Alpha | AIA Engineering Ltd. – Equity Research Desk

AIA Engineering Ltd – Global Solutions Provider for Mining Companies

Incorporated in 1991, AIA Engineering Ltd. specialises in the design, development, production, installation, and servicing of high chromium wear resistant parts for grinding equipments in cement, mining, quarry and thermal power-generating industries. Headquartered in Ahmedabad, Gujarat, with a legacy of more than 45 years in India and with its international marketing arm Vega Industries, the company set benchmarks in quality, services and innovation, establishing a strong reputation as a global solution provider. AIA and Vega Industries are world leaders in manufacturing wear parts for cement plants. As of 31 March 2023, the company has 6 plants in India, and it is serving to more than 120 countries internationally. 

Products and Services

AIA’s product portfolio consists majorly of high chrome grinding media, mill liners, energy efficient pulp lifter system predominantly serving mining and cement industry. The company also supplies blow bars, hammer, impellers, anvil, feed disk, frame liners etc for quarries, aggregate and recycling industry. On the services front it has capabilities to assists in alloy selection for wear reduction, installation support, liner wear monitoring, alloy optimisation for improving metal recoveries, mill audits etc.

Subsidiaries: As of FY23, the company has 11 subsidiaries and one associate company.     

Key Rationale

• Expansion plans – During FY23, AIA commissioned mill liners plant, adding an incremental capacity of 50,000 TPA. It added two Hybrid Projects (2.1 MW Windmill + 1.89 MWp Solar) at Village Dedan, Gujarat, taking total Renewable Energy Capacity to 32.28 MW. The company expanded capacity of 50,000 MT in castings at Kerala GIDC Facility. It continues to proceed with its brownfield capacity expansion of grinding media capacity. With an ongoing capex of Rs.250 crore, this is estimated to be commissioned by the end of FY2024-25. The company is undergoing a restructuring of its manufacturing operations encompassing a range of strategic initiatives aimed at optimising operational efficiency. These initiatives include some capacity de-bottlenecking and restructuring, creation of warehouse space, pattern storage facilities and related infrastructure investment at an estimated cost of Rs.200 crore. Company anticipates achieving 20,000 MT of capacity addition in castings because of de-bottlenecking. The company acquired 30% stake in a high technology design capability company based in Australia, aiming to accelerate the penetration in the overall mid-liner business.

• Q2FY24 – During the quarter, AIA achieved 77,725 metric tonnes sales which converts to revenue of around Rs.1274 crore compared to the Rs.1312 crore of Q2FY23. The company reported EBITDA of Rs.444 crore marking an increase of 29% YoY compared to the Rs.344 crore of Q2FY23. The net profit increased by 32% to Rs.323 crore compared to the Rs.245 crore of same period of the previous year. The EBITDA and net profit margin for the quarter stood at 35% and 25% respectively, benefits from improved product mix and reduction in freight costs. During the period the company received export benefit of Rs.21 crore which is in line with the benefits under RoDTEP and duty drawback. The company experienced a slight dip in the sales volume in mining segment but was offset by an increase of about 3,300 tonnes in the cement segment.

• Financial performance – AIA has generated a revenue and PAT CAGR of 15% and 19% over the period of 5 years (FY18-23). Average 5-year ROE & ROCE is around 16% and 20% for FY18-23 period. The company has strong balance sheet with a robust debt-to-equity ratio of 0.08.

Industry

Minerals are precious natural resources that serve as essential raw materials for fundamental industries, so the growth of the mining industry is essential for the overall industrial development. The vast resources of numerous metallic and non-metallic minerals that India is endowed with serve as a foundation for the expansion and advancement of the nation’s mining industry. India is the second-largest producer of coal in the world and also the fourth-largest iron ore producer in the world. The index of mineral production of the mining and quarrying sector for the month of June 2023 at 122.3, was 7.6% higher compared to the level in the month of June 2022. With high allocation under the Union Budget 2023-24 for infrastructure, affordable housing schemes and road projects to fuel the economy, the domestic cement industry is poised for a volume surge. As India has a high quantity and quality of limestone deposits through-out the country, the cement industry promises huge potential for growth.

Growth Drivers

As per the Union Budget 2023-24 Government approved an outlay of US$ 32.57 billion (Rs. 2.7 lakh crore) for the Ministry of Road Transport and Highways which is likely to boost demand for cement. Under the housing for all segment, in 2023-24 the budget estimate for Pradhan Mantri Awas Yojana is US$ 9.63 billion (Rs. 79,590 crore), a 66% rise than the last year’s budget estimate of US$ 6.43 billion (Rs 48,000 crore) in 2022-23. The country has allowed 100% FDI through automatic route in mining sector.

Competitors: BEML Ltd.

Peer Analysis

In comparison with its listed competitor, with a robust growth in revenue, AIA is ahead in terms of performance ratios, indicating the company’s financial stability and its efficiency to generate income and returns from the invested capital.

The company is operating in a relatively oligopolistic market with private companies like Magotteaux Industries Private Ltd (MIPL) and ME Elecmetal considered as key competitors globally.

Outlook

The company has proposals to spend Rs.500 crore capex between FY24 and end of March 2025 where about 200 crore goes towards the grinding media expansion, 200 crore towards overall restructuring and debottleneck, 50 crore towards captive power and other 50 crore for land and other requirements. 80,000 ton grinding media expansion is on track for being commissioned by December 2024. The company has given a long-term margin guidance of 23-24%.  AIA with its expanding global footprint and long gestation projects in pipeline is expected to generate robust revenues in mid and long term.

Valuation

Given the significant market share of the company coupled with strong entry barriers to new players, we believe that AIA Engineering Ltd has the potential to increase its revenue and profitability in the coming years. Hence, we recommend a BUY rating on the stock with target price (TP) of Rs. 4338 at 22x FY25EPS.

Risks

• Forex risk – The company has significant operations in foreign markets and hence is exposed to forex risk. Any unforeseen movement in the forex market can adversely affect the company.
• Delays in finalising project – Technical evaluations and negotiations with the client entities might take longer than expected to materialize.
• Permitting risks – It takes on an average couple of years to secure permits needed to commence operations for mining companies, which might impact the turnover of the companies associated with the metals and mining sector as well.