Mining Profitable Growth

MINING PROFITABLE GROWTH 

AIA Engineering Ltd. (AIA) is one of the world’s largest manufacturers of the value-added, impact abrasion and corrosion resistant high chrome mill internals (HCMI). It is engaged in the designing, development, manufacture and installation of products like grinding media, liners, diaphragms and vertical mill parts (collectively referred to as mill internals). 

The company’s strength is evident from its strong focus on three core industry segments – mining, cement and utility. These products find application for grinding and crushing operations in these segments. 

The company has been investing to enhance its presence in the mining segment. In this segment, the company caters to different mineral ores like iron ore, copper ore, platinum ore, gold ore, lead ore, zinc ore and bauxite ore, among others, across different mill types. The growth primarily stems from the large annual replacement market of 2.5 to 3 million tonnes in this industry. Out of these, HCMI accounts for just about 15 per cent of the demand. Hence, AIAE is strategically poised to leverage the conversion opportunity from conventional mill parts to its high chrome wear parts. Apart from the cost reduction due to much lower wear rates, this technology also reduces environmental hazards and the cost of other consumables (other than high-chrome grinding media). We expect a steady growth in this segment over the medium to long term. 

AIAE has, over the past few years, added major customers in the mining segment across the globe, with more focus on major mining centres such as North America, Latin America, Australia, Africa, and the Far East Asia. Although the company’s current focus is on the mining segment outside India, AIAE is wellpoised to capture incremental domestic mining demand in India as and when the industry expands. 

AIAE has strong manufacturing footprint, which includes a full-fledged design shop using 3D technology for drafting, pattern shop equipped with the latest CNC machines, and manufacturing facilities located in and around Ahmedabad, Nagpur, Bangalore and Trichy. 

In the cement segment, the global demand continues to be sluggish in the key markets of North America, Latin America, western and eastern Europe and Africa. However, certain specific markets in Asia, Africa and South America, may see capacity enhancements and increasing utilisation. In India, the average capacity utilisation of the cement companies have started improving on the back of the government’s impetu s towards improvement in infrastructure, especially the road and port segments. This will provide a much-needed stimulus to the industry. AIAE will be an immediate beneficiary to serve the additional requirement from the increasing cement production going ahead. However, the overall outlook of this segment remains flat. 

Revenue Distribution 

Capex Plan 

AIAE’s effective capacity reached 3,40,000 metric tonnes after successful commission of phase-I of brownfield expansion project at GIDC Kerala during FY17. The company is implementing second phase of capital expenditure plan at GIDC Kerala, involving expansion of the total capacity by further 1,00,000 MT, which is expected to be commissioned next year. This will take the total installed capacity to 4,40,000 MT. The incremental capex required to be incurred for the second phase is estimated at around Rs 350 crore and the company is funding it entirely from its internal cash accruals. According to the management, this is an automated plant, hence employee costs are lower at this plant. 

Two fundamentals driving the future growth 

The large market opportunity in the mining sector amidst potential conversion from forged to high-chrome grinding media. 

Phased expansion to 4,40,000 MT by FY2018-19, which will make aiae the largest high-chrome grinding media producer globally

Key Risks 

AIAE has entered into the global mining industry which is an uncharted territory for the company and is mainly served by traditional players. This poses a risk for the company. In addition to this, fluctuating raw material prices are a threat for the company. Even though price escalation clauses have been built into customer contracts, any substantial increase in the raw material prices can still affect AIAE’s performance significantly. Any shortage of domestic or imported raw materials may also affect the company’s growth prospects. Also, AIAE is dependent on growth prospects of cement, mining and power sectors for product sales and any slowdown in these industries may lead to restriction in volume growth or contraction in margins. 

Key Highlights/Developments 

1. Mining sector sales increased on account of continued business penetration efforts in the sector.
2. New long term order from Barrick Group of 18,000 MT per year
3. Order book as on October 1, 2017: Rs 656 crore. 

Aia group, through its wholly-owned subsidiaries outside india, sells directly to end customers located in more than 125 countries. 

Financials 

On the financial front, the net sales of AIA Engineering declined by 2.13 per cent to Rs 480.93 crore in the second quarter of FY18, as against Rs 491.41 crore in the same quarter of the previous fiscal. The PBIDT of the company dropped by 31.02 per cent to Rs 79.40 crore in the second quarter of FY18, as against Rs 115.11 crore in the second quarter of FY17. However, the net profit of the company grew by 35.99 per cent to Rs 91.76 crore in the second quarter of FY2018 as compared to Rs 67.48 crore in the second quarter of FY2017. On an annual basis, the net sales of the company increased by 12.19 per cent to Rs 2,063.65 crore in the FY2017, as against Rs 1,839.46 crore in the FY2016. The PBIDT of the company increased by 8.44 per cent to Rs 557.85 crore in FY2017, as compared to Rs 514.41 crore in FY2016. However, the profit after tax of the company declined by 32.21 per cent to Rs 417.31 crore in FY2017, as compared to Rs 615.63 crore in FY2016. 

On the valuation front, the company's PE ratio stands at 35.06x, as compared to its peers Mahindra CIE (114.93x) and Graphite India(75.21x). The company’s return on equity (RoE) and return on capital employed (RoCE) stood at 16.18 per cent and 33.68 per cent, respectively. The company, with debt-to-equity ratio of 0.05x, is virtually debt-free. AIAE has also been maintaining a healthy dividend payout of 23.85 per cent. 

Conclusion:- 

The overall sales volume for AIAE is expected to continue to grow strongly in FY18. The company has guided for volume of 245,000-250,000 MT. While cement and utilities are expected to remain flat in the near term, growth is expected to be driven almost entirely by the mining segment. 

With a strong global mining outlook, we recommend our reader-investors to BUY the stock.