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Boom in the cement industry augurs well for the company.

Srividhya Sivakumar

Investors can buy the AIA Engineering stock with a long-term investment horizon. Being the second largest high-chrome mill internals player in the world, AIA appears well-placed to capitalise on the increasing demand for such mill internals from the cement and mining industries. Further, the company’s expansion in capacities, sound technical expertise, strong balance-sheet and a buoyant order-book suggest strengthening prospects.

At the current market price of Rs 1,625, the stock trades at about 15 times its likely FY10 per share earnings. This appears justified, considering the growth potential that lies ahead of the company. Investors, however, may have to temper their expectations on the returns front given the broad market volatility.

AIA specialises in the design, manufacture, installation and servicing of high-chrome mill internals, which find application in cement, mining and thermal power industries. The mill internals are used to grind clinker in cement mills; coal in thermal power plants and mineral ore in mines.

In terms of market share, both AIA and Magotteaux International of Belgium (global market leader) enjoy a dominant position worldwide. However, in the domestic market AIA is the market leader.

The demand for AIA’s products is likely to be driven by the switch in the user industries’ preference towards high-chrome mill internals against the conventional forged ones. While the current share of high-chrome mill internals stands at only about 15 per cent of the total demand, this may shift in favour of the former.

Higher productivity, greater control over grinding process, lower power consumption and lower wear rates give high-chrome mills an edge over the conventional ones. Higher replacement and projected demand from user industries, given their capex plans, also point to strong demand.

Moreover, since nearly 70 per cent of the company’s business comes from replacement demand, revenues are also protected to some extent from a sharp downturn during a slowdown in the capital spending cycle.

The company has significantly expanded capacity to keep up with the increasing demand scenario. It is looking to augment its capacity to 265,000 tonnes per annum by the end of the calendar year 2009 from the current levels of over 115,000 tonnes per annum. Of this, an addition of 50,000 tonnes is expected to become operational soon (currently under trial production). This would peg up the company’s consolidated capacity to over 165,000 tonnes per annum.

AIA plans to add the remaining 100,000 tonnes of capacity by setting up a manufacturing plant at a SEZ (special economic zone) near Ahmedabad. This facility will be completely export-oriented and, once operational will cater to the overseas mining sector also.

The company plans to increase its share of mining revenues in its exports to over 20 per cent by FY10 from negligible levels at present. However, it has so far not made any progress on the land acquisition. Any delay on this front may postpone the roll out of additional capacity beyond the intended timeline of CY 2009.

The total capacity of AIA, post-expansion, would be comparable with Magotteaux, which boasted of a production of about 262,751 tonnes in 2007. While this will help AIA expand its market share, it will increase the competition from the market leader.

Over the last two years, AIA has recorded a compounded revenue growth of over 33 per cent on a consolidated basis. With newer capacities coming on stream from this year onwards, the growth momentum is likely to continue. On the operational front, the margins have expanded by 11 percentage points to about 24 per cent. Helped by higher volumes and realisations, the net profit margins have also seen a healthy expansion.

With capacity expansion plans in place, AIA may have to look at securing commensurate ferro chrome supplies (critical raw material). While it has for some time been on the lookout for a possible backward integration (either by acquisition or setting up a new plant) for sourcing ferro chrome, there has been no notable progress.

With commodity prices soaring internationally, AIA’s ability to source raw materials may become crucial. Till such time, the presence of escalation clause in most of its contracts may offer some cushion.

Further, since the company derives more than half of its revenues from the overseas market and has presence in the US, UK and West Asia through its subsidiaries, its revenues stand exposed to forex risk. Any delay in expansion plans may also pose a downside risk to the company’s earnings.

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