Ador Fontech

25Apr10

The problem one has with small caps is the lack of proper disclosures or analysis in their Annual Reports and Ador Fontech is no exception. It is absolutely impossible understand what business this company is into from their annual reports and MD&A. They are extremely vague. But the numbers behind this will definitely give many a comfort.

* The company has shown a sales growth of 13% across last 10 years and its sales have grown from 36 crores in 2000 to 112 crores in 2009. The ride is not a smooth increase but a bumpy one, nevertheless pretty consistent.

*Their PAT has grown at a CAGR of 30% over last 10 years which obviously indicates that they have benefited from the increasing sales. The growth in OPM is from 8% in 2000 to 15% now. Their PAT margins have increased from 2-3% to 8-9% over the last 10 years. The growth is a steady increase. It is not clear whether this is due to economies of scale, better industry environment or cost cutting measures within the company.

* Across last 10 years, they have generated total income of 600 crores with Operating profit of 70 crores and Net profit of 37 crores which indicates an average OPM of 12% and average PAT margin of 6%

But these do not show a more critical aspect of the business, i.e., how much capital did they use to generate this growth and how much cash have they burnt to get to this growth.

* They have no debt on their books for their last 3 years and had minor debt before. They have grown mainly through the ability of the business to generate Free Cash Flow without any equity dilution.

* Their ROE record is enviable. It has grown from 8-10% steadily to 30-40% at present. On an asset base of 30 crores, they have generated PAT of 9.5 crores. Very interesting. The business is not a cyclical one and has performed even during the recession time.

*They have consistently declared dividend for the last 10 years without fail.

Their cash flow figures are also very interesting:

Over last 10 years they have generated 40 crores of cash through operations, which matches closely with the 10 year total PAT of 37 crores. They have spent only 10 crores on investments and 20 crores on repaying loan/share buybacks.

Market Valuation:

The market cap of the firm currently is 82 crores. If one excludes the cash of  9 crores, it shows an effective EV of 73 crores.  Average EBIT of last 4 years is 12 crores which gives an EV/EBIT of 6 for this firm. If one considers average earnings in last 4 years, it is 7 crores which gives it an P/E of 10. However considering the earnings of last year gives it a P/E of 7. I feel its intrinsic value is closer to 120-130 crores of market cap. It was a wonderful discount 2 months back when it was trading at a Market Cap of 60 crores. Now at 80 crores it looks like a close call.

Risks:

It is difficult to understand the business in which they are operating and hence difficult to evaluate its future. They are into repairing machinery (called reclamation) at an organized level. I think its a very boring business but there are opportunities to grow at a slow rate. I took a small position on this one hoping that numbers don’t lie. Either there are many value investors are punters out there. The stock price has grown from 160s to 230s within one month.

Disclaimer: I am long on Ador Fontech and bought it at a Stock Price of 202 Rs and Market Cap of 70 crores.

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6 Responses to “Ador Fontech”

  1. 1 vinvestor2010

    Ador is in the business of reselling welding equipment etc also for firms like Sulzer Chemtech
    also it has close relations with related parties like Ador Welding etc

  2. Hi Pradeep,
    This company was in my radar too but i failed to load up when it was available at a MCap of around 40-50 Crs 😦 . It indeed has an enviable FCF yield ,however we shouldn’t read too much into it as the base is low being a microcap. I second your thoughts on the Vagueness of ARs of small cap companies in India. its impossible to glean any qualitative information whatsoever. Many companies don’t even have the ARs available. However one concern i have with ADOR is whether 2009 was an extraordinary year. During recession companies go in more for maintainence & repairs rather than investing in new ones. This explains why it did well during the recession. However more positives than negatives, its on my watch-list,will try to take a position at cheaper levels.

    • Hi Siddharth,

      I am not considering the FCF yield as such in %age terms. I am just considering the fact that they have ramped up from 36 crores to 112 crores of sales in 10 years with maximum 10 crore of fixed capital investment. It does not seem to be a capital intensive business and hence their dependence on equity dilution/debt should be hopefully lower resulting in higher returns for us.

      Regarding the second fact, they have actually grown their PAT at a CAGR of 30% in 3yrs period and 9 years period. They did not have a windfall 2009 year actually. In fact their PAT and Revenue grew by just 6% and 3% in the 2008-2009 period.

      My only concern is I do not understand what business the company is in nor do I have an idea about the competition. But since the figures over a 10 year time period speaks something I took a position. I would exit it at a market cap of 100 crores which I think is reasonable value.

      If we look only at numbers, we can compare this business with the GRRPL business posted at DS.com. They both are very similar in numbers but GRRPL is more capital intensive and has generated lesser FCF (though it is an industry leader). Not apple to apple obviously. But earning power seems to be similar.

    • I too saw this company at 170 Rs and before I could even study it, it shot to 200 Rs and now it is at 230. As Warren Buffet says, we should have done all homework in as many businesses as possible and must be ready to strike when the opportunity comes. 🙂

  3. 5 Neeraj

    Hi Pradeep,
    I had made a report on Ador Fontech..
    Can i have ur email id plz? You can also mail me on research.neeraj@gmail.com in case u dont wana give it out here..
    cheers!
    Neeraj

    • Hi Neeraj,

      Thanks for the same. Please send it to rpradeep dot kumar at gmail dot com.
      I have mailed you too.

      Rgds,
      Pradeep


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