Ador Welding Limited (517041) Earnings Call Transcript & Summary

Good evening to all the participants, and a warm welcome to our investors meet. I, Bhavya Jain, part of the strategy team, will be your moderator for the session. We will be starting the session now. Let me first introduce our management team who are present on the call. We have our Managing Director; Mr. Aditya Malkani with us. Next, we have our CFO, Mr. Suryakant Sethia. And then we have our Company Secretary, Mr. Vinayak Bhide. We will first start off with a 15-minute presentation by our MD, followed by a 45-minute Q&A from the participants. The guidelines for the Q&A have already been mailed to all the participants. I kindly request you all to follow those for the smooth conduct of the session. Now over to you, Aditya, for the presentation.

All right. Good evening, ladies and gentlemen. Thank you for making the time to attend. I will have a quick presentation and try to cover a few of the points about the company and the group as we go forward. As soon as we finish, I'll leave it open to question and answers. Just to give you a quick overview, for those who are new to Ador, per se, Ador is approximately 113 years old, started in 1908. These are the primary operating companies of the group, the welding industry with Ador Welding, Ador Fontech being the main drivers. However, we do have other businesses as well. The group revenues are approximately INR 700 crores last year post COVID, with approximately INR 850 crores to INR 900 crores being the peak a year or 2 before that. The business we are here to discuss today is Ador Welding. Just to give you an overview, welding is primarily used anywhere steel is, the joining of steel -- anywhere steel is used, which means primarily core sector industries, which is defined over there, defense, railways, shipbuilding, general infrastructure and all of them. We have in Ador Welding 4 business divisions: domestic welding consumables, which is the primary component of our business; followed by international business division; our welding automation division; and our projects division. The Indian welding industry is a very small industry. It's varied in size. It ranges anywhere from approximately INR 4,000 crores to INR 5,000 crores depending on who you're talking to. The main reason for that is it's a supply-side estimation rather than a demand-side estimation and dealt through the distribution network and a lot of other channels as well. We have -- the segment is broken up into 2 parts: consumables, which is the actual joining of the steel; and then the equipment, which basically fires up to allow that joining to happen. These are the main players in the industry. I'm guessing most of you are aware of these names. And we cater primarily to industries such as heavy engineering, automotive, construction, railways and so on. As you know, I guess this gives a quick outlay of what is expected to have -- come in the coming years. The core sectors such as steel, power, auto, railways, defense and infrastructure, we have tremendous plans going ahead. And hopefully, we'll see fruition of these plans going forward. Coming to the company itself, we have made certain changes in our entire envisioning as well as our branding. A lot of what we were doing earlier was looking towards our past, which lent a lot on our legacy. It's a great platform to be on but was not forward-looking enough. So in recent months, what we have done is we have changed our vision to become very clear, as in creating the best welding experience. This gives credence to the fact that we are completely welding focused. Around 90% of our efforts are driven towards that. And secondly, it's built on the fact that we must take it to the next step of an experience, whether it be customer experience, product experience, distribution experience to deliver what is required for the future rather than just the legacy on which we stand in the past. We've also done a cleanup of the brand. And we've adopted a new tagline, which is "peace of mind," which we've got feedback from the industry as something that the brand does provide and which is why people like to use us. The Make in India has always been there. We've been doing it for the last 70 years almost. However, given the impetus that is being done today, we have also put this on our packaging and driving that forward. Quick overview. We've been around for 70 years almost in October this year. We have 3 plants, 3 large manufacturing plants, 250 distributors across the country and 10-plus industry segments that we serve. We have a strong technical competence. We have an R&D -- research and development facility based out of Pune, which deals with consumables as well as equipment. And we have a team of almost 35 people working on new product development, enhancing product development, laboratory accreditation and so on. Some of our customers, I'm sure most of you have heard of these names. I won't waste too much time over there. Our domestic welding business has the following action plan that we've implemented a few months ago to garner greater strength in the market and basically driven upon the fact that if you look at us versus our competitors, you will see that there is an opportunity for improved margin realization as well. So we have identified certain actions for the domestic welding business to grow. Strengthen the distribution systems, and that means policies -- connectivity is better placed for certain products. We also want efficient use of IT systems. We are creating platforms on which ordering mechanisms and all of that become much simpler than the legacy systems we have in place. So this is going beyond ERPs and all. This is going more even beyond CRM. This is going technically more into just order system process that could basically streamline the way we deal with the entire distribution market. Reconfiguration of manufacturing system lends itself to the fact that are we optimized in our manufacturing legacy cost, do we require more rationalization, which are the key product groups that require further enhancement and so on. Product development remains part of our everyday work, as I mentioned earlier. Logistics is an area that we've identified as somewhere that we can improve a lot, reduce costs as well. And therefore, there's a lot of focus on looking at avenues such as third-party logistics, et cetera. Product mix, as you can understand, in our industry, the steel industry, there are varying types of steel that you deal with. There are varying types of base metals. There are varying types of productivity improvements that you can deal with that give you a better product mix. And we continually work on those. On the international business front, we are looking more at 3 or 4 very straightforward actions. One is related to strengthen our market presence in the existing markets, which is primarily the Middle East and a little bit of Africa. More and more rate contracts with the larger customers going forward. Application-oriented selling, which is primarily to do a little bit with the repair and maintenance, where you can see greater value, is also an area that we are focusing on. And we are continuing to look to build our welding equipment line, which is doing exceedingly well in India. And we have a small loyal user base in global markets, but we need to add on to that as we go ahead. This is, again, a list of customers that we work with globally, quite standard in that regard. The welding automation business is going to focus -- it's fairly nascent. When I say nascent, it actually means small, I don't mean new. It's been around for some time, but we've been sort of cranking more on the basics. And now we're trying to push ourselves to do a little more high-value jobs and to see a little more engineering resulted solutions and value in there. So we're building a good team over there. We're enhancing our product portfolio, potentially looking at good partnerships going ahead and improving the strike ratio on our orders so that we just don't become another player in that field. Projects is an area that has been a concern with a few people that we've spoken to at past AGMs and all of that. We've rebranded this. It used to be called project engineering business division. It's been rebranded now just to projects. We were earlier focused on a range of, for lack of a better word, we'd say EPC projects in which we were actually not doing enough engineering. And we were doing a lot more just the contractual part and the execution part, which is consuming tremendous working capital and not allowing margins to be at the level that we like. This led to certain errors in the past and certain cleaning up of all of that. So we have a division that now focuses on what we know, which is flares and process equipment. So it's going to be interesting going ahead because we're not looking at very large execution of orders. We're looking more sustainable business. We're looking more orders that provide value, whether it be the bottom line, working capital and all of that. So we've rebranded it as projects. And if you look at our results for the last financial year, you would have noticed that we separated out the consumables, the equipment and the projects for the first time to give clear indication that these are 3 distinct business units. We've taken on new people over here, upskilling ourselves to provide the right solution and working on our customer focus. I think this is a fairly standard financial overview that gives a breakdown between the welding business and project engineering. You would have seen this in our results. This is just to give you an indicator of where we ended last year. Segment-wise revenue breakup. Again, fairly standard. Consumables occupies the chunk of it, and that is where we see tremendous value. Our equipment business is also picking up, another good -- our team out in Pune has done an excellent job of building a very robust and reliable equipment. And we are continuing to work on building up that product line more and more. And the projects, which is a small part of last year, will remain anywhere in the region of 6% to 8% to 10%, I think, over the next 1 to 2 years, the way we see it in terms of billing, whereas we see order bookings picking up with players over the next 6 to 9 months. On the financial parameters, I think this is fairly standard. Nothing new that we're giving here. It's just a segment-wise breakup for each of the 4 years across the 3 different business lines. When it says Ador Welding in that column, sorry, what we mean is -- when we say Ador Welding, I think that basically means that as a company, this is the margins that we have been seeing. The welding business has been that. And then the projects at that, as you understand, by the restatement that took place in Q2 and Q3 -- in Q2 of last year, followed by the other provisions that have been made in Q3 and Q4. Of course, the projects business has had a tough time in that regard. And this is the data for the rest of the company based on that. Volume shares, again, provided in annual report, just to give you an idea for the consumables, what we're looking at. And hopefully, we will continue to see robust growth going ahead into FY '22 as long as things come out of the unfortunate COVID scenario soon. Quarter-on-quarter, just to give you an idea, the reason we look at quarter 4 is, from an economic perspective, quarter 4 was fairly good. We saw underlying factors, fairly strong. Demand was strong. Cash flows were good. We saw money moving through the channels of trade as well as through customers and back much better. So it's a good quarter to evaluate. And if you look at it, we had approximately, I think it was a decent growth. I think we had about 18% -- 17%, 18% growth over previous quarter 4 in terms of revenue. Our margins, as far as consumables went, took about a 2%, 3% dip primarily because of the steel price fluctuation and the ability to pass it on. And it takes a little bit of time to do that, but it's -- the lag is about 2 weeks to a month, and then eventually, we get there. Our equipment, as the business scales up, is improving on the margins as well as we go ahead. And the PEB, as you all know, has been explained. The projects has been explained. And the raw material consumption as a percentage of sales is fairly standard over there as well. The financial ratios. I think the main key highlights over here are in red. The borrowing, we have spent a lot of time as a Board, as a team, to find a way to ensure that we get the right level of growth while ensuring -- to ensure our debt levels remain within control. And they were absolutely soaring high in July of last year. So we have managed to control that. The team has done -- the sales team and the finance team have done a very good job of bringing that down to within the realm of very manageable numbers. Working capital as well. And the ROC and ROE is kind of irrelevant for FY '21, but if we look at the data, excluding the project business, that has been fairly good. And we expect it to hit a high on this year going ahead. Lastly, it's very simple as a philosophy. What we look at is to focus on our strengths. As I've said many times, the welding business is to build on the Ador brand in the welding space. There is more and more areas in which we can grow, geographies in which we can keep taking it forward and product mixes that we can keep improving. There's legacy costs. As some of you may understand, being a 70-year-old business, there are definitely legacy costs that are sitting there. And we have been working very hard to keep removing those along with the bureaucracies around them so that we operate leaner and improve our margins going ahead. Lastly is to keep it simple. I hope -- I just raced through that a bit too quickly. Thank you very much. I will now leave it -- we can remove the presentation. We'll now leave it open for questions in a certain order. Thank you.

Thank you, Aditya, for the presentation. [Operator Instructions] So we have our first question from Mr. [ Suraj Navandar ].

So my first question was more of an industry-based question. How are you seeing the demand on ground of number of inquiries or the order pipeline for our consumer in the welding equipment business given that the government is focusing a lot on Make in India, PLI schemes for different sectors? So how are we seeing the response on ground?

If you look at post, let's say, October onwards, it was a little bit slow. It got a lot better come December. And then in Q4, of course, it was quite exuberant going in. It was a great demand scenario. And what happened was, of course, understandably, in April and May, we've seen a bit of a slowdown. Of course, it's understandable what's going on in the country. As we come out of it, it's slowly literally, as we speak, on a daily basis coming out of it, depending on the geography you're talking about. And it's opening up. I wouldn't say the exuberance of Q4 is there yet. I would say that it's looking okay. The trade channels and stocking and all of that is taking a little bit of time. Auto has got its own few lags. But in general, I'm not stressed about the order book at the moment, and neither are we buoyant like we were in Q4. So it's somewhere in the middle with signs of improvement, if that helps.

But you're very optimistic for coming 1 to 2 years perspective.

Look, it's a very simple equation, so if you follow steel consumption and you follow IIP numbers. So as long as that remains concrete, if you guys are exuberant about that, we remain exuberant on that basis. That's the simple answer I can give you, yes. But we are optimistic that fundamentals on the ground are in place to do well.

Okay. And sir, what would be our capacity utilizations currently? Do we have enough capacity to serve the growing demand? And do we need to [Foreign Language] do we get, first of all, any operating leverage and expand our margins? And after that, any CapEx we are looking at in next 1 to 2 years?

Yes. So we have on the consumable space -- depending on the product mix, which is the bulk of the electrodes and stuff like that, we are adequate to scale up by about 2, 2.5x easily. On the wires and the fluxes and all of that, we can increase by anywhere between 30% to 40%. And we're also undertaking a small CapEx project in this year to increase that more. However, there are certain other key products in that line that definitely need to be expanded, that we will work on CapEx over the next 12 to 24 months. So we do expect that to happen slowly. But in general, on the equipment front, I think we're quite fine. I don't see any issue coming up. We're probably at 40%, 50% capacity utilization. So there are certain key products where we need to add. And we're going to spend very hard over the next 12, 24 months and certain things where we were quite comfortable. So I think we should be okay for the next 2 years in terms of what we see. There is -- since you bring up the topic of CapEx, I might as well discuss this now. There is a subject of manufacturing rationalization like we discussed earlier, where we were looking at our entire manufacturing systems that might require some level of CapEx. But that project is not yet off the drawing board. So I want to add clarity on that.

And so what margin improvement can we have currently, like in...

So I'm going to take this as your last question, if you don't mind. You can always come back later at this time. Don't worry. We'll give you...

What kind of margin improvements we can have when we reach to our -- as we increase our capacity utilization or we reach our optimum...

I am not in a position to give you anything externally on it. Well, I will answer you this. There are competitors out there who have better margins than us. And I don't see any reason why our margins cannot be better than theirs. That's my only answer to you. I don't -- I can't give any other guidance beyond that.

Next, we have [ Ketan ] from [ Alpine Research ].

Just one second. He will unmute you. One second. [ Ketan ], can you hear us? Go ahead. All right. If you can't, okay, we'll come back to you then. All right. Let's go to someone else.

Next, we have [ Akshay ] from [ Alpine Capital ].

Can you hear me?

Yes. We can hear you. Go ahead.

Yes. So my first question was on the dividend payout ratio. So there was a time when we used to maintain a 50-odd percent of dividend payout ratio. Can we at any time soon expect getting back to those payout ratios as we don't see any major CapEx that's coming in, in the next 2, 3 years, and as we ramp up our facilities, we should be doing better cash flows?

I think we will ideally look at somewhere in the dividend payout ratio anywhere between 35% to 50% is what we put down as our dividend policy also this year -- dividend policy that we have declared. So I think anywhere in that region, we want to definitely get back to a decent payout ratio going ahead. However, I want to correct you on one statement that we do have CapEx coming up. It's just a question of standard. At this year, the outlay that we see for this year is fairly routine CapEx, a few capacity additions that are not very expensive. However, in the next 12 to 36 months, based on this new manufacturing plan, there will be some CapEx. But we will ensure dividend payout ratio is kept in the region of 35% to 50% going ahead, hopefully, based on the fact that we don't have issues like COVID and all of that, of course.

Okay. Got it, sir. Sir, also now, if we look at the last decade, sir, we've lost significantly to ESAB as they overtook lots of our -- a few large clients, and they have started selling directly to them. Now do you think we can actually pull this back from ESAB? And what would be our strategy to achieve this glory and legacy in a short period of time?

So one is, let me correct that statement by saying that, first of all, ESAB has been running down Ador Welding and has been successful on Ador Welding since approximately, I would say 2004 or 2005. Not only 10 years, it's been about 14, 15 years that they've been managing to successfully jump there. In fact, in the last 3 or 4 years, we've, in fact, made further inroads to hold that back and grow our sales in the consumable space. So I think now we're in a much better playing field with ESAB than we were probably 7, 8, 10 years ago. And I think a lot of credit to the sales team that they're able to do that. Having said that, there is gap. And we work very hard on that. We supply at times directly as well. We work on large rate contracts, which is very much a focus of ours going forward. ESAB is not the only competitor. Look, I wish it was a Coca-Cola, Pepsi game. It's not. There are 10 other competitors or 15 other competitors out there as well. We are well placed with certain product lines. We are well placed in certain geographies. And we're well placed in trade channels as well to take advantage of it. I think the buzz is to do simple, smart things. And we should see something going forward. It's not only them that we compete against, but I think there's definitely opportunity for us to get in there. So I think we're just a lot more diligent. I think the sales team is a lot more hungry in terms of ensuring that we protect what we need to protect. Go ahead. I hope that answers your question. If there's something else, then please.

Next, we have [ Dhwanil Desai ].

Aditya, can you hear me?

I can hear you. Go ahead.

Yes. So, Aditya, just 1 clarification and 2 questions. So I assume that for the write-off, which was to be taken on the project side, have we taken? Is that the right answer to me?

Yes.

Okay. Okay. And 2 questions, sir. On the -- first question is on the export side. I think that is one area where we have very little presence, and we have not done much. So anyway, in your presentation, you also talked about certain areas where you want to focus on the export side. So how large, do you think, is this opportunity? Can it be of significance delta to our existing business?

So I think it's a good question. First of all, like I said, we've made -- there's nothing further left on the project side. We've done everything we had to, and I think we've been much clear on that. I like what you're asking because I think the exports is tremendous. In fact, in 2007, '08, '09, we were doing more exports in rupee value terms than we are doing now. So we actually lost a lot of ground on the export front. So we've done this time a few basics. We've teamed up correctly. Back in Sharjah, we've got people, our own people over there. We've added more distributors, and we keep doing that. I think there's good potential. I also think there's a lot more favorable environment for the India product versus our Asian contemporary. So I tend to believe that exports can actually do really well for us going ahead. In this year, we expect exports to be somewhere in the region of 8% to 10% of our sales. And I think going forward, it will be anywhere in the region of 15% to 18% of our sales. It's a question of structured focus, and our brand is very strong in those markets. So it's again just doing the basics right. And I think there's tremendous potential. So yes, exports will be a focus for us going ahead.

Okay. Got it. And second question is on the equipment business, Aditya. So we are doing a range now in terms of our equipment business. But I think we have all the capability in terms of having the right equipment that we have been -- the industry and market. What are the things needed to double the business scale from here on the equipment side?

So the equipment business is kind of -- is 2 things. It's welding equipment and welding automation -- sorry, 3 things. It's welding equipment, it's welding automation and there's gas cutting products. All 3 of these comprise what everyone, our competitors or us term as equipment. On the welding equipment front, we are actually quite well placed. And as I say, it's hard to get real data, but I would say we're probably #1 or #2 very clearly in that field with a very robust product that is manufactured by us, sold by us and gets a lot of repeat business. So that is a question of market reach, doing that, winning a few big orders, having a product and trade. That will continue to do well. The other 2 areas, which is the welding automation, there is a huge delta. We are 1 of 40, 50 guys, and we must be somewhere in the space of being 20th or 30th in that space. There's tremendous leverage there with the right talent and our brand to grow that from a small division 2x, 3x, 4x very quickly. So we're working on that, like I mentioned earlier. Lastly, on the gas cutting products, it's not only gas cutting now with the oxygen crisis that happened. In fact, there's a lot of plasma cutting, and we've seen a good uptick from there. So on the cutting, it's basically cutting a steel product line business. We are also focusing a lot on that. That's a combination of trade. ESAB is very strong in that space. And we just have to keep making inroads step by step. So I don't think it's a 2x, 3x scenario, but it is a scenario where you can definitely see a lot more volume and some realization coming from there. So if you bake it into these 3 parts, I definitely think the welding equipment space, the CapEx is strong -- was strong, rather. If you leave April and May out, CapEx signs are very strong. Order book is also slowly starting to come up. The other good part on equipment is to let you know is Make in India focus, various government companies, all of them showing preference towards that, which is helping us. So all of these things together give us confidence that, yes, we should do okay on the equipment business going ahead.

Okay. Great. And just one small observation. For this time, we have not declared any final dividend, right?

No. No, there was no dividend. We have to do a lot of cleanup. I mean, look, it's not like we couldn't afford to do it given our cash flow scenarios and all of that or the strength of the balance sheet. It was just a question of given what had gone on in the last year and all of that, it just made sense not to do it. And given the fact that it was COVID uncertainty, it's okay. So we'll just hold tight for some time. Don't worry, we will remain a strong dividend-paying company.

Next, we have [ Rohit Balakrishnan ].

So Aditya, a couple of questions. So one, I mean, slightly longer term, if I look at the gross margin of your business over the last few years and both, for you and ESAB as an industry, it has consistently trended down. So just wanted to understand, I mean, in terms of going ahead, how do you see that part of gross margin. I know that we had ventured into project business, which is inherently low margin. But even if you exclude that and see, there has been a slight erosion in the gross margin. So just from -- not talking about next quarter or even next year. Thinking slightly longer term, what are the gross margins that you probably think are doable in the normal scenario in your consumable business and in your welding business -- welding equipment business? So that was question number one.

So on the gross margin basis, look, the last few years, if you go pre-COVID, my understanding of the business -- of our business and various core sector industries was that everyone was discounting the product to a certain level, using working capital receivables into the market as a way of restoring top line remains sort of strong. But we were not losing margins. Everyone is being sort of loose with their receivables. All of that was going on. Post-COVID, what we've seen the outcome of that has been with sort of what's happening in terms of deficits and all of that, in terms of money being pushed through. We're seeing much better, stronger movement of products. We are seeing turnover of product better. We're seeing all of that. So I think that itself will help margins to go up. And you will see demand being quite robust, which will help margins to go up a little bit. Our margins on the consumable business were approximately 22% -- 26% the year before and 23% this year. I think we should be in a position to definitely improve upon these numbers going ahead. As an industry goes, I'm not in a position to speak. But I think when you have shocks to a system like -- whether it's demonetization or whether it's GST or whether it's COVID, they tend to help the bigger guys a little bit more. And when you have supply shocks like you have in [ steel ], again, they tend to have that. Sorry, [ Rohit ], I'm going to ask you to mute your line. There's some interference coming through. So that basically helps a little bit. And does that mean it will remain a competitive industry? Look, I just named you 15 guys. It's going to remain a competitive industry. But I think as you size and scale up and you move more towards higher-quality product, which I think is happening and the big guys are realizing that it's better off having a higher-quality Indian product, hopefully, we'll see something good there. I don't want to give you guys a specific number. It's just that I expect it to be better. Sorry, [ Rohit ], go ahead.

Right. Yes. I mean -- I'm sorry, just to harp on this point a bit more. I mean if you listen to the call of ESAB Global, they are talking about growing their margins from whatever level they are to high -- to even higher-teens and close to 20%. So I mean from that perspective, I'm just talking again very -- not immediate term, but maybe 3, 4 years out. I mean -- this was asked earlier, but I just want to understand qualitatively from you. What do you -- I mean what are the low-hanging fruits that you see? And longer term, from a structure point of view, from an industry point of view, you have a clear global company which is saying that we are going to expand margins. So how do you see that? I mean how do you see that affecting us? And what is your outlook for yourself?

Yes. So look, at the end of the day, Colfax private equity guys go in, consolidate, acquire, consolidate, acquire and carry on ensuring margins go up accordingly. And I completely get that strategy, and I think it makes a lot of sense. And they will see a margin improvement on that. Our margin improvement, if you're talking about from a selling perspective, I told you the competitive scenario and that's going to be a little bit difficult to see a massive margin improvement unless you see demand picking up. I did harp, however, on the legacy costs that we are sitting on and on the manufacturing rationalization and fixed cost potential that Ador does offer. So if we'll be a little brutal, maybe if we start to think like private equity industrial guys about how we should marginalize certain costs and do things certain -- correctly, which we are trying to do and it takes a little longer in an old ship like this to do it, there is definitely scope of margin improvement by reducing costs. I would completely agree with you on that. And we are definitely working towards it, to be very clear. Does that answer your question, [ Rohit ] or still no? I want to make sure it answers your question.

No. No. That was helpful.

Okay. Thank you for the question.

Next, we have [ Rahul Jain ] from [ Prudential ].

So a couple of questions. Aditya, you have taken over with regards to the day-to-day operations somewhere around 8 to 9 months back. So just need to understand -- and I do see a lot of changes. It looks like visible like you have started this year with a complete write-off, and the newer streams have started on a clean slate. So we are quite happy with that. So coming to what kind of changes you have already brought about in the organizations in various functionalities, be it on the production side or marketing side, and what are the key 3 focus areas where you are concentrating for the immediate and the medium term? And accordingly, what kind of capabilities are being built? And where do you see Ador in next 3 to 5 years?

I think I covered a part of it in my presentation. I may not have done it in enough detail. But just to give you an idea that, look, I genuinely believe that the brand as a welding brand is underutilized. What I mean by that is we don't have enough beats with it and don't have enough clarity with it to export more out. So we're doing a lot of that. What that means is whether in trade, whether in direct customers, all of that, we're building the brand stronger and stronger to look ahead rather than looking at the past. So rather than people walking in and saying, you should buy me because I've been here for 70 years, it's about what experience they're going to provide. That experience is what, when it comes to welding. It's ability to make the process of providing your welding seamlessly. And that means that there's not much headache and logistics and all of that. So that's an area that we're definitely going to work on, where we basically provide the product to you that much easier and faster in terms of supply. There's a lot more to that. I don't want to get into access detail, but that's an area over there. Legacy costs, which I answered, [ Rahul ] is a big area that we'll definitely look to improve on. Old companies such as ours tend to have bureaucracies and legacies in place that we've been working with the team over here and some of the other teams who are on this call very hard to work on to improve. There are certain gaps in technology. We're identifying those gaps and seeing how we can pick ourselves out to get right, either have an alliance with someone, buy their license technology, whatever it is. So that's also a big part of it. And streamline -- simplify the way we do business from that angle. And I think in 3 to 5 years, we should be in a leadership position is what we're aiming at. It's not going to be easier said than done, but we are definitely aiming at it. I think from 1951, when we started, all the way till approximately 2006, '07, we were leaders. For the last 15 years, we've allowed that to slip more because of our mistake than anything great done by the opposition. So we just have to be smart about how we do it, and we can get back there. The brand has a potential to do it. So that's it, without me going into excess detail. It's fairly straightforward as for that.

Sure. And just one more question. So in an annual report also, we have been in general talking about the new products which we developed and typically with regards to technology and R&D and product development. Plus, you did mention in your remarks about a larger amount of CapEx going around in the next year, that is FY '23, if I'm right. So if you could share some more details in regards to somewhere, what kind of products you are trying to add. Are there going to be much more value-added kind of products? What kind of segments could they cater to? Is it more for domestic or export market, something on the product side can you share?

So anything you add on products primarily is going to be on a higher tech or it's going to be a higher productivity of a certain tech. That's the way you look at it. Look, at the end of the day, this is the welding industry. You're not really dealing with AI, for example. So there's a certain evolution. There's certain technology curb that you're moving on, and you're trying to just make gradual upticks on that curb. It's not like you're going to miss the bus stop and be with something we have ahead. So there are 2 or 3 things in the consumable space. Look, it follows what skills are being used around the world. And as those grades of steel go higher and higher, it's your ability to have a product ready that is cost effective to meet that requirement. So we do that, a lot of all of that. As I said, we have alliances in all through that. I think the Indian market is -- most of our focus is on the Indian market, whether it be on the technology front or on the sales front. Like I said, there's opportunity in the export space, but it doesn't actually mean your technology opportunity. It means more selling opportunity over there that has to be worked on. There are welding products which are more efficient, which require more productive such as flux-cored wires and all, in which we are sort of behind. So we're looking at opportunities there as well. Automation, generally, there's opportunity there. So yes, along those lines, definitely, we will keep investing and working on that, yes.

Next, we have [ Shweta Jain ] from [indiscernible].

I have a few questions. The first question was regarding our projects business. So like you said that you've taken all the right steps. So could you just highlight what are the key 2 or 3 things that we've really changed here, which will take our project business to the next trajectory? And if you could also share what is the order book on the projects business? And what kind of margins are we expecting in this?

So let me clarify, I think there's slight miscommunication here. Let me clarify. First of all, on the project space, I don't know about right steps or not, but let me again go through it in step by step. The projects division was doing flares, process, equipment -- so I'm going to request everyone to mute their lines whilst listening. Flares, process equipment and was undertaking contract jobs for EPC, such as the one we overtook overseas, which is a very large order for INR 100-plus crores. Now in the flares, we do -- this is a legacy business that has been there since the days of an alliance called Ador Samia, I think in the '70s or '80s. We do engineering value. We are one of the largest 2 players in the country or 3 players in the country. We go in. We have a flare engineered solution. And we provide that as an engineering value to be provided over there. It's not a very large space, but it's a good, healthy operational business. That is an area of focus that will remain, and we strengthened that with more people and design capability. Process equipment is also an area, which is okay -- I would not say great margins or bad margins. Okay margins. Your ability to weld correctly, your ability to execute correctly, all of that, in which we also have some level of capability. And we will continue to do that as well as to focus. And that will ensure scale in the project business to a certain level. Other part of the business, which is these contracts on EPC front was things that consumed working capital and eroded margin because we were not putting engineering into it. We were basically doing revenue-oriented work. So we've now stopped that. There are some small tiny projects that are left over. We have to finish, part of our obligation. We are doing those, but we are not bidding for any new projects over there. So this is what we've done. So just to clarify, you are not going to see a massive top line jump in the project business. What you're going to see is a more efficient project business when it comes to management of capital and margins. And that will take a little bit of time to get there. It doesn't happen overnight. As you can imagine, the last few months has been difficult also for large-ticket projects suddenly. So I'm hoping we'll see some traction over here. Plus we internally have to make a lot of sweeping changes. So we don't have a very large order book at the moment. I think we have an order book for of INR 20 crores, INR 25 crores, INR 30 crores, INR 40 crores at the moment. We're looking to build an order book at least of that size or more with flares in the next year. So that's a more concrete business going ahead. I hope that clarifies a little bit on what we're discussing, [ Shweta ].

Yes. Yes. Got it.

Okay. Yes, because I don't want you to be under the assumption we're chasing large projects, which are going to give a big top line. We're not. We are very consciously not doing that. We are much more focused on the welding front.

Understood. And sir, just to clarify, I believe the margins in flares and process equipment would be also higher, like about 10%, 12% approximately?

Anything is better than what margins we saw last year particularly, so yes. No, I think -- yes, slightly healthier margins on that front definitely, yes.

Okay. Okay. Sir, my second question is regarding exports. So what markets are we typically targeting? And also just one more question. I'm going to collaborate and don't count it as my third question, please. If you could also give us some sense on how much revenue is contributed by our top 5 or top 10 customers in each of the segments, sir.

Okay. The first question is a little easier. So on the export front, look, we've been in the export market, I think we've been exporting since the '80s. Middle East is somewhere we've been very strong. We had certain select customers based out of Abu Dhabi, Qatar, all of them. And we have a distribution network as well that we did well. I think the last few years, we just lost some focus over there. To be honest, I don't know why, but we did. We're rebuilding all of that. We're not going into any new markets. UAE, Kuwait -- for welding, Kuwait for welding. UAE, Saudi, Oman, all of them is where we stay strong. The brand is well known. We don't have to create the brand. The brand is very well recognized. In fact, we compete not with Indian players over there. We compete only with global, I would say, just below Tier 1 product, I would say we compete on that account. So it's a strong brand, decent pricing, all of that. So I think the exports has tremendous potential. As far as within the businesses, where are our top 5, top 10 customers. In the welding business, I'd say our top 10 customers will contribute anywhere in the region of 25% of our business, up or down a little bit is what I see. In the welding export business, that will be much larger, probably about 50%, 60%. In the automation space, you have definitely 15, 20 good customers in a year. So that contributes all of that. And in the project space, again, very few customers, few orders. So big-ticket 8, 9 projects in a year is what you look at for us specifically from that perspective. So I hope that answers it.

Yes. Sir, can I just ask one last question [indiscernible] questions. Okay. Sir, if you could tell us what is the unbilled revenue on the books as on FY '21? And if you could just quantify the CapEx number as well, sir.

The unbilled revenue is...

It's almost gone. Only [indiscernible] projects are running. Otherwise, here, everything is gone now [indiscernible] projects, so it's gone now.

Okay. So any further write-offs we're expecting in Kuwait, or it's done, sir?

No. It's done.

Okay. Okay. And sir, you were mentioning CapEx about -- for FY '22. Can you just give a number, sir? Is it possible?

It will be along the lines of what we had in previous years on the CapEx front, not very different from that. So if you forget the COVID here, of course, you look back at that, I think that's anywhere in the region of INR 15 crores to INR 20 crores. However, I do have one project as I keep reiterating with regard to manufacturing consolidation/rejig, which I'm still working on and I don't know, but that will not only happen in this year. It's a 24-month project.

Next, we have [ Saloni Hemnani ] from [indiscernible].

Sorry, there's a bit of rain. So in case there's any disturbance from our side, please let us know. All right, go ahead.

Congratulations, sir, on amazing set of the results this quarter. First of all, I really appreciated the cleanup that you have done this quarter. So now that the Kuwait project write-offs are done, I just wanted to get an exact number on the revised value of the project. And what was the cumulative write-off that you have done for the project as well, sir?

Interesting question, all right. Cumulative write-off we have done all together is...

So totally, it was a loss-making project. We incurred a loss of -- in the range of INR 50 crores.

We lost about INR 50 crores, INR 60 crores; INR 50 crores, INR 55 crores on that project.

That's in part because of the [indiscernible] from early...

Yes. It's just a horribly mismanaged project. I wish I had anything else to say. It's unfortunately just a horribly mismanaged project. And we lost a lot, and we lost great deliveries. We did a lot of stupid things. And it is what it is, I mean.

Okay, sir. Sir, I know that the user industries are bit diversified for you to really say anything on how you are able to see traction. But just to get a rough idea on your outlook for welding consumables asset and equipment. How the industry is going to grow? From where exactly on ground are you seeing traction? And for the next 3, 4 years, how are you seeing the company's growth going along with the industry, sir? Can you just briefly explain that?

Look, it's -- the first driver of industry has been and will be, I think, for some time, will be the infra projects. I think the L&Ts and the Tata projects and all of them, given what's expected to happen and given how the government is expected to move money, I think you're going to see a lot of that. I think we're seeing railways also provide a lot of uptake. Auto is a little shaky. You guys know more about auto than I do. And for us, auto is more a volume driver than a value driver. But lucky to be a part of it for sure. I like the railway. I like a little -- I like steel. I like general infra. I think those are value segments that provide a lot of opportunity going ahead. And we're seeing good traction. And also, we're quite strong there as a brand. I think, look, I don't know -- especially in COVID times, it's very hard to predict which way it's going to move. But I think if we don't outperform the market, we would have failed. So it's very simple that we have to outperform the growth of the market by not just 1% or 2% but significantly more is what we're trying to do. Now where we have to make that happen, it's got its own challenges to it. But that's the way we look at the business very clearly.

And according to you, the market is growing at 10%, 11% for the next 2, 3 years.

Depends on what base period are you looking at. It all depends what base period you're taking, right? It depends what value steel you're putting on it. So if you're doing a real account and not inflationary account, right? It depends what time period you're looking at. I would say 10% is fairly okay. The way I measure it is very simple. You just take IIP and steel consumption, you try and draw -- make those 2 dots, form a third dot, and that's basically it. So that's the way I look at the market.

All right. All right, sir. Sir, one more thing, one more...

Last question, if you don't mind, okay? Sorry, last question. Go ahead.

Sure. This is last question. Sir, on the consumable side, I just wanted to get an idea on where the value-added products are or electrodes, fluxes like -- can you explain in terms of value chain, how these products add to your top line as well as margins, sir?

Yes. So the electrodes is -- there is -- when it comes to products like electrodes and all, there is formulation involved. There is powder and steel involved in a mix. And that automatically provides value because there's intrinsic technology in there. So electrodes are a good value product. Flux-cored wire has become fairly commoditized at the base range. But on the higher range, there is definitely value over there. What auto market consumes, which is a lot of what we call CO2 wire with limited value addition, very large volume, there's not as much value as you could imagine. And the fluxes, which is used by the engineering building industry and stuff like that, there's a lot of value as well. There's a lot of value in maintenance game. So in the application selling, there's value in certain stainless steel grades. So from that perspective, there is value to be seen. And as I said, a volume gain that we have to play quite well as well. And that itself through scale can provide enough value.

Next, we have [ Chetan ] from AlfAccurate Advisors.

Congratulations for the excellent turnaround and very swiftly and effectively managed by you even in such tough times. I have 2 questions. Firstly, on the steel, is the principal raw material for us here? And if I'm not wrong, that constitutes 50%, 60% of our RM costs. So does that imply -- means, what kind of price increase will be required for us to pass on the entire steel price increase? And what percentage of that we have already taken?

So look, you're very right. Steel capacity is a very large part of the consumables as well as in the equipment, of course, but in the consumables, more so. Look, my learning has been that we pass it all on. We definitely pass it all on. We're not here to subsidize any of our customers. But there's a time line to passing it on. And we can't always see -- you don't initially notice in the morning, saying, this might be price dilutive. So you are intermediary. So you have to do it -- our sales guys manage it a little more carefully than that. So I find that there's a slight time lag of a few weeks, I would say, at the upper end, about 3 weeks by when the complete transformation of passing on has happened. And I hope to see that once I see receding on the price, we get to keep that as well. But there's full intent to completely pass it on, so we do, do that.

Okay. So just a clarification, this -- does this imply that we can see a realization of growth of upwards of 20%, 25%?

Look, steel prices today versus steel prices a year ago are in that region. But you had -- you've had a difficult April, May. So if things had just followed Q4's path, which I'm again telling you guys is not following that path. It hasn't followed that path. We're coming out of it. So we didn't follow that path as I'm sure most of your companies you track are similar. Then yes, you will see a certain value realization that is very closely linked to that price.

Okay. And just lastly, I wanted to understand, you said that we'll be trying to regain our lost market share in consumables business. So what are the steps that the company is going to take on the distribution side? So what is the distribution universe currently? And what percentage of that are we present in? And with respect to large customers like L&Ts of the world, which are going to be the major driver for infra spending, how are we -- how is our relationship to them? Are we supplying directly to them? Or how does it work?

So we have approximately 250-plus distributors, a lot of legacy distributors as well. So they're trade markets like the Bombays and the Delhis of the world. And plus we have end user focus, which might be anywhere from Orissa to UP stuff like that, depending on the industry. We're down south as well. We, in fact, are looking at upscaling a few more distributors, adding a few in, who have the capability of doing larger business. We also are looking at certain belts in which might be weak like Northeast and certain other belts that our sales team has identified revenue to add distribution network. Doing business to distributors is better in terms of security of products, security of receivables, all of that regular churn. So we try and push that to about 65% to 70% of our business. As far as the infra companies you mentioned, we try and have a very good relationship with them. They're smart guys. They don't only -- for store only, they don't only want to be with one vendor. So you're always competing. Secondly, they're also smart to ensure that they know that they're taking large volumes. They know how to negotiate accordingly. But we definitely -- it is our intent to be in bed with all of them, and then we try very hard to do that. And there's some still out there in the universe that we have to tap and some who are getting large projects that we still have to go after. But I think what's important is ensuring payment security while you do it, not getting caught in another trap. So we're doing it step by step. Our sales team is working quite hard step by step on that.

Next, we have [ Viraj Mehta ]. Next we have [ Naitik Modi ].

Aditya, 2 things. One is what is our plan for dealer addition, dealer or distributor addition for the next 2 years? And in addition to this, how do you -- what are the other things that we could do to capture market share?

So look, we are not -- have a massive target. We have a fairly decent distribution network. So it's not like we go out there, looking to add 50 more distributors. I think it's qualitatively looked at to say who are strong performing this year and how do we add on to that list? So do we develop internally more? Or we have to go outside and search? So I think the sales team is looking at that 10 qualitative improvements we need to make this year with our distribution network. It's not we go from 250 to 500 distributors. That's not going to solve the problem at all. So 10 qualitative distribution improvements, whether they be certain appointments in certain regions or uplifting a certain distributor potential is what we look at. Beyond that, as far as market share goes, I think -- look, what I've explained is that keep it very simple. We have strong relations with the customer. Keep building on all of those things and be as aggressive as we possibly can be. Use sourcing to our advantage. Corner a few things here and there. So it's basics. I don't think there's anything different than -- I don't have a rocket science answer to you on what we will do differently to increase market share. As I said, the platform we stand on today, the brand is underutilized. And that provides the greatest opportunity for us, not the question of how smart we are in building on that.

Next, we have [ Samad ] from [ Core Capital ].

Not there.

Next one, [ Keshav Garg ]. No? Then we have Pritesh Chheda from Lucky Investments.

Pritesh, go ahead.

It was not getting unmuted, that's why. So the question is, your net working capital has been all over the place for past many years. Now with largely your business being consumable and building equipment business, what kind of net working capital cycle should we see? And within that, the consumable business, the current asset that you have on ground, what kind of peak revenue is possible from that current asset?

So Pritesh, just the short answer is, on net working capital, there is no reason why our -- should be so different to our competitors that you guys are monitoring as well. And there is a big difference at the moment. So we should be improving that a lot. 50 to 55 days is what we're looking at. We very closely track our competitors in that regard. And like we said, the PEB business has been an excuse for us to not do that. And now we're going to clean up. So I don't see any reason why we shouldn't improve our net working capital accordingly. And we're doing a lot more diligence on collections and all of that as well and getting more impressions in that regard. So we'll definitely see an improvement, quite a significant improvement, COVID apart, on that front. The next thing you asked was, sorry, on the consumables, what sort of revenue additionally we can build out...

Yes. So the current asset, what is the peak revenue possible?

Look, it's all about product mix. It's all about product mix, which is an easy answer. We have approximately 600 different products in our consumable range, if I'm not mistaken, maybe even more. And they vary in price from INR 70 a kg or INR 80 a kg all the way to a couple of thousand bucks. So I can't give you a value generation answer. But on a metric ton basis, I think if you are looking at it on this basis, we should be up to, I think, 2x of what we are doing here at least before on consumables?

Yes, yes. You're right.

So 45,000 tons can be 90,000 tons.

45,000 tons is not 90,000 tons. Let me correct that a little bit. On the electrode front, I think we can push from 27,000, 28,000, 30,000 to approximately 60,000. On the consumables, on the wires, we're adding a little more capacity. So I would say -- so you would look at somewhere in the region of approximately 65,000 to 70,000 being more accurate, sorry.

So on the net working capital, we are 87 days today. When -- in a good period, we were at 55, 60 days, and our competitor is also 55, 60. So what you're indicating is that eventually, we should move towards 60 days of net working capital, right?

We should. There's no reason why not. There's no reason why not. We have to make it.

Okay. And lastly, on the growth side, do you think what we have seen in the last 5, 7, 8 years versus what you'll see incrementally for the next 3, 4 years, is that if -- are you seeing much more confidence in the value part of your business growing, which is basically normal course? And with steel inflation also...

Pritesh, we lost you. You are on mute. You said steel inflation, and then we lost you after that.

Yes. So without -- do you think that the value part of your portfolio will start moving much better versus what it was in the recent last 4, 5, 6 years? And steel inflation, kind of flowing through the number, which should be beneficial, you see a situation where next 3-year cycle is going to be one of the best growth cycles from the welding equipment -- welding business per se?

Okay. So look, my take on the last 2 years' pre-COVID growth as what I gave you is I don't really think there was real growth at a very high level. I think there was -- many things that are going on that we're trying to ensure people retain a certain top line and still at the cost of a bottom line, at the cost of margin and at the cost of working capital. Look, I can only comment on what we saw and what I saw or what we all saw from October of last year to approximately March, mid-April. And we saw a very robust -- if we can come out of all of this and go back to that fundamentally being in place, then yes, it should be a very good time. If we don't come out of it, then that scenario, I can't comment with so much bigger issues and I won't be able to respond. And I can't provide, but I definitely think it's well placed to do very well. It's a question of the fundamentals being -- continuing, money flow continuing, all of that.

From the earnings point of view, we have nowhere been on your -- on the profits part for the last whatever, 5, 6, 7, 8 years. But now if I'm to interpret you, the first step is that we do not have losses on the project business. It follows with growth momentum coming on the equipment plus welding consumable business, followed by margin expansions, whatever, reorganization of facilities, et cetera, that you have been talking about. Do you see a case where your company in this cycle can actually be INR 90 crores, INR 100 crore profit company over the next 3, 4 years?

I wish. I wish. Look, the aim is always that. And the idea is to keep working hard towards it. So I can't comment and say yes or no. And look, it's easier said than done, a lot of these things, but there's no reason why it's foreseeable. That's all I can comment.

Directionally, do you see that?

Yes. I can't give you anything different than what I'm answering you, Pritesh. So you have to move on. I can't tell you anything different. I can tell you exactly what I have. Like the endeavor is to get there, okay? That's it.

Next, we have [ Kiran Dhanwar ]. We have [ Keshav Garg ] from [indiscernible]. No? We have [indiscernible].

Aditya, I just want to understand the thought process on our group company, Ador Fontech. And do we see any synergies between the 2 companies, Ador Welding and Ador Fontech, at this point of time?

Yes. I don't want to comment too much on Fontech. This is a welding meeting. Look, there are synergies. I would be wrong to say there are no synergies. There are synergies for sure. All I can tell you is that there is -- I can't really comment too much on this right now. I can only tell you that there's nothing concrete to outlay. There's nothing concrete to outlay.

Okay. Sure. That's fair. The second question is on the equipment business. Historically, we have seen that ESAB has managed to grow pretty well while we have sort of struggled there. So is it the case of lack of product profile in certain segments, which we don't have? Or is it that we have not been able to do well on the sales and marketing side of things? Do you want to comment?

Yes. As I said, there are 3 parts to that business. There's welding equipment, there is welding automation and there is gas -- cutting products. In the welding equipment, we've done quite well, and we remain quite strong. And I don't have the exact data, but I do know that, based on how our sales team reacts with us and talks to us, we are definitely one of the dominant players between us, and ESAB, if not more dominant than them. On the welding automation, there is definitely scope for improvement like I was highlighting earlier. We are very small in the universe in welding automation, and there's opportunity to grow. And ESAB is a much stronger player over there. And plus they also have their MMC solutions that they come and provide in the market, which are beyond what we are in the position to provide today, to be honest. But there are many -- the universe is big, and we can still do much better over there. On the cutting front, as far as gas cutting goes, they are a much stronger player than us. We have a product line, and we're pushing it hard. But our trade channels are not as developed as theirs. But we are seeing a transition slightly from gas to plasma, which is driven by this oxygen shortage. And while that will not happen on a full basis, there has been a shift there. And we feel we are well placed in the plasma to do quite well. So if you break it into each of these segments, I think we have the potential to get -- to narrow that gap with them. But I think that the -- we have to work still very hard to get there as well. But I think the potential is there to get there, definitely. And welding equipment is doing quite well. There's a few more additional things, and we should be in a position to narrow that gap down. Is there last question you have? Please go ahead.

On mute?

On mute? Is that S-W-U? Go ahead.

I just have 2 small follow-up questions. One was, sir, what I understand is the industry on the consumable side and even on the equipment side is largely unorganized. So because of COVID or for whatever reasons in the past 1, 2 years, have you seen consolidation happening at an industry level?

No. I mean you had consolidation happen where ESAB basically bought [ UAC ]. That was one consolidation attempt that is part of, I think, a fairly smart move. Beyond that, I've not really seen anything major happen. As I talk of it all the time, I think it's an entrepreneur-driven business, a lot of it, especially after ESAB and Ador. Ador, for that extent, it has a lot of promoter involvement. But the rest of the businesses are entrepreneur-driven. I don't see any consolidation at the moment, but if opportunity arises, we'll look at it.

Okay. Okay. And sir, my last follow-up question is, sir, about the welding automation industry. Like you said, we are not that dominant right now. But if you could just help me understand what kind of opportunity is there on the market side, like ESAB is a dominant player, right? So what kind of opportunity do we see for ourselves in the welding automation segment, sir?

The opportunity is, look, there's low tech, there's medium tech and there's high tech in automation. We are unfortunately dealing a lot more in low and moving towards mid. And now we are working on creating a higher base in the mid-segment. And our team is dealing towards all of that. Mid-tech means just higher engineered sort of solution, right? And the very high tech, we're not players. And neither do we have the capability to be there, and we don't need to be there right now. There are much larger players. On the high tech, ESAB India does not do. ESAB Global comes in and works with ESAB India and does it. And plus there are many other players that also do it. But that all depends on CapEx outlay. Like, for example, auto is a big part. We're not seeing that much auto or large capital outlay right now. Wind power is a very big part, again, with a lot of capital outlay right now. So I think on mid-tech, we still see a lot of it happening, and there's opportunity over there. I think we also need to have a few alliances and some kind of international partners with the right technologies. So we're looking at that as well. Beyond that, that's it. I don't want to participate too much in the low-tech area. It doesn't interest us that much. So I think in the mid-tech area, there's a lot of opportunity to do well.

Can you quantify this in numbers, the opportunity on the mid-tech?

It'd be difficult to provide you any number that will not be misleading. I don't have a number that cannot be misleading. Sorry, I don't have anything. That is...

Like a rough range? No? Okay.

I don't have a number that I can publicly sort of announce. I'm sorry about that.

No problem. It was very helpful.

Okay. Thank you very much. I think we don't have any further questions. I hope we've answered everything. We will try to do this every 6 months is the plan to try and do this, and thank you for your time. Okay. Done?

Thanks a lot.