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Engineering Growth

AIA Engineering’s 35 per cent share in the global cement grinding space makes it a good long-term pick…

AIA Engineering (AIAE) designs, develops, manufactures, installs and services parts made from chromium that are resistant to wear and tear, corrosion and abrasion. These products find application mainly in industries like cement, mining and thermal power generation. The company’s product portfolio consists of high chrome grinding media, liners, vertical mill spares, diaphragms and mining liners.

Growth drivers.
Currently the company has a 35 per cent share in the global (excluding China) cement grinding media space. The company has lately begun to focus on the Chinese market, and its efforts have started yielding results. Strong demand for its products also emanates from the mining sector globally. Hence, the company has also been focusing on this sector across commodities like iron ore, copper, gold, and platinum.

Expanding capacity.
In FY11 AIAE expanded its existing facilities after which its capacity stands at 2 lakh tonnes per annum. The company has further expansion plans, both greenfield and brown field, and plans to increase its capacity by a further one lakh tonnes per annum by FY14.

Business development expenditure.
AIAE is in the process of adding more mining customers for which it is incurring developmental expenditure. It is also incurring some expenditure in the crushing market, which it is looking to enter over the next six to nine months. While mining volumes have already gained traction, the continued introduction of new mine sites (on which trial runs have to be conducted) is likely to impact margins.

Sound financials.
In FY11 the company generated free cash flow of Rs 291.10 crore. This free cash flow is used both to meet its working capital requirements and to fund its capex. At the end of FY11, it had cash and bank balance of Rs 153.06 crore. The company’s total debt stood at a meagre Rs 21.15 crore.

Valuation.
The stock is currently trading at a price-to-earnings (P/E) ratio of 15.94, which is lower than its five-year median P/E of 20.06. Its five-year compounded annual growth rate in earnings per share (EPS) comes to 27 per cent, which translates into a price-to-earnings to growth (PEG) ratio of 0.59 times. You may buy this stock with an investment horizon of at least three years.