Riding the economic boom

Updated: Nov 13 2005, 05:30am hrs
Infrastructure is the pivot on which economic development of the country rests and cement, mining and utilities are its basic drivers. Further, to maintain a consistent GDP growth rate of 7%, power generation has to grow by 8-9% in India. All these attributes have made solution-based companies to expand their capacities and fill the present demand and supply mismatch.

AIA Engineering Ltd (AIAEL) is one such company that has come up with 47,00,000 equity shares of Rs 10 each for cash at a premium to be decided through the book-built process. The price band for the issue has been fixed from Rs 275 to Rs 315.

The company is promoted by Bhadresh Shah and is a niche player in the value added high chrome metallurgy segment catering to the cement, mining and thermal power industries.

At present it has six manufacturing units, all in GVMM Estate , Odhav with a total capacity of producing 30,000 tonnes mill internals with a proposed capacity of 76,000 tonnes.

AIAEL with its initial public offer is planning to use Rs 75 crore of net proceeds for new expansion plans. The company has proposed to set up additional manufacturing facility at a village Changodar near Ahmedabad to augment its share in the cement market both in India and abroad. The plant is scheduled to begin by October 2006 and is proposed to be set up for the purpose of manufacturing high chrome mill internals with an installed capacity of 46,000 TPA.

The sales of the company moved up to Rs 167.48 crore for the year ended March 2005 from Rs 144.85 crore in March 2004. PAT also moved up by 16% to Rs 26.89 for the year ended March 2005. The half yearly results for the period ended Sept 30, 2005 registered sales at Rs 95.17 crore and PAT figure at Rs 21.06 crore. Besides this, the company maintained a high working capital of Rs 140.6 crore during the period ended Sept 30, 2005 for its strong warehousing facility and due to JIT (Just-in-Time) inventory system followed by the company.

The company had a technical-cum-financial collabration from 1991-2000 with M/s Magatteaux, a Belgium based manufacturer of high-chrome metallurgy based wear and impact resistant cast components. Since then the company has been working independently and at present it's major customers in cement industry are ACC Limited, Gugrat Ambuja Cement, Ultratech and Grasim Industries Ltd. In the mining segment it has beneficial plants like Kudremukh Iron Ore Company, Hindustan Zinc and Bharat Aluminium Company. It also sells its products on the international market through the subsidiaries located in the UK, USA and the Middle East.

After the Electricity Act 2003, the licensing requirements have been reduced and the generation-company is free to enter distribution business and vice versa. Currently, the private sector accounts for 11% of the total power generation capacity. Thus the industry foresees an increase in power capacity thereby generating demand for the company's vertical mills. Further the government plans to add 1,50,000 MW of generation capacity over the next decade in order to bridge the demand and supply gap. The government also plans to add 1,00,000 MW of thermal power generation capacity that means new project demand of around 12,000 mt spread over next 10 years.

The company enjoys a direct customer relationship and accounts to meet 95% of the industry demand. The company's export share has moved up to 34% in 2005 from 20% in 2004 of the total revenues. It has global marketing network for selling products outside India and with the enhancement of capacity at Changodar, the company envisages to further raise its global market share.

Valuation

AIAEL has a weighted return on networth (RONW) of 43% with an EPS of Rs 34.03. There are not many companies listed in the same industry. The only company with a similar profile is Welcast Steels which is traded at a P/E of 12.04.

On the lower band, the PE of AIAEL works out to 8.08 times and on the upper band the same figure is 9.25 times. This is lower than the industry P/E of 12.