Investors with a long-term perspective can consider taking exposures in the stock of AIA Engineering (AIAEL), a manufacturer of impact, abrasion and corrosion-resistant high chrome parts. At current market price, the stock trades at about 23 times the expected per share earnings in FY2008. On the back of an estimated global market of Rs 12,500-crore for mill internals used in mining and cement sectors (growing at about 4-5 per cent per annum) we believe, AIAEL, the second largest player in the product category in the world, is well placed to capitalise on this increasing demand. This apart, the threefold expansion in capacities, and a strong clientele with the likes of Holcim, Lafarge and Cemex also lend more confidence to the company's business prospects.
AIAEL's decision to expand focus on global mining and utilities holds immense potential; given that currently only about 10-15 per cent of the mill internals in the mining industry are hi-chrome. However, the demand for these hi-chrome products is likely to be driven by substitution of conventional products. For the quarter ended December 2006, cement, utilities and mining contributed about 52 per cent, 34 per cent and 14 per cent respectively of the company's domestic revenues. However, in the overseas market, the entire revenues were contributed by the cement sector. Revenue contribution from the cement sector on the domestic front is likely to sustain given that cement companies, despite the price control imposed by the government, have not scaled down their expansion plans. In addition to this, since the cost of consumables as a percentage of cement production costs is only about 1.5 per cent, it is unlikely to affect the margins of AIAEL.
Since more than 70 per cent of the company's total revenues come from replacements, there is a low possibility of any significant drop in demand during a downturn in the capital spending cycle. Furthermore, the proposed backward integration (either by acquisitions or setting up a new plant) for sourcing Ferro chrome and the setting up of a captive power plant, could lead to improved operating margins. However, delay in expansion plans, lower than expected capacity utilisation and a sharp rise in raw material cost remain the principal risks to our recommendation.