In a niche of its own

Renowned Wall Street investor Peter Lynch in his book One Up on Wall Street had famously noted that there are bad companies in exciting industries and great companies in dull industries. AIA Engineering clearly fits the latter category. But its promoter, Bhadresh Shah, will have no complaints about being dubbed “dull”—not when his company is showing smart earnings growth year on year.

The uniqueness of AIA Engineering lies in its business model. It operates in a high-tech, niche engineering segment, making parts for coal grinding in equipment that’s used in power plants, cement units and the mining industry. “We have a wider customer base in 70 countries and our products are mainly for the replacement market,” says Shah.

If AIA has no competitors in India—and few globally—it’s because of the high entry barrier the business has. That ensures a virtual monopoly, and chunky profit margins.

Why AIA Engineering is a winner High entry barrier in the area it operates Its products for replacement market are recession-proof Diversified customer base Low debt on the books

It is not a business in which you set-up a plant and then start selling the product. In our business, one has to first understand the application at the customer end and design the product with the right metallurgy to offer a solution to the customer,” says Shah.

What makes AIA downturn proof is that its products are used by industries that are seeing plenty of activity. Just one of them is power. AIA has diversified into a range of user industries— like cement, mining —to ensure that it isn’t tied down to the fortunes of just one sector. The company says its biggest customer does not contribute more than 10 per cent to sales.

However, there are a few dark clouds on the horizon. “Many of the new capacities being added by the company are for the mining industry and in the current scenario, demand may not come from the sector,” says Ankit Babel, Research Analyst with Dolat Capital Market. He adds that AIA’s profit margins are on a cost plus basis; due to this, profits could decline when input costs fall.

AIA is looking to hedge its risks by entering new geographies and looking for new opportunities within mining. The company may get mired in the slowdown in the days ahead, but will clearly be the biggest beneficiary once the global economy turns around.