AIA Engineering: A good long-term bet due to opportunities in emerging markets

AIA Engineering’s first quarter results beat expectations after its sales and net profit grew by 11% and 22%, respectively, compared with that in the corresponding period last year.

Despite the slowdown in user industries like mining, cement and power, the world’s second largest high crome casting producer achieved strong sales growth by entering new markets and increasing the market share in the existing ones.

High chrome metallurgy helps reduce wear and corrosion rate in tools compared with conventionally used iron & steel, hyper steel, forgings, etc.

AIA Engineering will displace Magotteaux as the largest player in the wear and corrosion-resistant high chrome metallurgy segment when it completes its 50% capacity addition. This will be done through brown field expansion of 60,000 tonne, and green field expansion of 40,000 tonne. These are expected to be commissioned in the fourth quarter of 2013-14 and fourth quarter of 2014-15, respectively.

The cashrich balance sheet of Rs 625 crore (June 2013) and the company’s ability to generate consistent cash from operations should help it build up scale without any dilution of equity.


The high chrome-based tools currently constitute only 3 lakh tonne compared with 15 lakh tonne used in the mining industry. Considering the vast opportunity in the mining segment, capacity addition, and the ability of AIA Engineering to enter new markets, it should be able to show a volume growth of 15% during 2013-16.

Besides its better product mix, the favourable rupee movement (68% of its revenue is through exports) should also help the company improve its EBITDA margins in the coming years.

While the valuation is currently depressed due to the weak industry environment, re-rating should take place in the counter soon because of its higher net profit growth. A further improvement in EBITDA margins and return on equity are other factors that will help in this re-rating.

Its stated dividend policy to distribute 20% of its net profits, which may be revived upwards once the ongoing capacity addition is over, is another reason why it deserves a higher valuation.

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