extraordinary items (P): Projections
Source: Capitaline Corporate Databases




Ador Fontech: Results





0706 (3)
0606 (3)
Var. (%)
0703 (12)
0603 (12)
Var. (%)

Sales
15.97
13.46
19
79.61
68.95
15

OPM (%)
7.6
5.8

10.8
11.2


OP
1.22
0.78
56
8.62
7.71
12

Other inc.
0.16
0.16
0
1.11
1.06
5

PBIDT
1.38
0.94
47
9.73
8.77
11

Interest
0.00
0.07
-100
0.34
0.32
6

PBDT
1.38
0.87
59
9.39
8.45
11

Dep.
0.29
0.27
7
1.04
1.06
-2

PBT
1.09
0.60
82
8.35
7.39
13

Tax
0.44
0.29
52
3.23
2.94
10

Deferred Tax
0.00
0.01
-100
0.00
0.00
--

PAT
0.65
0.30
117
5.12
4.45
15

EPS* (Rs)
#
#

14.6
12.7


* Annualised on current equity of Rs 3.50 crore; Face Value: Rs 10
# EPS cannot be annualized due to seasonality in business
EPS is calculated on PAT without considering EO
Figures in Rs crore
EO: Extraordinary items
Source: Capitaline Corporate Databases




Ador Fontech: Segment results




Sales
0706 (3)
0606 (3)
Var. (%)
% to total
0703 (12)
0603 (12)
Var. (%)
% to total

Products
14.84
13.00
14
92
74.66
65.82
13
92

Services
1.29
0.61
111
8
6.06
4.19
45
8

Total
16.13
13.61
19
100
80.72
70.01
15
100

Less Inter segment revenue
0.00
0.00


0.00
0.00



Net sales
16.13
13.61

100
80.72
70.01

100

PBIT









Products
2.07
1.87
11
80
11.75
11.63
1
80

Services
0.52
0.13
300
20
2.85
2.08
37
20

PBT before tax and interest
2.59
2.00
30
100
14.60
13.71
6
100

Less: Interest
0
0


0.34
0.32



Less: Other unallocable income
1.50
1.33


5.91
6.00



EO
0.00
0.00


0.00
0.00



PBT
1.09
0.67
63

8.35
7.39
13


Capital Employed









Products
17.37
15.01
16
95
16.97
13.81
23
98

Services
0.82
0.33
148
5
0.42
0.68
-38
2

Total
18.19
15.34
19
100
17.39
14.49
20
100

Figures in Rs crore
Source: Capitaline Corporate Databases