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Grinding its Way to the Top

Operating in a duopoly, AIA Engineering enjoys high barriers to entry. The company is also debt-light and cash-rich

AIA Engineering operates as part of a duopoly that manufactures high chrome mill internals (HCMI) - a superior substitute of the traditionally used forged-steel grinding media in cement, steel plants and mining companies. The barriers to entry in this industry are high - based not on technology but on customer relationships. To add to its strength, lower manufacturing costs give AIA margins higher than its global competitors.

Selling to the core sector comes with its share of risks. AIA's two main user industries - mining and cement - are both down. The fall in global demand has resulted in cutbacks in production. While AIA's top line could be under pressure, it has a couple of things going in its favour.

First, it is debt-light. To wade through tough times, AIA has the cushion of cash to the tune of ₹845 crore. Debt stands at ₹116 crore. AIA plans to utilise this cash hoard and its fantastic cash generating business (EBITDA margins at 29 per cent) to undertake an expansion project, at the end of which it will double its existing capacity and by 2016 become the largest HCMI manufacturer in the world.

AIA is for patient investors. The risk at hand is of the slowdown in the mining and steel sectors. Leading global miners BHP Billiton and Rio Tinto have cut production. The outlook for steel remains in dumps for now, with production levels expected to remain muted for the rest of the current year.

The slowdown in the mining sector, if the current trend continues, will make it difficult for AIA to increase penetration in the sector - simply because the sector may go slow in conversion to HCMI.

According to Ambit Research, mining volume growth could fall from earlier estimates of 30 per cent and 25 per cent in FY16 and FY17, respectively, to 27 per cent and 21 per cent, respectively, for the same two years - a reflection of the slowdown in the sector.

AIA's strength lies in the relationships that it has cultivated with its clients. That is a difficult advantage to beat. Yes, servicing a commodity industry exposes it to cycles, but AIA today is at its strongest position it has ever been. After a smart run-up of close to 70 per cent in the last one year, the stock has cooled down 15 per cent.

Utilise any future market decline to buy this high-quality company. It does not have any listed competitor in the country.

Key Financials

TTM5Y CAGR (%)
Market cap (₹cr)1113123.71
Revenue (₹cr)208616.7
EBITDA (₹cr)67119.92
Net profit (₹cr)43820.31
TTM5Y average
EBITDA margin (%)31.1123.32
Net margin (%)20.3414.85
RoE (%)20.6418.33