AIA Engineering Ltd

I am unable to join the concall. Working cap days, other income, and revenue all are better. Then what is the cause of EBITDA margin compression?

Please share call highlights here and oblige.

Thanks
Amil

They are being aggressive with pricing to sign up new customers. So margins will continue to remain under pressure. I think the old margin levels (of 2-3 years back) are gone. Can’t expect them to come back any time soon.

I attended the call and asked two questions.

  1. First was on the court case, how far it has progressed and by when a decision can be expected. There was no specific reply to that, they said we cannot say anything and it may even take a couple of years. And thereafter it seems the losing side can go for appeal, so basically this is something which will drag on. I think this is something which hangs as a Damocles Sword over the company, since the amount claimed is quite large (USD 60 million i.e. around Rs.400 crores at current rate)

  2. Second was on cash utilization. Company has announced capex of around Rs.800 crore over the next 2-3 years. Against that, current cash in hand is Rs.1200 crore plus another Rs.1000 – odd crore may accrue over the next 2-3 years. So there is significant surplus left, almost Rs.150 per share, even after providing for the proposed capex. However, management said cash is required for working capital and other uses also. So dividend levels are expected to remain the same.

Research Bytes is working now a days. So you can listen to the full call there.

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really AIA has plant in Kerala? Kerala GIDC is in Gujarat isnt it? am i missing something?

There is GIDC named Kerala GIDC nr Ahmedabad.

AIA engineering remains a good business with some competitive advantage. On chrome grinding media side, it is a duopoly business with Magotteaux. But on overall grinding media space, there are several competitors.

I was skeptical about their ability to take market share from traditional iron grinding media players & especially from Magotteaux. But volume growth of 40-45k each for last two years is very encouraging and there might really be competitive advantage that AIA has in terms of products and also usual low cost geography arbitrage.

The company is on steady expansion by gradually taking capacity from 240k to 440k in phases. The current capacity is 340k & it would be 390k by Dec 2020. The sales volumes have pretty much tracked the production & capacity expansion. The foray into mill liner business with EEML and dedicated plant for 50k capacity is also very encouraging.

The company has strong balance sheet with ~1145Cr of gross cash & not a lot of debt. The ROCE has been above 20%+ for last 10 years. The working capital has remained elevated over the years but good fixed asset turnover & good EBIT margin compensates for that. The CFO has taken hit due to increasing WC over last 2-3 years.

Overall it remains a 15% of steady growth story with good quality earnings as they come from gaining of market share which is usually difficult. The EIBTDA margins were 27-29% betweeb FY15-FY17 due to benign RM prices. if current margins are at the bottom & if one can visualize margin improvement over next 2-3 years, earnings growth can escalate to 20%.

Another factor that had troubled me about AIA was aggressive narrative in conf calls from management. That seems to have moderated in recent quarters with moderation in margins & they guide 20-22% EBITDA margins and remain pretty non-committal on margin trajectory.

Disc - I have a small position, not a buy/sell reco. Interested in knowing ferro-chrome prices trend visibility.

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They expect that long-term average EBITDA/kg of $400 by FY21 (now $300)

Q1 FY2020 results (link)

Standalone sales/profits declined but consolidated sales/profits has increased. Looks like their international subsidiaries have seen major turnaround.

Any comments?

Disc: Tracking, not invested

AIA … Good post

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Q2 results (Link)

Decline in Consolidated revenues and PBT (despite significant reduction in raw materials cost). PAT increased because of lower tax expense.

Standalone numbers are quite good mainly driven by low raw material costs and tax expense.

Disclosure: Tracking

The company’s working capital cycle has been worsening for almost three years now, and I always wondered why no one questioned the management on the lack of proportionate cash flow generation. In the past, management has explained that they are adding new customers aggressively and need to keep adequate stock at the customer location to ensure un-interrupted supply – “ that is our business model ”.

Last concall – for Q1 FY20 - was the first time analysts grilled the management repeatedly for bloating inventories. And promptly, inventory growth has now been arrested. Q2 results show receivables too have been brought down significantly by Rs.176 crore by end-Sep. All this by taking a hit on the topline which is down for the quarter, both Q-o-Q as well as Y-o-Y. Sell from the inventories, realize old receivables, reduce the production and sell less so new receivables do not accrue as much – that is what AIA has done this quarter. In the concall, management explained that customers are de-stocking due to global uncertainities, and so have we. I am not sure if this – analysts grilling the management on worsening working capital and AIA’s customers deciding to de-stock at the same time – is just a coincidence. I wonder whether a clean-up in progress?

Even the capex has been deferred. H1 capex was a mere Rs.61 crore and I see almost no increase in fixed assets or capital work-in-progress. The final 40,000 MT capacity will now be ready by Dec 2020. The first and the original deadline for this expansion was Oct 2017 as per my records.

One positive fallout of all of the above is that there is significant improvement in cash position. CFO has improved from Rs.78 crore in H1 FY19 to Rs.435 crore in H1 FY20 (against a PAT of just Rs.292 crore).

I have a feeling that while the AIA business model is a moat, it suffers from too many moving parts. Raw material price fluctuations, natural disasters, exchange rate volatility, steel price cycle, the time lag to pass on prices hikes to customers – you need a combination of too many independent factors to move favourably at the same time for the stock to realise its full potential. Will that ever happen is the question……

Holding this for more than 5 years, but stopped adding to my positions since Dec 2016. Not sure what to do next ! :slightly_smiling_face:

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An updated corporate presentation…

Net cash per share is now a whopping Rs.1700 crore, or around Rs.180 per share. This is far higher than any capex requirement which is at most a few hundred crores over the next 2-3 years. Mr. Bhadresh Shah holds 58.45 % stake in his personal name. Effective tax rate for super rich is 42.75 % and DDT 20.3576% (including Surcharge & Cess). With DDT gone and dividend being taxed at the hands of the shareholder, there is a strong case now for a special dividend before 1st April.

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Investor PPT : Q3FY20

Production & Sales

  • No significant up tick in Sales for 9MFY20. Capex in 9MFY20 : 86 Cr

  • FY19 Production : 289K MT, Sales 265K MT

  • 9MFY20 Production : 194K MT, Sales 185K MT

  • 9MFY19 Production : 217K MT, Sales 185K MT

Capacity Expansion

  • Current Capacity : 340 MT
  • Greenfield (Kerala, Gujarat) : 50K MT (Phase 2 Commissioned)
  • SAG Mill Liners : 50K MT (250 Cr Capex, Dec 2020)
  • Grinding Media (Kerala GIDC) : 50K MT
  • Total planned capacity : 490K MT
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Some Interesting insights into the business model, size of the opportunity, management and risks that the business faces today: (Taken from concall Q3FY20)

On diversification:

On Size of opportunity

This is an opportunity and a threat as well. Since, stickiness doesn’t allow for others to migrate to Aia’s product. In the long run, generally the better product/player wins out.

Their nearest comeptitor doesn’t supply Mill liners. Threby, making AIA a one stop shop for providing mill liners and grinding media to the customers.
image

-This is a quality business which is here to stay for decades.The only thing that one needs to track is whether the company is able to gain market share in the next 3-4 years or not. These gains might be lumpy rather than in one direction.

Disclosure- Invested and forms nearly 5% of my PF.

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Analysis of non-financial numbers of AIA Engineering is given below:

  1. Between Q1FY2015 and Q3FY2020, total sales have grown at a CAGR of 6.5% p.a. from 42,719 MT in Q1FY2015 to 60,263 MT in the latest quarter.

  2. Mining sales have grown faster, at 11.5% p.a., from 22,633 MT five years ago to 41,162, MT in the latest quarter.

  3. Sales from non-mining segment have remained stagnant, at around 20,000 MT per quarter. As a result, proportion of mining to total sales has increased from 55 per cent five years ago to 68 per cent today.

  4. Pricing has remained stagnant, at around Rs.110,000 per MT of finished product.

One can say that if the current trend holds, overall growth rate would slowly improve from current 6-odd per cent to around 11 per cent.

  1. Production growth has consistently been higher than sales growth, leading to increase in Finished Goods inventory. Inventory increased in 17 out of last 22 quarters, growing at 7 % p.a. during the period.

The difference between production growth at 7% and sales growth at 6.5% seems small. But when translated into actual numbers, the picture looks alarming. Finished Goods inventory has tripled during the period, from around 10,000 MT at year-end 2014 to close to 34,000 MT in end-2019 (latest available figures). This is a growth rate of over 26 per cent! Overall in 5 & ½ years, company has added over 70,000 MT of finished goods inventory, more than one quarter of sales.

Management has explained that growth in inventory is part of the business model itself. As company adds more and more customers, it is required to stock inventory at their (or nearby) locations to assure customers of continuous supply at short notice.

The overall business model remains a moat, with high switching costs and assured customers buying at least some quantity every quarter.

Capex has been deferred multiple times and current cash balance is far in excess of what is needed. I wrote about it a few days ago, click here:

AIA Engineering Ltd - #138 by Chandragupta.

With constantly changing (for the worse) tax laws, I see hoarding cash also as a major risk.

Draw your own conclusions.

(Disc.: Invested)

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The company prospects are well covered by many (@hack2abi, @aveekmitra, @rajanprabu, @Chandragupta) on this thread. I have been tracking this stock for some time and was surprised to see the resiliency in the stock price during the current situation. To me, this looks like a Colgate toothpaste (non-discretionary and recurring spend) for the Mining and Cement industry. This prompted me to take a relook and below are some observations that I hope can complement some already well-articulated research on this thread.

Profitability

  • It depends on a mix of products, currency rates, geography. Customers were not accepting high chrome wares, but now they do, so it is a mix of all these factors.
  • Margins came down after they ventured into mining around 2008/2010, and then gradually it saw an uptick from 2014 onwards only to dip again in 2018.

Headwinds

  • The company customer segments are Mining, Cement, Thermal Power and Quarry operations. All of these are directly related to Infrastructure spend and dependent on economic cycles.
  • Mining, Thermal Power and Quarry have negative environmental effects. Any setbacks to players in these segments might affect the company.

Tailwinds

  • Anti-dumping duty retained till 2023 for imports from China and Thailand
  • Recent geopolitical developments might further restrict Chinese imports
  • Government encouraging mines to use seawater because of environmental issues.
  • Seawater causes more corrosion on conventional media, therefore mines are expected to switch to chrome media.

Capital Allocation:

  • Working Capital: There is a need to keep the inventory close to the customers, therefore working capital will remain high.
  • Not keen to acquire something for the sake of it, they don’t want to do anything at the cost of margins. They have let go of opportunities in the past because of this.
  • Management intends to incrementally deploy cash to expand capacity, they like to good maintain cash levels (but how much is good?)

Subsidiaries:

  • Vega Industries is present as a subsidiary in many countries where they operate. This appears to be a business imperative
  • The company owns 75% in Welcast Steels. It has a market cap of 21 crores, listed on BSE, illiquid and trades on a similar valuation from a earnings multiple perspective. The remaining 25% shares are held by non-institutions comprising of about 1800 shareholders. I don’t understand the rationale of keeping this as a separate entity.
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AIA engg CON‐CALL HIGHLIGHTS

Business outlook

 Management has refrained from giving out any guidance for FY21 as situation is still evolving.
However, its primary focus will remain on business recovery & normalization.

 Mining market continues to be AIAE’s growth engine. It represents a large opportunity for conversion of conventional forged grinding media to high chrome grinding media.

 Management is extremely bullish on business prospects from Gold & Copper mining.

 Annual consumption of grinding media for the mining segment is estimated at 2.5mn tons
with less than 20% of the same converted to high chrome, thus offering a sizeable growth
opportunity of conversion.

 In addition, AIAE increasing its wallet share with Mill linings which has ~0.3mn tons global
market and represents a growth opportunity. It is focusing on effective penetration through,
a) Ability to offer significant reduction in the grinding media cost through use of high chrome
media in place of forged media resulting in much lower wear rates, b) Reduction of other costly consumables/reagents in the down process by using high chrome grinding media and
thereby also improving recoveries, c) Mill optimization through unique high chrome mill lining solutions resulting into improvement in throughputs and cost reduction.

 In the Cement segment, the near‐term prospects continue to remain flat. However,
whenever production will go up, AIAE will be an immediate beneficiary service the additional
requirement. Cement customers in India are optimistic about the cement demand picking up
snd see a lot of demand in the future. Cement companies are seeing traction from infrastructure segment and not so much from real estate projects. Utilities segment was
stable as the coal production activities was not impacted that much. Power generation did
get impacted as commercial consumption went down and industrial activities were stalled.
As thermal is a small part of the business, it won’t affect AIAE’s top line that much

 There is a pause on developmental activities and customer acquisition in near term for mill
liners till things settle down. As far as new development is concerned, activities like exchange of information and physical experimentation on the customer end have come down on account of lockdown. Mgmt. believes the activities to pick up as soon as international travel restrictions are lifted and the employees are mentally ready to travel as well

 Mgmt. expects demand in India to ramp up quickly as it is getting enquiries from its various
domestic customers

 Mgmt. also expects all countries to come up with an infrastructure stimulus which would
ultimately increase the demand for AIAE’s customers products as infra stimulus would boost demand for cement and iron ores

 No incremental update from Vale customer.
Promising mining volume performance in Q1FY21

 Total volumes came in at 53,177 MT, down 16% yoy due to weak non‐mining segment
volumes during the quarter.

 Mining volumes surprised positively at 41,055 MT, +1% yoy, non‐mining segment volumes
slipped 47% yoy to 12,122 MT due to sluggish infrastructure & industrial activities in
domestic as well as exports markets.

 AIAE was very alert and expected production & supply disruptions to arise due to which it
produced a little more and stocked up its warehouses strategically which allowed dispatches to the customers during Q1FY21 amid lockdown.

 Inquiries have picked up pace in June’20 as order book as on Q1FY21 improved to Rs7.4bn
vs Rs6bn qoq.

 Brazil & South Africa markets are also opening up gradually like India.

 COVID‐19 impact: Company faced plant closures for a brief period when the country was
placed under Government‐mandated lockdown. Its plants were started in a staggered
manner from mid of April 2020 and, now running at 70% to 80% of Pre‐Covid utilization.

 Gold plants are running at full throttle, copper is largely linked to electronics customers and
consumption there hasn’t shrunk as well. Iron ore is linked to infrastructure, and AIAE sees
reasonable encouraging signals from its customers on that front

Update on Mill lining and grinding media expansion

 One of the decisions taken by AIAE in terms of covid‐19 impact was to revisit the design and
implementation schedule for the grinding media expansion. Once

 For mill lining expansion, the company is on track but there was a disruption for about 8‐10
weeks. Equipment is in place and is commissioned. Mgmt. expects the facility to get
commissioned by Mar’21.

 For the mill lining plant, AIAE spent Rs600mn/ Rs300mn in FY20/Q1FY21 and the balance
Rs1.6bn should come in remaining 9MFY21.

Other Highlights
 Capex planned for FY21: Rs2.6bn (Rs330mn spent in Q1FY21)

 Working capital has come down to Rs9.7bn from Rs12bn in Q4FY20.

 Net cash balance stood at Rs17.5bn, up by Rs3bn qoq.

 Wind mill projects is generating IRR of ~20% & annual saving of Rs250‐300mn.

 AIAE had hedged almost 40% of the receipts at a rate between 76‐77.

 It had a foreign exchange gain of Rs380mn for Q1FY21

 INR realization rate was at 75, up 7.7% yoy.

 The company did not see a single customer failing to pay or running in an overdue situation.

AIAE also made its payments to vendors on time

 Tax rate for FY21 would be 22%.

 Govt. likely to come out with an export incentive policy by CY20 end.

 Anti‐dumping duties from various countries like Brazil won’t have a significant impact on
AIA’s business prospects as company is following fair business practices with no undercutting of product prices.

 From supply standpoint, AIAE has no dependence on China. From a sales standpoint, the company sells premium castings (3,500 MT) to China

 If covid‐19 had not occurred, AIAE had planned sales of close to 290,000 MT for FY21

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Kunal Shah, Executive Director talks about the business and does QA.

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I saw this tweet on Aia engineering, it seems pretty concise and to the point for the company

Q3FY21 notes from results and conference call:

  1. On December 17, 2020, the Canada Border Service Agency (CBSA) has initiated investigations with respect to the alleged dumping and subsidizing of certain grinding
    media from India. The Company is reviewing the matter and will be taking appropriate steps for defending its position [If you have been following this company there was a discussion on anti-dumping duty from Barzil during the last conference call]. Expect interim duty to be announced soon, the rate at which interim duty comes will decide on the future sales from this geography.

  2. Company’s business continues to face uncertainty in terms of outlook on account of the continued impact of Covid in most parts of the world. Our marketing efforts continue to be hampered by restricted ability of our sales team to travel. No new customers have been signed/engaged because of travel restrictions, continue to engage existing customers virtually.

  3. On Welcast Steels subsidiary:

During the quarter ended 30 September 2020, Welcast Steels Limited (‘WSL’), a subsidiary company, had decided to permanently close its only factory.
However, during the current quarter, the Board of Directors of WSL has decided to continue the manufacturing operations in the hope of revival of the economy
and withdrew its closure notice filed with the concerned authorities. Accordingly, WSL has prepared its financial results for the quarter and nine months ended 31
December 2020 on a going concern basis. This has resulted in a reversal of exceptional charge aggregating to ₹ 369.10 lakhs recognised in consolidated statement of
profit and loss during the previous quarter.

  1. The quarter saw an increase in raw material as well as shipping costs. Expect shipping cost to reverse back to mean.

  2. On a YoY basis, sales have shown a slight uptick in both the Mining and Others (Cement) segment. Mining remains to be the bigger driver.

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