What kind of stocks should one buy in a bear market?
Especially given the fact that bear markets are often accompanied by a slowdown in the local and/or global economy?

We need to find companies with robust business models. We want companies with low debt so that they can survive through difficult times. We want companies that have performed very well across long periods of time, can grow moderately fast in the future. And most importantly businesses that do not require external equity financing for achieving future growth.

Today we discuss one such business and evaluate what price do we want to pay to buy this stock

What is the Business?
The first step of processing any ore – be it copper, gold or iron ore is to crush the large rocks excavated from the mines in to smaller pieces. The smaller pieces are then subjecting to further processing to extract the pure metal.

The crushing/grinding process is a mechanical process and is done exactly how we would break rocks – with a hammer and a lot of mechanical force. In large mines, we use what is called as rotatory kilns which use the force of gravity to grind the ore rocks using grinding media (balls).

AIA Engineering provides hi-chrome grinding media and mill internals to process industries which require crushing and sizing of the input raw material – cement, power plants and mining industry (iron ore, copper, gold, platinum)

Rotatory Kiln

What is unique about AIA Engineering?
The world uses forged steel balls for the grinding process and the annual consumption is around 30 Lac Tons. There are only 2 companies in the world that make hi-chrome grinding balls – Magotteaux (headquartered in Belgium) and AIA Engineering. Hi-chrome grinding media offer cost savings through lesser wear-and-tear and better ore recovery in down-stream processing. AIA Engineering customizes the hi-chrome grinding media solution based on the mine-specific conditions.

Also, the cost of grinding media is around 2% (5%) of total production cost for cement & power plants (mining), but AIA product’s better performance results in total savings of 5-10% on the overall production costs. Thus, AIA adds much more value than what it costs to the customer to use its products.

Thus, once a customer gets converted to AIA, it tends to stick with it as the costs of switching to an alternate supplier are potentially damaging.


History of AIA Engineering
AIA Engineering was started in 1978 by Mr. Bhadresh Shah – IIT Kanpur graduate as a foundry. By 1985 he reached a business decision that the company should focus on grinding media mill internals.

Bhadhresh Shah sold 51% of the company to the market leader Magotteaux in 1991 (Belgian company) from which it also got the technological know-how for designing hi-chrome mill internals.

Bhadresh Shah fell out with Magotteaux in 2001 and after a protracted legal battle, bought out the stake of Magotteaux. AIA Engineering listed on the stock exchanges in Dec 2005 and started expanding outside India.

Business Segments that AIA operates in

  • Cement Industry (Global)
  • Mining – Iron Ore, copper, gold, platinum – (Global)
  • Power Plants (only in India)

AIA has an extremely focused approach to expanding its business. It focused on becoming the market leader in the cement industry and power plants in India before venturing out into the mining industry globally.

Today its focus is on the global mining industry.
The growth in the future will come from the global mining industry which is switching to hi-chrome grinding media solutions from forged steel grinding balls.

Let us have a quick glance at the sales break-up of AIA Engineering

Sales Volume (Tons) 2015 2016 2017 2018 2019
Mining segment (Tons) 106,056 100,684 126,479 138,398 170,224
Non-mining (Tons) 80,600 85,104 87,998 90,326 94,950
Mining Growth (%) -5% 26% 9% 23%
Total (Tons) 186,656 185,788 214,477 228,724 265,174

Financials (long-term record)
Let us look at the long-term financial performance of the AIA Engineering

2006 2010 2015 2019
Production (MT) 59,329       1,01,561       2,00,315 2,89,666
Revenue (Rs Crs) 430 974 2267 3070
PAT (Rs Crs) 54 171 431 511
Revenue from India (%) 52% 45% 28% 23%
Revenue outside India 48% 55% 72% 77%
ROCE(EBIT/CE) 29% 26% 28% 20%
Total Debt (Rs Crs) 48 8 55 128
AIA reach
(no of Countries)
65 90 120 125
Revenue per Ton (Rs/Ton) 72,477 95,903 113,172 115,773
PAT per ton (Rs/Ton) 9,068 16,837 21,516 19,270

The company has been expanding at a brisk pace in a profitable manner with high ROCE ratios with insignificant debt on the balance sheet. Future expansion shall also be met through internal accruals.

Competition and Substitute Products
The hi-chrome mill internals market is a world duopoly with AIA a close no. 2 behind Magotteaux. There are several other players which are 5% the size of AIA Engineering. Also, AIA engineering focuses on the replacement market of mill internals, whereas Magotteaux focuses on the OEM market for mill internals.

Hi-chrome mill internals are superior to the current manganese steel alloys that are used by 80-85% of the mining industry. However, adoption of hi-chrome internals is a slow process since a solution has to be tailor-made for each mine separately and the field trials to demonstrate superiority take anywhere between 12-18 months.

Competitor Year Revenue EBDITA Material Sold
Magotteaux Dec-18 $709 Mn $62 Mn 322,700 Tons of hi-chrome
Arrium Mar-15 $1.6 Bn $211 Mn 1,130,000 Tons of manganese alloy
AIA Mar-19 $440 Mn $94 Mn 265,200 Tons of hi-chrome

Magotteaux is now owned by the Chilean Sigdo Koppers group. Though it is the largest hi-chrome grinding media player in the world, it is not as profitable as AIA Engineering. Also, the largest grinding media player – Arrium was sold to the British Steel group under a bankruptcy resolution process when its parent went bankrupt in 2015. Based on data available from 2015, even Arrium was not as profitable as AIA Engineering.


What the future holds?
World Cement market ~ 300,000 tons
Indian Power Plant market ~ 100,000 tons (might double in next 10 years)
World Mining Market ~ 2,500,000 tons out of which only about 20% use hi-chrome internals.

Thus, AIA engineering can potentially grow by 3-4 times (over a long period) by substituting the demand for manganese steel alloys by hi-chrome mill internals.
Also, AIA Engineering would be able to easily fund its expansion with its strong internal cash flows.

The constraint to the growth is the pace of conversion of existing mines from the traditional forged steel balls to the hi-chrome grinding media.

Recent developments
In Jun-18, AIA Engineering announced a collaboration with EE Mill Solutions LLP, USA (EEMS).

Tie-up with EEMS

AIA Engineering will also set-up a new plant to exclusively manufacture mill internals that will be used in the mining industry. Presently, AIA Engineering already manufactures mill internals as well as grinding media for the global cement industry. This tie-up with EEMS – a special knowledge partner is expected to open up the door to have discussions with several miners across the globe about re-designing their grinding mills and in the process also talk about hi-chrome grinding media.

This is a significant positive development.

Completion of successful trials

In fact, over the last 12 months, successful trials of the mill internals solutions have been conducted at a large gold mine in Africa.

AIA Engineering becomes the only company in the world that not only now has a better hi-chrome grinding media solution, but also has the capability to re-design the mill internals for better downstream performance.


Current market cap = Rs 14,581 Crs. (Stock Price = Rs 1,546)
Investments = Rs 1,145 Cr
Enterprise Value (EV) = 13,564 Cr

AIA Engineering being a capital-intensive business, we use the metric EV/EBIT
Current, EV/EBIT = 23

The Nifty midcap and smallcap indices have fallen by more than 25% in the last 18 months, the stock price of AIA Engineering has held up quite well in this time-period.


18 months Price Chart – AIA Engineering

This is also an indication of the robustness of the business.

What is the growth expected?
Global mining industry is not growing more than 2-4%. Most of the additional sales of AIA Engineering come from substitution of the traditional forged steel balls used for grinding. Also, the sales process is very slow and time consuming.

I don’t expect the company to grow more than 10% over longer periods of time (5 to 7 year time horizon). The tie-up with EEMS may help boast the growth rates over the next 2-3 years.

Given the quality of the business, quality of earnings, no requirement of external financing to fund the growth, one should definitely pay-up for quality.
However, returns made in the stock market are partly determined by the price paid to acquire the stock. I would not recommend paying more than 15 times EV/EBIT.

Thus, I would be happier buying more stock of this company at a price of Rs 1200 per share. In case, one already owns the business, it’s a great business to own especially in a bear market like this.


2 Responses

  1. I have couple of observations
    There is no top in the bull market and there is no bottom in the bear market :-market saying , however the story hold good but the number from last couple of quarters narrate different story
    Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19
    Sales -1.90% 2.33% 30.01% -3.85% 3.51% -1.88% 22.13% -17.35% -5.00%
    Expenses 1.50% -0.32% 29.64% -3.05% 5.92% -5.33% 24.01% -18.87% -3.92%
    Depreciation is wildly swinging
    Depreciation -10.14% 12.09% -21.86% 18.38% 9.06% 19.61% 4.96% 4.24% -5.97%
    tax payment is more enjoying the bumpy rides …
    Tax -26.13% -21.50% 102.30% 10.63% 4.17% -24.53% -16.82% 24.16% -84.97%

    data : screener
    debtor day are in high range thus blocking the money and reduce cash conversion cycle timing , inventory turnover is 3 to 4 being no 2 in world this kind of inventory turnover may block the growth.
    How they are valuating their inventory need some digging is it FIFO or LIFO ?

    Who will take care his company after him : Shah has two daughters – one is a fashion designer and another has interest in chocolate making.wife also not interested in business, though she shares his interest in philosophy,on personnel note : He plays golf four times a week and his phone generally goes in the sleep mode after 4 pm “I come to office only if I have an appointment,”
    source: https://www.businesstoday.in/magazine/cover-story/best-indian-ceos-2014-bhadresh-shah-aia-engineering-export/story/212736.html


  2. There is a difference in the business model of AIA Engineering and its competitors.
    The competitors have manufacturing plants near to the customer. So, they have the plants spread out in South America, Europe, South East Asia etc.
    AIA Engineering has manufacturing plants only in India and supplies across the world from here. This means they need to keep much higher inventory in warehouses located near the customer mines. The customer mine needs to get comfort that their process will not halt for lack of spare part availability at any point in time without himself paying extra for the stocking of inventory.
    Given the high ROE, very low debt, large cash position of the company, I would assume working capital is not a constraint (at least as of now).

    It is a difficult and a lengthy process to convert the customer from forged media to high-chrome grinding media. We have to look at the past track record. Have they done it in the past – Yes. They will continue to do so in the future.
    The problem is the sales growth which is mediocre. Sales growth tracks customer conversion from forged media to high-chrome grinding media.
    Having said that, the recent tie-up with EEMS a metallurgy specialist is promising. Results at the customer mines have been very encouraging. This might help accelerate the customer conversion/penetration process for AIA Engineering.

    The variation in quarterly growth is fine with me given that there are so many variables in the business – currency conversion rates across 120 countries, mine maintenance schedules, macro factors, business plans of customers etc.

    I have not gone into the details of why the tax rates vary so much quarterly. The only thing I have checked is they actually pay the taxes that they claim they pay. It is a healthy profitable company that pays taxes.
    The reason for the variation could be export incentives, tax benefits because of holding structure – AIA has a subsidiary based out of UAE (tax haven) to supply to Africa, Americas, Europe etc.

    Promoter age is a problem. I see the fact that Bhadresh Shah plays gold 4 times a week as a positive – the business is running well without him. However, post-Bhadresh Shah will always be a risk.

    The purpose of the article is to analyse great businesses.
    Valuation is not cheap. One of the ways of making this investment work is that in case of a “global slowdown”, 2008 style financial crisis or even a 2013 type taper tantrum, this stock may fall by 30% to 50%. At that time, we don’t need to do the analysis, we will just buy in large quantities.

Leave a Reply

%d bloggers like this: