AIA Engineering: Why investors can hold this stock

Only 20-25 per cent of the global mining industry has shifted from using forged products to chrome products for its grinding operations. This gives significant opportunity for a company such as AIA Engineering, which is involved in manufacturing high chrome grinding mill internals.

Since our ‘Accumulate’ recommendation in bl.portfolio dated April 16, 2023, the stock has gone up by 33 per cent and its trailing P/E has also expanded from 28 times to 35 times during the period. With this, the valuation has moved up from its historical P/E range of 25-30 times. While the volume addition of minimum 30,000-40,000 tonnes can lead to revenue growing at more than 10 per cent CAGR, the EBITDA margin normalisation from current levels of more than 30 per cent to a sustainable level of 20-22 per cent over the long term might not lead to similar growth in EBITDA and PAT.   

Thus, while business prospects look good for the long term, to some extent this is countered by relatively higher valuation and scope for margins to normalise at lower level in the long run.. For these reasons, while existing investors can continue to hold the stock, fresh positions need not be considered at this juncture. 

Business

AIA Engineering is the world’s second largest manufacturer of HCMI (high chrome mill internals). Collectively known as mill internals, HCMI includes high chrome grinding media (grinding balls), mill liners and diaphragms. Mill internals are mainly used in crushing and grinding operations of mining, cement and thermal power generation industries. The grinding media balls are placed in a grinding mill (a hollow cylindrical shell) where the materials get crushed into an extremely fine form for their further usage.

High chrome grinding media is the company’s core product. About two-thirds of the company’s total sales is contributed by mining space (predominantly copper and gold) while the rest comes mainly from cement and thermal power. While in the cement space, majority of the players are now using high chrome grinding media, the same stands at only 20 per cent in case of mining industry, with the rest using conventional forged grinding media. In the Indian cement space, the company has 95 per cent market share while the same is 35 per cent at the global level (ex-China).

Though chrome-based grinding media cost higher than forged ones, by 20-40 per cent depending on the chrome content, this is compensated by wear, corrosion and abrasion resistance, increased throughput, lower power consumption and possibility of high level of customisation.

Scrap metal and ferro chrome are the raw materials used for the process. The company has a price escalation clause in its contracts, which enables it to pass on the costs to its customers with a lag of about one to two quarters.

Currently the company earns 75-80 per cent of its revenues through exports and the rest from selling its products in India. The US (12 per cent) and Australia (10 per cent) have been major markets for it, apart from India. The company supplies products in the international markets (about 120 countries) through its wholly-owned subsidiary Vega Industries. Its clients include large mining and cement companies such as BHP Billiton, Rio Tinto, Vale, Barrick Gold, Holcim-Lafarge, and Heidelberg Cement. Higher portion of income outside India exposes the company to forex fluctuation which it attempts to hedge by way of derivatives.

Performance

During H1FY24, the company reported production volume in line with H1FY23 at 1,48,744 tonnes and registered a YoY growth of 4 per cent in sales volume, delivering 1,51,771 tonnes. While mining volumes saw a growth of 5.5 per cent, the same for non-mining segment remained flat. Previously, the management guided for volume addition of 30,000 tonnes during FY24, which it has reduced to 10,000-15,000 tonnes on account of given slower pace of new customer conversion. However, management expects the annual sales volume addition of a minimum 30,000-40,000 tonnes. by the end of FY25.

The company reported YoY operating revenue growth of around 5 per cent to ₹2,534.38 crore in H1FY24. Further, its EBITDA increased by 38 per cent at ₹725 crore and margins expanded from 25 per cent to 29 per cent, driven by favourable product mix and lower raw material and freight cost. As per the management, EBITDA margins can normalise to 20-22 per cent on a sustainable long-term basis.

Over the last 10 years, during FY2013-23, the company has been able to grow its revenues at a CAGR of around 11 per cent with consistency in EBITDA margins ranging at 22-28 per cent. This shows its ability to pass on its raw material prices to its customers. Further, with growth in volumes, the company is expected to increase its revenue at a similar CAGR in the near term.

It has a strong balance sheet with net cash of around ₹3,135 crore, which enables it to incur capex without external borrowings.

Outlook

AIA Engineering has a dominant position in the chrome grinding media space after Magotteaux with sales volumes of around 2,91,000 tonnes (FY23). As currently, only 20-25 per cent of the grinding mill internal space is covered by the chrome grinding internals in mining industry, there is an addressable market opportunity of 2-2.5 million tonnes of conversion, which provides significant headroom for growth.

To capitalise on conversion, the company has planned to incur a total capex of ₹500 crore till FY25 of which ₹300 crore will be done in FY24. With 80,000 tonnes capacity enhancement project on Kerala JIDC plant and debottlenecking certain plants, which can add 15,000-20,000 tonnes of capacity, the company aims at expanding its production capacity from the current levels of 4,40,000 tonnes to 5,40,000 tonnes by the end of FY25.

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