Grinding profits

PENNY WISE

AIA Engineering has been a stunning performer on the bourses since listing and the stock is still worth buying.

AIA Engineering that makes crushing and grinding machines for cement, mining and power companies has been caught in an enviable situation.

Driven by strong demand in the past 12 months, the company has been refusing orders as its plants have been running full steam. Yet in FY06, AIA managed robust revenue growth of 39 per cent and a stunning profit growth of 97 per cent.

"We put up great show last fiscal due to substantial increase in realisations, thanks to increased contribution from high margin project business. Favourable product mix and stable raw material prices in the last quarter pushed growth numbers too," says a senior company official.

To maintain this growth and tap the tremendous potential in international markets, AIA is going for massive capacity additions of around 160 per cent.

The Rs 300-crore AIA produces mill internals that are used to grind boulders of raw materials like limestone or coal into fine material. The company manufactures high chrome parts that reduce wear rate, are heat resistant and maintain quality, along with controlling costs.

With 90 per cent market share in the cement market, this niche player boasts of a near monopoly in an otherwise fragmented domestic market.

Now AIA is making moves not only to consolidate its dominant position in the cement segment, but also to cater to the growing needs of the mining and power sector.

Over the years, AIA has grown through acquisitions to become the leader in its business segment, but now it is going for internal expansions.

In November 2005, AIA raised Rs 148 crore through an initial public offering in order to fund its expansions. AIA is coming up with a 100 per cent export oriented unit (EOU) at Changodar in Ahmedabad to augment its capacity from 65,000 MT to 1,69,000 MT. One half of the expansion will be complete by the end of calendar 2006 and the rest by end of next year.

"The growing business scale will bring in benefits of economies of scale and tax savings, once the EOU becomes operational," says Ajay Parmar, head research, Emkay Securities.

To keep up its edge, AIA is also strengthening its technical expertise through tie-ups with Southwestern Corporation, UK for improving process operations.

Cementing gains

At present AIA has no major competitors in the domestic markets. Cement majors such as L&T and ACC did try to enter the business, but abandoned soon because it requires specialised expertise and given the size of their core business, this market seems small.

Magotteaux International, Belgium though present in India, has not yet taken keen interest in the domestic market. AIA management is not worried about competition as it commands a wide and loyal customer base, both in India and abroad.

With 70 per cent of its business coming from cement, AIA's clients include all the big cement manufacturers in the country "� ACC, Gujarat Ambuja, Ultratech and Grasim Industries "� apart from global players such as Holcim , Lafarge and Cemex.

In fact, AIA enjoys 20 per cent market share in the global cement market. With the EOU, the company hopes to take its share up to 35 per cent. The company has made inroads into China; the world's largest cement market and is expanding presence in America, Middle East and Europe.

The big picture for the cement industry looks promising. The 2000 million tonne global cement market is growing at around 3.5 per cent annually, thanks to boom in the construction landscape in China, India and Middle East. Thus demand for high chrome grinding media used mostly in cement industries is expected to grow at 5 per cent y-o-y.

The treasure mine

Plagued by under investments for years, the mining activity is finally picking speed across the globe. Backed by insatiable demand from China, America, Europe, Middle East, Australia and Africa, the sector is seeing massive investments.

AIA plans to capture this market, which promises 10 times more potential than the cement market. The company is ideally poised to tap this opportunity since high chrome grinding media, in which AIA specialises, enjoys low wear-tear advantage over other forged media and is thus a preferred option for the mining industry.

Currently, the mining business contributes 10 per cent to AIA's revenues and its key clients in the segment include Hindustan Zinc and Bharat Aluminum.

Another area of growth for AIA is power. About 83 percent of the 1 lakh MW power capacity addition planned in the country is likely to be coal-based.

And the rising demand for coal will provide fresh triggers to the grinding media demand. Thus the contribution from utilities which at present constitutes 20 per cent of revenues can be expected to increase.

Strong numbers

In FY06, the consolidated revenues and net profits stood at Rs 407 crore and Rs 52.36 crore respectively. Operating profits jumped by 110 per cent to Rs 81.5 crore.

In June 2006 quarter, AIA's standalone sales posted y-o-y growth of 51 per cent to Rs 92.04 crore. Operating and net profits increased by 83 and 96 per cent respectively. 
 

FINANCIALS
(Rs crore)	FY06	FY05	FY04	FY03
Net sales	301.75	222.49	161.20	155.90
Y-o-Y growth(%)	36.00	38.00	3.40	-
Operating profit	55.29	30.84	26.79	24.67
Y-o-Y growth(%)	79.00	15.00	8.59	-
OPM(%)	18.32	13.86	16.62	15.82
Net profit(%)	37.28	20.40	20.58	-21.41
Y-o-Y growth(%)	83.00	-1.00	196.12	-
NPM	12.35	9.17	12.77	-13.73

AIA holds orders worth Rs 295 crore as on June 2006 (0.72 times FY06 revenues), of which 40 per cent consists of high margin projects. AIA management is confident of delivering a revenue growth of 25 per cent per annum over the next couple of years. Analysts estimate AIA's s consolidated FY07 and FY08 revenues at Rs 506 crore and Rs 702 crore respectively.

Issued at Rs 315, AIA has been a star performer on the bourses, post its listing in December 2005. The stock is currently trading at Rs 725.2, a premium of 88 per cent over its listing price.

At the current price, the scrip trades at 24.6 times its FY06 consolidated earnings of Rs 29.45 and multiples of 19.6 and 12.2 times its FY07 and FY08 consensus earnings estimates.

"The current valuations may seem to be expensive, but if we look at the FY07 and FY08 multiples, AIA offers a good investment opportunity. Being a niche player and looking at the earnings visibility, the current premium is justified," adds Parmar.