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Equity Research: AIA Engineering
AIAE has gained a significant market share of 90–95% in India and 35–40% globally. Since only 18–22% of consumables have switched to high chrome, where AIAE's solutions outperform competitors with compelling value propositions, mining has enormous development potential.
The global duopoly of high chrome mill internals (HCMI) is dominated by AIA Engineering (AIAE). In the mining and cement industries, the highly specialized and customized products are employed as consumable wear parts for crushing and grinding. High chrome utilization in the cement industry has advanced, and AIAE has gained a significant market share of 90–95% in India and 35–40% globally. Since only 18–22% of consumables have switched to high chrome, where AIAE's solutions outperform competitors with compelling value propositions, mining has enormous development potential. Given the importance of replacement demand (which accounts for 98% of sales), the size of the export market (74% of sales), and the complete pass-through of freight and commodity prices, AIAE's growth, margin, and cash flows are still solid. High chrome mill internals (HCMI) are dominated by AIA Engineering (AIAE). It focuses on designing, developing, producing, and maintaining HCMI products on a bespoke basis. Consumable products used in crushing and grinding applications are included in HCMI. Examples include grinding media, mill liners, diaphragm, blow bars, and dipping tubes. Mining, cement, and thermal power plants are the main end-user sectors that AIAE services. While the solutions provided to thermal power plants are only for the Indian market, the majority of revenue from the mining and cement industries comes from foreign markets. With a presence in more than 120 countries, AIAE has a high market share of 90–95% in India and 35–40% globally (excluding China) in the 0.3 million MT cement business. With a bigger worldwide market size of 3 million MT, the mining industry has enormous growth potential as only 15 to 20 percent of the industry has switched to high chrome. In the mining business, AIAE is present in more than 40 countries. Although it is a small company with less than 5% of yearly sales volume, AIAE also provides castings to India-based thermal power plants for the pulverization of coal process.
As of FY22, AIAE's manufacturing facilities in Ahmedabad, Nagpur, Bengaluru, and Trichy had a combined installed capacity of 390,000 MT. It recently started up a 55,000 MT liners capacity in 2QFY23, and an 90,000 MT grinding media greenfield project is expected to start up by the end of FY24. By the end of FY24, both of these plants will increase AIAE's total capacity from 390,000 MT in FY22 to 520,000 MT, assisting with increased volume growth. Even though all manufacturing is done domestically, international markets account for a sizable portion of total revenue (78% in FY22). Through its wholly owned subsidiary Vega Industries (Middle East) FZC, which in turn has many step down companies in different locations, AIAE provides its products and customer service on a global scale.
Shareholding:
Industry Research:
The Engineering Services Market size is expected to grow from USD 1.60 trillion in 2023 to USD 1.96 trillion by 2028, at a CAGR of 4.20% during the forecast period (2023-2028). The market size represents the revenue generated from various types of services, such as product engineering, process engineering, automation-related services, and asset management-related services, offered by market players. Infrastructure demand is a significant driver of the engineering services industry since it creates a need for specialized skills and encourages innovation. Infrastructure projects are often vast and complicated, necessitating the need for engineering service providers to design, plan, and execute these projects, thereby delivering value-added services to their customers. Furthermore, the need for infrastructure is pushing innovation in the engineering services sector as suppliers create new, more efficient methods of designing and building infrastructure. The engineering services market size in India was valued at USD 65.3 billion in 2023. It is expected to reach USD 88.77 billion by 2028, growing at a CAGR of 6.35% during the forecast period (2023-2028). The market is growing in the country due to the digital transformation and the growth of industries such as chemicals, petrochemicals, and cement, mining. Overall, the market for engineering services is expected to rise in the future as a result of several factors, including a robust and diverse economy, a trained workforce, a rise in government initiatives, infrastructure investment, and globalization.
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Key Strength:
1. Highly technical and customized character of products: The production of high chrome mill internals is a highly technological and specialized procedure that uses cutting-edge metallurgy. Due to the fact that each mine demands a unique solution, it is an incredibly specialized and tightly managed industry. In order to build a precise and tailored product solution for each unique mine and cement mill, AIAE uses more than 150 different types of alloys. Only two international players, AIAE and Magotteaux, now have this level of technical knowledge in the high chromium industry.
2. Key consumable with replacement demand serving as the primary business driver: For the mining and cement industries, major consumable wear parts during daily grinding and crushing operations include liners and grinding media. Since the products are daily necessities, replacement demand dominates the volume offtake. Since 99% of its revenue is generated by replacement demand, AIAE's growth prospects are not dependent on the end user sectors' increased greenfield investment. Despite being in the capital goods sector, this is a significant plus because it means that the company model is not cyclical.
3. Cement has attained dominance, and mining has strong growth potential: For tube and vertical mills used in the cement industry, AIAE has accumulated technical experience in metallurgy, grinding applications, and component design over the years. In the cement industry, AIAE has a commanding 90–95% market share in India and a 35–40% market share globally (ex China). Due to its many advantages, the cement industry has developed over time and has achieved full high chrome media penetration. With only 18–22% penetration at the moment, the mining industry is still in the process of gradually switching from standard forged media to high chrome media. This has a significant and sustained growth potential because (1) mining consumes 11 times as much grinding media as cement,and (2) cost savings for the customer are much higher because the cost of worn parts in mining accounts for 10–12% of overall production costs as opposed to 14% in cement.
4. Global duopoly in the high chrome grinding media: The global high chrome grinding media industry is a duopoly between AIAE and Magotteaux. Further, Magotteaux, a Belgium based firm, is the market leader and first mover in high chrome grinding media. AIAE had a JV with Magotteaux from 1991 to 2000. In 2001, AIAE bought them out and became independent. Over the past decade, AIAE has considerably outpaced Magotteaux and gained market share through its superior solutions and significant advantage in terms of capital cost, operating cost and advancement in product mix and capabilities. On the other hand, Magotteaux has consistently lost market share as its new owner, Chile based conglomerate Sidgo Koppers (a supplier of large mining and earth moving equipment) has under invested in keeping up with technological advancements in high chrome media.
5. Large export income with little import content: Since AIAE provides grinding and crushing solutions in more than 120 countries, a significant amount of its sales (74% of FY23 sales; an aggregate 76% of sales for FY15–22) come from the export market. However, due to the abundance of MS (mild steel) scrap and ferro chrome in India, AIAE primarily sources these essential raw materials domestically. The business concept of AIAE stands out in a world of declining currencies. Being a major exporter, AIAE has seen a steady increase in net foreign inflows, from Rs9.4 billion in FY13 to Rs19.8 billion in FY23.
6. Pass through of raw material and freight cost aids superior margin profile: AIAE enters in long term contracts of 3‐5 years with customers with 100% pass through of Ferro Chrome and MS scrap prices, generally with a lag of one quarter. Its billing is on FOB basis from India’s ports with freight cost to be borne by customers on actual basis. This helps AIAE to safeguard its margins against any fluctuation in commodity costs and freight rates. This is evident from the fact that AIAE‘s gross/EBITDA margin have largely remained in the range of 61‐64%/23‐27%, respectively over the past 10 years.
AIAE has been actively working since the past 10 years to penetrate the global mining market through its key products such as high chrome grinding media and mill liners. Mining offers a major growth opportunity as these two products have an annual replacement market of 3mn MT to 3.45mn MT. AIAE is focussed on three major ores namely iron, gold and copper. These three ores provide an annual addressable replacement market of 2mn MT to 2.8mn MT, of which only 18‐20% of the industry has shifted to high chrome grinding media, catered by AIAE and Magotteaux, a global duopoly. As more than 80% usage is still of conventional forged grinding media, the head room for growth is immense. For these three ores, the key mining markets are spread across 40 countries in the region of Latin America, North America, Australia, Africa, CIS and Far East countries like Philippines. Further, AIAE has forayed in these 40 countries and is servicing more than 100 mines while additional 45‐50 mines are under development. It takes a year or two to convert a mine as a customer since each mine is different and the characteristics of its ore is different. Hence, AIAE has to develop customized solutions for each individual mine. Compared to 2mn‐ 2.8mn MT addressable replacement market, the current supplies of AIAE to mining sector is ~181,000 MT in FY22 and likely to be ~220,000 MT in FY23E, thus providing immense growth prospects over the next 10-12 years. For customers to shift from conventional forged media to high chrome media, no incremental capex is needed in their existing plant and machinery. The existing set‐up of crushing and grinding does not need any changes. High chrome grinding media will be inserted in the same mill with same configuration and same crushing technology used by the customers. Also, demand for the grinding media and liners does not depend on new greenfield capex. Out of total annual sales, 98% comes from replacement demand as HCMI are consumable wear parts. The replacement cycle of grinding media is 15 days to 1 month, liner is 6 months to 2 years and diaphragm is 1 to 2 years, varying from mill to mill.
For the mining customers, AIAE has adopted a solution driven approach rather than simply product driven. Using high chrome mill internal instead of conventional forged media, the key benefit derived by a mining customer is a sizeable reduction in its cost of production. Using high chrome media has several advantages like reduction in wear rates, lower cost of consumables, reduction in power cost and improvement in through‐put. This would lead to significant cost savings as consumable wear parts constitute 8‐10% of total mining production costs. If wear rate reduces by 25‐30% (can go even higher to 40‐50%), effective direct reduction in cost of consumables will be 10‐15% which would translate to a straight improvement in EBITDA margin by 2‐3%. The second key advantage of opting for high chrome grinding media is lowering of environmentally harmful and costly re‐agents. In mining, the final ore is recovered via beneficiation process. Starting from pre‐primary (sag mill stage) to primary to secondary and then to tertiary mills, all processes involve grinding and crushing. To retain the level of oxygen and reduce rusting, environmentally harmful and very costly chemicals and re‐ agents like cyanide are used at each step. Instead of forged media (which have the tendency to rust faster), using high chrome grinding media will lower the pace of rusting. Thus usage of re‐agents will materially reduce.
Mill Liner also Plays a pivotal role for AIAE growth:
Along with grinding media, the second high consumption mill internal is mill liner. So far, AIAE was supplying 15,000 to 18,000 MT mill liners to the mining industry, and was manufacturing it at its multi‐purpose centrifugal large casting plant. In Q2FY23, it commissioned a new greenfield plant of 55,000 MT of mill liner dedicated for the mining industry. AIAE tied up with American firm EEMS, who has patented designs for mill liners used in grinding and crushing equipment in mines. As part of this exclusive lifelong contract with EEMS, AIAE will commercialize mill liner design for them on an exclusive basis for usage across the world.
In costly metals like gold and copper, the input‐output ratio is very adverse. Notably, 110 MT of gross crushing and grinding at pre‐primary stage results in only 2 or 3 MT of copper and gold output at final stage. Hence, even if AIAE’s solutions improve the recovery rate by even 0.15%, the cost of grinding media becomes fully justified. To demonstrate the same, AIAE engaged with experts and tied up with Australian Mining Research institute to create a pilot plant in Australia. In this plant, they take customer’s ore and demonstrate to them (1) the difference in recovery using forged media vs. grinding media and (2) cost savings. AIAE has created another mobile pilot facility in Chile, a major hub for copper mining, to exhibit to customers the benefits and significant value addition HCMI brings. Starting from the pre‐primary sag mill stage (where large lumps are grinded and crushed) to primary, secondary and tertiary stage, the benefits brought by AIAE are (1) it enables the finest of grinding which improves the through‐put of the entire mine by 15‐20%, and (2) significant power saving of 8‐10%.
With the commissioning of a dedicated mill liner plant, AIAE’s value proposition has materially improved and the solution offered has become superior to peers. With the combination of high chrome grinding media and dedicated customized mill liners, the key benefits provided to mining industry are (1) cost saving due to lower wear rates, (2) cost saving due to improved recovery of down process, (3) significant improvement in through‐ puts, and (4) significant capital cost and operating cost savings. Just like the market share dominance achieved by AIAE in the cement industry over the past few decades; AIAE can attain a similar leading market share in mining industry worldwide over the next decade as it has achieved the expertise of grinding and crushing for the mining sector as well.
While the 55,000 MT greenfield mill liner capacity was commissioned in Q2FY23, another capacity addition of 90,000 MT grinding media is scheduled for commissioning by end of FY24E. Both these plants will lead to enhancement in total capacity of AIAE from 390,000 MT in FY22 to 550,000 MT by end‐FY24, thereby aiding enhanced volume growth. Over FY15‐22, AIAE’s mining sector volumes grew at a CAGR of 8.5% from ~106,000 MT in FY15 to ~181,000 MT in FY22. With enhanced offerings and capacity addition, AIAE targets incremental volumes of 35,000‐45,000 MT annually. The rise in volume will be aided by rising share of high chrome in the total grinding media of the mining sector, which currently stands at only 10‐15%. This should aid AIAE improve its market share compared to Magotteaux as well as other conventional forged media players such as Molycop. We expect AIAE’s mining sector volumes to rise by 24% CAGR over FY22‐25E to 340,000 MT in FY25E.
AIAE provide game changing solutions to cement industries:
Over the decades, AIAE has developed technical expertise in metallurgy, grinding applications and component design for tube and vertical mills used in the cement sector. AIAE’s core products include grinding media, liners and grate plates for entry and exit points of tube mills. These HCMI products are used in the process of grinding and crushing in the tube and vertical mills. The key benefits of using high chrome media for the cement industry is (1) optimization of grinding efficiency, (2) mills never close because of breakage or stoppage of grinding media, (3) mills run continuously on maximum through‐put, and (4) achieves 8‐10% power savings. AIAE studies the mill, designs HCMI products to suit that mill and designs the metallurgy and component balancing with a focus on optimization of grinding process.
Entire cement industry worldwide has converted to high chrome media owing to its material benefits despite the fact that the total cost of consumables is lower at just 2‐3% of the total operating cost of a cement plant. AIAE has achieved a dominant 90‐95% market share in India and 30‐40% market share worldwide (ex‐China) in the cement sector. It supplies its products to all major cement groups like Holcim, Heidelberg, Italcementi, Cemex, etc. The replacement demand of HCMI products in the cement sector is estimated at 320,000 MT annually, while AIAE supplies between 80,000‐90,000 MT to cement customers in more than 120 countries. The high chrome media is a duopoly globally between Magotteaux and AIAE. As cement industry is fully matured worldwide since the past decade, the incremental growth is limited and depends on 4‐5% industry growth and little bit of market share gains. Over FY15‐22, AIAE’s volumes have grown only 3% CAGR from ~80,000 MT in FY15 to ~95,000 MT in FY22 in the non‐mining segment, which includes cement and thermal power sector. Cement is likely to have accounted for ~80,000 MT of volumes while remaining ~15,000 MT is likely to have been supplied to thermal power sector domestically. For thermal plants in India, AIAE supplies castings for the process of pulverization of coal.
The HCMI products globally is a duopoly between AIAE and market leader Magotteaux. Magotteaux, a Belgium based company established in 1918, is a leading global provider of high chrome grinding media and castings for cement and mining industries. Magotteaux has 14 wholly‐owned manufacturing facilities spread across 11 countries (main facilities in Belgium, Brazil, USA and Thailand) and 25 commercial offices with exports presence in more than 150 countries. In 2011, Sigdo Koppers, a Chile based industrial conglomerate founded in 1960, acquired Magotteaux for a total consideration of Euros 550mn.
From 1991 to 2000, AIAE had a joint venture with Magotteaux. In 2001, AIAE bought them out and became independent and set up its global foray. As per the settlement agreement, AIAE has unrestricted right to use technology that was developed together throughout the lifetime. However, now less than 5% of sales come from the old technology developed together. Majority revenue comes from the technology and solution developed by AIAE over the past decade, for which it has its own patent. Over the past decade, AIAE has considerably outpaced Magotteaux and gained market share through its superior solutions and significant advantage in terms of capital cost, operating cost and advancement in product mix and capabilities. The Chile based conglomerate, Sidgo Koppers, is a supplier of large mining and earth moving equipment. Magotteaux’s business of mill internals is a small portion of its total sales, which has not seen much advancement over the past decade under the new management.
Magotteaux has high chrome grinding media capacity of 320,000 MT. It also has a JV with Scaw Metals in South Africa with total installed capacity of 100,000 MT for high chrome media. In cement industry, Magotteaux has an industry leading market share of 44% in high chrome grinding media while its market share in mining industry is at 14%. Magotteaux also has 55,000 MT capacity of low chrome media and forged steel media each. Low chrome grinding media has Ferro Chrome content ranging from 1% to 5% whereas high chrome grinding media has Ferro Chrome content ranging from 5% to 33%. AIAE has no intention to make low chrome media or forged grinding media as these are technically inferior products than high chrome.
In cement industry, AIAE’s volume sales have risen from ~80,000 MT in FY15 to ~90,000 MT in FY22 (excluding ~10,000 MT volume attributable to thermal power sector) while Magotteaux’s volumes have reduced from 81,000 MT to 71,000 MT over the same period. In mining industry, AIAE has gained considerable market share as its volume increased from ~106,000 MT to ~181,000 MT over FY15‐22, while Magotteaux’s volume have remained flattish from 271,000 MT to 300,000 MT over the same period. Also, the margin profile of AIAE is much superior to Magotteaux, both in terms of percentage EBITDA margin as well as EBITDA/MT.
AIAE large export revenue:
AIAE’s business model stands out due to (1) high share of exports (an aggregate of 78% revenue over FY15‐22 has come from international markets) as AIAE offers grinding and crushing solutions in more than 120 countries, and (2) low dependence on imported raw materials (Ferro Chrome and MS scrap is abundantly available in India).
The share of exports will keep rising, as mining is the key growth driver where international markets are primary contributors of growth. Notably, hardly any mining activity happens in India for the three ores that AIAE is focused on – gold, copper and iron ore. For mining, volume sales to India are limited to 7,000 to 9,000 MT while supplies to international market are likely to be close to 220,000 MT in FY23E. For cement, AIAE’s total volume sales are 80,000 MT to 90,000 MT, of which India accounts for 28,000 MT. Additionally, AIAE supplies 10,000 MT to 12,000 MT per annum to thermal power industry domestically.
All wear parts made by AIAE are consumables in nature and made from high chrome and MS scrap. Ferro Chrome forms 5% to 35% of the alloy along with MS scrap, which is the mild steel melting scrap. These two key raw materials of AIAE are found abundantly in India and supplied by many domestic suppliers. Volume‐wise, MS scrap constitutes 78% of the total raw materials requirement for AIAE while the remaining 22% is constituted by Ferro Chrome. In value terms, contribution from both MS Scrap and Ferro Chrome is equal at 50:50 since prices of Ferro Chrome is generally double of MS scrap. Since a majority part of AIAE’s raw material requirement is fulfilled by domestic suppliers, dependence on imported raw materials is limited.
To ensure uninterrupted supply of Ferro Chrome, AIAE signed a supply agreement in September 2022 with a Gujarat based Ferro Chromium manufacturer SAL Steel. As per the terms of agreement, AIAE will have access to 100% capacity of SAL Steel for three years. At its peak, SAL Steel will supply 3,500 MT to 5,000 MT of Ferro Chrome per month, which would form 55‐65% of AIAE’s total requirement. This helps AIAE to diversify its vendor base as well as ensure a guaranteed supply of its critical raw material. AIAE has paid SAL Steel an inter corporate deposit (in the form of a loan) worth Rs1.35bn bearing a yield of 11.5% and secured against the assets of SAL Steel. AIAE generally prefers to keep a limited stock of raw materials of 15‐30 days. It enters in long term contracts of 3‐5 years with customers with 100% pass through of Ferro Chrome and MS scrap prices, generally with a lag of one quarter. Since AIAE’s products are consumables, it keeps a large finished goods inventory of two months closer to customer’s plants across its 20 plus warehouses worldwide, to ensure just in time delivery.
Management Profile:
Financials:
Valuation:
Analysis of financials reveals that AIAE has operated at superior margin profile with an avg. gross/EBITDA margin of 64%/28%. The cash flow generation is robust with aggregate EBITDA to OCF conversion at 65% and OCF to FCF conversion at 58%, leading to FCF as a % of sales at 9.5% over FY13‐22. Net cash position has improved from Rs3.1bn in FY13 to Rs18.6bn in FY22. AIAE’s technological leadership in high chrome mill internals, strong growth opportunity in mining sector and superior financial metrics are key business moats. Expected revenue/earnings CAGR of 18%/22% over FY22‐24E is justifiable.
Key Risk:
AIAE’s products are daily consumables and supplied to over 120 countries worldwide. Any disruption in its factories in India or global shipping network will pose challenges of continuity in supply.
AIAE’s supplies depend on continuous production at mining and cement sites of its customers. Any stoppages of production in key countries or customers will impact AIAE’s volumes.
Exports constitutes a large proportion of AIAE’s total consolidated sales. Any sharp fluctuations in the currencies of the countries where AIAE has large presence will impact financials.
Imposition of import duties by key countries can have a bearing on business prospects from that country. Countries like Canada and Brazil have levied 9‐12% duties, which customers are bearing. However, any irrationally large duty levy may make a customer switch its grinding media supplier.
I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Stocx Research Club). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI Registered individual/entity and the above research article is only for educational purpose and is never intended as trading/investment advice.
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