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Low penetration of high chrome mill internals (HCMI) globally can prove to be a growth opportunity for mill internals manufacturers. As one of the leading global manufacturers of HCMI, AIA Engineering appears to be well-placed to ride the transition from forged grinding media to chrome based grinding media.
Since its March 2020 lows, the stock of AIA Engineering has more than doubled. Earnings growth has also been supportive, hence the stock is currently trading at a trailing P/E of around 28 times, in line with its historical 5-year average valuation of about 27.6 times.
While there is no strict comparable peer, Tega Industries which is a closed listed peeron account of a common product i.e. mill liner, trades at 30 times. Both companies have similar margin profile and low debt levels. However, note that AIA Engineering is about 4.5 times bigger (9MFY23 revenue) than Tega.
Over the last ten years, the company has clocked double-digit growth (CAGR) in its revenues without accumulating debt while it has accumulated cash and maintained its operating margins. Investors with a long-term view can accumulate the stock on dips due to broader market volatility.
Business
AIA Engineering is the world’s second largest manufacturer of HCMI. Collectively known as mill internals, HCMI includes high chrome grinding media (grinding balls), mill liners and diaphragms. As on December 31, 2022, the company has an installed capacity of 4,40,000 TPA. Mill internals are mainly used in crushing and grinding operations of mining, cement and thermal power generation industries. It’s a niche business in which only two players in the world are involved — the other being Belgium-based Magotteaux.
High chrome grinding media is the company’s core product. About two-third of the company’s total sales is contributed by mining space (mainly copper and gold) while the rest comes mainly from cement. 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. The rest still use conventional forged grinding media. Though chrome-based grinding media cost higher than forged ones, by about 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 cement and mining companies such as BHP Billiton, Rio Tinto, Vale, Barrick Gold, Holcim-Lafarge, and Heidelberg Cement.
To capitalise on the mining industry conversion from forged to chrome mill internals, the company has planned to expand its capacity to about 5,20,000 MT by FY24. As per the management, the capex incurred for the same shall be through internal cash accruals. Thereby, the company is expected to close FY23 with a capex of around ₹200 crore and plans about ₹300 crore for FY24. Further, it maintains its stance of achieving sales volume growth by 30,000-35,000 MT during FY24 from the current levels of 2,94,000-3,00,000 MT, the majority of which is expected to come through new customers.
Financials
During the 9MFY23, the company reported revenue from operations of about ₹3,635.21 crore i.e. an increase of about 47 per cent year-on-year, while there has been volume growth of nearly 16 per cent. This has been on account of higher realisations due to softening of raw material and freight costs and pass-through of earlier rise in costs. These factors also helped EBITDA margin expansion to about 25.4 per cent over 20 per cent in the same period last year, while both EBITDA and net profits grew by about 85 per cent during the period. The management has refrained from giving any specific guidance on margins but has maintained its stance that margins may sustain at 20-22 per cent on a long-term basis.
The company has negligible debt, which makes it a net cash company with cash balance of nearly ₹2,308 crore. This provides enough room for incurring the incremental regular capex. Further, as per the company’s dividend distribution policy, it shall keep on making payouts to the tune of 20 per cent of profits.
As AIA manufactures its products in India and sells them internationally, it has to maintain high inventory in warehouses across geographies which makes its operations working capital-intensive.
Over the years (FY10-FY23), share of exports in revenues increased from nearly 50 per cent to about 80 per cent currently. In line with this, the working capital requirement of the company has also increased, which can be captured by gradual increase in inventory days from about 60 in FY10 to nearly 120 days in FY23.
Risks
Despite the strong fundamentals, one needs to note the risks. The company has faced certain headwinds in Canada and South Africa as its product has been subject to import duty to the tune of about 15.7 per cent on account of anti-dumping. Currently, the matter is sub judice and the duty shall remain till the resolution. On account of the duty imposed, the company has faced combined volume loss of around 32,075 MT (major loss from Canada) during FY22, which it has been able to mitigate on account of significant volume gains through other geographies.
During FY23, AIA expects to get volume of 5,000-6,000 MT from Canada. Ultimately, it might face the risk of further volume loss in case of such decisions in other geographies.
Further, on account of requirement of maintaining stock across geographies and extending high credit to overseas clients, working capital requirement may remain high. Besides, as AIA gets majority of revenues through exports, it is exposed to foreign currency fluctuations — which it attempts to hedge by way of derivative instruments.
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