AIA Engineering Ltd(AIA) headquartered in Ahmedabad, Gujarat was setup in 1979. The company is promoted by Mr Bhadresh K Shah. I will explain more about the company’s product, history and way ahead in the blog ‘AIA Engineering Ltd- Analysis’. Just so that you do not lose interest in not going further: The co. has a consistent profit margin of around 20%, net cash of more than ₹1200+ crores and counts mining giants like Rio Tinto, Barrick Gold as its clients.
Good read about the history of the company: Link
History of AIA: Link
AIA Engineering Ltd is world’s second largest manufacturer of high chrome mill internals (HCMI). HCMI includes grinding media(grinding balls/GM), liners and diaphragms, collectively known as mill internals.
The primary or core product of AIA Engineering in HCMI is grinding media(grinding balls(GM)). The purpose of these balls are to crush minerals, coal, limestone and cement into smaller particles from where is it sent to refining. These balls are rotated along with the axis in either horizontal(ball mills) or vertical mills to have impact with the larger objects(mined rock pieces etc) and covert them into smaller pieces by impact and wear. It is a high power consumption process and is called comminution.
The video below explains how the grinding takes place.
AIA Engineering Ltd- Analysis
Basic video explaining how the ball mill works, and how the grinding ball crushes the rock pieces.
Forged Grinding Media Vs High Chrome Grinding Media
There are 2 major types of grinding media/ball used globally:
1. Forged steel media . Due to crushing and pulverizing(breaking into smaller particles) materials, grinding balls obviously would need good abrasion resistance and enough impact toughness.
2. High chrome grinding balls are stronger than forged grinding balls because of the use of chromium and because of superior quality the price for high chrome media is 30% higher than forged media. Higher the chromium content, higher will be the hardness of the ball.
Along the main goals of mineral processing, reduction of the consumption of both power and grinding media is equally important for both economic and environmental reasons.
To reduce consumption of grinding media, it is necessary to understand the wear mechanisms that are in action during the grinding process, considering the peculiarities of this process, i.e., the heterogeneity of the feed and the interactions between the mineral slurry and the grinding media, among others. This makes customization very important to garner the best results.
Forged steel balls can be customized only to a certain extent whereas high chrome balls can be customized to whichever way required.
Also, Wet grinding mainly with seawater(much more corrosive) is more prevalent in several areas(due to govt regulation), where high chromium balls are much more effective.
The higher cost of High chrome grinding media is compensated by lower wear rates, lower power consumption as well as very high level of customization to meet the requirement of specific mills.
AIA IS PRESENT ONLY IN THE HIGH CHROME MEDIA SEGMENT.
AIA Engineering Ltd- Analysis
AIA Engineering Ltd- Sectors serviced
AIA Egineering Ltd’s grinding ball/grinding media finds usage in 3 sectors:
1. Mining: In mining, grinding media is used to grind mineral ore before it is processed for further metal separation. Historically, forged steel balls are being used as grinding media but gradually high chrome media has been replacing them. AIA’s growth in this segment comes from converting clients from forged media to high chrome media. There is larger opportunity for high chrome media in gold and copper grinding. AIA’s product is used into the mining of mineral such as Iron, Copper, Gold, Platinum, Lead, Bauxite etc. Mill internals contribute about 10% per cent to the production costs in mining industry.
2. Cement: In cement manufacturing, grinding media is used for Grinding of limestone and clinker. In cement, there is already high acceptance of high chrome grinding ball as grinding media. Also, there is standardized process and facility template across the globe, so not much change or replacement expected. Because of excess capacity of cement worldwide, there is only recurring demand from the wearing out of these ball. Mill internals contribute just 1.5-2 per cent to the production costs in cement manufacturing.
3. Thermal Power project: In power generation, grinding media is used to grind coal before feeding into the boiler. Thermal power generation is on a decline given the emphasis on renewable energy sources. This segment is present only in India.
AIA Engineering Ltd’s management used to give out the segmental break of revenue till 2018 but stopped giving them since then.
Till FY18, the breakup was 50-55% revenue from mining, 35% from cement and 10% from thermal power plant.
Now, the management just gives out the growth in the production and sales of Mining segment as their point is they want to just focus on the mining sector. As of Q2Fy20, the revenue contribution from mining was 64%.
AIA Engineering Ltd- Analysis
AIA Engineering Ltd-Industry Size and growth
The grinding media market size towards Mining is roughly 25,00,000-30,00,000 TPA and is dominated by forged media. Of this, only 20% is high chrome media.
AIA’s growth comes from replacing those mines that already use forged media with high chrome media.
So the growth rate of the industry is meaningless as it would totally depend on the ability of AIA engineering ltd’s management team to convert existing mines to high chrome mines. Hence, the business is neither impacted by slowdown or growth of the industry. It makes non-cyclical as well. That is a large enough market for the company to capture.
In terms of the new offering by them i.e. the technical collaboration with EEMS, the idea is to replace existing mill lines with new designed liners. It is a 3,00,000-5,00,000 T market and more like the grinding media category.
For Cement industry, the demand is constant for the replacement of weared out grinding media/balls.
For thermal power plant, the segment will continue to grow at the industry rate which wont be anything to talk about.
Steps involved in Mining
Mining involves 5 major steps:
Exploration—> Exploration on the availability & then feasibility of mines
Mine development—> Building required infrastructure across the mines
Mining—> Mainly through explosives, the rocks are broken.
Miling—> This is were AIA Engineering’s product find usage. The large rocks are converted to fine particles using grinding media inside ball mills.
Smelting & Refining
AIA Engineering Ltd- Analysis
AIA Engineering Ltd- Mining Focus
Why do the management wants to focus on mining?
Offers large replacement demand: Mining industry uses forged grinding media(forged grinding balls which is cheaper than high chrome grinding balls offered by AIA since the wear rate of forged balls are much higher than HCMI). The total size of mining grinding media is about 3 lakh Tonnes(T) of which only 20% has been replaced with High chrome media offering huge opportunity.
In cement industry the penetration level of high chrome media is much higher leaving less opportunity to grow.
Because of the difficulty involved in onboarding clients, once converted, there is a stickiness from the clients
A typical timeline of converting one single client is 18-24 months.
Providing custom product.
Management have strong conviction regarding their product based on which they can convert large mining companies
Because of the larger share of mill internals in the mining process(10%+), the idea is to get greater revenue from mining industry.
Why is it difficult to get into mining industry?
Mining is a very conservative industry and there is a reluctance of change.
Most of the companies in mining are huge bureaucratic corporation, many of them govt corporation.
Every mine is different with different deposit type, rock strength, depth, thickness, inclination, roof, and floor strata. Implying the heterogeneity of grinding media required across mines requiring lot of customization.
There are a lot of hierarchy involved in their end client companies. The first and the most important decision is to be taken by the Mine’s Project Manager. Project manager has the entire responsibility of a single mine and he is responsible for the smooth running of the mine and more important profitability.
Post the project manager’s approval any change suggested needs to be vetted by the risk management team. Its a very major decision for them to migrate.
AIA Engineering Ltd- Analysis
About the company: AIA Engineering Ltd
Headquartered in Ahmedabad, AIA Engineering Ltd has clients in 125+ countries covering all continents of the world. About 75% of the company’s product are exported and India contribute less than 25%.
Co. Operates in only one domain- high chrome mill internals-includes grinding media, liners and diaphragms. The company wants to focus only on a very small segment and create expertise around that.
Outside India, AIA sells its products under the brand name ‘Vega’. Hence, you might have guessed ,most of the foreign subsidiaries of the company is named ‘Vega’.
Capacity: The company has present installed capacity of 3,90,000 TPA. The latest 50,000 TPA capacity was commissioned in the Q3Fy20 at its GIDC Kerala plant in Ahmedabad.( Kerala is a name of area in Ahmedabad also). The 3,90,000 TPA is towards Grinding media( a little amount of 15,000 T of the total is towards Mill liners).
The company is on track to setup SAG mill liners with capacity of 50,000 MT with estimated capex of Rs. 250 crore and is expected to be commissioned by December 2020. With this the capacity expansion will come to an end for the next few years.
The company does all the engineering of adding capacity themselves. Given, the high amount of investment required for any sort of capacity addition, also adds a deterrent for the competitors.
Power cost: To reduce its power cost (11% of topline, second largest cost after raw material), the company has installed 8 wind mills of 2.1MW each at a total cost of 104 cr. This will bring down the energy cost.
Promoter salary: Very low promoter salary with the promoter group salary coming at just ₹5 cr which is like 0.17% of sales and 1% of profit. Promoters held 58.47% stake as of March 2020.
Research: Co. continuously researches on metallurgy that improves product performance & reduce costs for customers.
Promotion: Co. promotes and advertises its products through direct marketing activities such as technical seminars, one-on-one meetings.
Plants: The company has 8 manufacturing plant located in 4 locations in India, Ahmedabad, Nagpur (Maharashtra), Bangalore(Karnataka) & Trichy(Kerala).
High entry barrier due to technical nature of the product and more importantly the long period(about 2 years) and persistence required to convert the large mining companies.
Given that company’s plant is located in India, they have a cost advantage over their overseas peers.
Product pricing is decided via negotiation but the AIA usually gives out discounts initially to onboard clients whereas the prices of raw material are market determined. Psych of the mill operators is to operate within their budget, that is the reason for initial discount. The change in prices of raw material (Ferro chrome & steel scrap) are passed on to the customers with a lag.
Nalanda Capital held 9.68% stake as of March 2020 and has been holding or rather increasing since quite a few years.
The company is in an expansion mode right now so the ratios as well as free cash flow would be subdued for sometime. All the expansion will be done through internal accruals.
AIA Engineering Ltd- Clients
AIA Engineering Ltd- Subsidiaries
Subsidiaries:
The company has 11 subsidiaries given its global presence. Like some textile exporters, the company manufactures the products in their Indian facilities and sell it to their subsidiaries which in turn sell it to the end customers. So, even if there is any wrong doing here, it would be next to impossible to find out. I would give the benefit of doubt to the management.
AIA Engineering Ltd- Analysis
Technical Collaboration with EE Mill Solutions LLC(EEMS), USA
AIA Engineering has formed a technical collaboration with EE Mill Solutions LLC(EEMS), a US based consultancy. The venture is towards improving the mill design that reduces power cost by 8-10%. Power is a major cost for mining industry. The cost of setting up the mill liners will be the same as that of existing ones. As per the management commentary, EEMS is basically a consultant based out of US and are not into manufacturing. The offering by EEMS is Patented.
EEMS payments : Royalty payment will be a part of revenue.
About EEMS:
COULD NOT FIND THE WEBSITE OF THE COMPANY link
I looked further to find more information about them. The company is run by Sanjeeva Latchireddi Link.
He is more of a scientist and has filed a number and won a number of patent either himself or for the organization he worked for.
How will it benefit AIA Engineering Ltd?
Since AIA is already offering a couple of parts of Milling in the overall mining process. It will help them to cross sell existing grinding media clients and have more wallet share. Increase AIA’s offering and another avenue of growth.
Capex of ₹250 crore to set up 50,000 TPA capacity of mill liners to come on steam by Dec 2020. Existing mill lining capacity is 15,000 TPA.
The company have already executed the mill liner redesigning for a large gold mining customer. This has led to not only improvement in power efficiency but also have increased the mining throughput. They are in talks with 30-40 mines to redesign the mill liners.
AIA Engineering Ltd- Financial Analysis
AIA Engineering Ltd- Financial Analysis
AIA Engineering Ltd- Analysis
Growth drivers:
Conversion of new clients in Grinding media.
The replacement of weared out grinding media in the existing mills will keep the replacement volume constant. Continuous consumption of product ensures a replacement demand.
Any new project towards mill lining.(EEMS)
Capacity expansion of grinding media.
Deteriorating ore quality increases the hardness of the low grade ore which derives up the demand for high chrome grinding media.
AIA Engineering Ltd- Key risks
Mines being closed for some reason: In 2018, the management had guided the volume growth of 40,000-50,000 T per annum but FY20 had a couple of setbacks for them. First was closure of Vale mine in Brazil since march 2019 and closure of a copper mine due to environmental issues. So, these things are highly unpredictable and can lead to significant degrowth of volume and sales.
Currency: Although the company does hedging, I think since the company imports raw material and exports end products, it more or less balances out. Also, rupee depreciation is good for the company.
Sharp fall in mineral prices may lead to corporations stalling production and expansion.
AIA Engineering Ltd- Competitor
AIA Engineering Ltd’s biggest competitor is once their joint venture partner Magotteaux. Belgium based Magotteaux is the largest player in high chrome mill internals. Although, the offering by both of them is more or less similar, AIA has the benefit of lower cost because of being located in one country and being located in India. Hence, AIA is able to give discounts to their end customers and still maintain the margins.
Given that Magotteaux was an erstwhile JV partner of AIA, there is ongoing tussle between them regarding violation of agreement terms. Magotteaux have been filing cases against AIA. The first lawsuit went in the favors of Magotteaux and AIA had to pay a fine but the second lawsuit which was quite recent went in the favor of AIA.
AIA Engineering Ltd- My Analysis
Given the high profitability of the company operating in a niche, it trades at a premium. Market cap to sales stands at 5, Price to earnings stands at around 25.
Further reading: