Stock Discussion – Axtel Industries Limited(AIL)

The main intention of this blog is to learn and understanding various stock analysis and valuation techniques. From time to time , I will draw your attention to certain stocks. This is not a buy or sell recommendation but you can definitely keep these stocks under your watch list and keep on monitoring them. Today , let’s discuss the stock of Axtel Industries Limited or AIL. It is a small-cap( 599cr) company.

About Axtel Industries Ltd –

• Axtel industries, a company based out of Gujarat, is a specialist in engineering food processing machines for companies in the food processing industry.

• AIL is operational in the food industry since 1991. AIL has a well-diversified client portfolio.

• Axtel’s customer base consists of massive, dominant and organized players( of the food industry) of diverse geographic areas(India and abroad). It’s clients include Hershey’s , Nestle , Cadbury and Kellogg’s.

• On the managerial front , AIL’s promoters hold more than three decades of experience in the same industry.

• They have propelled the company when it comes to internal growth by planning the factory setups etc.

The Industry –

• COVID 19 has moulded a new trend altogether. Masses have inclined towards packaged foods. In India, a rise in the number of working women has had a significant impact on the demand for ready-to-eat as well as packed foods.

• The availability of processing equipment in different designs, sizes, configurations, among others can further foster market growth. Also, changing dietary habits and increasing consumption of ready to eat and processed food further increases the market growth over the next few years.

• The urbanization trend contributes significantly towards improved living standards and rising incomes, which, in turn, influence the affordability of processed food products to a greater extent.

• The India food processing equipment market is segmented based on equipment, process, form of end product, application, company and region. Based on process, the market can be categorized into automatic, semi-automatic and manual.
  However, concerns pertaining to loss of important nutrients while processing food can hamper the market growth

• The benefits of packaged food include easy handling, and free from external tampering.

Shareholding –

Competitive Landscape –

Axtel’s Competitors Include –

Axtel mainly faces competition from European players.

• Buhler (Switzerland)                    
• JBT (Chicago)
• Marel(Iceland)
• Hobart (USA)
• Alfa Laval (Sweden)
• Krones AG (Germany)
• BADDER(Germany)
• Reico(India – Unlisted)

• Buhler Group (one of the largest food processing equipment manufacturing company – has been in existence for 150 years) and is ahead of everyone.

• Buhler’s sales are 2.4 times its raw material cost compared to 2 times for Axtel. 

• Their employee cost on average is 30% of sales compared to around 20% for Axtel.

• Buhlers Revenue in 2020 was approximately 250 million (Canadian dollars) or 1520 crores. On the other hand Axtel’s sales were 100 crores.

• Reico which is a fully owned subsidiary of Sudarshan Chemicals operates/competes in the same business line as Axtel. They also have organized, dominant clients.

Key Points –

• The small players (in India) are based out of Bombay, Faridabad, Ludhiana, Coimbatore and Calcutta.

• The machines are easy to copy

• Small players(most companies) in India don’t have a strong customer base(example – Bharat Process Equipment) like Axtel

• Axtel has a large labour arbitrage

•  The specialized custom equipment market is dominated by European and American players like Buhler, SPX, GEA Group, Russell Finex, Rockwell, CM-OPM etc. 

• European entities will grow and dominate the export markets

• These(European) companies specialize in certain equipment and a product line

•  large food companies have internal design teams to come up with designs

• Small companies hire external consultants for this section

• FMCGs distribute their Capex over more players

Risks Associated with AIL –

• Commodity Price Risk– AIL’s profit margins are susceptible to changes the price of raw material such as steel , power etc. Since its customers are massive players, AIL  has limited bargaining power in terms of passing on any unfavourable movements in the price of its raw materials.
• Interest Rate Risk – A change in interest rate can affect the finance cost of AIL.
• Foreign Exchange Risk– Any volatility in the currency market can affect AIL. However, the Forex market tends to move in smaller increments because it’s higher liquidity results in lower volatility

Axtel’s Financials (Last 5 years) –

Key point –

• From the table , it can be observed that AIL has an above-average operating profit margin of 19%

• The sustainability Axtel’s OPM (Operating Profit Margin) is a worth discussing.

• Operating profits are either driven by pricing power in sales or by better cost management

•  In order to maintain or improve it’s OPM , Axtel must  improve its price realizations substantially or reduce its costs substantially

• Since AIL is highly susceptible to changes in the price of its raw materials, AIL ‘s OPM might not be sustainable.

• Axtel cannot improve it’s price realization as it has limited bargaining power

PE Ratio Chart (last 5 years) –

Sales and Margins Chart (last 5 years) –

Axtel’s Financials (Charts) –

Why did Axtel incur a loss 2015?

• Axtel’s sales decreased due to significant order cancellation from a client

• There are two broad reasons that cause negative profit margins: an increase in costs or a decline in sales. In this case, it is a combination of both.

• AIL’s expenses increased(especially employee cost- by 11%) and exceeded revenue, leading to a loss.

• Moreover, increasing expenses and decreasing sales caused a loss.

• Depreciation (a non-cash expense) also increased (leading to a loss).

Valuation –

*The information provided by Finance Voyager is for information purposes only and is not intended for advice. Finance Voyager also does not make any recommendation or endorsement as to any investment, advisor or other service or product. The information is only for educational purposes and not buy or sell recommendations.