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11 July 2009


This is the time of the year when one reviews the investments made in the past to see how they are faring. One such company which recently came out with its Annual Results is Ador Welding. I had initiated a coverage on the stock as a value pick in Jul 08 when the index was at 4162 and the stock at Rs 141. The stock was valued, then at Rs 171.  You can read the report here.

Now the index is at 4003 (drop of 3.82%) while the stock is at Rs 122 ( a drop of 13.4%). It touched a 52 week high of Rs 160 and a low of Rs 74 while giving a dividend of Rs 4 ( a current dividend yield of 3.27%).

The under performance of the stock can be attributed to three factors:-
  1. Slowdown in the domestic economy causing drop in welding consumable prices.
  2. Sharp decline in Equipment and Project Engineering due to curtailment of capex plans.
  3. Export dependence on Oil producing countries where the slowdown is significant.
None of the factors mentioned above show a sign of change for the better, in the immediate future. Perhaps six months down the line things may be different but that would be contingent on a reasonable investment in infrastructure development in the country, easing of the liquidity situation and an up move in the global economic scenario. Tall order that.

However to be fair to the management, the company is continuing towards completion of its capex plans and gearing up(operationally) to take advantage of any positive up move. And all this it has done while keeping the company totally debt free giving it significant manoeuvre space if the situation so warrants.

Sales have dropped 13% and though the cost of materials has also reduced, the overall net profit has dropped 46%. Some part of it can be explained by the increased depreciation and a higher provision for taxation(which is surprising considering the 17% fall in gross profit!). If one carries out these tweaks on the P&L account, the net profit should be Rs 16.31 Cr instead of Rs 12.16 Cr and the EPS should be Rs 11.99 instead of Rs 8.94. 

At a cost of equity of 15 % and a growth rate of 10% the stock can be valued at Rs 125. However the adjusted value is Rs 155. 
The current PE 13.65 is high for a company with a market cap of Rs 166 Cr and ROE of 12%.  

The Verdict
Well, this company, like the market, has seen better times and is likely to do so in the future too. However at the current juncture it does'nt offer the 'moat' like quality that would make for a mouth watering treat for a Grahamite.


sumi said...

Happy to see the moat aspect analyzed in the last bit of the post. As usual the analysis is a really good read.

Puneet said...

@ Sumi. Thanks.

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