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Core Duopoly Business

AIA Engineering is a defacto monopoly player in the manufacturing of HCMI in India. But is it worth investing in?

How would you like to own a duopoly business in a core sector? AIA Engineering is one part of a global duopoly that manufactures grinding media, liners and diaphragms-collectively called high chrome mill internals (HCMI). AIA is the world's second largest manufacturer of HCMI and is a defacto monopoly player in India.

Traditionally, mills use forged mill internals. These are being replaced with HCMI that promise better grinding, lower wear and tear and longer life. AIA is now turning to the mining sector that is estimated to open up an opportunity of 1.2 million tonnes per annum (ICICI estimates) and is largely untapped. Only around 20 per cent of the mining sector uses HCMIs.

Mill internals by nature need replacement fairly often, creating a constant stream of replacement demand. Such demand is no small affair - they constitute 85-90 per cent of total demand for mill internals.

AIA is on its way to become the world's largest HCMI manufacturer post its capacity expansion. Capacity is expected to jump from current 2 lakh tonnes to 4.4 lakh tonnes by FY16. AIA's arch-rival and the current world No. 1, Magotteaux has a current capacity of 3.5 lakh tonnes per annum.

Short term hiccups: AIA's two primary sectors, cement and mining are highly cyclical. Cement relies on economic growth and real estate demand, mining on global metal prices. With both client sectors cyclical, AIA's earnings will be impacted by their respective industry cycles.

AIA's free cash flows will take a hit as a result of its capacity expansion. In the current financial year and the next, the company will have no free cash flows.

Even though cement and mining sectors did not do well in the last couple of years, AIA's revenues compounded by 25 per cent annually in the last 10 years. Earnings per share grew by 28 per cent annually during the same period. A good long term bet on the core sectors, AIA still has a large opportunity in front of itself.