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AIA Engineering Ltd

Key takeaways of the conference call by Capital Mkt;

Having clocked a volume of 93000 tonnes in H1FY15 the company expects to end the fiscal with a volume of 200000-210000 tonnes in FY15. The company has an order book of Rs 450-500 crore.Capex for augmenting the total capacity of the company by 180000 tonne to 440000 tonne is about Rs 600 crore. In first phase the company’s capacity will increase by 80000 tonnes and balance 100000 tonnes will come up by March 2016. Of the total capex about Rs 200 crore will be incurred in FY15 and balance will be in FY16.

Continue to guide for an EBITDA margin of 20-22% even though the company has clocked higher margin in first two quarters of current fiscal as the company is working in an uncertain environment where material cost, forex is not in the hands of the company.Other income for the half year consists of export incentive of Rs 19 crore, Rs 11 crore of dividend and interest income, forex gain of Rs 9 crore (compared to loss in Q2FY14).Cash on hand as end of Sep 2014 was Rs 827 crore and debt was at Rs 106 crore.

Realization in Q2FY15 was about Rs 109/kg.The company clocked a mining volume of 33000 tonnes in Q2FY15. The company has done about 60000 tonnes in non mining segment and that will be sustained in FY15 as well. The declining in non mining volume in Q2FY15 is largely on account of seasonality with volumes skewed towards second half across globe.

On account of depreciation accounting method the depreciation cost will go up to Rs 65 crore compared to earlier expectation of Rs 56 crore.Export freight cost is about 3-4%.

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Thanks Bhatiaji. Other Income was perplexing until now and this clarifies to some extent. Export incentive+ Dividend and Interest + Forex gain accounts for 39 crores, out of 7456. crores other income. Source of the other 34.56 crores is still a mystery.

For yoy sales growth of 10.4%, cost of materials consumed has increased a whopping 45%.

May be the full transcript may have answers. Can you add the full transcript if you have it



Full transcript can be heard here.

Qtrly nos. out. YoY Sales flat, NP looks better as last year this qtr had the exceptional item of 31 cr. Concall should provide more insights.

Key takeaways of the conference call by Capital Mkt;

Production in Q3FY15 was about 50000 tonne but the sales volumes were lower at 44200 tonnes with about 6000 tonnes being stock in transit. For one customer the company has to maintain a finished stock of about 300 tonnes. The company expects this finished stock is expected to get liquidated in Q4FY15.

For 9mFY15 the company has done a sales volume of 137000 tonnes (including mining volume of 80000 tonnes) and the company expected to close the current fiscal with a volume of 187000 tonnes. So the company expects to clock a volume of about 50-52000 tonnes in Q4FY15. Sales volume for FY16 will be higher by 20000-25000 tonnes more than FY15 volumes.

There is no change in demand fundamentals but closing of few new orders are taking more time than expected. The shift in closure of order is by one quarter. The company is not impacted by commodity price decline. No production decline in any mining sector. The customers are consuming at their optimum levels.

Capex plans are on track. Brownfield expansion capacity of 15000 will commence in April 2015 taking the overall capacity to 275000 tonnes. As the work on the Greenfield capacity is progressing well the additional capacity will come in phases in next fiscal. The company’s planned capex is Rs 200 crore in FY15 and Rs 300 crore in FY16.

Other income of Rs 45 crore for the quarter ended Dec 2014 include export incentives of Rs 21 crore, dividend of Rs 5 crore, exchange gain of Rs 18 crore.

Sustainable EBITDA margin is about 20-22%. The business deals with lot of uncertainty, materials cost, currency fluctuations so some quarter the margin will spike and some quarter it will be under pressure. As far as margin is concerned the company hit a sweet spot with help from lower commodity prices, currency gain. Some of these benefits have to be passed on to the customer. The company is targeting the replacement side of the market.

Most of supply contracts are USD denominated.Tie-up with Steelcast for casting is for new product line. This is in the process of operationalized.Indian is less than 30% of the company’s supply to cement sector.The prices of key raw materials such as Ferrochrome and scrap are volatile.

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I made a scrap note on AIA Engineering about 7 - 8 months back and last updated after Q3 '15 result…Thought of sharing as I never checked this thread of VP before. If any one can update further on the questions raised, it would be great.

AIA is in a very interesting business … Large opportunity size…Very professional promoter …

  1. Increase of business volume is dependent on adding new mines as existing mines can continue replacing grinding balls / mil parts but pace / tonnage would be more or less a function of mining capacity / mining plan.

  2. Since they do total consultancy and customization, QoQ result has very little merit but at the same time once a base level is created that would be protected for as many years as the mine survives (and its rate of extraction). It is a 5 year horizon one need to look assuming they remain technically / costwise ahead of the curve. They are producing now not only the consumable but the wearable parts too. Like a company with full range of product basket for both horizontal and vertical grinding mills.

  3. In India, Balls & Cylpebs, Balaji Industrial Products also produce Chromium Grinding balls … It would be good to know what AIA does special and where these guys falter.

  4. Magotteaux competes directly with them now (US$ 800 - US$ 900 million sales) and also they have a technology agreement with Scaw Metals in South Africa. If you know the sales of Scaw Metals, let me know. Else I would find out.

  5. Annhui Ninguo (China), Ares Engineering (Egypt), Arrium Mining and Materials also manufacture these items but don’t know much details. Firth Rixson used to a grinding mill component 15 years back (not balls) but they vacated the space as they moved up in value chain and produce Jet Engine components (acquired by Alcoa recently).

  6. Mill Internals are special steel casting and their are few International Companies like Christian Pfierrer; Estanda etc etc … Why they don’t get into consumable space of Grinding Balls is something you may look into. Or for that matter why Simplex Casting of Bhilai or some quality alloy steel foundry can’t make it.

  7. If bespoke solution made available, why a customer (miner) would go for an integrated solution exposing them to one supplier risk?

  8. As per management total world market for Cement Grinding Balls is about 300,000 tons and they cater 60% of the market. So others does rest (assuming Magotteaux does a good portion of this) … And other areas like Iron, Platinum, Gold,Copper, Coal etc have a market size of 2.4 million tonnes. and presently only 20% is in cast steel segment. Their expanded nameplate capacity would be 440000 MT and actual may be in the rage of 300 K to 350 K range … So surely they are targeting other segments aggessively. Incremental yearly conversion rate is the data point to look for…

  9. If my understanding is correct, management tells every year incremental increase would be in the range of 20000 to 30000 MT from their current 200000 MT level … So full utilisation of new added capacity (from FY 16) is at least 4 -5 years away.

  10. Margin improvement from 22 - 24 % level is difficult but sustaining that is very much possible. So, a 30% increase Yoy PAT is very plausible for coming 5 years.

Overall a very good business and very hard to dislodge but outsized return possibility is limited at this price point but downside is very well restricted.

Disc.: No investment at present.


Aveek - Here are my notes. It may not answer all your questions but hopefully provide some more insights. Just FYI, all this information is purely by reading up relevant materials. I have not spoken to company management or any expert in the industry. I don’t do as much scuttle-butting as this VP forum is known for.

Where will the demand come from for the additional capacity of AIA?
• Demand would basically come from replacement of existing mining mills from forged media to high chrome media. Reason for replacement is benefits of using HCMI over forged media. Overall HCMI costs 20% more but it generates gross savings in the cost of mill internals to the extent of 50% on less wear of media, and higher productivity. It is estimated that about 2m MT of media can be converted into HCMI, which provides ample room for growth for AIA.
• New mines and added cement capacity

What is the replacement cycle of grinding media?
• Grinding media needs to be replaced every 30 days. Grinding media accounts for around 80% of the total replacement demand
• Other mill internals such as liners and diaphragms need to be replaced every 2-3 years
• Average wear rate of grinding media per ton of cement produced is around 100 grams.
• 300 MT of grinding media is required per million ton of fresh cement capacity

What is stopping manufacturers of forged mills venture into high chrome mills?
• No entry barriers. AIA’s competitive strength lies in the service that it provides, the durability and dependability of its products and relationship it has cultivated.
• Technical knowledge of metallurgy, grinding application and process technology is key and should not be under-estimated. Companies like Electrosteel, L&T and ACC have tried to enter into this industry but have failed.
• The lead-time to develop exact specifications of media depending on various variables can be anywhere from 6-18 months, but once the customer switches to AIA product they become sole or key supplier. Think of Mayur Uniquoters model here where they take a long time to get their product approved from OEMs but once they have foot into the door they become sole supplier for that specific model.
• AIA has slowly become a solution provider rather than product provider. You are right about the risk for the client to have sole supplier, but the very reason the client would like to work with significant players such as AIA or Magotteaux who are reliable and have a strong balance sheet. Look at a company called TDG in the US that is sole supplier of most of its product to airline companies. You may wonder why would an airline depend on a single supplier for its critical components but the customers don’t have a choice in many cases and/or the supplier has proprietary knowledge

Who are the competitors and the competitive advantage of AIA?
• Magotteaux – 350K MT, Anhui – 12K, Estanda – 8K, Christian Pfeiffer – 7K
• AIA has cost advantage over the other players providing them higher margins even with lower realizations. Able to supply the exact same product 20% cheaper. Raw material prices are not a significant risk because AIA has moved to fluctuating price contract whereby they pass the cost/benefit of the raw material to the customers.
• I’d think that AIA also has better technical knowledge over other players but that is debatable

Risks and Issues
• Currency risks due to huge FX exposure but AIA seems to be hedging the same.
• Power supply

Matters that need further digging

  1. Joint venture with Polyex minerals? Status on that? How does that backward integration help the company?
  2. More in-depth understanding of the what is stopping other forged media players to transit to high chrome media
  3. Why is Magotteaux not expanding capacity or trying to move to a competitive cost manufacturing base?

I agree that outsized return possibility is limited but I’ve a very low bar :smile:

Disc: Happy-go-lucky investor in AIA



Yes, the growth would be a function of conversion and mining plan of existing miners (covered as my first point in my previous post) … And AIA has done very well over the years. The immediate challenges for them are due to the soft commodity prices. Will the miners be interested to convert from Forged Steel to HCMI in this challenging environment?

The decline is scrap prices are much steeper than ferro chrome prices and hence the price differential between forged media and HCMI has widened over last one year.

If miners would be willing to change operating parameters and incur extra cost to upgrade to HCMI when the price differential has widened is a question for me… From current and next few quarter results we would come to know how it is being played out…

Hastened to add that it is a short term question and doesn’t change the long term story of AIA …



As you may agree, there are too many variables that come into play when you run a business and as an owner of the business you have to trust that the management will find a way around it. Good businesses manage to keep the market share/revenue intact in bad times and grow disproportionately during good times. The core fundamentals of AIA does not change with temporary changes in mining sector, increase in RM prices etc.

In the recent call, management highlighted some very good points that can be quite insightful to understand AIA business better such as:

  1. There is no cost for clients to migrate from forged to HCMI. In fact AIA does all the work for the clients to understand the mine, mill etc and manufacture the right grinding media. This is naturally an attractive proposition for the clients to consider moving from forged to HCMI.
  2. A slowdown in mining can in fact be advantageous to AIA as clients are becoming more cost sensitive and as such are happy to look at more efficient HCMI which can help the clients reduce overall costs.
  3. The price gap between steel scrap and ferro chrome cannot be wide enough to make HCMI uneconomical. 80% of ferro chrome in the world is used for steel production and average chrome content in steel is more than 18%, so practically steel prices cant keep going down if ferro chrome prices keeps ticking up.
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Conference Call - from Capital Markets

Phase I of Greenfield capacity expansion will get commissioned by Q2FY16
AIA Engineering held a conference call on May 20, 2015 to discuss the performance of the company for the quarter/fiscal ended March 2015.

Key takeaways of the call

• Mines globally across for all minerals are optimizing costs. But replacement demand continues to happen globally in mining sector. However the sales to domestic mining sector continue to be flattish with volume around 7000-8000 tonnes a year. In case of cement sector the domestic market is internally seen as flattish for FY16 with a likely volume increase of about 1000 tonnes from current 70000 tonnes. On global cement sector demand, excluding Chinese demand, which is a different kind of market which is largely met internally and not of global quality; there is not much of room for growth.
• Forex gain for the fiscal ended March 2015 was Rs 48 crore compared to a loss of Rs 68 crore compared to corresponding previous fiscal. The forex gain for the quarter ended march 2015 was Rs 8 crore compared to nil in the corresponding previous quarter.
• Tax rate for FY16 will sustained at about 28-29%.
• The company is reasonably successful in its attempt to get into primary crushers segment. Some of the trails are successful and the company has arrived but significant volume is some time away.
• Current capacity stands at 260000 tonnes and the phase I of green field expansion of 80000 tonnes capacity will get commissioned in Q2FY16.
• Full year transfer pricing adjustments made only in Q4FY15 and that has resulted in consolidated EBITDA for FY15 lower than standalone EBITDA of FY15.

Disc: Not Invested

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Good points as far as long term story of AIA … agreed …

However, your Chromium content figure is suspect… My off hand estimate (can’t be very way off the mark) is Chrome content in Stainless Steel is about 18% and about 40 million tonnes of Stainless Steel is produced yearly… atleast 75% to 80% of Chromium is used for making Stainless Steel. The consumption of SS is growing fast.

Compared to that total steel production is about 1500 - 1600 million tonnes per year.Chrome content is steel varies depending on use but very very low.

Chromium production would be about 20 million tonnes per year

Scrap traded in Global market is about 550 - 570 million tones per year

May be AIA management wanted to convey something else… But this logic what you mentioned is not feasible to me…


I owned AIA for about a year , recently reduced position by 70%. Key reasons being 1. Opaque nature of business, virtually impossible to find out the real drivers of this industry unless one speaks to actual miners. The analyst reports have merely regurgitated management ideas and are practically useless. 2. AIA faces significant tailwinds from a negative commodity cycle, I don’t buy the company’s argument that the weak cycle won’t impact them.

Having said that, the way the company has steadily penetrated the mines over the past few years shows their competence. Their return ratios are also fantastic. The real research needed here is to understand issues from a Miner’s perspective. Do they really need High Chrome internals for grinding as AIA claims or is it more of a hard sell? Recall, Astral Poly was able to grow at turbo charged growth rates because the market was ready and willing to replace inferior GI pipes with HDPE pipes. Is there a similar momentum in mining? Very important also to understand whether there are any substitutes to Chrome, if so this could completely upend AIA’s business.

Your questions on why such and such players are not getting into this is unlikely to lead to much. Same could have been asked for Mayur Uni.

This is a consulting/ customisation/ product business. As per management it takes 6-12 months to convert a client and get repeat business, how many are willing to invest so much time and energy? It is also very likely these guys during their JV with Magotteaux swiped a lot of their IP which acts as a barrier to entry. It is not that any guy who can set up a foundry can compete with AIA. Had this been the case the Chinese would have trounced AIA.


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Sorry, change tailwinds to headwinds.


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Good points Aveek.

The management just highlighted “The price gap between steel scrap and ferro chrome cannot be wide enough to make HCMI uneconomical” without giving any numbers.

We probably need to understand what kind of scrap is used to make traditional forged media. If it is stainless steel scrap or some other high grade scrap, then the price should move in tandem with stainless steel price which in turns impacts chrome ore as more than 90% of ferro chrome is consumed for stainless steel production. I’ll soon speak to someone qualified to get better insights and will update you later.

However you may be right that the price differential between forged media and HCMI is expanding. If I look at Arrium (largest producer of forged media mining consumables) their average realisation is approx INR65/kg vs. AIA realisation of INR105/kg. Arrium states in its results that “average selling price was lower than the prior corresponding half due to the ‘pass through’ impact in grinding media of lower steel raw material costs”. However AIA works at much higher EBITDA margins compared to Arrium (around 12-13%)

The production and sales from Arrium - largest producer of forged media mining consumables has been increasing highlighting that the potential of the mining sector is huge. Arrium is also expanding capacity and so is Magotteaux.
One interesting point in Arrium presentation is “Magotteaux provides predominantly highchrome cast balls, limited application overlap with Moly-Cop’s forged media”. So also need to understand if there is really no or limited application overlap. In that case what is the size of opportunity for HCMI media within the mining sector.

Huge OEM and replacement market. New areas like Dredging coming up. Only 2 major players. RM may be short term hiccups and lets not worry too much on it. It is a matter of time all forged move towards HCMI. Give attention to the life of the grinding media in Cement, Mining, Utilities and Aggregates apart from Dredging which is a new area.

Is it not a fantastic business? See the total capacity of the 2 players 760000 ( Yr 2014) as against the demand.

Bobby / Punit,

AIA is a good company and done wonderfully and the long term story of mining sector demand is an absolute no brainer.

Coming to specifics, Bobby, hard sell don’t work in mining sector or in any of the mission critical industrial marketing sector unless there is a need, application, requirement, cost effectiveness and expertise of the supplier. And, other players can make grinding balls but may not be interested or may not have the full spectrum consulting / project management capacity of AIA. About twenty plus years back, I remember buying Hi Chrome as well as forged ball grinding media for L&T made Lime stone crusher from Simplex Casting for L&T Jharsuguda Limestone clinker grinding unit. I didn’t have the curiosity then to know which is required where :blush:

Punit, Stainless Steel ball is ruled out … It is used only where the end product being crushed is going for making food items. Regarding scrap, there are huge variety and I really don’t know which specific varieties are used in Forged Mill Internals. Grossly I can tell that options to choose are many not few types.

To know which mines require HCMI and which require Forged Ball / Mixed Media / Magnetic Separator etc. is a subject in itself. I don’t want to get in here (chance of buried alive is too high :smiley:) as I have seen / gone into many open cast and underground mines in my L&T days … It is too complex and critical issue about which “little learning is very dangerous” :smile: Ask any miner, he will say all mine is unique — no similarity of one with another even if they are just 20 km apart.


One thing to add… It is also very very difficult for anybody to dislodge AIA from its perch. Mines are very slow to adopt a new technology and once settled almost impossible for another to unsettle it. AIA track record is wonderful in this regard… They have covered a huge ground and it is a very safe company to bet on as downside is very much protected.

We are here only talking about “fast” growth. All discussion are in this context.

Aveek- is downside protected if we go into a prolonged commodity downturn? AIA may not necessarily need new mines to come up to sustain its growth but it definetely is exposed to mine utilisation levels.


Hi Aveek , few points

  1. Is it possible to get the minimum effective cost of application per tonne. ( forged,cast,HCMI). Since HCMI is expensive, this will be deterrent for change over.
  2. I understand that there is minimum overlap between HCMI and forged media. If yes, how forged can convert to HCMI. For eg Moly Cop has four times the installed capacity of Magotteaux and AAI is half of Mag. Mag has also got licensed operation across Globe ( SCAW in Africa).
    3.Forged media is still predominantly used in ore-milling. Is it possible to convert.
  3. Is it possible to get scrap and chrome movement for past years and see the GAP.
  4. Ore going to be milled in the coming years,

sorry cost of application per tonne of ground.