Updated: Jun 9
Company Name – AIA Engineering Limited (AIA)
Current Share Price – INR 1,889 (November 18, 2021)
Market Cap – INR 17,812 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 of 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 revenues for 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 new capacity setup.
Grinding media or balls (which generate majority of the revenue) are mixed with what is to be crushed (cement clinker, mined ore, coal) and are the 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 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 for the high chrome cast media players.
Over FY10-20, AIA grew volumes at 10% CAGR, revenue at 12% CAGR and operating profit at 11% CAGR aided by continued share growth in mining segment globally. This was supported by 12% CAGR in manufacturing capacity from 130,000T to 390,000T annually. FY21 growth was hit by the pandemic which restricted travel and new business generation for the company. The company also got hit by anti-dumping duties in a few key countries which restricted imports from India.
Manufacturing is basically 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 viability of shift from forged grinding media to company’s high chrome cast grinding media. This involves understanding the ore characteristics and customizing the grinding media for 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 healthy part of value created for miners with operating margins of 20%+ and ROCE of over 22% over last ten years.
Going ahead, strong commodity price environment globally is driving production for miners and higher acceptance for shift to AIA’s products. This is a long term volume and earnings growth driver with my expectation of earnings growth of 10% over 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 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, 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
As highlighted above, FY21 was hit by the pandemic and anti-dumping duties. Margins have been largely stable over 20% but 2QFY22 saw the impact of sharp rise in commodity prices such as steel, ferro chrome and scrap as well as higher freight costs globally. These will be passed on to the customers with ~6 months lag, which would help in the normalization of margins. RoEs appear weak as the Company is flush with more than Rs 2,000 cr cash on the balance sheet. Adjusted for cash, the RoE would be over 25%.
3. What is my view on company valuation?
The stock trades at 31x trailing 12m PE and 25.5x one year PER. This is in-line with historical valuations for the company (5 year average PE ratio of 31x). The stock has underperformed due to lackluster volume growth amid pandemic and import restrictions. As travel opens up, volume growth should see an improvement as was visible in 2QFY22. Capacity to service the demand is already in place and additional capacity can come up rapidly based on ramp up with expansion of 440,000 in the works. I estimate volume and earnings CAGR of 9% over the next three years with healthy longer term visibility of the continuation of this growth. Growth in volume delivery will help sustain P/E multiples over the near to medium term. Stock looks attractive for long term and should be evaluated by investors.
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 14 years of experience in equities with detailed focus on industrials, infra and metals/mining. I am an engineer and an MBA from a premier institute in India.
I have no stock, option or similar derivative position in any of the companies mentioned since 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 purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.