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Initiating Coverage

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

 De-risking the business model: Addressing concerns over the 400

introduction of vertical mills to reduce consumption of grinding media, the 300

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.
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Valuation & Recommendation: We initiate coverage with an Overweight


rating on the stock with a target price of Rs 444 based on average of DCF
value of Rs 425 and PE based price of Rs 462 based on 22x FY11E EPS.

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

 BUSINESS BACKGROUND 24-30


o Background
o Settlement deed with Magotteaux – restriction clause for 15 years
o Company structure
o Products
o Technical collaborations
o Production capacity
o Management team
o Manufacturing facilities
o Manufacturing process
o Mining process
o Cement production process
INDUSTRY ANALYSIS *
 COMMINUTION – MILL INTERNAL DYNAMICS *
o What is comminution *
o Objectives of comminution *
o Four stages in comminution *
o Different levels of hardness required in grinding media for different rocks/ores *
o Types of comminution *
- Batch comminution *
- Continuous comminution *
 Open circuit *
 Closed circuit *
o Grinding *
- What is grinding? *
- Materials and particle size desired post grinding *
- AIA target market for grinding media *
o Types of grinding mills *
- Autogenous Grinding (AG) and Semi-Autogenous grinding (SAG) mills *
- Ball mills (tubular) *
 Three types of tubular mills: *
-Overflow discharge mills *
-Diaphragm / Grate discharge mills *
-Centre periphery discharge *
o Preferred ore treatment for different kinds of mills *
o RULE OF THUMB FOR DECIDING GRINDING MEDIA AND OTHER MILL INTERNALS *
- Rule of thumb for grinding balls in a BALL mill *
- Rule of thumb for liners and other parts *
- Ore wise abrasion index *
o Factors affecting grinding media wear *
o Growing competitive technologies 31
- High Pressure Grinding Rolls (HPGR) – competition to SAG mills 31
- Vertical Mills – competition for SAG+BALL mills 32
 FINANCIAL SUMMARY 33
 DISCLAIMER; Other stocks covered by the analyst 34

Available in the detailed hard copy of report only.

14 June 2010 3
IFIN Research AIA Engineering
IFCI Financial Services Overweight

Key Investment Criteria


 Breakthrough in international mining to lend volume growth – but margins International
to be impacted mining to be
future growth
International mining volume sales for FY10 stood at 20,000 Tons. For FY11E we estimate driver
~40,000 Tons while for FY12E we estimate ~60,000 Tons in the international mining
business. This will be driven by the following key factors:
A. International mining breakthroughs and business potential:
AIA has been witnessing recent breakthroughs with various mining companies in Africa
in the area of copper, platinum and platinum group metals, and gold. Some of these
visible names are Anglo Platinum (South Africa), Konkola Copper Mines (Zambia),
Lonmin (Aouth Africa) and ARM Group in South Africa (for their Nkomati mines).
We estimate the following potential from these players for AIA:
Estimated potential for grinding media from new mining breakthroughs:
Client BALL Mill grinding media
Vale (Samarco, Vittoria)* 10,000-15,000 TPA to 30,000 TPA Estimate potential
Anglo Platinum 32,000-43,000 TPA of 68,000 – 85,000
Konkola Copper 4,400-6,600 TPA TPA (detailed on
Lonmin 9,000-12,000 TPA page 16-20)
ARM Group 12,350-14,200 TPA
-Nkomati 950-1,300 TPA
Source: IFIN Research; * - as indicated by management of AIA
The total potential indicated above is in the area of ball milling, which is the target
market for AIA Engineering in the grinding media space.
In any mining operation globally, the standard milling or grinding or comminution
process includes a SAG mill as well as a BALL mill. The SAG mill (Semi Autogenous
Grinding) is generally large in size and is used to crush large pieces of rock (read: ore) Target market is
ball mills only
into smaller manageable pieces. It is the primary grinder in any milling operation. The
since forged iron
BALL mill is then used to further grind these smaller pieces of rock into smaller sizes of is preferred in SAG
ore. SAG mills are generally huge in size and cannot use high chrome grinding media mills.
since the pressure generated in a SAG mill at times touches 20 bar, under which
circumstances, the high chrome grinding media tends to break. Hence forged iron is
always preferred in SAG mill operations. Our target potential for AIA Engineering
therefore lies in breaking through at the secondary grinding (BALL mill) level in various
mines. This again can hold true only for BALL mills which are smaller than 24 feet in
diameter. SAG mills may be as wide as 40 ft in diameter.
B. However, margins to be impacted in initial years of breaking through:
While AIA engineering may successfully convince its potential customers the benefits of
high chrome grinding media over forged, there are certain factors which are inevitable:
Supplier will have
1. The key factor here is cost. In the mining industry, the highest cost component is to compromise on
crushing and grinding (10-15%), followed by explosives and diesel cost to run mining margins initially
equipments. If a supplier is ready to cut margins to 10-15% in the first year of operation, by pricing not
more than 10-15%
then only will it give him an initial entry to use the products. The cash cost of operations above forged for
is a very important factor globally in the mining industry. Later on, once the products an initial entry for
are approved and come into regular use, then one will always talk about increase in trials.
prices due to rise in raw material prices, labour charges and energy expenses.

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IFIN Research AIA Engineering
IFCI Financial Services Overweight

Cost of producing copper in Central Africa:


Process % of total
Mining 46% Crushing and
Concentrating 11% grinding are single
highest cost
Smelting 6%
forming part of
Leaching 13% mining and
Refining 2% concentrating @
Overheads 22% 10-15% followed
Total 100% by explosives and
Fixed Cost 60% diesel
Variable Cost 40%
Source: IFIN Research
2. Risk of using new products in the system: the plant chief engineer or the plant head
is generally taking a risk on the production front by giving an opportunity to a new
player, against tested and in use products. Hence, he will be all the more interested in
looking at lower costing during initial trials.
3. The 6 months testing criteria: the typical time taken to test the full impact of the It takes 3 months
newly introduced charge (grinding media) is 6 months. At any given trial, it is not to flush out the
possible for the plant manager to shut down the mill and therefore charge has to be existing charge
(grinding media)
continuously added through the day or once in a day. It generally takes 3 months to
and another 3
empty the old charge which could be forged iron and another 3 months to allow the ne months to test the
charge of high chrome to be present in the mill completely. Hence the first 3 months full impact of the
will not show the performance of the mill with the completely new charge. It is only newly fed charge.
after completion of the first 3 months through refilling of the charge in the mill tested
for performance with a single company’s products. Hence the first one or two supplies
for 6 months will be considered as a trial supply and will have to be provided at very low
margins.
4. Only grinding balls are high chrome; liners are low on chrome: liners used in ball mills
in the world are always of forged material with small traces of chrome.
Capacity Grinding Media Vertical Other Mill
Competitive scenario Location Diaphragms Liners
(Tons) Forged High-Chrome Mill Parts Parts
AIA Engineering India 172,000 √ √ - √ √ √

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

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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.

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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.

“Going forward SensoMag will take a lot of pressure off the


operators.......”.......international mining expert

 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.

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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

Source: AIA Presentation 2009;

 Pricing competitiveness with forged media


The primary difference between high chrome grinding media and forged media is the
extent in raw material terms is the extent of use of scrap steel for the manufacture of
grinding balls. The general trend of Ferro Chrome prices, used in the making of high
chrome grinding media, has been similar to scrap steel and exists to the extent of 20-
25% while the balance 75-80% is scrap steel. In case of forged, the scrap steel forms
100%.
A question that comes to ones’ mind is the how will AIA compete with forged media Margin pressure
players in an event of Ferro chrome prices rising abnormally higher than the scrap steel expected as AIA
will compete with
prices. The chart below helps signify the same since such scenario was witnessed from forged players
Jun’07-Dec’08. However, until FY08, the company had very little presence in the who have
international mining market. Going forward, such variation could have an adverse exposure only to
steel scrap.
impact on margins to an extent of 150bps.
Voltality in raw material prices causing change in realisation
4.0 120

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

Scrap (75%) Ferro Chrome (25%) Wt Avg Realisation (RHS)

Source: IFIN Research

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IFIN Research AIA Engineering
IFCI Financial Services Overweight

 Shortage of large scale manufacturers of high chrome grinding media in


international markets; Company dominates domestic markets
AIA Engineering (AIAE) and Magotteaux are the only two companies in the world with
strong brand visibility and large production capacities to command a lion’s share in the Domestic Grinding
niche segment of high chrome grinding media, which is a fragmented industry with media sales of AIA:
Cement 25,000 tpa
several small players operating at various levels. On the domestic front, AIA engineering
Utilities 14,000 tpa
enjoys the largest chunk of market shares @ 90% in cement and 70% each in power Mining 3,000 tpa
utilities and mining. However, the mining market in India yields AIA only 3,000 TPA, TOTAL 42,000 tpa
power utilities 14,000 TPA and cement 25,000 TPA. The market size is too small for long
term sustainability and hence the need to foray into international market. Almost all the
major cement companies such as ACC, Gujarat Ambuja, Ultra Tech, Grasim Industries
etc have their expansion plans tied up with the company. The balance is catered to by
conventionally used forged components or other high chrome/forged mill internal
players like ACC Nihon (Hindustan Udyog Ltd), RN Metals, Aqua Alloys and Tega.
In the mining space, AIAE’s client list includes Kudremukh Iron Ore Company, Hy-grade
Pellets, Hindustan Zinc Bharat Aluminium Company. The utilities space consists of
customers such as the OEMs to the thermal power sector and major thermal power
plants. The company also has an 18 year long term contract with BHEL (OEM to the
thermal power segment).
Magotteaux on the other hand is the largest player globally with a total production
capacity(CY07) (excl JV) of 235,000 MT vis-a-vis AIA engineering which has a present Magotteaux is the
capacity of around 172,000 MT up from 65,000 TPA in FY06 owing to the commissioning largest player
of the Moraiya plant. However, as per our estimated and indicative guidance by industry globally with a
capacity of ~300K
experts, Magotteaux may have a capacity of 300,000 MTPA until Dec’09. The company
TPA followed by
has a manufacturing facility in Thailand with estimated capacity of ~70,000 MTPA. The AIA with 172K TPA
company also has manufacturing facilities in Belgium, China, South Africa, Brazil,
Australia and USA.

 Increased capacity to help meet demand from new breakthroughs in


international mining Increased demand
The company has built its capacity from 65,000 tons in FY06 to about 165,000 tons at from international
mining to be met
present. The company is in the process of debottlenecking its plant to build up capacity
through increased
to 200,000 tons to be available by Q3FY11.The company is debottlenecking its Odhav production
plant and also building up a third line at its Changodar facility for the same, both in capacities to 200K
Ahmadabad. TPA.
The Nagpur unit (Formerly Paramount Centrispun Castings) has also become Capex of 40,000
operational. The company expects to incur capex of around Rs 400 mn for the same. Tons of which
20,000 TPA to be
Also, with breakthroughs achieved in international mining and increased demand of towards Vertical
40,000-50,000 tons coming in for FY11 the company would need incremental addition mill parts
to capacity to meet this demand. For the same the company has planned brownfield
expansion of capacities at existing facilities by another 30,000-40,000 TPA. This facility
will require a funding of around Rs 750 mn-800 mn over FY11 and FY12 and is expected
to be ready by end of FY12.

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IFIN Research AIA Engineering
IFCI Financial Services Overweight

Total Sales and Mining Volume(MT)


250,000
100,000 TPA plant
200,000 not to be set up in
SEZ
150,000
MT

100,000

50,000

0
FY09 FY10 FY11E FY12E

Mining Sales Capacity

Source: IFIN Research


AIA Engineering has in the past increased their production capacities to meet the ever Debottlenecking
growing demand for the business, post their IPO in 2005. The current production capacity from
172K TPA to 200K
capacity of the company stands at 165,000 tons per annum. The company is further TPA
planning to de-bottleneck their capacities up to 200,000 tons per annum.
AIA has been expanding capacities in the past which has led to the sales to capital
employed ratio dipping from ~2.0x levels to ~1.0x. While de-bottlenecking at the current
sites will help improve this marginally, we expect the same to stay at ~1.0x on account
of further capex required in future to scale up capacities by further 100,000 TPA. With a
pick up in the international mining business, we expect significant uptick in volumes for
the coming years.

Sales : Capital Employed (x) (capex driving down the ratio)

2.5 New capacity


32,000 MT 165,000 MT
2.05 100,000 TPA
1.98
2.0
1.74

1.5 1.73 Sales:Capital Emp-


1.23 loyed to hover
1.01
1.23 around 1x
1.0 1.20 65,000 MT
1.08 1.00 1.02 1.00
0.99
0.5 115,000 MT debottlenecking
to 200,000 MT
-
FY10E

FY12E
FY11E

FY13E
FY01

FY03

FY05

FY07

FY09
FY02

FY04

FY06

FY08

Source: IFIN Research

 Cement and mining activity uptick in global and domestic markets


The outlook for the domestic cement industry is positive on the back of favourable
factors such as revival of the housing sector, speedier project execution of infrastructure
projects and the increase in plan outlay of the Union Budget for rural housing and
infrastructure from Rs 207 bn in FY10 to Rs 299 bn for FY11.
Cement production is expected to grow by 13% in FY11 owing to buoyant demand and
the government impetus on infrastructural growth for the economy.

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IFIN Research AIA Engineering
IFCI Financial Services Overweight

Cement Production Growth YOY (%) Cement prodn. to


14 grow @13% in
FY11E (CMIE)
12

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

Source: Planning Commission


The global cement industry is stabilizing after being depressed in late 2009 due to the
economic downturn in the developed economies. Demand in the key continents of
North America and Europe continues to be low with only a gradual recovery expected.
Emerging markets such as Africa, India and China are to drive the global demand for
cement going forward with companies being aggressive in building up capacities in
these growth regions.

14 June 2010 11
IFIN Research AIA Engineering
IFCI Financial Services Overweight

Global Cement Demand


3250
3000
2750
2500
2250 Emerging Markets-
Million Tonnes

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.

Mining Growth(IIP) YOY (%)


12

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

 Sustainability of Business Model


The company’s replacement demand forms ~70-80% of its sales which consists of mainly
the worn out media which need to be replaced over a period of time depending upon
their wear rate and abrasion index of different ores. Hence even in a downturn, when
companies defer or go slow on their capex, the replacement demand will hold the
company in good stead to garner sales which leads to a healthy and sustainable
business model for the company. The company derives almost 80% of its sales from the
cement sector.

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.

Replacement demand analysis Q1 Q2 Q3 Q4

Sales FY09 (Cement+Mining+Utilities)* 21,172 26,900 23,928 23,348

Sales FY10 (Cement + Utilities) 16,400 18,718 23,813 23,880

Percentage Demand Maintained 77% 70% 100% 102%


* Total mining sales in FY09 was 8,000 Tons.

14 June 2010 13
IFIN Research AIA Engineering
IFCI Financial Services Overweight

Key Investment Risks


 Volatility in currency movements and raw material prices
The company derives about 50-55% of its sales from exports and hence hedging this risk
forms an integral part of the company’s agenda. The company total derivative losses for
9MFY10 stood at Rs 314 mn. Notional Mark to Market loss on outstanding derivative
contracts, maturing in 2012 stood at a much improved Rs 540 mn for 9MFY10 compared
to Rs 1.36 bn as on March 31, 2009, owing to the substantial appreciation of the rupee
from Rs 50 levels to current levels of Rs 44.
INR/USD
52

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

Scrap (75%) Ferro Chrome (25%) Wt Avg Realisation (RHS)

Source: IFIN Research


Realisations are a function of product mix and raw material prices. As the company
follows a pass through policy, the input prices form key drivers for the profitability of
the company. The crash in input prices in FY09 led to fall in realisations for the company
from Rs 113/kg in Q4FY09 to Rs 86/kg in Q3FY10. From the above chart it’s observed
that realisations are moving with a 3-6 months lag effect to the key raw material prices.

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(%)

Scrap Ferro Chrome

Source: IFIN Research


However, if Ferro chrome prices (being 25% of the product composition and 40% of the Deviation of 10%
cost) move in a 10% deviation from steel scrap, the impact on margins can be 100-200 between Ferro
Chrome and
bps. This scenario has not impacted the company till FY09 as the company almost had
Melting scrap will
NIL sales from the overseas mining segment. But going forward as the international have impact of
mining segment volume rises, this phenomenon could pose a sizeable risk to the 120bps on
company’s overall margins. margin

 Upcoming new technologies - Vertical Mills


Vertical Mills are mills which use the concept of stirring along with attrition for grinding.
Grinding is primarily done with a helix screw which maximises grinding efficiency by
imparting high pressure between the feed material and the grinding media.
In a ball mill, 30% of the energy is spent only in the tumbling action of the mill and as
the vertical mill is based on the concept of stirring it results in energy savings up to 30%-
40%. Also it occupies only half of the area of a ball mill among other advantages such as
lesser noise, downtimes and installation costs. The vertical mill also has better drying Ceramic grinding
media is
ability and the internal temperature can be controlled to suit the varied temperature
preferred in
needs of the input feed. vertical mills
Ceramic or steel grinding media is usually preferred in vertical mills and there is no
scope for high chrome grinding media in the same. Also it uses only 25% of the grinding
media required in a ball mill resulting in purchase and energy cost savings for the mining
company. Owing to all these advantages, vertical mills are steadily gaining popularity all
over the world with OEMs such as Metso, Atox, Polysius etc. AIA is expanding
Although it poses a risk in the near future as far as grinding media is concerned, vertical their offerings
into the
mills constitute a very small portion today (about 1%-2%) and ball mills continue to
manufacture of
dominate the market. Also, the company is expanding their range of manufacturing vertical mill parts
vertical mill parts which will substitute the loss of business in grinding media, if any, and to de-risk their
instead provide better realisations and margins. business model.

14 June 2010 15
IFIN Research AIA Engineering
IFCI Financial Services Overweight

 Increase in market share in international markets will attract competition


on account of high margin (+20%) and healthy return ratios (20%)
With the company steadily making inroads into the overseas mining segment Margin and ROE
(~2.4million TPA including India), attractive return ratios could induce increased to dip in the long
competition especially from China. China imports cheap scrap from Africa to term

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

2% 453 424 397 386 374 354 318

3% 480 446 416 403 390 367 328

4% 517 475 440 425 410 383 339

5% 567 515 472 454 435 404 354

PE (x) basis of valuation


AIA Engineering - PER Band Chart - 1 year forward
600
30x
500
24x
400
18x
300
12x
200

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

Adj. Share Price 12x 18x 24x 30x

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

Rs mn / Ton FY09 FY10 FY11E FY12E

Average Realisation 0.107 0.092 0.090 0.087

Raw material price and mix assumptions


FY09 FY10 FY11E FY12E
Key raw material prices
Scrap (Rs / Ton)* 24,765 18,104 22,000 25,000
Ferro Chrome (USD/Ton)** 4,400 2,026 2,400 2,700
Raw material mix
Scrap (%) 77.7 77.0 75.0 75.0
Ferro Chrome+Other (%) 22.3 23.0 25.0 25.0
* Scrap - Source: HMS-1, Delhi - CMIE
** Ferro Chrome - Source: Bloomberg - 6-8% C, 60% Cr max 15% SI major EU destination

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

Revenue (Rs mn) 10,625 11,817 13300 12,600 13,879 17500


EBITDA (%) 23.3 24.4 25.5 23.0 23.7 25.0
PAT (Rs mn) 1,686 1,985 2356 1,947 2,223 3014
EPS 17.8 20.9 24.9 20.5 23.5 31.8
PE(x) 22.4 19.0 16.0 19.4 16.9 12.5

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

Source: IFIN Research

 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

Source: IFIN Research


The company is generating substantial cash flow from operations owing to steady
growth in profits, healthy margins and effective working capital management in FY09
and we expect the company to generate around 1.05 bn of the same in FY10. Robust
bottom-line and margins coupled with no major capex has also led to free cash flow
generation which is a positive sign for the company.

14 June 2010 19
IFIN Research AIA Engineering
IFCI Financial Services Overweight

From FY11 onwards, we expect a dip in these on account of following factors:


a. Incremental International Mining order breakthroughs leading to higher volumes.
This will increase the delivery cycle for overseas mines leading to stretch in the
working capital cycle.
b. The company will be investing ~Rs 1.3 bn in FY11 and FY12 for brown field
expansion of capacities.
c. The company is virtually a debt free company and has surplus cash balance of Rs
3.54 bn as on December 31, 2009.This includes around Rs 480 mn of the unutilised
proceeds of the QIP done in December 2006.
Cash Position and Net Debt

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

Cash Position Net Debt Net Debt to Equity Ratio(RHS)

Source: IFIN Research

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.

 Return Ratio analysis


Return Ratios - ROCE / ROE
40.0
36.1 35.4
35.0 33.8
31.2 31.5
33.0
30.0 27.6
30.1 26.7 26.4
(%)

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)

Source: IFIN Research

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.

 Stretch in working capital cycle ahead


From FY05 onwards it is observed that the company has significantly reduced its debtor
days from 120 days to around 65 days in FY09, implying that the company has
implemented an effective receivables policy for the same. However, going forward, with
increased exposure to international mining, we expect receivables and inventory levels
to harden to 90 days and 60 days respectively on account of the typical nature of
working capital involved with the international business.
The breakthrough in international mining will lead to lengthening of the working capital
cycle due to the additional time taken for shipment and delivery. We expect inventory
days and debtor days to be in the range of 90-120 days for FY11 and FY12 respectively.

Inventory and Debtors turnover (days)


140.0
116.9
120.0 110.3
99.2
100.0 92.3
84.0 87.5
79.0
80.0 65.9
Days

60.0 68.6 71.8


60.2 62.0
40.0 52.1 53.7 54.3
49.7

20.0

0.0
FY10E

FY12E
FY11E
FY05

FY06

FY07

FY08

FY09

Inventory turnover ratio (days) Debtors turnover ratio (days)

Source: IFIN Research

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

3.5 3.2 3.1


3.1
2.8
3.0 2.6 2.6
2.5 2.9 2.3
2.6 2.6
2.0 2.4 2.5
2.1 1.9
1.5
1.7
1.0

0.5

0.0
FY10E

FY11E

FY12E
FY09
FY05

FY06

FY07

FY08

Current Ratio Acid Test Ratio / Quick Ratio

Source: IFIN Research

14 June 2010 21
IFIN Research AIA Engineering
IFCI Financial Services Overweight

 Breakthrough in mining to lead to margin reduction

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
%

16.7 16.9 16.0


10.0 13.4

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.

Average Realisation (Rs mn / MT)


0.120
0.107
0.110
0.100 0.092 0.090
0.087
0.090 0.083
0.079 0.081
0.080
%

0.069
0.070
0.060
0.050
0.040
FY11E

FY12E
FY06

FY07

FY08

FY10
FY05

FY09

Average Realisation (Rs mn/ MT)


Source: IFIN Research

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.

14 June 2010 23
IFIN Research AIA Engineering
IFCI Financial Services Overweight

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

AIA Engineering Ltd

Manufacturing Subsidiary Own Manufacturing


Marketing Subsidiaries
Capacity-42,000 MT Capacity-130,000 MT

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

Tube Mill Internals HRCS Castings


Vertical Mill Internals

Grinding Media Liners Diaphragms Dipping Tubes Cooler Grates


Roller and
Table Liners

14 June 2010 24
IFIN Research AIA Engineering
IFCI Financial Services Overweight

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.

14 June 2010 25
IFIN Research AIA Engineering
IFCI Financial Services Overweight

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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IFIN Research AIA Engineering
IFCI Financial Services Overweight

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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IFIN Research AIA Engineering
IFCI Financial Services Overweight

Total Sales and Mining Volume(MT)


250,000

200,000

150,000
MT

100,000

50,000

0
FY09 FY10 FY11E FY12E

Mining Sales Capacity

Manufacturing Process

Source: AIA Engg - RHP

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IFIN Research AIA Engineering
IFCI Financial Services Overweight

Mining Process

Source: FL Smidth

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IFIN Research AIA Engineering
IFCI Financial Services Overweight

Cement Production Process

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IFIN Research AIA Engineering
IFCI Financial Services Overweight

GROWING COMPETITIVE TECHNOLOGIES


HIGH PRESSURE GRINDING ROLLS – competition for SAG mills
Comminution processes account for the largest portion of energy consumption in mining operations. This has
led to new technologies being constantly developed. With increasing economic pressures, the emphasis is now
on reducing unit costs by making equipment larger and through use of technologies with lower operating
costs. This trend can be seen in the increasing size of grinding mills and flotation cells used in recent plant
designs and in the adoption of HPGR crushing as an alternative to SAG milling. The High Pressure Grinding Roll
(HPGR) technology is one such technology which has been growing in the last 10-15 years with key benefits
being better energy efficiency and higher grinding capacity and higher metal recovery in downstream
processes such as leaching and flotation. It can boost milling capacity by 20-40%.
The crushing action occurs in a packed bed between the rolls. As rock is drawn between the rolls they are
forced apart until the inter particle crushing force balances the hydraulic pressure on the rolls. The rock is
compacted into a cake that has a bulk density of between 80-90% of the true rock SG.
Schematic diagram of a HPGR

Difference with a HPGR based grinding circuit and a SAG mill based grinding circuit

HPGR Systems are known to


save ~30% power compared
to SAG mills.

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.

“Fineness is not influenced by Press Force........”....... International mining expert

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IFIN Research AIA Engineering
IFCI Financial Services Overweight

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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IFIN Research AIA Engineering
IFCI Financial Services Overweight

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

Key ratios Balance Sheet (Rs mn)


Year end 31 March FY09 FY10 FY11E FY12E Year end 31 March FY09 FY10E FY11E FY12E
Growth rates (%) Share Capital 188 188 188 188
Net sales 48.0 -7.2 24.4 17.4 Reserves & Surplus 7,538 8,911 10,527 12,306
EBITDA 50.6 -0.4 17.4 13.8 Shareholder's funds 7,726 9,099 10,715 12,494
APAT 27.5 -2.2 18.6 12.0 Minorities Interest 57 - - -
Margins (%) Short term debt 442 490 565 665
EBITDA 24.1 25.9 24.4 23.7 Long term debt - - - -
EBIT 24.3 25.3 24.2 23.4 Total Debt 442 490 565 665
PBT 24.1 25.0 23.9 23.1 Creditors 521 549 719 887
APAT 16.7 17.6 16.8 16.0 Other current liab & provn 2,483 2,637 2,855 3,184
Valuation ratios (x) Other non-current liabilities 100 50 50 50
EPS (Rs) 18.2 17.7 21.0 23.6 Total Liabilities 11,329 12,825 14,904 17,280
EPS Growth (%) 27.5 -2.6 18.6 12.0
PER (x) 21.9 22.4 18.9 16.9 F.Assets (net) incl. Cap WIP 2,383 2,567 2,942 3,339
Price / Cash EPS (PCEPS) (x) 19.3 19.8 16.9 15.0 Investments 414 600 750 950
Price /Book Value (P/BV) (x) 4.8 4.1 3.5 3.0 Cash & Bank 2,587 3,200 3,355 3,865
EV/Net Sales (x) 3.4 3.6 2.9 2.4 Inventory 1,393 1,413 1,947 2,357
EV/EBITDA (x) 14.2 13.9 11.8 10.2 Debtors 1,847 2,056 2,720 3,327
DuPont Other current assets 2,705 2,990 3,191 3,443
ROE (%) 24.8 19.9 20.0 19.2 Total current assets 8,532 9,658 11,213 12,991
Net Margin (%) 16.7 17.6 16.8 16.0 Other non-current assets 0 0 0 0
Asset Turnover (x) 1.0 0.8 0.9 0.9 Total Assets 11,328 12,825 14,904 17,279
Leverage (x) 1.4 1.4 1.4 1.4 Key Balance Sheet parameters (Rs mn)
Other key ratios Capital Employed 8,324 9,639 11,330 13,209
ROCE (%) 33.8 26.7 27.2 26.4 Net Current Assets 5,527 6,472 7,638 8,920
Net Debt / Equity (x) -0.3 -0.4 -0.3 -0.3 Book Value ( Net Worth ) 7,725 9,097 10,713 12,493
Dividend Payout (%) 13.8 15.3 16.1 17.1 Working Capital 2,940 3,271 4,283 5,056

14 June 2010 33
IFIN Research AIA Engineering
IFCI Financial Services Overweight

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

IFIN: IFCI Financial Services Limited


Corporate Office: 'Continental Chambers', III Floor| 142, Mahatma Gandhi Road |Nungambakkam | Chennai - 600 034 | Tel: +91-44-
2830 6600 | Fax: +91-44-2830 6650
Mumbai Office: 2B (1), Gr. Floor, Filmcentre | 68, Tardeo Road |Mumbai Central I Mumbai - 400 034 | Tel: +91-22-4333 5111
E-mail: sales@ifinltd.in | Website: www.ifinltd.in

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