The Hindu Business Line : AIA Engineering: Invest at cut-off

INVESTORS can take exposure in the IPO of AIA Engineering. Strong growth prospects for the user industries and a well-known clientele — both in the country and abroad — induces confidence regarding sustainable double-digit growth in earnings for the next few years.

The offer is to be priced between Rs 275 and Rs 315. At the upper end of the price band, the offer is priced at 10 times its likely consolidated FY-06 earnings per share on post-offer equity.

AIA Engineering manufactures impact, abrasion and corrosion-resistant high chrome parts, which find application in the crushing and grinding operations in industries such as cement, coal-based power generation and mining. The high chrome metallurgy products are subject to a lower wear rate and optimise productivity of grinding mills.

Mr Bhadresh Shah (left), Managing Director, and Mr Jules Spede, Director.

Our take on the offer: We believe there is growth momentum in the underlying user segments such as cement, mining and power plants. We are bullish on the cement and power segments, which contribute close to 75 per cent of the turnover.

Cement production in the country is expected to be on an upward trend, given the vast infrastructure projects in the pipeline and buoyancy in the housing sector.

Domestic cement production is expected to grow at 7-8 per cent annually over the next three-four years. Moreover, fresh capacities of 15 million tonnes will be added in the next three years. Together, this could ramp up both the project and replacement demand for wear-resistant parts used in cement plants.

In the power sector, AIA Engineering's products are used in coal-crushing operations in thermal plants. Sixty nine per cent of the power generated in the country is from thermal plants and close to 83 per cent of the projects expected to come up are coal-based.

India expects to double its generation capacity in the next ten years. This gives an idea of the robust demand likely for abrasion-resistant components for coal crushing in the next few years. About 13 per cent of the company's revenues come from a single major client in the thermal power sector.

With the Asian hunger for metals growing, mining activity too is expected to go up. Companies have increased their exploration budgets and fresh capacities are coming up in sectors such as steel, aluminum and copper.

Given the good growth prospects for the user industries and a convincing clientele, we expect earnings to maintain the strong momentum of the past few quarters.

The company's international trade is confined to the cement segment; it already supplies to global majors such as Lafarge and Holcim. The current project will enable it further consolidate its position in the global cement segment.

Exports contributed 34 per cent of the turnover in 2004-05. Globally, cement production is expected grow at 3-4 per cent. The company is also expanding its foothold in China, a nascent market for the company. It already has sizable orders from cement plants in China.

What the offer document says: Fresh issue of shares would constitute 26.4 per cent of the capital. The cash raised from the offer will be used to set up production capacities, increase market share in the mining sector and enter the Chinese market.

Commercial production is expected to commence in September 2006. As on June 30, 2005, the company has an order book of Rs 163.3 crore, close to 73 per cent of FY-05 turnover.

AIA Engineering's domestic clientele includes ACC, Gujarat Ambuja, UltraTech, Grasim, Kudremukh Iron Ore Company and major thermal plants.

Internationally, it has supply contracts with global cement manufacturers such as Holcim, Lafarge and Cemex and commercial relationships with OEMs like FL Smidth. It reaches the overseas market through its subsidiaries in the UK, the US and West Asia.

Offer details: AIA Engineering is making a public issue of 47 lakh equity shares to be priced in the range of Rs 275 and Rs 315. SBI Capital Markets is the lead manager for the offer. The issue opened on November 17 and closes on November 22, 2005.

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