Brokerage Assigns ‘Tactical BUY' On This Small Cap Multibagger Stock, Sees Robust 32% Upside

Nuvama Wealth Research has initiated a "Buy" to the stock of Ador Welding Limited (AWL), a small-cap Industrial Equipment sector stock (Market Capitalisation - Rs 1,088.90 crore). It sees a potential upside of 32% in the share price with a target price of RS 1,050 apiece.

AWL established in 1951, formerly Advani-Oerlikon, is one of the leading welding companies in India, manufacturing high-quality welding equipment, consumables, and welding automation solutions. AWL operates through 3 segments - Consumables, Equipments, and Flares & Process equipment division (FPED). AWL is expanding capacity to meet demand growth; and product mix change is helping margins. FPED segment is on a recovery path after cleanup & has won major order recently from ONGC.

Stock Outlook & Returns

The stock of Ador Welding last traded at Rs 800.75 apiece on NSE, gaining 1.09% compared to its previous close. It recorded its 52 week low at Rs 586.15 apiece on 25 February 2022 and 52 week high at Rs 1,037.80 apiece on 22 September 2022, respectively. 

The stock in a week has fallen 2.28%, whereas, in the past 1 month it has fallen 5.175 and in the past 3 months, it has fallen 11.89%, respectively.  Over a year it moved down by 18.45%. It gave 170.57% multibagger returns in the past 3 years and 62.69% positive returns in the past 5 years. 

Capex cycle to drive industrial consumables space

Multiple data suggest towards accelerating capex upcycle which will sustain industrial consumables demand. Cumulative order book/sales (TTM) of capital goods companies in 2QFY23 are nearing to / surpassed pre-Pandemic peak. Steel demand projection for India (unlike other regions) remains robust and welding consumable is directly correlated to steel usage.

AWL is a credible play within welding materials segment

AWL has ~15%/~9% market share in the welding consumables/equipment space and, along with ESAB India (CMP INR 4,021, INR 6189 cr), is a strong play on capex cycle driven welding material demand. Additionally, AWL is revamping its distributor network (drives ~65% of consumable sales), strengthening direct sales channel (in India as well as exports market), cleaned up Flares & Process equipment division (FPED) & won major order recently from ONGC (worth INR 145 cr), and regularly introducing new products to plug offering gaps verses competitors.

Healthy balance sheet and margin expansion potential

AWL is generating operating cash and able to fund capex without resorting to long term leverage. Now, AWL is undertaking capex to strengthen its IT system and also to expand capacity. Currently capacity utilization is running at 65-90% depending on consumables products and 60-65% for equipment products. We believe overall margins will also improve based on a) demand upcycle, b) gradual product mix change in favor of higher value items, and c) recovery in Equipment + FPED from 6% segmental margins in 1HFY23 (v/s 13% for consumables) to high single-digit (9.3% b FY25E).

Merger with Ador Fontech Ltd (AFL) to expand addressable market

AWL is in the process of merging Ador Fontech Ltd (AFL, a group company) and share ratio is fixed at 5 AWL shares for 46 AFL shares. AFL is engaged in repair & refurbishment market which is ~10% of overall welding market and integrated entity will be able to target project-based larger market through direct sales. Post-merger, promoter shareholding will be 53% in the merged entity.

Assign ‘Tactical BUY' rating with target price of INR 1050

Nuvama Wealth Research said, "We are using EV/EBITDA multiple for valuation instead of P/E multiple as past EPS trend is highly volatile (due to effect of exceptional items from one large EPC contract). At CMP, the stock is trading at 11x 1-yr fwd EV/EBITDA, marginally higher than the last 10 years average of 10.8x. In our view, industrial consumable stocks tend to trade at premium to their historical average in early upcycle, hence we are assigning +0.5 stdev premium to the 10-year average to arrive at target EV/EBITDA of 12.4x and assign target price of INR 1050 (12.4x FY25E EBITDA). Year to March FY21 FY22."

Disclaimer

The stock has been picked from the brokerage report of Nuvama Wealth Research. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.