Company Name – AIA Engineering Limited (AIA)
Current Share Price – INR 2,796 (March 13, 2023)
Market Cap – INR 26,373 cr
1. What is interesting about the stock?
AIA Engineering is a more than two-decade-old B2B company manufacturing grinding media and mill liners which are both consumable for crushing and grinding cement clinker, mineral ores, and coal. The product is manufactured in India and sold across more than 175 countries globally with exports contributing more than 80% of the revenues of the company. The media is sold to cement manufacturers and miners of iron ore, copper, gold, and platinum and is more linked to overall production levels rather than the new capacity setup.
Grinding media or balls (which generate the majority of the revenue) are mixed with what is to be crushed (cement clinker, mined ore, coal) and are then processed in a SAG mill (similar to a front-loading washing machine) wherein the tumbling action makes the balls fall on the clinker/ore and crush and grind them. In the process, the balls also get consumed and a fresh batch is fed after fixed intervals.
Traditionally grinding media was made of forged steel but AIA and its current competitor and earlier partner (Magotteaux Industries) have successfully established the superiority of high chromium cast balls in terms of lower lifetime costs, better mineral throughput, and lower reagent use for iron ore/copper/gold/platinum ore crushing. They have hence gained steady market share in the 2-5-3mt annual grinding media market. Their combined share of ~16% is almost equally divided between the two. Other competitors include forged steel grinding media manufacturers globally. Being a sort of a niche market, no other new entrant has been a threat to the high chrome cast media players.
Over FY12-22, AIA grew revenue at 10% CAGR, and net profit at 13% CAGR aided by continued share growth in the mining segment globally. This was supported by growth in manufacturing capacity and Company is increasing capacity from 4,40,000 tons in FY23 to 5,20,000 tons in FY24. Current capacity utilization is around 65%.
Manufacturing is a foundry operation with expertise in steel alloying and heat treatment being the key elements. The moat for AIA is the extensive on-ground engineering presence globally as adding a new mining customer is an arduous year-long process of establishing the viability of the shift from forged grinding media to the company’s high chrome cast grinding media. This involves understanding the ore characteristics and customizing the grinding media for the best output and cost combination while at the same time not impacting crushing operations at all. Once established, customers are sticky and volume offtake grows with mining output growth. AIA on its part retains a healthy part of the value created for miners with operating margins of 20%+ and ROCE of over 22% over the last ten years.
Going ahead, a strong commodity price environment globally is driving production for miners and higher acceptance for the shift to AIA’s products. This is a long-term volume and earnings growth driver with my expectation of earnings growth of 10% over the next three years and visibility of this continuing for a long time. Strong demand for copper for EVs will be a ley long-term growth driver. Growth will also be aided by a tie-up with EESL for providing design solutions for mill liners to improve grinding mill output and lower power consumption for operations.
The Company is owned and headed by Bhadresh Shah, a first-generation entrepreneur who is actively involved in the business. He is ably supported by a strong professional management team. Succession planning is one thing that will need to be watched though.
2. Key Historical Financials
The business has recovered in FY22 and 9MFY23 after being hit by the pandemic and anti-dumping duties in FY21. Margins have been largely stable at over 20% but Q3FY23 saw the impact of falling raw material prices, freight costs, and better product mix driving margin to 30%. Raw material prices and freight costs are passed on to the customers with a lag so the management expects the long-term EBITDA margin to be 20-22%. AIA Engineering has high working capital at 191 days in FY22 which increased from 160 days in FY22 driving poor cash flow conversion (CFO/EBITDA) in FY22. ROCE peaked at 29% in FY14 and FY15 and has been coming down since then partly dragged down by the cash balance (the current level at INR 2,300 cr).
3. What is my view on company valuation?
The stock trades at 27x trailing 12m PE. This is below with historical valuations for the company (5-year average PE ratio of 31x). The stock has outperformed as the business picked up after a difficult FY21. Management has guided towards a 10% growth in revenue over the next three years with healthy longer-term visibility of the continuation of this growth.
However, the stock could look expensive based on the expected growth rate and high working capital.
4. What are the risks to the investment analysis?
The key risk for volume growth is increased protectionism which would limit imports from India and hurt volumes. We have seen this in Brazil and Canada already, even as management remains sanguine on this not repeating in other countries. Another risk would be stronger competition from forged steel media manufacturers in terms of aggressive pricing as high chrome cast media continues to gain share.
About the Author
I have over 16 years of experience in equities with a detailed focus on industrials, infra, and metals/mining. I am an engineer and have an MBA from a premier institute in India.
I have had no stock, option, or similar derivative position in any of the companies mentioned for the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.