Bhadresh Shah: Colours of chrome

Bhadresh Shah has no plans to diversify AIA’s business though it is generating more cash than he can invest
Image: Mayur Bhatt for Forbes India

Bhadresh Shah remembers his early brush with entrepreneurship with a hint of embarrassment. Soon after he graduated from IIT-Kanpur in 1975, he found himself back in his hometown Ahmedabad and, as he remembers, “The problem in Gujarat is that everyone wants to be an entrepreneur.” So with ₹1 lakh in capital, the metallurgical engineer set up a small foundry that made pressure dye castings and succeeded in losing all his money in the first year.

Fast forward four decades later and in a country that can boast of few manufacturing successes, Shah, 67, has built a world-class metallurgical company, AIA Engineering which exports three quarters of what it produces. It counts among its formidable set of customers the who’s who of global metal, mining and cement companies from ArcelorMittal to Rio Tinto and Heidelberg to Lafarge. As customers have accepted his products (and service), Shah has announced plans for a big expansion to take capacity up by 40 percent.

Clearly Shah sees a long runway ahead. It is an assessment the analyst community agrees with. “There is a huge opportunity in the wear parts business in the mining space with global demand at 3 million tonnes and penetration by ferrochrome alloys at less than 20 percent,” says Shradha Sheth, research analyst, institutional equities, Edelweiss. After its recent expansion, AIA’s capacity stands at 440,000 tonnes. At 32 times earnings (₹14,200 crore market cap) the stock is pricing in rapid future growth even though the last five years have been subdued with profits rising by 6.3 percent a year to ₹443 crore.

What makes the success of Shah, who is back on the 2018 Rich List at rank 100 after a gap of seven years, even more noteworthy is that he has built his niche in a B2B business where customers usually have the upper hand. The technical name for what AIA supplies is ‘high chrome mill internals’. These are the metal alloys that are coated on everything from grinders to crushers and allow mills to function more effectively. The company boasts of 100 different alloys. His main competition is from a global company, Magotteaux, which was once his partner. For many, AIA’s slow and measured expansion is a textbook study on how Indian companies should expand their business overseas. But before we get there let’s take a look at how AIA built its capabilities.

Soon after running through his initial capital in 1975, Shah said he had no choice but to keep his plant operational. His first task after losing his initial capital was getting himself on the list of suppliers to the Ahmedabad Electricity Company. Once in, he used his time to suggest improvements and went beyond the role of an ordinary supplier. His parts were used in pulverisers and boilers and that was where metallurgy played a role. Shah’s suggested changes resulted in the parts performing better and this gave Shah the confidence to spend on research. As his business grew, Shah started thinking about other areas where he could expand and set up Ahmedabad Induction Alloys or AIA.

What set Shah apart, even in those early days, was his ability to be on the constant lookout for new business lines. At the same time he was clear that the business had to be built on a strong technological backbone; over the next two decades Shah tied up with Slegten, a Belgium headquartered maker of mill linings and mill internals, and formed a joint venture (JV) with Magotteaux. It was here that AIA started making chromium alloys that are then used to coat linings for grinding equipment in say, a cement plant or a mine. The alloys are melted and then put into moulds, heat-treated and shipped to factories in India and the world over.

As his business grew (and the tie-up with Magotteaux matured), Shah shifted base to Belgium in 1996 to work as an employee. But it was his decision a year and a half later to move back that would set AIA on the path to success. As an entrepreneur, he wanted the Indian JV to succeed. “I thought they were not paying enough attention to the Indian joint venture of which I was a 49 percent owner,” he says. He knew if he stayed on in Belgium, the Indian plants would never become exporters as they would serve only the Indian market or at best the subcontinent. They would probably not push themselves to adopt the best manufacturing practices and would never become world beaters in what they produced. The entrepreneur in Shah decided to take over. He knew that the Indian market was finite and for him to succeed in the long run he would have to look for markets outside India.