Stock Pointer

Ador Welding Ltd. CMP Rs 210 P/E 7.0x FY2012E & BUY
Ador Welding Limited, one of the leading players in the welding consumables & equipment space is all set to benefit
from a pick up in the investment cycle in the core infrastructure space resulting in strong demand outlay for its welding
products. AWL is expected to exhibit a revenue & PAT CAGR of 24% & 26% for the period FY10-12 respectively on the
back of strong volume growth of 25% and capex in continuous welding equipment which is margin accretive. We value
AWL at 10x its FY12e earnings and initiate a BUY at CMP with a price target of Rs 298, representing a potential upside
of 42% over a 15-18 months horizon.

PRICE TARGET Rs 298/- (18 Months) ‰ Key Investment Highlights

Index Details
Sensex 17,833
Nifty 5,352 Volume expansion: key growth driver
Small Cap 9,270
In FY10 AWL clocked a volume growth of ~42% from 18,655 TPA in FY09 to
Industry Industrial Goods
Scrip Details ~24,000 TPA in FY10. Considering a further uptick in the demand for electrodes,
Mkt Cap (Rs in crore) 285.6 we expect a volume growth of 25% (on conservative basis) over the next two
Book Value (Rs) 110.4 years. With the volume growth set to kick in, the revenues in the welding
Eq Shares O/s (Cr) 1.4 consumables segment are expected to exhibit a CAGR of 26% from Rs 196
Avg Vol 37,833
crore in FY10 to Rs 310 crore in FY12.
52 Week H/L 222 / 107
Dividend Yield (%) 2.9 Capex in continuous welding segment to fuel further growth
Face Value (Rs) 10.0
With the demand for continuous electrodes outpacing manual electrodes, AWL
BSE Code 517041 has initiated a Rs 15 crore capacity expansion programme which would add
NSE Code ADORWELD
10,000 TPA of capacity space in the form of adding special wires. The main
purpose behind this expansion is to enable AWL to enter into high growth &
Shareholding Pattern (31st March, 2010) niche areas of welding application which includes nuclear power, super critical
Shareholders % holding boilers & some special steel applications. This would not only help in widening its
Promoters 56.3
Indian Institutions 10.7 product profile but would enable the company to improvise on its margins
FII’s 0.2 backed by low competition in these niche segments.
Non Promoter Corporate 4.3
Public 28.5 Uptick in infrastructure spending spells good opportunity for welding
Total 100.0 players
We are currently witnessing a strong pick up in the capex cycle across its user
Ador Welding vs. Sensex segments viz Steel industry, petrochemicals, fertilizer, hydro electric and thermal
power, nuclear power, ship building and heavy machinery, etc. This would
present increasing opportunities for the Welding players. AWL which has a
market share of ~23% is expected to be one of the biggest beneficiaries.

Clean balance sheet, Zero Debt Company with attractive return ratios
AWL has one of the cleanest Balance Sheets apart from being a debt free
company. Further it has a track record of paying dividend since more than 12
years with the current dividend yield placed at 2.8%. The ROE & ROCE which
stands at 18% & 26% respectively in is expected to further increase to 22% &
32% respectively in FY12e on the back of improved financial performance.

Key Financials
Y/E Mar Net EPS Growth ROCE RONW EV/EBIDTA
(Rs Crore) Revenues EBIDTA PAT EPS (%) (%) (%) P/E (x) (x)
FY10 260.7 46.0 25.6 18.8 110.5 26.1 18.2 11.2 6.0
FY11E 320.0 58.0 31.0 22.8 21.1 29.0 19.5 9.2 4.7
FY12E 400.0 73.0 40.5 29.8 30.6 32.3 22.2 7.0 3.7
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 Stock Pointer
AWL holds a unique position in the
organized welding industry with a
market share of 23%
Currently nearly 1/3rd of the revenues
come from the continuous electrodes
while the balance 2/3rd comes from the
manual electrodes
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Company Background
Ador Welding Ltd, incorporated in the year 1951, is one of India’s leading players
in the field of Welding Products Technologies & Services. The company has a
23% market share in the organized segment of the Indian welding industry.
AWL has two Technology Development Centers (TDCs) at Silvassa in the Union
Territory of Dadra & Nagar Haveli and at Chinchwad (Pune) in Maharashtra for
consumables and Equipment respectively, providing the company with
innovations, upgradations, improvements and cost reductions.
Business Profile
Ador Welding Limited is in the business of welding consumables (manual &
continuous), welding and cutting related products and services. AWL has six
manufacturing plants across India, a comprehensive distribution network with 26
sales offices, 8 field offices and 400 distributors.
The Company offers comprehensive welding solutions, which includes a wide
variety (over 200 types) of electrodes, fluxes, flux-cored wires and special
customized electrodes. It covers the need of a whole range of industries such as:
Steel, petro chemicals, fertilizer, hydro electric and thermal power, nuclear
power, ship building and heavy machinery.
AWL’s Revenue Streams
AWL’s Revenue Mix
(100%)
Welding Consumables Welding Equipment &
(75%) Project Group (25%)
Welding Equipment Project Group
(80%) (20%)
Welding Consumables:
This segment is into manufacturing of welding consumables which include
electrodes, fluxes, flux cored wires and special customized electrodes. Four
years back, AWL was only into manufacturing of manual electrodes. However
with the demand for continuous welding coming into fore, AWL had set up a
facility for manufacturing of continuous electrodes with an investment of Rs 70
crore.
Currently nearly 1/3rd of the revenues from this segment come from the
continuous electrodes while the balance 2/3rd comes from the manual
electrodes. Currently the total capacity of electrodes (manual as well as
continuous) stands at 52,000 tons.
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Stock Pointer
Products under Welding Consumables segment:

Shielded Metal Arc Welding (SMAW): These are Stick Electrodes which comes
under the Manual Welding segment. Types & Applications of SMAW electrodes
are as under:

Types of SMAW Electrodes Typical Applications

Mild Steel Electrodes Steel structures & tanks, Truck frames & bodies,
ships, pipelines, automobile bodies, bridges,
boiler tubes, pressure vessels, railway wagons,
construction equipments, etc

Low Alloy High Tensile Steel Welding of steel used in refineries, power plants,
Electrodes chemical plants, pressure vessels, heat
exchangers, boilers, fertilizer plants, pipelines,
bridges & heavy structures, earth moving
equipments, etc

Hard Facing Electrodes For reclamation (repairing) of Gears, Pinion teeth,

Pulleys, Shafts, Sugarcane crushers, Spindles,
Conveyor parts, Axles, crane wheels, Mine rails,
Cement grinding rings, etc

Stainless Steel & Heat For Fabrication of equipments in Refineries,

Resisting Steel Electrodes Chemical Industry, Power plants, Paper & Pulp
Industry, Paint & Dye industries & Apparatus /
Equipment for household, soap, hospital, brewery
industry, etc

Non Ferrous Electrodes For welding of Copper, bronze, aluminium alloys,

Nickel steel for applications in Refineries,
Offshore, Fertilizers, Foundries, Food processing
units, Pump & Valves manufacturing units,
chemical plants, etc

Cast Iron Electrodes Welding & Repairing all cast iron components well
suited for gears, machinery parts, pump bodies,
etc

Cellulosic Electrodes Welding of cross country pipelines

Gas-Shielded Tungsten Arc Welding (GTAW): These are TIG Welding Wires
which comes under the Continuous Welding segment. GTAW Wires are solid
wires for TIG Welding of Carbon Steel, Low Alloy Steel & Stainless Steel.

Application – Welding of pipes & tubes in Power Plants, Refineries,

Petrochemicals & Fertilizer Plants.

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Stock Pointer
Gas-Shielded Metal Arc Welding (GMAW) / Flux Cored Arc Welding
(FCAW): These are Wires which comes under the Continuous Welding segment.
Types & Applications of GMAW / FCAW Wires are as under:

Types of GMAW /
Typical Applications
FCAW Wires

Solid Wires for MIG / Wide applications in automotive industry, construction &
MAG Welding mining equipment, railway wagons & coaches, etc. Also
suitable for welding pipe, pressure vessels, LPG
cylinders, pre-engineered buildings and structural steel
components

Flux Cored Wires for MIG Welding of mild steel & carbon steel for fabrication of
/ MAG Welding machinery, structures, steel frames, ships, vehicles,
bridges, towers, chemical plant machinery, rolling stocks,
cans, etc

Submerged Arc Welding (SAW): These are Wires & Fluxes which comes
under the Continuous Welding segment. SAW Wires & Fluxes are used for
welding of structures, pressure vessels & boilers, machine building, automobiles,
locomotives, earth moving equipment, LPG cylinders, etc.
Welding Equipment & Project Group
This segment includes Equipments, Spares, Cutting Products and agency items
related to Equipment and cutting products. Apart from the welding equipment,
this segment also has a Project Engineering Division (PED) which undertakes
Engineering, Procurement and commissioning of flares, incinerators, furnaces,
etc.
Welding Equipment
Products under Welding Equipment segment:
Products Scope & Applications
AC Arc Welders Extensively used as power sources for most of the
manual metal arc welding jobs with bare rods and coated
electrodes. Typically used for light, medium & heavy
purpose structural work, machine building and fabrication
work
Welding Motor Suitable for welding with Cellulosic electrode, particularly
Generator for cross country petroleum & natural gas pipelines and
thermal & nuclear power plants
Welding Rectifier Sets These sets are fully electronically regulated transformer
rectifier units suitable for manual arc welding process
MIG / MAG Welding Suitable for wide range of metals like carbon steel,
outfits stainless steel and aluminium & ideal for auto ancillary
units for increased productivity & quality welding
TIG Welding outfits These outfits are available for AC/DC or DC applications.
The heat required for effective welding is provided by the
electric arc inside the outfits
Diesel Engine Welding These unique welding generating sets are specifically
sets designed to meet the stringent demand of quality welding
in assembly work, repair maintenance & pipe welding
applications
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Stock Pointer
Apart fro the welding equipment, the welding equipment segment also
manufactures cutting equipment, accessories & spares as under:
Products Scope & Applications
Cutting Equipment Extensively used for automotive repairs, general
fabrication, bus & coach body building, railways & road
transport workshops, power stations, chemical,
petrochemicals or fertilizer industries, sheet metal
fabrication, food processing equipment manufacturing,
scarp cutting, ship breaking, etc
Cutting Accessories These accessories include gas cutting torches, gas
welding blowpipe, machine mounted gas cutting torch,
gas cutting outfits, etc
Spares These include regulator cum flow meter, electrode
drying oven, wire feeders, MIG/MAG Torches & TIG
Torches

Project Engineering Group

ADOR PROEN is the Project Engineering Division of AWL. With over two
decades of proven expertise, this division is engaged in providing customized
solutions for projects & contracts related to Refineries/ Oil & Gas/
Petrochemicals/ Fertilizers/ Steel plants, etc.
Areas of Specialization:
1. Combustion Engineering: Products & Applications
Product Significance Applications
A. Flares Flares are used for safely For burning hydrocarbon
burning waste/ excess gases, ammonia, coke
gases components oven gas, Bio gas or any
other combustible Gas.
AWL is the largest supplier
of flares for the Indian
Steel Industry
B. Burners Basic heating applications For Industrial applications

2. Thermal Engineering: Products & Applications

Product Significance Applications
A. Industrial Furnaces These are high velocity For Stress relieving,
burners with sophisticates hardening, annealing,
control & instrumentation tempering, re-heating,
and are energy efficient & drying and Pre-heating
eco friendly
B. Cremation Furnaces It is a disposal system that For cremating bodies in
can ethically & the crematorium
satisfactorily undertake a
cremation while making
process fast, hygienic,
economical & eco-friendly
C. Incinerators Incinerators are designed For disposal of waste
for safe and economical generated by hospitals,
disposal of human and/or clinics, nursing homes and
animal waste research/industrial labs
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 Stock Pointer
3. Fabrication Engineering

Products under this segment include:

Pressure Vessels
Column & Boom
Rotators & Positioners
Manipulator for Assembled Bogie

AWL’s Product Portfolio, Competitors & Market Share

AWL’s Market
Product Portfolio Competitors
Share
ESAB India, D&H Welding, General
Welding Consumables *23%
Electrodes, Lincoln Electric

ESAB India, Memco Machinery

Welding Equipment 13%
Mart, Imports

Airoil Flaregas (India), Combustion

Flares 55%
Technologies

Airoil Flaregas (India), Callidus

Burners NA
Technologies Inc

Furnaces L&T, BHEL, Thermax NA

Incinerators L&T, Petron Engineering, Punj Lloyd NA

Alstom Projects, BHEL, L&T, Godrej

Pressure Vessels NA
& Boyce, etc

* Market share related to organized market

Investment Arguments

♦ Capex in continuous welding segment to fuel further growth

AWL’s welding consumables segment has an installed capacity of 52,000 tons

AWL has initiated a capacity expansion
programme which would add 10,000
TPA of capacity in the continuous
electrode space at a cost of Rs 15 crore
per annum (TPA), with 22,000 TPA for manual electrodes & 30,000 TPA for
continuous electrodes. With the demand for continuous electrodes outpacing
manual electrodes, AWL has initiated a Rs 15 crore capacity expansion
programme which would add 10,000 TPA of capacity in the continuous electrode
space in the form of adding special wires. This expansion is likely to be
completed by FY11 which would take the total installed capacity to 62,000 TPA
(22,000 TPA – Manual Electrodes & 40,000 TPA – Continuous electrodes).
The main purpose behind this expansion is to enable AWL to enter into high
growth & niche areas of welding applications which includes nuclear power,
super critical boilers & some special steel applications. This would not only help
in widening its product profile but would enable the company to improvise on its
margins backed by low competition in these niche segments.

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 Stock Pointer
♦ Volume expansion: key growth driver
The current capacity utilization in the welding consumables segment stands at
46%. With the pick up in the capex cycle across all its user industries viz Steel,
petro chemicals, fertilizers, hydro electric and thermal power, nuclear power,
ship building ,heavy machinery, steel, defense, automobiles, general fabrication
and engineering industries, we believe that AWL is all set to witness a decent
volume growth over the next two years.
It may be noted that in FY10, AWL clocked a volume growth of ~42% from
18,655 TPA in FY09 to ~24,000 TPA in FY10. Considering a further uptick in the
demand for electrodes, we expect a volume growth of 25% (on conservative
Considering a further uptick in the
basis) over the next two years. With the volume growth set to kick in, the
demand for electrodes, we expect a
revenues in the welding consumables segment is expected to move up from Rs
volume growth of 25% (on conservative
196 crore (30,000 TPA) in FY10 to Rs 310 crore (37,500 TPA) in FY12:
basis) over the next two years
Welding Consumables: Volume & Revenue Growth
350 37,500 40,000
300 30,000 35,000
30,000

Volumes (Tons)
Net Revenues

250 24,000
25,000
200 18,655 16,966
20,000
150
15,000
100
10,000
50 5,000
0 -
FY08 FY09 FY10 FY11e FY12e

Revenues Volume

Revenue Mix: Present & going forward

The welding consumables segment currently contributes 75% of the total
revenues where as rest is accounted for by the Equipment and Project
engineering division. Further in the latter segment, 80% of the revenues is
contributed by the welding equipment while the balance comes from the Project
Engineering Division (PED) (more than 80% is contributed by Flare Systems in
the PED). It may be noted that nearly 2/3rd of the revenues in the welding
Going forward we expect the welding consumables segment is accounted for by the manual electrodes while the
consumables to increase its share from balance from the continuous electrodes.
current 75% to 77.5% in FY12e Revenue Mix
450 400
400
350 320 90
261 261
300
224 75
250
92 65
200 59
150 310
245
100 169 196
165
50
0
FY08 FY09 FY10 FY11e FY12e

Welding Consumables Welding Equipment & Project Engg

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 Stock Pointer
Going forward we expect the welding consumables to increase its share from
current 75% to 77.5% in FY12e while that of the Welding equipment & Project
Group to reduce from the current 25% to 22.5% in FY12e.

♦ Exports to witness marginal growth

Over the years AWL’s exports have been mainly to the Oil producing Gulf
countries. The slow-down in these oil-based economies had adversely affected
its business over the last 15-18 months. Consecutively its exports had taken a
hit, falling from Rs 35 crore in FY08 to Rs 24 crore in FY10.
AWL Exports

450.0 16.0

E xports % to Net Revenues

400
400.0 14.0
350.0 320
12.0
Net Revenues

300.0 261 261

224
10.0
250.0
We expect AWL’s exports to remain 8.0
200.0
under pressure with marginal growth 150.0
6.0
from Rs 24 crore in FY10 (9.2% of the 100.0 4.0
total turnover) to Rs 32 crore (9.2% of 35 33 24 26 32
2.0
50.0
the total turnover) in FY12
- -
FY08 FY09 FY10 FY11e FY12e

Net Reveneus Exports % to Revenues

In its quest to expand geographies, AWL in FY10 has made inroads in Sudan,
Vietnam & Indonesia by exporting welding consumables & equipments. Further
the company is currently putting in efforts to add newer markets which include
Saudi Arabia & Africa in FY11.

With exports yet to pick up considering the sluggish market environment

prevalent in the Gulf countries, we expect AWL’s exports to remain under
pressure with marginal growth from Rs 24 crore in FY10 (9.2% of the total
turnover) to Rs 32 crore (9.2% of the total turnover) in FY12.

♦ AWL- AMET Alliance: Would enable AWL to enter into high end
automation space

In February 2010, AWL entered into an alliance with US based Advanced

Manufacturing Engineering Technologies (AMET) for offering critical welding
applications, particularly the high end automation segment for serving Indian as
This tie up would thus result in AWL
well as the Middle East markets.
coming out with a slew of niche
products over the next few years
Since 1989 AMET Inc. has been an innovator and integrator of advanced
thereby expanding its product segment
welding systems to meet the most demanding applications. It has developed
& also adding niche markets
complete set of welding fixtures in high end automation areas which include
nuclear, aircraft, aerospace, oil & gas, wind tower, heavy industry and general
manufacturing industries.

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 Stock Pointer
This tie up would help AWL coming out with a slew of niche products over the
next few years thereby expanding its product segment & also adding niche
markets / verticals to its existing offerings leading to enhanced sales volumes &
better product differentiation as compared to its peers.

♦ Clean balance sheet, Zero Debt Company with good return ratios
AWL has one of the cleanest Balance Sheets apart from being a debt free
company. Further it has a track record of paying dividend for more than 12 years
with the current dividend yield placed at 2.8%. The ROE & ROCE which stands
at 18% & 26% respectively in FY10 look impressive as well and are expected to
increase to 22% & 32% respectively in FY12e.

Impressive Financial Performance

AWL’s net revenues for Q4FY10 jumped by 20% to Rs 83.4 crore from Rs 69.5
crore registered in Q4FY09. The revenue growth was attributable to higher
volume growth in both welding consumables as well as welding equipment &
project group segments. PAT for the company was also up 7080% at Rs 10.8
crore from Rs 0.2 crore on the back of expansion of EBIDTA margins by 1,010
bps from 8.4% to 18.5% driven by better operational efficiencies.
For FY10, net revenues jumped 16.5% from Rs 223.8 crore to Rs 260.7 crore.
The operating margins expanded by 120 bps from 16.4% in FY09 to 17.6% in
FY10. AWL posted PAT of Rs 25.6 crore for FY10 as compared to Rs 12.2 crore
registered in FY09, a YoY growth of 110.5%. EPS for FY10 stood at Rs 18.8 as
against Rs 8.9 in the corresponding period of the previous year.

Financial Outlook

Led by robust volume growth of 25% in the welding consumables segment, the
total revenues of AWL are expected to grow at a CAGR of 24% from Rs 260.7
crore in FY10 to Rs 400 crore in FY12e. The Welding Consumables segment
would continue to drive the revenues with a lion’s share of 77.5% in FY12e
(FY10 share at 75.2%).
Actuals & Projections: Net Revenues & Margins
18.3
500 18.1 18.5
17.6 18.0
Net Revenues

Led by decent volume growth of 25% in 400

17.5

OPM (%)
the welding consumables segment, the 300 16.3 16.4 17.0
total revenues of AWL is expected to 200 16.5
grow at a CAGR of 24% from Rs 260.7 16.0
100
crore in FY10 to Rs 400 crore in FY12e 261 224 261 320
15.5
400
0 15.0
FY08 FY09 FY10 FY11e FY12e

Net Revenues OPM (%)

We expect the OPM to improve from the current levels of 17.6% to 18.3% by
FY12 on the back of better capacity utilization & AWLs expected entry into high
end automation segment in the welding consumables space. PAT is expected to
show a CAGR growth of 26% from Rs 25.6 crore in FY10 to Rs 40.5 crore in
FY12. EPS for FY11e & FY12e is pegged at Rs 22.8 & Rs 29.8 respectively.
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 Stock Pointer
Peer Review

Parameters – Full Year AWL Esab India D&H Welding

Year Ending March 2010 December 2009 March 2010
Financial Snapshot – Annual

Net Revenues 260.7 420.6 52.1

YoY Growth 16.5 (0.5) 7.5
EBIDTA 46.0 100.8 3.1
YoY Growth 25.3 11.3 (31.8)
EBIDTA (%) 17.6 24.0 5.9
PAT 25.6 66.2 1.6
YoY Growth 110.5 8.2 (37.4)
NPM (%) 9.8 21.4 3.0

Financial Snapshot – Quarter ended March 2010

Net Revenues 83.4 114.6 15.3

AWL has outperformed its peers in
terms of its financial performance (full YoY Growth 20.0 8.2 15.2
year as well as March 2010 quarter). EBIDTA 15.4 23.7 1.3
Further there is also scope for AWL to
YoY Growth 164.2 (11.8) (10.0)
improve on its margins
EBIDTA (%) 18.5 20.6 8.2
PAT 10.8 14.4 0.7
YoY Growth 7080.0 (11.9) (20.5)
NPM (%) 12.9 12.6 4.5

Valuation Ratios

EPS – TTM 18.8 34.8 1.6

CMP 210.0 612.0 28.0
PE – TTM 11.2 17.6 17.5
EV / EBIDTA 6.0 10.6 9.2
Dividend Yield (%) 2.9 3.3 3.6
Market Cap / Sales (x) 1.1 2.8 0.5
Price / Book Value 1.9 9.1 1.1
Debt / Equity (x) 0.0 0.0 0.1

As marked in the cells above, we believe that apart from being attractively
valued, AWL has outperformed its peers in terms of its financial
performance (full year as well as March 2010 quarter). Further there is also
scope for AWL to improve on its margins as the capacity utilization is
expected to improve with decent volume growth of 25% projected over the
next two years.
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 Stock Pointer
Industry Outlook - Domestic Scenario

Welding Consumables Market

At present the size of the Indian welding consumables market is nearly Rs 18
billion. The domestic Welding Consumables industry is highly fragmented with
50% being shared by hundred’s of unorganized (small & regional) manufacturers
while the balance is accounted by the organized players like AWL, ESAB, D&H
Welding etc. Currently AWL’s share in the organized market stands at 23% while
ESAB has a market share close to 35%.
D &H We lding, 6 %

We believe that Welding Consumables ESA B , 35%

market should grow at a blended CAGR
Uno rga nize d
of 15-16% p.a. for a period of next 2-3 O rga nize d
M a rk e t , 5 0 % M a rk e t , 5 0 % O t he rs , 3 6 %
years led by the continuous electrodes
segment A WL, 2 3 %

In FY10, the Welding consumables industry grew at around 13-14% with manual
electrodes growing at 9-10% while continuous electrodes outpaced the growth of
manual electrodes by clocking a growth of 19-20%. With the infrastructure
spending likely to grow at a brisk pace, we believe that this market should grow
at a CAGR of 15-16% p.a. for a period of 2-3 years.

Welding Equipment Market

On the other hand, the size of the Indian welding equipment market is around Rs
10 billion. Here too, the industry is faced with unorganised sector claiming 50%
of the market share. Of the organized market (valued at Rs 5 billion) AWL’s
share stands at 13% while ESAB’s share is ~23%. Imports constitute a large
portion of the organized market, currently contributing around Rs 2 billion (40%
market share).

The Indian welding equipment market

earned revenue of $208 million in 2008
Impo rts, 40%
and is estimated to reach $311.5 million
in 2015, signifying a CAGR of 6%
Uno rganized Organized
M arket, 50% M arket, 50% ES A B , 23%

Others, 24%

A WL, 13%

According to the business research & consulting firm Frost & Sullivan, the
Indian welding equipment market earned revenue of $208 million in 2008 and is
estimated to reach $311.5 million in 2015, signifying a CAGR of 6%.

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 Stock Pointer
Domestic Growth Drivers
Welding consumables & equipment caters to the need of a whole range of
industries such as steel, petrochemicals, fertilizers, hydro electric and thermal
power, nuclear power, ship building, heavy machinery, defense, automobile,
general fabrication and engineering. The growth in these sectors is merely the
reflection of how the Index of Industrial Production (IIP) shapes up in the
economy.

Recovery post
18 global slowdown
16
14
12
The recent surge in investment in core
10
infrastructure sectors would present
increasing opportunities for the Welding 8

players. AWL which has a market share 6

of ~23% is expected to be one of the 4
biggest beneficiaries 2
0
-2
-4
Jan-07
Feb-07
Mar-07

Jun-07

Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08

Jun-08

Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09

Jun-09

Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
May-07

Jul-07

May-08

Jul-08

May-09

Jul-09
Sep-07

Sep-08

Sep-09
Apr-07

Aug-07

Apr-08

Aug-08

Apr-09

Aug-09

Apr-10
IIP (%)

The country is, at present, witnessing a surge in investments in the core

infrastructure sectors which have a combined weight of 26.7% in the Index of
Industrial Production. This would present increasing opportunities for the
Welding players. AWL which has a market share of ~23% is expected to be one
of the biggest beneficiaries.

Global Welding Consumables & Equipment Market – Industry Size &

Growth Rate
The global market for welding equipment and consumables increased from
$12.7 billion in 2007 to $13.2 billion by the end of 2008. It is estimated to reach
$16.9 billion by 2013, a compound annual growth rate (CAGR) of 5%.
The global market for welding Global Welding Consum ables & Equipm ent Market
equipment and consumables increased
from $12.7 billion in 2007 to $13.2 billion 18 16.9
by the end of 2008. It is estimated to 16
reach $16.9 billion by 2013, a compound 13.2
Mkt Size ($ billion)

14 12.7
annual growth rate (CAGR) of 5%. 12
10
8
6
4
2
0
CY07 CY08 CY13

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Stock Pointer
Key Concerns

ƒ Slowdown in the growth of its user industries may lead to slower

demand growth for AWL’s products and thus may impact the revenue
and profitability of the company.
ƒ Fragmented industry structure comprising of huge number of small and
regional unorganized players may lead to unhealthy competition and
price wars which may impact company’s margins and profitability.
However with the company present in high end welding segments & also
consistently coming out with new product launches and that too in niche
areas, we believe AWL has been & will be able to mitigate this hardship.

Valuation & Recommendation

Ador Welding Limited, one of the leading players in the welding consumables &
equipment space, is all set to benefit from pick up in the investment cycle in the
core infrastructure space resulting in strong demand outlay for its welding
products. With the volume growth of 25% forecasted for next two years, AWL is
expected to exhibit a revenue & PAT CAGR of 24% & 26% from FY10 to FY12
respectively. We recommend a BUY on the stock at CMP with a price target
of Rs 298, an upside of 42% for 15-18 months horizon.

P/E Chart

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EV/EBIDTA Chart

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 Stock Pointer
Exhibit 01: Financials and Projections

Profit & Loss Statement Key Ratios

Y/E March, Fig in Rs. Cr FY2010 FY2011e FY2012e Y/E March, Fig in Rs. Cr FY2010e FY2011e FY2012e
Net Sales 261.5 320.0 400.0 Per Share Data (Rs)
% Chg. 16.1 22.4 25.0 EPS 18.8 22.8 29.8
Total Expenditure 215.5 262.0 327.0 Cash EPS 28.5 33.8 43.0
% Chg. 14.3 21.6 24.8 DPS 6.0 7.0 8.0
EBDITA 46.0 58.0 73.0 Book Value 109.3 124.0 144.4
EBDITA Margin % 17.6 18.1 18.3 Capital, Liquidity, Returns Ratio
Other Income 3.9 3.0 4.0 Debt / Equity (x) 0.0 0.0 0.0
PBDIT 49.9 61.0 77.0 Current Ratio (x) 2.2 2.3 2.3
Depreciation 13.1 15.0 18.0 ROE (%) 18.2 19.5 22.2
Interest 0.6 1.0 1.0 ROCE (%) 26.1 29.0 32.3
PBT 36.1 45.0 58.0 Dividend Yield (%) 2.8 3.3 3.8
Tax Provisions 10.5 14.0 17.5 Valuation Ratio (x)
Reported PAT 25.6 31.0 40.5 P/E 11.2 9.2 7.0
PAT Margin (%) 9.8 9.7 10.1 P/BV 1.9 1.7 1.5
EV/Sales 1.1 0.8 0.7
EV/EBIDTA 6.0 4.7 3.7
Raw Materials / Sales (%) 56.8 56.3 56.5 Efficiency Ratio (x)
Employee Exp / Sales (%) 9.7 10.0 9.8 Inventory (days) 99 101 97
Other Mfr. Exp / Sales (%) 16.0 15.6 15.5 Debtors (days) 23 31 37
Tax Rate (%) 29.2 31.1 30.2 Creditors (days) 69 71 73

Balance Sheet Cash Flow Statement

Y/E March, Fig in Rs. Cr FY2010e FY2011e FY2012e Y/E March, Fig in Rs. Cr FY2010e FY2011e FY2012e
Share Capital 13.6 13.6 13.6 Profit After Tax 25.6 31.0 40.5
Reserves & Surplus 133.9 153.8 181.6 Depreciation & W/o 13.1 15.0 18.0
Minority Interest 0.0 0.0 0.0 Working Capital Changes -11.7 -18.4 -14.4
Total Loans 0.0 0.0 0.0 Others 0.0 0.0 0.0
Deferred Tax Liability 1.2 1.2 1.2 Operating Cash Flow 27.0 27.6 44.1
Total Liabilities 148.7 168.6 196.4 Capital Expenditure -13.3 -13.0 -18.0
Change in Investment 0.0 0.0 -10.0
Gross Block 192.0 207.0 225.0 Others 0.0 0.0 0.0
Less: Acc. Depreciation 111.5 126.5 144.5 Cash Flow from Investing -13.3 -13.0 -28.0
Net Block 80.5 80.5 80.5 Proceeds from equity issue 0.0 0.0 0.0
Capital Work in Progress 12.0 10.0 10.0 Inc/(Dec) in Debt 0.0 0.0 0.0
Intangible Assets 0.0 0.0 0.0 Dividend Paid -9.5 -11.1 -12.7
Investments 0.0 0.0 10.0 Cash Flow from Financing -9.5 -11.1 -12.7
Net Current Assets 56.2 78.1 95.9 Net Change in Cash 4.2 3.5 3.4
Misc. Expd not w/o 0.0 0.0 0.0 Opening Cash Balance 7.5 11.7 15.2
Total Assets 148.7 168.6 196.4 Closing Cash Balance 11.7 15.2 18.6

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Stock Pointer
STUDY SECTION
What is an Electrode?
It can be any one of these:

• The flux coated rod in manual metal arc welding

• The tungsten in TIG welding
• The consumable wire in MIG / MAG welding

Why use welding?

• One of the most cost-effective methods of joining metal components

• Suitable for thicknesses ranging from fractions of a millimeter to a third of a meter
• Versatile, being applicable to a wide range of component, shapes & sizes
• Joints produced by welding are permanent, strong, leak tight, reproducible and readily inspected

Process of welding:
A large number of welding processes and techniques are available. No process is universally the best. Each has
its own special attributes and must be matched to the application. Choosing the most suitable process requires
consideration of a number of factors viz type of metal, type of joint, equipment availability, labour availability, cost
of consumables, labour costs, etc.

Arc Welding Process: Arc welding uses a welding power supply to create an electric arc between an electrode
and the base material to melt the metals at the welding point. They can use either direct (DC) or alternating (AC)
current, and consumable or non-consumable electrodes. The welding region is sometimes protected by some
type of inert or semi-inert gas, known as a shielding gas, and/or an evaporating filler material. The process of arc
welding is widely used because of its low capital and running costs. Some of the processes widely used are as
under:

Shielded Metal Arc Welding (SMAW) is an arc welding process in which coalescence of metals is
produced by heat from an electric arc that is maintained between the tip of a consumable covered
electrode and the surface of the base metal in the joint being welded. SMAW is one of the widely used
processes, particularly for short welds in production, maintenance and repair work.

Gas Shielded Metal Arc Welding (GMAW), also referred as Metal Inert Gas (MIG) welding or Metal
Active Gas (MAG) welding, is a semi-automatic or automatic arc welding process in which a continuous
and consumable wire electrode and a shielding gas are fed through a welding gun. A constant voltage,
direct current power source is most commonly used with GMAW. Originally developed for welding
aluminum and other non-ferrous materials, GMAW was soon applied to steel because it allowed for lower
welding time compared to other welding processes. Today, GMAW is the most common industrial welding
process, preferred for its versatility, speed and the relative ease of adapting the process to robotic
automation. The automobile industry in particular uses GMAW welding almost exclusively.

Gas Shielded Tungsten Arc Welding (GTAW), also known as tungsten inert gas (TIG) welding, is an
arc welding process that uses a non consumable tungsten electrode to produce the weld (The tungsten
electrode is not consumed but produces the intense heat required to weld and a separate filler rod is used
for filling in the joint). The weld area is protected from atmospheric contamination by a shielding gas and
a filler metal is normally used, though some welds.

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 Stock Pointer
GTAW is most commonly used to weld thin sections of stainless steel and non-ferrous metals such as
aluminum, magnesium, and copper alloys. The process grants the operator greater control over the weld
than competing procedures such as shielded metal arc welding and gas metal arc welding, allowing for
stronger & higher quality welds.

Flux-cored arc welding (FCAW)

FCAW which is a semi-automatic or automatic arc welding process requires a continuously-fed

consumable tubular electrode containing a flux and a constant-voltage welding power supply. An
externally supplied shielding gas is sometimes used, but often the flux itself is relied upon to generate the
necessary protection from the atmosphere. The process is widely used in construction because of its high
welding speed and portability. The flux core in the tubular consumable electrode contains more than just
flux. It also contains various ingredients that when exposed to the high temperatures of welding generate
a shielding gas for protecting the arc. This type of FCAW is attractive because it is portable and generally
has good penetration into the base metal.

Submerged Arc Welding (SAW)

Submerged arc welding (SAW) is a common arc welding process which requires a continuously fed
consumable solid or tubular (flux cored) electrode. The molten weld and the arc zone are protected from
atmospheric contamination by being submerged under a blanket of granular fusible flux consisting of lime,
silica, manganese oxide, calcium fluoride, and other compounds. When molten, the flux becomes
conductive, and provides a current path between the electrode and the work. This thick layer of flux
completely covers the molten metal thus preventing spatter and sparks as well as suppressing the
intense ultraviolet radiation and fumes that are a part of the shielded metal arc welding (SMAW) process.

Current share of Welding Processes in India

The share of SMAW process though having decreased over the last decade still remains the dominant welding
process with the current share estimated at 65% while the share of GMAW has gradually gone up to 27%. The
share of SAW and GTAW / others have been hovering at around 7% & 1% respectively.

Ventura Securities Limited

Corporate Office: C-112/116, Bldg No. 1, Kailash Industrial Complex, Park Site, Vikhroli (W), Mumbai – 400079

This report is neither an offer nor a solicitation to purchase or sell securities. The information and views expressed herein are believed to be reliable, but no
responsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in or have positions in the securities mentioned in their
articles. Neither Ventura Securities Limited nor any of the contributors accepts any liability arising out of the above information/articles. Reproduction in whole or
in part without written permission is prohibited. This report is for private circulation.
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- 16 - Monday, 12 July, 2010

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