Why Are Prashant Jain, Kenneth Andrade & Other Stock Wizards Bullish On AIA Engg?

Bhadresh Shah

When you study the list of major shareholders of AIA Engineering, you will be surprised to see that most of the well-known stock wizards are sitting pretty in it.

Pulak Chandra’s Nalanda Capital is the single largest shareholder with a massive chunk of 79,18,845 shares worth Rs. 480 crore. We already know Nalanda Capital’s incredible track record in finding multi-bagger stocks like Mindtree, Page Industries, Supreme Industries etc.

Mathews India Fund (which has winning stocks like Symphony, Gujarat Pipavav Port, Sun Pharma, Bajaj Corp, Supreme Industries, MindTree etc in its portfolio) holds 23,06,467 shares.

Prashant Jain’s HDFC Mutual Fund & Kenneth Andrade’s IDFC Mutual fund hold 21,12,958 & 3,76,461 shares respectively. David Nadel’s Royce Fund holds 42,500 shares.

The attractiveness of AIA Engineering as an investment opportunity was described by David Nadel in pithy terms. He pointed out that AIA Engineering is the global number two (the first being Magotteaux of Belgium) manufacturer of chromium grinding balls used by the mining and cement industries. He emphasized that AIA had averaged revenue growth of 30% and ROE 20%+ for more than a decade. He explained that the competitive advantage or “moat” enjoyed by AIA was that its products had a low cost but were essential for the customers. Because there was a high cost of failure in the form of a plant shutdown, customers are not interested in looking for cheaper grinding alternatives and prefer to stick to AIA.

This theme is expanded further in the research report at valueresearchonline.com. The essence of the report is that AIA Engineering has a “stranglehold” and is the “de facto monopoly player” in the cement industry and a dominant player in the mining sector. The report explains that AIA has a 90% market share in the domestic cement sector and a 25% market share globally. It is also emphasized that AIA is expanding its capacity from 200,000 tonnes to 440,000 tonnes by FY 2016 and that this will make AIA a much bigger player than its arch rival Magotteaux.

Another report that will help you understand the dynamics of AIA Engineering is an article by Jwalit Vyas in the ET. Jwalit has pointed out that thanks to the oligopoly nature of the business, AIA enjoys a strong bargaining power with clients. Its operating margins have been consistently around 20% for the past several years. He also points out that AIA had a debt of only 160 crore as against equity of 1,418 crore and operational cash flows of 160 crore at the end of FY13. AIA’s profits are expected to grow at 20% CAGR, he adds.

There is also a nice interview with Bhadresh Shah, the founder and MD of AIA conducted by AXIS Capital. In the interview, Bhadresh Shah is asked several searching questions on AIA’s roadmap/ vision over the next 5 years, the global opportunity size, succession plans, management structure, outlook on capacity, margins, working capital etc.

There is also a detailed research report (pdf) by ICICIDirect which corroborates much of what Bhadresh Shah is stating in the interview.

Speaking for myself, I think the fact that so many stock wizards with proven credentials have taken a substantial position in AIA means that it cannot be ignored. However, given the strong run up that the stock has seen in the recent past (91% YOY, 18% 3M) I am nibbling on the stock and waiting for a dip to load up a meaningful quantity.