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