Midcap Mania: Despite pain in smallcap index, Axtel Industries outperforms the boarder markets

They offer process plants for grinding/milling of foodstuffs, pharmaceuticals, cosmetics and chemicals; cleaning, grinding, pasteurisation and steam sterilisation systems for spices; food/feed extrusion systems and conveyor dryers and dehydration systems.

The company is located at Halol, near Vadodara and has everything that is required to manufacture robust and aesthetically-designed equipment. The major industries that the company caters to include confectionery, spices, condiments, snacks, etc... and finds its application when a company is setting a new plant or when a firm is looking at automation by replacing the existing labour force.

The first nine months of FY19 have been superlative with topline growth of more than 50 percent. Axtel Industries' margins were stable at 17 percent and net profit was at Rs 13 crore. Additionally, the company’s nine-month performance is better than the entire FY18 on all parameters.

A company delivering strong results and not declaring dividend raises questions in the minds of investors but in 2018 Axtel had declared the dividend for the first time which soothes some nerves. The company had done a capital expenditure a few years ago but now has repaid loans and is sitting on some cash in its books which will support valuations.

Questions that could be posed to its business is where does the growth come from? Does the company have capacities to scale up? Input costs like stainless steel could hurt margins in the times to come if it spikes up. Also, the company pays taxes only in Q4 for the full year which could be due to its lumpy nature of the business.

The promoter group holds 49.95 percent in the company and consists of two engineers -- Ajay Naishad Desai and Ajay Nalin Parikh -- who are also the co-founders of the company.

One may argue that the promoter group could have looked at adding more stake in the company to give a sense of confidence. Besides the promoter group, two other families have large stakes in the company. The Pathak and Bubber families together own nearly 18 percent in the company.