Engineering growth

GUEST COLUMN/ IPO REVIEW

Though AIA Engineering is a market leader in the mill internals currently, there are concerns over its dominance in the future.

Ahmedabad Induction Alloys (AIA) Engineering is among the slew of IPOs slated to hit the market this week. The company has planned an initial public offering to mop up Rs 148 crore at the upper band of Rs 315 to expand its existing capacities and to meet working capital needs.

AIA operates in the mill internals industry that demands sophisticated technological knowledge and has its dominance in the tube mill segment. With a strong clientele list in domestic as well as overseas markets it is little wonder that the company's turnover is growing at a decent rate.

Having said that, the company's financial track record is far from consistent, predominantly due to its vulnerability to input cost.

Further its market dominance may be under threat if its one-time collaborator Magotteaux Industries decides to foray in the tube-mill segment in India in which AIA has currently 90-95 per cent market share.

At the higher end of the price band AIA's price to earning multiple on the basis of FY05 earnings is at 20.82x and at the lower end its 18.18x which according to analysts is slightly on the higher side.

The company plans to deploy 75 per cent of the funds for capacity expansion. AIA plans to issue fresh equity capital of 47 lakh equity shares of face value Rs 10 each in the price band of Rs 275-315.

The business
AIA is a niche player in the impact, abrasion and corrosion resistant high chrome metallurgy segment. The products of

AIA are used in ball/tube mills or the horizontal mills and also has a presence in the vertical mills used for crushing and grinding operations in the cement, mining and utility industries.

It offers a range of solutions in grinding operations for productivity optimisation and helps save power and maintenance costs. The business operation requires superior technological know-how and hence very few players operate in this segment.

AIA has an envious client profile with major cement companies like ACC, Gujarat Ambuja Cement, UltraTech, Grasim etc. In mining segment the client list includes Kudremukh Iron Ore Company, Hindustan Zinc etc.

AIA has forayed into the overseas markets with three 100 per cent subsidiaries one each in Middle East, UK and USA. Its products are sold under the brand VEGA.

The company currently has a capacity of 65000 tonnes including subsidiaries. The proceeds from the equity expansion will be used to expand its capacities, which are slated to go up by 44000 tonnes by October 2006.

The company derives its demand primarily from the replacement market as wear and tear in the cement industry is high and machinery needs to be replaced once a year. Presently, very few players operate in the market which allows domestic clients little option but to turn to AIA for procuring tube mills.

In the thermal power segment AIA is working on extending its market share.

In the overseas market the company caters to the cement sector. It plans to foray into the mining sector after it has consolidated its position in the cement sector. The company has ambitious plans to venture in the Chinese market too.

Financials
On a consolidated basis, the company has an inconsistent financial track record over a period of five years. The company started operating independently from 2001 after its association with Magotteaux Industries, Belgium ended. 

FINANCIALS
(In Rs crore)	FY05	FY04	% Chg
Net sales	293.67	214.35	37.00
Other income	7.98	6.98	14.33
Total Expenditure	260.91	186.69	39.76
Operating profit	32.76	27.66	18.44
OPM (%)	11.16	12.90	-102bps
Net profit	26.89	23.14	16.21
NPM (%)	9.16	10.80	-0.88bps

Though the topline has shown a consistent growth rate, operating and net profits have shown marginal growth during the five-year period. In FY05, net sales amounted to Rs 293.67 crore compared with Rs 214.34 crore in FY04, a growth of 37 per cent. Net profit improved marginally to Rs 26.89 crore compared with Rs 23.14 crore during the same comparable period.

But operating and net profit margins dipped due to higher raw material cost. In HI06, the company generated revenues of Rs 170.30 crore and net profit of Rs 21.06 crore after raw material prices declined.

Key concerns
One key concern for AIA is raw material costs. Though increase in input costs can be passed on to customers with flexible pricing contracts, it is only possible with domestic private sector players.

But this leverage is unlikely to be there with a domestic client base of PSUs which are rigid in their pricing structure. As far as overseas markets are concerned, the company has clients like Lafarge, Cemex and Holcim.

But it may not be always possible for AIA to pass on high costs due to competition, particularly from its erstwhile technical and financial collaborator Magotteaux industries which is the worldwide leader in mill internals.

Further, though the company has a dominant position in the tube mills domestically, it is possible the scenario may change in the future. Magotteaux itself may enter the tube mills segment by utilising its capacities in Thailand, as a green field project in India is likely to be cost ineffective, says a company official.

Higher import duty, currently at 15 per cent, restricts the company from entering the tube mill segment. But with import duties on a decline, this cost disadvantage may soon disappear. In such a scenario, AIA's market dominance can be under threat adversely affecting the financials of AIA.

Valuations
Though AIA seems to have capable management team and a dominant position in the niche segment of the mill internals, the offer in the price band of Rs 275-315 seems to be a little stretched.

At the higher end of the price band AIA's price-earnings multiple on the basis of FY05 earnings is 20.82x and at the lower end it is 18.18x. Valuation seems to be slightly on the higher side.