Aeron Composites got listed on the NSE Emerge Platform on September 4th, 2024. It was around the same time as Premier Energies getting listed on the mainboard so while Premier Energies made all the right noises, Aeron Composites did not make any and went by largely unnoticed.
But the market is gradually noticing what it failed to notice back then and it’s starting to show in the increased volumes.
To talk of the business model, the company deals in Fibre Reinforced Polymers (FRP). Most of you are hearing of it for the very first time, so let me take a moment to simplify this wonderful product for you.
FRPs are basically polymer resin matrices reinforced/re-strengthened with fibers. I am sure this didn’t make sense either.
Consider simply, plastic. It is flexible on its own but not very strong. If we were to add several threads of strong fibers inside it, it will definitely make this plastic very strong.
Think of it like this:
Plastic: Flexible, but not very strong on its own.
Fibres: Super strong and stiff.
FRP: A mixture of the two – Strong, stiff, and lightweight.
The FRP that we now have is surprisingly so strong, that it is fast becoming an alternative to the traditional building materials like steel and wood.
FRP has several advantages over traditional building materials like steel and wood:
- It is lightweight, so easy to carry.
- It has a really high strength-to-weight ratio.
- It requires virtually no maintenance for all of its lifetime. It doesn’t rust or corrode.
- It is highly durable.
- It is much more flexible.
- It is recyclable.
Thus it is emerging as a greener alternative to steel and wood which require high maintenance throughout their lifecycles.
The FRPs find wide applications across varied industries where it can potentially replace wood and steel.
The above is a slide from the corporate presentation uploaded by Aeron Composites and it shows the diverse applications of its FRP products and the width of industries it caters to.
A few factors have enabled me to develop deep conviction in Aeron Composites:
- Aeron Composites has just added FRP rebars into its product portfolio, which is the steel equivalent of sariya. The revenue from this new product will reflect in the March Half-Yearly results. Pundits are expecting a 20% add-on to the existing numbers.
- The money raised from the IPO is being used to establish a new plant in Mehsana, Gujrat. The company currently operates in rented property and the IPO money will enable it to move to its own production facility. The new production facility is also going to increase their manufacturing capacity from 18,8000 tons to 22,000 tons.
- The money raised from the IPO is being used to establish a solar power plant which will lead to reduction in energy costs for the company.
- The FRP industry itself in India is facing strong tailwinds. The expected growth rate in the industry in India is 16% growth rate compounded annually for the coming several years. Good, diligent players in the industry will take away the greater share of this growth pie.
- The company is trading still at decent valuations. While it appears to be fully priced in valuation wise, I feel that the market is yet to discount the capital expenditure and addition of new products into the portfolio.
- The promoters are very conservative with their guidance for the coming year, even though a substantial increase in revenue is visible with naked eyes. This shows that the promoters do not want to over-promise and under-deliver and believe in execution rather than the talking.
Of course, there are points of caution to ponder upon:
- It is after all an SME stock and many SMEs in the past have crashed by 90% owing to low float, bad promoters, company running into losses etc. SMEs inherently carry a risk which is several times greater than that of the mainboard companies. Fraud is rampant and honest promoters are a rarity, so it is hard to draw conclusions about Aeron or its promoters so early on. There is nothing that conclusively says Aeron and its promoters can’t be cronies and fraudsters.
- FRP as a product is costlier than wood and steel, even if the long-term costs are around the same.
- The industry is in nascent stage in India and how it shapes up will also depend a lot on market acceptability, government support, performance etc.
Disclaimer: I am heavily invested in the stock and nothing discussed over here is an investment advice, it is meant for educational purposes only.
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