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AIA Engineering
14 June 2010 Overweight Mid Cap
THE “COMMINUTION” INDIAN EXPERT – READY FOR THE SPURT IN
INTERNATIONAL MINING BUSINESS Market Data
AIA Engineering is the largest Indian and second largest player globally in the
Bloomberg code AIAE IN
manufacture of high chrome mill internals which forms an important
Sensex 16,922
ingredient of every cement, iron ore, copper, gold, platinum group metals,
Price Rs 398
coal, and other mineral processing mines globally.
Target Price Rs 444
Penetration into new global mining companies to offer volume growth:
Target return 12%
AIA has cleared the trial stage and has entered the regular supply stage with
Equity shares o/s (mn) 94.3
- Vale, Brazil (CVRD) for their Samarco (iron ore – 50% JV with BHP Billiton)
Market Cap ($ mn) 814
and Vittoria Mines (for Kaolin) up to 30,000 TPA; Lonmin (South Africa)
Market Cap (Rs bn) 38.1
~10,000 TPA ; Konkola Copper (Zambia) ~5,000 TPA; Anglo Platinum (South
52 Wk H/L 434/ 188
Africa) ~30,000 TPA; Nkomati (ARM – South Africa) ~1,000 TPA.
FII Limit 24%
Together these mines offer new business in international mining of 60,000-
80,000 tons per annum in the next 24 months to the existing 20,000 tons Stock performance
per annum in mining and 103,000 TPA overall.
(%) Absolute Relative
Lack of a large sized quality grinding media supplier in international
1 Month (0.5) 0.4
markets: AIA will be the only other global player with second largest
6 Months 16.9 19.7
manufacturing capacity of ~165,000 TPA after Magotteaux, thereby meeting
12 Months 63.6 45.8
the need of mining companies for quality and consistency in supplies.
EBITDA margins to dip: The trial period for supplies is at least 6 months Shareholding pattern
of grinding media consumption, post which results are analysed. Initial Promoter 61.7 FIIs 17.8
supplies post approval desire tough negotiations on the pricing front which Pub & Oth 7.0 DIIs 13.5
will keep margins under pressure. AIA at present will only be supplying
Sensex Relative chart
grinding balls while liners will take more time to breakthrough. We expect
EBITDA margins to dip ~150 bps dip in FY11E and ~70 bps in FY12E. SENSEX AIA ENGINEERING LTD
500
company is expanding capacities by 20,000 TPA for the manufacture and 200
supply of vertical mill parts. However, vertical mills at present form barely 100
1% of the global market and hence the ball mill market still offers 0
tremendous potential for the coming 10 years.
Mar-07
Mar-08
Mar-09
Mar-10
Dec-06
Dec-07
Dec-08
Dec-09
Sep-06
Sep-07
Sep-08
Sep-09
Jun-06
Jun-07
Jun-08
Jun-09
Year end 31 Mar (Rs mn) FY09 FY10 FY11E FY12E CAGR (10-12E)
Net Sales 10,233 9,497 11,817 13,879 20.9
EBITDA 2,467 2,458 2,886 3,285 15.6
PAT 1,712 1,673 1,985 2,223 15.3
EPS (Rs) 18.2 17.7 21.0 23.6 15.3
PE (x) 21.9 22.4 18.9 16.9 -
EV/EBITDA (x) 14.2 13.9 11.8 10.2 -
P/BV (x) 4.8 4.1 3.5 3.0 -
EBITDA % 24.1 25.9 24.4 23.7 -
PAT % 16.7 17.6 16.8 16.0 -
ROE % 24.8 19.9 20.0 19.2 -
ROCE% 33.8 26.7 27.2 26.4 -
Vinay Pandit +91-22-4333 5115 vinaypandit@ifinltd.in
Jason Soans +91-22-4333 5133 jasonsoans@ifinltd.in
Refer to disclaimer, analyst certification and ratings criteria on the last page prior to making any investment decision.
IFIN Research AIA Engineering
IFCI Financial Services Overweight
Contents Page
KEY INVESTMENT CRITERIA 4-13
o Breakthrough in international mining to lend volume growth – but margins to be impacted 4
- International mining breakthroughs and business potential
- However, margins to be impacted in initial years of breaking through
The key factor here is cost
Risk of using new products in the system
The 6 month testing criteria
Only grinding balls are high chrome; liners are always forged
Cost competitiveness to Chinese
-Similar composition of Chinese forged players
Local manufacturing/ technology based competition from players like Magotteaux
o Forged mill internals are here to stay *
- The type of grinding media required for a type of mill *
o Potential for high chrome grinding media in mining *
- Other prominent technologies in grinding (other than ball mills) *
- Established rule of thumb for grinding media in ball mills *
- Market size for grinding media (Source: AIA)
o Pricing competitiveness with forged media 8
o Shortage of large scale manufacturers of high chrome grinding media in international markets; 9
AIA dominates domestic market share
o Increased capacity to help meet demand from new breakthroughs in international mining 9
o Cement and mining activity uptick in global and domestic markets 10
o Sustainability of business model 13
o POTENTIAL ANALYSIS OF MINING CLIENTS WHERE BREAKTHROUGH ACHIEVED *
- Anglo Platinum, South Africa *
- Konkola Copper Mines, Zambia, Africa *
- Lonmin, South Africa *
- Nkomati – African Rainbow Minerals, South Africa *
KEY INVESTMENT RISK 14-16
o Volatility in currency movements and raw material prices 14
o Upcoming new technologies – Vertical Mills 15
o Increase in market share in international markets will attract competition on account of high 16
margin and healthy return ratios
VALUATIONS 17
KEY ASSUMPTIONS 18
SENSITIVITY ANALYSIS 18
FINANCIAL ANALYSIS 19-22
o Debottlenecking to improve sales to capital employed in FY10-11-12; However, further capex 19
for 100,000 TPA to keep ratio <= 1x
o Low debt and healthy cash flow position to assist in expansion and acquisition 19
o Return ratio analysis 20
o Stretch in working capital cycle lies ahead 21
o Breakthrough in mining to lead to margin reduction 22
SWOT Analysis 23
Available in the detailed hard copy of report only.
14 June 2010 2
IFIN Research AIA Engineering
IFCI Financial Services Overweight
14 June 2010 3
IFIN Research AIA Engineering
IFCI Financial Services Overweight
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IFIN Research AIA Engineering
IFCI Financial Services Overweight
International Players
Magotteaux Belgium 262,751 √ √ √ √ √ √
Christian Pfieffer Italy 15,000 √ √ - √ - √
Estanda Spain Spain 8,000 √ √ - - √ √
Toyo Japan NA - - - √ - -
Anhui China 120,000 - - - √ - -
Aresco Egypt NA n/a n/a n/a √ n/a -
Firth Rickson UK NA n/a n/a n/a n/a √ -
Scaw Metals(Anglo American) S.Africa 700,000 - √ √ √ - √
Local Players
ACC Nihon (Hindustan Udyog) India n/a √ √ - - √ √
Balaji Industrial Products India n/a √ √ √ √ √ √
Balls and Cylpebs India n/a √ √ √ √ -
RN Metals India 18,000 - √ √ √ -
Aqua Alloys India 5,000 √ - - - √ √
Tega Industries India 6,200 - √ - - - √
Source: IFIN Research
14 June 2010 5
IFIN Research AIA Engineering
IFCI Financial Services Overweight
5. Cost competitiveness to Chinese: Chinese players are big players in the manufacture
and sale of grinding media. They are very price competitive in the international markets
on account of following key factors. However they lack in consistency and quality of
supplies, thereby hampering the production. While the Chinese
i. Chinese players import huge quantities of scrap steel from Africa for manufacture of manufacturers are
competitive on the
forged grinding media. Even high chrome grinding media uses scrap steel as a key
pricing front, they
material component. AIA Engineering raw material composition primarily comprises are at times
of 75% scrap steel, 23% Ferro chrome and 2-3% others. unable to set
ii. The liners, made of forged iron / high chrome, are scrapped and remade into quality standards
and product
grinding balls for grinding purposes.
differentiation.
iii. The Chinese players work with small units of even 4000-5000 tons per annum, with a
supplier of steel rods at times carrying 20 rods in a truck and dropping 3-4 rods at
each supplier and hence have quite similar composition to one another (see table
below).
iv. The Chinese manufacturers get export subsidies from their government as well.
Similar composition of Chinese forged players
Forged grinding SIMON The similarity in
JINAN ZOUPING WE JINAN ZIBO
media composition CHEN composition of the
% Carbon 0.4-0.65 0.52-0.8 0.52-0.65 0.52-0.65 0.52-0.65 Chinese
% Manganese 0.5-1.2 0.6-1.2 0.6-1.2 0.6-1.2 0.6-1.2 manufacturers is
quite evident.
% Chromium 0.25 max - 0.25 max 0.25 max 0.25 max
% Silicon 0.15-0.37 0.15-0.37 0.15-0.37 0.15-0.37 0.15-0.37
% Phospherous <0.04 <0.04 <0.04 <0.04 <0.04
% Sulphur <0.04 <0.04 <0.04 <0.04 <0.04
Rockwell Hardness 50-60 55-65 50-60 50-65 50-63
Source: IFIN Research
Hence, when it comes to pricing, the competition with Chinese players will always be an
important factor.
However, the factor that plays in favour of players like AIA in grinding balls is superior
quality and steadiness of quality through supplies.
6. Local Manufacturing / Technology based competition from players like Magotteaux:
Magotteaux has traditionally on its website indicated mill internal production capacity Magotteaux
of 235,000 tons per annum as of 2007. This capacity, as per our various sources, at focusing on value
present stands at approximate 300,000 tons per annum with manufacturing facilities addition and new
technological
across continents to support the demand in the specific regions and keeping themselves
advancement like
cost competitive. Magotteaux today has manufacturing facilities in Belgium, Thailand, “SensoMag”.
South Africa, Australia, China and others. This allows them to buy the scrap steel / scrap
chrome from the respective markets including their mill internal customers and reuse
the same in preparing new mill internals.
AIA has now decided to open a warehouse in Africa to meet the regular demand from AIA will open a
breakthroughs in the region. We have good reason to believe that the warehouse would warehouse in
Africa to meet the
have opened closer to the Bushveld complex which is where key mining players are demand where
housed in Africa. Company may also have to consider opening a warehouse in Brazil, breakthroughs
another region where mining players are largely based. received.
“For any mill internal supplier, liners are the way to go. There is more money to be made
in liners......”......international mining expert.
14 June 2010 6
IFIN Research AIA Engineering
IFCI Financial Services Overweight
Magotteaux on the other hand is focusing on providing very strong technical backup and
support for clients and in return creating a market for their products. They are
developing new technologies such as the “SensoMag”.
What is SensoMag?
SensoMag is a magnetic sensor device which can be bolted onto a BALL mill. It is a
magnetic device and it can now measure the charge and the actual amount of balls in
the mill.
“It is the first time in 25 years I am seeing such an equipment......”.....international
mining expert.
So, they are looking at that aspect. So if one can buy such peripherals, they will feel
committed to buy other mill internals as well though one again needs to be price
competitive. This way they have a complete package and they are more professional Sensomag will
compared to an Indian or a Chinese. help reduce the
pressure on
This technology when bolted to the mills, tells you what percentage of the mill is operators by
charged with balls. There is a radio transmitter on the device which communicates with directly sensing
the outside and sends the signal to your control room so you can tell what levels of the the optimum ball
ball you have in the mill, and you can decide the charge. mill requirement
to continuously
This results in optimum utilisation leading to power savings and higher productivity. feed the charge.
Normally a mill operator charges the mill once a day on the day shift which is not the
right thing to do. One should be charging balls right through the day so that the
efficiency does not fall off otherwise day shift is the most efficient, afternoon shift is
lower and night shift is the most inefficient, and then one charges the next day.
However, with this new technology, one can also get a device from them which will add
3 balls per minute so that you have consistent performance in the ball mill.
Forged iron mill internals are here to stay; however tremendous scope for
high chrome mill internals in BALL mills up to 20 ft diameter
We feel the need to dispel the thought process that high chrome mill internals can Forged media is
completely replace forged mill internals and grinding media. THIS IS NOT GOING TO BE here to stay
POSSIBLE AT ALL.
Before we explain this, one need to understand that in any mining facility there is a
primary grinding process and then there is a secondary grinding process. The primary
grinding process is generally done using SAG mills (Semi Autogenous Grinding mills),
which grinds the large rocks into smaller pieces that are then let out for grinding into
the secondary grinding mill called the BALL mill.
SAG mills are generally more than 24 ft in diameter and go as large as 40 ft while BALL
mills are generally up to 24 ft in diameter.
14 June 2010 7
IFIN Research AIA Engineering
IFCI Financial Services Overweight
As per the indications provided by the management of AIA, the indicative market
potential for high chrome grinding media in mining stands as under:
Global Mining
market for
grinding media is
estimated at 2.4
MTPA while for
cement at 0.3
MTPA.
India 25 KT
3.5 100
3.0
80
Indexex prices
2.5
Rs / Kg
60
2.0
40
1.5
1.0 20
0.5 -
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Jun-05
Jun-06
Jun-07
Jun-09
Jun-10
Mar-05
Mar-07
Jun-08
Mar-10
Dec-05
Mar-06
Dec-06
Mar-08
Dec-07
Dec-08
Mar-09
Dec-09
14 June 2010 8
IFIN Research AIA Engineering
IFCI Financial Services Overweight
14 June 2010 9
IFIN Research AIA Engineering
IFCI Financial Services Overweight
100,000
50,000
0
FY09 FY10 FY11E FY12E
FY12E
FY11E
FY13E
FY01
FY03
FY05
FY07
FY09
FY02
FY04
FY06
FY08
14 June 2010 10
IFIN Research AIA Engineering
IFCI Financial Services Overweight
10
0
FY06 FY07 FY08 FY09 FY10E FY11E
Source: CMIE
As per the Planning Commission estimates, investment in roads and bridges and power
will grow by a CAGR of 13% from FY08, which will pave the way for increased capacity
additions for the cement sector.
Indian Infrastruture Spend (Rs bn)
700
Spending on infra
600 to grow at CAGR
500 of 13%
400
Rs bn
300
200
100
0
FY08 FY09 FY10 FY11 FY12
Roads & Bridges Electricity
14 June 2010 11
IFIN Research AIA Engineering
IFCI Financial Services Overweight
2000 90%
1750
1500
1250
1000
750
500 Mature Markets-
250 10%
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: LaFarge
The company derives almost 80% of its revenues from the cement sector which over the
last years has exhibited CAGR of 7%. Even during the 2009 recession the global demand
posted growth with 90% emanating from emerging economies, which holds the
company in good stead as the growth in the cement industry is sustainable.
The domestic mining sector after a year of low growth in FY09 is expected to post
substantial growth in FY10 and FY11 on account of heightened demand from the
construction, automobiles, consumer durables and the power sector. Robust growth in Improving
automobile sales, capital goods and revival in construction & infrastructural activity is economic scenario
lends reasonable
expected to increase steel production and aluminium production. Copper being an growth to
important constituent in cables, wiring and other ancillary equipment, will exhibit domestic cement
increase in production due to the country’s massive power expansion programme under business.
the 11th five year plan.
10
0
FY06 FY07 FY08 FY09 FY10E FY11E
Source: CMIE
Globally the mining sector has witnessed increase in commodity prices primarily driven
by the USD 586 bn stimulus package for infrastructure spending by China. Thus
production also has risen as major mining companies have supplied substantial volumes
to China. With China leading the way, the mining sector has witnessed renewed interest
in mining activity.
14 June 2010 12
IFIN Research AIA Engineering
IFCI Financial Services Overweight
Continuous
replacement of worn
Replacement
Replacement out parts
demand forms
Demand 70% of company
70% sales volume
Annual Replacement which stands in
of worn out parts good stead in low
AIAE capex phases.
Project
OEM Greenfield
Demand
Projects
30%
Consequently even when the cement markets are depressed internationally (in FY10)
major markets such as North America and Europe, the company maintained its cement
tonnages at substantial levels of the FY09 volume (pre-depression) exhibiting their
robust business model.
14 June 2010 13
IFIN Research AIA Engineering
IFCI Financial Services Overweight
50
48
INR
46
44
42
40
23/03/2009
13/04/2009
22/04/2009
13/05/2009
21/05/2009
29/05/2009
22/06/2009
30/06/2009
20/07/2009
28/07/2009
17/08/2009
26/08/2009
16/09/2009
25/09/2009
21/10/2009
29/10/2009
19/11/2009
27/11/2009
18/12/2009
30/12/2009
19/01/2010
28/01/2010
19/02/2010
15/03/2010
25/03/2010
15/04/2010
23/04/2010
13/05/2010
21/05/2010
Source: Bloomberg
With increased sales coming in from the international mining segment, significant With increasing
depreciation of the Indian rupee can have an impact on the profitability of the company share of
international
and hence currency fluctuations pose a considerable risk to the bottom-line growth of mining, AIA will be
the company. exposed to two
new major risks:
Voltality in raw material prices causing change in realisation
1. Currency
4.0 120 fluctuations
3.5 2. Commodity
100
volatility
3.0 especially with
80
Indexex prices
2.5
differential
Rs / Kg
60 price increase
2.0 in Ferro
1.5
40 Chrome and
Scrap.
1.0 20
0.5 -
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Jun-05
Jun-06
Jun-07
Mar-05
Mar-07
Jun-08
Jun-09
Jun-10
Mar-10
Dec-05
Mar-06
Dec-06
Mar-08
Dec-07
Dec-08
Mar-09
Dec-09
14 June 2010 14
IFIN Research AIA Engineering
IFCI Financial Services Overweight
On an analysis of key raw material prices from March 05, it was observed that the
weighted average cost of the product and scrap cost generally move in tandem barring a
few quarters from September 07- September 08. This majorly reduces the degree of risk
to the company in the mining segment, where the company has to compete with forged
media players.
Key Raw Material -Weightages
80
70
60
50
40
%
75
30 60
20 40
10 25
0
Proportion of Weight(%) Proportion of Cost(%)
14 June 2010 15
IFIN Research AIA Engineering
IFCI Financial Services Overweight
manufacture forged grinding media. They have scattered foundries all over the country
which offer forged media at extremely competitive prices although not of the best
quality.
In the case of Chinese manufacturers offering high chrome mill internals to the market
in the long run, the company could face a serious threat on the pricing front for the
same. However the Chinese players will continue to lag on quality, continuity of regular
supplies, total solutions provider capabilities vis-a-vis global quality majors like
Magotteaux and AIA Engineering.
14 June 2010 16
IFIN Research AIA Engineering
IFCI Financial Services Overweight
Valuations
DCF Assumptions:
WACC DCF Value
Risk free rate 7.5% Perpetual Growth 4%
Beta 0.8 PV of forecast period i.e. FY25E (Rs bn) 20,931
Risk Premium 5.0% PV of terminal value (Rs bn) 15,859
Cost of Equity 11.5% Firm Value (Rs bn) 36,790
Cost of Debt (post Tax) 6.3% Less: Net Debt (Rs bn) (3,310)
Debt : Equity 0.10 Equity Value (Rs bn) 40,100
WACC 11.2% Per share (Rs.) 425
After tax
(Rs mn ) FY10 Wt. WACC
cost
Net worth 9,099 0.95 11.5% 10.9%
Debt 490 0.05 6.3% 0.3%
11.2%
Terminal
growth 10.0% 10.5% 11.0% 11.20% 11.5% 12.0% 13.0%
rate
100
0
Dec-2005
Dec-2006
Dec-2007
Dec-2008
Dec-2009
Oct-2006
Oct-2007
Oct-2008
Oct-2009
Aug-2006
Aug-2007
Aug-2008
Aug-2009
Apr-2006
Apr-2007
Apr-2008
Apr-2009
Apr-2010
Feb-2006
Feb-2007
Feb-2008
Feb-2009
Feb-2010
Jun-2006
Jun-2007
Jun-2008
Jun-2009
At CMP of Rs 398, stock is trading at 19x FY11E and 17x FY12E EPS of Rs 21 and Rs 23.6 respectively.
On a PE basis, even if we value AIA engineering at 22x FY11E EPS, we arrive at a target price of Rs 462. At this
price, the stock would be trading at 19.5xFY12E EPS. We believe that significant breakthroughs in the mining
space could lead to better than expected volumes from international mining, lending upsides to our EPS in
FY12E and re-rating in the stock.
We initiate coverage with an Overweight rating on the stock with a target price of Rs 444 based on an
average of DCF value of Rs 425 per share and PE(x) based value of Rs 462 per share.
14 June 2010 17
IFIN Research AIA Engineering
IFCI Financial Services Overweight
Key Assumptions
Sales Volume
Tons FY09 FY10 FY11E FY12E
Domestic 41,000 42,000 46,200 50,820
Export 54,348 61,011 85,100 108,708
- Mining 6,000 20,011 40,000 60,000
- Others 48,348 41,000 45,100 48,708
Total 95,348 103,011 131,300 159,528
Average Realisation
Sensitivity Analysis
Sensitivity to Volume and Average Realisation
FY11E FY12E
Bear Base Bull Bear Base Bull
Sales Volume (MT) 125,000 131,300 140,000 150,000 159,528 175,000
Average Realn (Rs mn / MT) 0.085 0.090 0.095 0.084 0.087 0.100
14 June 2010 18
IFIN Research AIA Engineering
IFCI Financial Services Overweight
Financial Analysis
Debottlenecking to improve sales to capital employed in FY10-11; However,
further capex for 100,000 TPA to keep ratio <=1x
An analysis of the sales to capital employed ratio shows that whenever the company
increased its capacity, the capital employed to turnover ratio has substantially
decreased in various phases.
This, points to the fact that there was always scope for improving the utilisation of the
additional capacity. Hence the company is now in the process of streamlining and
debottlenecking its operations to take the capacity to 200,000 tons. We expect this to
improve the ratio to a level of 1.07 by FY12. Subsequently after the commissioning of
the 100,000 tons new capacity, we see the ratio hovering around ~1x by FY13.
Sales : Capital Employed (x) (capex driving down the ratio)
2.5
32,000 MT 165,000 MT
2.05 New capacity
1.98
100,000 TPA
2.0
1.74
1.5 1.73
1.23
1.01
1.0 1.20 1.23
65,000 MT
1.08 1.05 1.05
0.99 1.00
0.5 115,000 MT debottlenecking
to 200,000 MT
-
FY10E
FY12E
FY11E
FY13E
FY01
FY03
FY05
FY07
FY09
FY02
FY04
FY06
FY08
Low Debt and Healthy cash position to assist in expansion and acquisition
Cash Flow from Operations and Free Cash Flow
2500.0
2000.0
1500.0
1000.0
Rs mn
500.0
0.0
FY10E
FY12E
FY11E
FY06
FY07
FY09
FY05
FY08
-500.0
-1000.0
-1500.0
Cash Flow From Operations Free Cash Flow
14 June 2010 19
IFIN Research AIA Engineering
IFCI Financial Services Overweight
5000 0.6
4000 0.5
3000 0.4
0.3
2000
0.2
1000
0.1
Rs mn
0
0.0
-1000 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E
-0.1
-2000
-0.2
-3000 -0.3
-4000 -0.4
-5000 -0.5
Owing to a healthy cash position, the company is comfortably placed to finance its
planned capex or look at a value accretive acquisition. The company may also look at
foraying into other areas like wind power in the future for captive usage leading to
backward integration for the same.
25.0
25.0 24.4 24.8
20.0
19.9 20.3
19.2
15.0
FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E
Return on Capital Employed (ROCE) Return on Equity (Shareholders funds) (ROE)
We expect the company to maintain ROE and ROCE around ~20% and ~26% respectively
for FY10-12E. We expect return ratios to dip in FY10 in an event of lower realisations
14 June 2010 20
IFIN Research AIA Engineering
IFCI Financial Services Overweight
due to correction in key raw material prices and increased contribution of international
mining segment.
20.0
0.0
FY10E
FY12E
FY11E
FY05
FY06
FY07
FY08
FY09
The company also has optimised its current ratio levels from FY07 onwards to a
comfortable level of 3:1 and we expect the company to maintain the same in the years
ahead.
Current Ratio
4.5
3.9
4.0
0.5
0.0
FY10E
FY11E
FY12E
FY09
FY05
FY06
FY07
FY08
14 June 2010 21
IFIN Research AIA Engineering
IFCI Financial Services Overweight
Margins
30.0
25.9
23.8 23.7 24.1 24.5 23.7
25.0
20.0
20.0
19.4
15.0 13.2 18.3 17.6
%
9.2
5.0
0.0
FY11E
FY12E
FY06
FY07
FY08
FY10
FY05
FY09
EBITDA margin(%) Adjusted PAT margin(%)
Source: IFIN Research
The company has maintained healthy EBIDTA margins in the range of 24-25% in the
recent past. Henceforth owing to increase in contribution from international mining
sales, wherein realisations are at a 40% discount to the cement realisations of around Rs
90-100 per kg, we expect a dip of 100-200 bps from FY10 levels in margins.
The realisation is much lower as the company in the initial phases will be only supplying
grinding balls to the mines. Over a period of time, the grinding media will be regularised
and AIA will look to provide the complete solutions to mining companies including their
liners. However, the same will take at least 2-3 years to be implemented.
0.069
0.070
0.060
0.050
0.040
FY11E
FY12E
FY06
FY07
FY08
FY10
FY05
FY09
14 June 2010 22
IFIN Research AIA Engineering
IFCI Financial Services Overweight
SWOT Analysis
STRENGHTS WEAKNESS
Largest high chrome grinding media player in India Pricing is the key – in the short-medium term
and second largest globally after Magotteaux. company cannot afford to be >10-15%
Technically strong management with ~30 years of expensive than forged media while in the long
experience in the industry. term not more than 20%.
Technical expertise obtained from Magotteaux AIA’s immediate competitor – Magotteaux –
under Settlement Deed of 2000. has developed a reputation for possessing
Cannot be bought over by Magotteaux until 15 strong technological capabilities, strong brand
years, starting 2000, as per Settlement Deed. image and a complete solutions provider.
Management control has to exist in AIA to continue None of AIA’s facilities are in tax free or export
using the technology without payment of royalty. oriented zones thereby losing the price
Total solution provider capability for user industry competitiveness to that extent.
to optimise cost and output. Lower arbitrage in labour cost, export
Ability to quickly scale up capacity on account of subsidies, economies of scale versus Chinese
strong cash flows and ability to service debt. however, better off against global players.
Low/ nil debt on the books. In the initial years of breakthrough, AIA will
Labour cost arbitrage against competitors like have to compromise on margins.
Magotteaux. High dependency on global cement and
Once breakthrough achieved and regularised, AIA domestic consumption markets to lead to drop
stands to gain from regular business on account of in volume growth in eventuality of a global
replacement demand. slowdown.
OPPORTUNITIES THREATS
AIA may look at getting into forged grinding balls Chinese players, supported by export subsidies
since their liners are anyways forged, thereby and undervalued currency, may further drop
competing with Chinese players on pricing, quality prices of forged products, leading to potential
and consistency and also target mill > 20 ft diameter erosion in margins.
Huge potential in international mining markets Large scale use of vertical mills for soft ores like
whose estimated mill internals market size is ~2.4 limestone, kaolin and others, will reduce
MTPA against cement which is 0.3 MTPA. consumption of grinding media drastically.
Competing with existing forged / high chrome With economies of scale gaining significance,
players and improving overall cost of operations. mines are moving towards large mills more
Setting up manufacturing facilities in densely mined than 20 ft in diameter. The target market for
areas such as South Africa, Brazil, Indonesia, etc in AIA is only ball mills up to 20 ft in diameter.
eventuality of company not setting up facilities in Increase in exports will lead to greater
trade free zones or tax free zones. exposure to foreign currency volatility.
Aggressive foray into liners in international mining Patents and copyrights by other international
markets, leading to higher realisation vis-a-vis competitors in various products in other
grinding balls. regions could hamper foray into such markets.
AIA is now foraying into supplying grinding media Increase in labour cost on account of higher
for new sectors such as Platinum Group Metals, payouts under Minimum Wages Act and
Gold and Copper. This will de-risk the model from increase in tax outgo on account of New Direct
sole dependency on cement and power utilities Tax Code to be introduced in 2011 could
sector. hamper pricing competitiveness.
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Business Background
Background
AIA Engineering Ltd (AIAEL) is promoted by Mr Bhadresh Shah, a metallurgical engineer
from IIT Kanpur and began operations in 1978 and is a niche manufacturer of
impact/abrasion/corrosion resistant high chrome castings. The company had a joint
venture with Magotteaux International S A, Belgium from 1991 to 2000. On 16 Feb
2000, Mr Bhadresh Shah bought out the 51% stake of Magotteaux in the erstwhile AIA
Magotteaux Ltd for a sum of Rs 400 mn. Post that, the company was renamed to AIA
Engineering Ltd on 2 May, 2000 and was listed in December 2005.
The company enjoys a virtual monopoly in the high chrome mill internals space in the
domestic sector and operates in a duopoly in the overseas market. The company derives
majority of its revenues from the cement sector.
Company Structure
Welcast Steels
Ltd
Vega Industries( Vega Industries Ltd Vega Industries Ltd
(Middle East) F.Z.E U.K USA
Business
The company is in the business of manufacturing high chrome mill internals for use in
the cement, power and mining industries through the process of sand casting. The
company categorises their offerings as follows:
Product Portfolio
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Products
For understanding the products, the structure of a ball mill is given below:
a) Grinding Media: These are grinding balls which are used in ball mills/ vertical mills to Key products manf
grind various feeds such as clinker/limestone, coal and minerals such as iron ore, include:
platinum etc for the cement, power and mining industry respectively. They should be -Grinding balls
sufficiently hard and resistant to wear and tear so that no cracks are developed -Liners
-Diaphragms
during the grinding process.
-Vertical mill parts
b) Tube Mill Liners: These are used to protect the shell of the mill from strong impact of -HRC castings
the grinding media. Liners impart suitable trajectory to the balls to ensure efficient
crushing of feed material.
c) Diaphragms: These are used to regulate the movement of the feed into the second
chamber of the mill and to ensure that the optimum level of feed is maintained in
the first chamber.
d) Vertical Mill Parts: These constitute roller and table liners which are used in the
crushing operations in vertical mills
e) Hot Rolled Carbon Steel (HRCS) Castings: These constitute dipping tubes or
immersion tubes located in pre-heaters which are primarily designed to improve
efficiency of separation of material and gas.
The company also provides services such as mill audit, designing, supervision and
optimization of the grinding process to its customers.
Technical Collaborations
Collaboration with M/s. Slegten S.A. Belgium for technical knowhow in
manufacturing of high chrome liners, Level controllers and other diaphragms
Technical/ financial collaboration with M/s Magotteaux International SA, Belgium in
1991 for manufacture of high chrome castings. This collaboration ended on the year
2000.
Technical collaboration with M/s. South Western Corporation, USA (SWCUS), for
process improvement in Raymond Mills since 1999.
Technical collaboration with M/s. South Western Corporation U.K., (SWCUK) for the
manufacture of high performance classifiers since November 14, 2002 for a period
of 5 years.
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Production capacity
The company is looking at enhancing its capacity up to 200,000 MT through de-
bottlenecking and streamlining certain plants to be available by 1QFY11. The Company
has also firmed up plans for setting up another High Chrome Mill Internals unit with the
capacity of additional 1,00,000 TPA at a suitable location, but not in the originally
planned SEZ as before.
Management
The management of the company is majorly independent in nature with only one
Independent Director out of 5 holding interests in AIA or affiliated subsidiaries. This is
Mr Vinod Narain who is also the Chairman of Welcast Steels.
Rajendra Shah
Non Executive Chairman; Independent Non Executive Director – AIA Engineering
Non Executive & Independent Director – Transformer and Rectifier
He is an Ahmadabad-based industrialist, he is a vital member of the AIA think tank and a
key contributor in important policy decision making. He was awarded “Best
Entrepreneur” by Ahmadabad Management Association in 2001.
Bhadresh Shah
MD and Executive Director – AIA Engineering Bhadresh Shah -
Key person with
Director – Welcast Steels (subsidiary of AIA Engineering)
technological
Director – Paramount Centrispun Casting (merged with AIA Engineering) expertise driving
Former Director – Reclamation Welding (merged with AIA Engineering) this business.
He is a metallurgical engineer from IIT Kanpur, he is the founder of AIA Engineering. His
vision and positioning AIA as a niche metallurgical products Company has placed it
among the top three global Companies in the mill internals space. Mr Shah started Gray
Cast Foundry Works in 1976 to produce small castings in manganese steel, cast steel
and cast iron castings. He founded Ahmadabad Induction Alloys Pvt Ltd (the predecessor
to our Company) in 1978, a company engaged in manufacture and supply of steel, alloy
steel and alloy iron castings used in cement, utility and mining industries. In March
1991, Magotteaux India Pvt Ltd was incorporated to which Ahmadabad Induction Alloys
Pvt Ltd. was merged effective from April 1991 (source: AIA RHP).
Vinod Narain
Independent Non-Executive Director – AIA Engineering
Chairman – WELCAST STEEL
He is the Independent Non-Executive Director of AIA Engineering Ltd. He is an
Industrialist based in Bangalore and the founder of Welcast Steels Ltd. He possesses
National Certificate Course of Mechanical Engineers from .Birmingham, England and is
also a Fellow of the Institution of Valuers and possesses rich and varied experience in
corporate management.
Samakulam Ganesh
Independent Non-Executive Director of AIA Engineering
Served as an Independent Director of Aries Agro
Served as a Consulting Advisor to TCS, Mumbai
Worked as an Advisor to the Essar Group.
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He has B. Tech (IIT), S.M. (Management) Sloan School of Management, MIT, USA, PhD
(Business Studies) London Business School, UK. He is a Management Consultant. He was
a former Senate Member of IIT Bombay; Professor of IIM Ahmadabad; visiting Professor
at various Management Institutes like Andersen Graduate School of Management UCLA,
USA, University of Virginia and S.P. Jain Institute of Management Research, Bombay.
Presently he is a visiting Senior Professor at Narsee Monjee Institute of Management,
Mumbai.
Bhupendra Shah
Independent Non-Executive Director of AIA Engineering Ltd.
He is a Chemical Engineer from IIT, Kanpur with a Masters in Science from the University
of California, Berkeley, USA, his domains of expertise span finance and administration.
Sanjay Majmudar
Independent Non-Executive Director of AIA Engineering Ltd
Independent Non Executive Director – Aarvee Denim
Independent Non Executive Director – Dishman Pharma
He is a practicing Chartered Accountant (S Majmudar and Associates). His financial
acumen facilitates the financial planning for the multiple projects that the Company
undertakes.
S Srikumar
Non Independent Non Executive Director – AIA Engineering
Company Secretary – I Power solutions (e-business IT solutions Provider Company)
He has M. Tech (Industrial Engg.). He has completed his Ph.D in 1988 and holding PGDM
from AIMA. He possesses vast knowledge and experience of Industry, Project
Management, Technical Evaluation, Engineering Coordination and Administration.
Manufacturing facilities
Facility at Ahmadabad for grinding media and small castings Consolidated
Facility at Ahmadabad for big sized mill internals manufacturing
capacity of
Facility at Foundry unit at Nagpur for manufacture of conventional grade industrial
172,000 TPA
castings having the capacity of 5000 TPA – on account of merger of Paramount.
Welcast Steels Limited-Manufacturing facility for grinding media at Bangalore –
subsidiary of AIA – manufacturing capacity of 40,000 TPA.
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IFCI Financial Services Overweight
200,000
150,000
MT
100,000
50,000
0
FY09 FY10 FY11E FY12E
Manufacturing Process
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IFCI Financial Services Overweight
Mining Process
Source: FL Smidth
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Difference with a HPGR based grinding circuit and a SAG mill based grinding circuit
Advantages of HPGR:
-Better energy efficiency.
-Steady high rate
throughput.
-Finer product.
-Low dust and noise.
-Compact design – less
space.
-Low installation cost.
-Low operating cost.
-More rapid progression
from stat to full capacity.
-Reduces grinding media
Source: IFIN Research consumption.
Faster delivery schedule.
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VERTICAL MILLS – competition for SAG+BALL Mills – potential threat in long run for soft ores
Since tumbling mills are not effective in fine grinding due to their relatively low power intensity, the
alternative is a vertical mill. Steel balls or pebbles are placed in a vertical grinding chamber in which an internal
screw flight provides medium agitation. The feed enters at the top with mill water and is reduced in size by
attribution and abrasion as it falls. The finely ground particles are carried upwards by pumped liquid and
overflow into a classifier. Oversized particles are returned to the bottom of the chamber for further grinding.
The idea of vertical mills was initiated way back in 1946 with the Mikro-Atomizer and the Raymond Vertical
mills. However, the idea of vertical mills has recently been taken up in a more serious manner by miners and
manufacturers worldwide with improvements in technology.
These are in direct competition to tubular mills which are generally positioned in horizontal form. They can be
used for wet as well as dry grinding processes. Manufacturers of vertical mills claim the following advantage
over tubular horizontal mills:
1. Higher energy efficient by up to 30-35%.
2. Lower media consumption coinciding with energy savings.
3. Lower maintenance and hence lower operating cost.
4. Lower installation cost and requires less floor space due to its vertical layout.
5. Useful for ultra fine grinding of 100 microns or less.
6. Lesser noise.
7. They can be used
Vertical mills claim to successfully ground virtually all ores namely aluminium oxide, barite, calcite, clay, coal,
coke, copper, copper ore, ferrite, ferro alloy, gold, graphite, iron oxide and sand, kaoline, lead zinc ore,
limestone, etc.
The theory behind vertical mill says
“WHY TUMBLE A MILL WHEN YOU CAN STIR A CHARGE – LESS ENERGY IS REQUIRED” since
ENERGY REQUIRED TO MILL ROCK = INPUT ENERGY – ENERGY REQUIRED TO TUMBEL MILL AND CHARGE
Layout of a vertical mill
Source: Metso
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Financial Summary
Income Statement (Rs mn) Cash Flow Statement (Rs mn)
Year end 31 March FY09 FY10 FY11E FY12E Year end 31 March FY09 FY10E FY11E FY12E
Net Sales 10,233 9,497 11,817 13,879 Oper.profit before w.cap.changes 2,576 2,488 2,946 3,355
Expenditure 7,766 7,292 9,231 10,944 Change in current assets (888) (514) (1,400) (1,268)
Operating Profit 2,467 2,205 2,586 2,935 Change in current liabilities 137 57 203 221
Other Operating Income - 253 300 350 Others activities (4) (639) (697) (763)
EBITDA 2,467 2,458 2,886 3,285 Cash flow from operation (a) 1,821 1,391 1,052 1,545
Other Income 218 160 210 230 Capital expenditure (396) (403) (614) (670)
Depreciation 203 219 240 274 Investments 533 (186) (150) (200)
EBIT 2,483 2,399 2,856 3,241 Dividend received 37 60 90 90
Interest 21 25 34 35 Interest received 72 70 60 70
PBT (before non-recurring) 2,462 2,374 2,822 3,206 Others - - - -
Non Recurring - - - - Cash flow from investing (b) 247 (459) (614) (710)
Tax on non recurring - - - - Free cash Flow (a+b) 2,068 932 439 835
PBT (after non-recurring) 2,462 2,374 2,822 3,206 Equity capital + share premium - - - -
Total Tax 750 701 837 983 Debt 306 48 75 100
Reported PAT 1,712 1,673 1,985 2,223 Interest paid (21) (25) (34) (35)
Adjusted PAT 1,712 1,673 1,985 2,223 Dividend paid (155) (287) (325) (390)
Prior period items (31) - - - Others 158 - - -
Minority interest (7) - - - Cash flow from financing (c) 254 (320) (284) (325)
Preference dividend - - - - Net change in cash (a+b+c) 2,322 613 154 510
Net Income 1,736 1,673 1,985 2,223 Cash and equivalents at the end 2,588 3,200 3,355 3,865
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Disclaimer:
I-Fin Disclaimer:
All information/opinion contained/expressed herein above by I-Fin has been based upon information available to the
public and the sources, we believe, to be reliable, but we do not make any representation or warranty as to its accuracy,
completeness or correctness. Neither I-Fin nor any of its employees shall be in any way responsible for the contents.
Opinions expressed are subject to change without notice. This document does not have regard to the specific investment
objectives, financial situation and the particular needs of any specific person who may receive this document. This
document is for the information of the addressees only and is not to be taken in substitution for the exercise of
judgement by the addressees. All information contained herein above must be construed solely as statements of opinion
of I-Fin at a particular point of time based on the information as mentioned above and I-Fin shall not be liable for any
losses incurred by users from any use of this publication or its contents.
Analyst declaration
We, Vinay Pandit and Jason Soans, hereby certify that the views expressed in this report are purely our views taken in an
unbiased manner out of information available to the public and believing it to be reliable. No part of our compensation is
or was or in future will be linked to specific view/s or recommendation(s) expressed by me in this research report. All the
views expressed herewith are our personal views on all the aspects covered in this report.
I-Fin Investment Rating
The ratings below have been prescribed on a potential returns basis with a timeline of up to 12 months. At times, the
same may fall out of the price range due to market price movements and/or volatility in the short term. The same shall
be reviewed from time to time by I-Fin. The addressee(s) decision to buy or sell a security should be based upon his/her
personal investment objectives and should be made only after evaluating the stocks’ expected performance and
associated risks.
Key ratings:
LARGE CAP MID CAP SMALL CAP
Rating
Market Cap > Rs 100 bn Market Cap Rs 25 – Rs 100 bn Market Cap < Rs 25 bn
BUY (B) > 20% >30%
Overweight (OW) 5% to +20% 10% to +30%
Neutral (N) -5% to +5% -10% to+10%
Underweight (UW) -5% to -20% -10% to -30%
SELL (S) < (20)% < (30)%
Not Rated (NR) Not initiated coverage on the stock / Not enough assurance to give a rating on the stock
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