AIA Engineering Ltd:Annual Report 2023-24 Analysis

AIA Engineering Ltd.: A Comprehensive Overview #

About the Company #

Year of Establishment and Founding History:

AIA Engineering Ltd. was established in 1978. The company started as a small-scale manufacturing unit and has grown to become a leading global player in the mining and mineral processing industries.

Headquarters Location and Global Presence:

The company’s headquarters is located in Ahmedabad, Gujarat, India. AIA Engineering has a strong global presence, exporting to over 120 countries across six continents.

Company Vision and Mission:

• Vision: To be the world’s leading supplier of high chromium wear, corrosion resistant castings and parts for the mining, cement, and thermal power industries, globally recognized for its quality, innovation, and customer service.
• Mission: To provide customers with cost-effective and innovative solutions that enhance their operational efficiency and reduce their total cost of ownership.

Key Milestones in their Growth Journey:

• Early Years: Focus on establishing a strong manufacturing base and catering to the domestic market.
• Expansion into International Markets: Strategic expansion into key mining regions globally.
• Technology Adoption and Innovation: Investing in R&D and developing innovative solutions for wear and corrosion resistance.
• Capacity Expansion: Continuously expanding manufacturing capacities to meet growing global demand.
• Diversification: Expanding into new industries, such as cement and thermal power, to broaden the product portfolio.

Stock Exchange Listing Details and Market Capitalization:

AIA Engineering Ltd. is listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) in India.

Recent Financial Performance Highlights:

• AIA Engineering experienced revenue growth in recent years, driven by increased demand for its products and services.
• The company has maintained healthy profit margins due to its focus on value-added products and efficient operations.

Management Team and Leadership Structure:

AIA Engineering is led by a team of experienced professionals with expertise in engineering, manufacturing, and global business management. The leadership team includes:

• Chairman and Managing Director: Bhadresh K. Shah
• Chief Financial Officer: V K Misra

Any Notable Awards or Recognitions:

• Recognized for its export performance.
• Awards for quality and innovation.

Their Products #

Complete Product Portfolio with Categories:

AIA Engineering manufactures High Chromium Grinding Media, Wear Parts & Castings. Their main categories are:

• High Chromium Grinding Media: Grinding balls and grinding media used in mineral processing plants for grinding ores and minerals.
• Wear Parts: Liners, hammers, and other wear-resistant components used in crushing, grinding, and screening equipment.
• Mill Internals: Diaphragms, shell liners and other internal components of mills.

Flagship or Signature Product Lines:

• High Chromium Grinding Media: The company is a leading manufacturer of high chromium grinding media globally, known for its superior wear resistance and performance.

Key Technological Innovations or Patents:

• AIA Engineering has invested significantly in R&D to develop innovative solutions for wear and corrosion resistance.
• The company holds patents for certain alloys and manufacturing processes.

Manufacturing Facilities and Production Capacity:

AIA Engineering has multiple manufacturing facilities in India. The production capacity is substantial, allowing the company to cater to the global demand for its products.

Quality Certifications and Standards:

AIA Engineering adheres to stringent quality standards and has obtained certifications such as:

• ISO 9001 (Quality Management System)
• ISO 14001 (Environmental Management System)
• ISO 45001 (Occupational Health and Safety Management System)

Any Unique Selling Propositions or Technological Advantages:

• High Chromium Technology: AIA Engineering’s expertise in high chromium alloy technology provides a significant advantage in terms of wear resistance and product performance.
• Customized Solutions: The company offers customized solutions tailored to the specific needs of its customers.
• Global Presence: Its global network allows it to provide timely and efficient service to customers worldwide.

Recent Product Launches or R&D Initiatives:

• Continuous development of new alloys and product designs to improve wear resistance and performance.

Primary Customers #

Target Industries and Sectors:

AIA Engineering primarily caters to the following industries:

• Mining
• Cement
• Thermal Power

Geographic Markets (domestic vs. international):

The company has a strong presence in both domestic and international markets, with a significant portion of its revenue coming from exports. Key international markets include:

• Africa
• Australia
• North America
• South America

Major Client Segments (agricultural, industrial, residential, etc.):

AIA Engineering primarily serves industrial clients in the mining, cement, and thermal power sectors.

Distribution Network and Sales Channels:

AIA Engineering uses a combination of direct sales and distribution partners to reach its customers.

Major Competitors #

Direct Competitors in India and Globally:

• Magotteaux (Global)
• ME Elecmetal (Global)
• Bradken (Global)
• Several smaller regional players

Competitive Advantages and Disadvantages:

• Advantages:
  • Strong focus on high chromium technology.
  • Global presence and established customer relationships.
  • Large manufacturing capacity and efficient operations.
• Disadvantages:
  • Vulnerable to commodity price fluctuations.
  • Exposure to cyclical industries like mining and cement.

How they differentiate from competitors:

• Superior wear resistance and product performance.
• Customized solutions tailored to customer needs.
• Strong technical support and service.

Market Positioning Strategy:

AIA Engineering positions itself as a leading provider of high-quality, high-performance wear solutions for the mining, cement, and thermal power industries.

Future Outlook #

Expansion Plans or Growth Strategy:

• AIA Engineering plans to continue expanding its manufacturing capacities to meet growing global demand.
• The company aims to strengthen its presence in key markets and develop new applications for its products.

Sustainability Initiatives or ESG Commitments:

• AIA Engineering is committed to sustainable business practices and has implemented initiatives to reduce its environmental impact.
• The company is focused on promoting employee safety and well-being.

Industry Trends Affecting Their Business:

• Increased demand for minerals and metals, driven by global infrastructure development and urbanization.
• Growing adoption of advanced grinding and crushing technologies.
• Increased focus on sustainability and energy efficiency in mining and cement operations.

Long-term Vision and Strategic Goals:

AIA Engineering’s long-term vision is to be the world’s leading supplier of high chromium wear parts and castings, recognized for its quality, innovation, and customer service.

Financial Performance Overview #

3-Year Trend Analysis of Key Financial Metrics #

• Revenue from Operations:
  • FY22: ₹3,514.47 Crores
  • FY23: ₹4,838.02 Crores
  • FY24: ₹4,853.76 Crores
  • Revenue increased slightly in FY24 after a substantial jump in FY23.
• EBITDA:
  • FY22: ₹877.24 Crores
  • FY23: ₹1,475.18 Crores
  • FY24: ₹1,616.67 Crores
  • EBITDA has shown consistent growth, with a significant increase over the three years.
• EBITDA Margin:
  • FY22: 24.96%
  • FY23: 30.49%
  • FY24: 33.88%
  • EBITDA margin has improved, indicating increased operational efficiency.
• Profit After Tax (PAT):
  • FY22: ₹619.68 Crores
  • FY23: ₹1,055.93 Crores
  • FY24: ₹1,136.99 Lakhs
  • PAT has nearly doubled from FY22 to FY24.
• PAT Margin:
  • FY22: 17.63%
  • FY23: 21.83%
  • FY24: 23.80%
• Net Worth:
  • FY22: ₹4,754.96 Crores
  • FY23: ₹5,691.33 Crores
  • FY24: ₹6,657.74 Crores
  • Net Worth has consistantly increased between FY22 and FY24.
• Debt Equity Ratio:
  • FY22: Not Provided
  • FY23: 0.09
  • FY24: 0.07

Business Segment Performance #

• The Company operates in a single segment: High Chrome Mill Internals.
• Export Turnover was consistent.
  • FY23: ₹2,753.84 Crores
  • FY24: ₹2,769.42 Crores
• The primary growth driver is the mining industry, with a focus on converting from forged grinding media to high chrome grinding media.

Major Strategic Initiatives and Progress #

• Mining Segment Focus: The company is actively pursuing conversion projects in iron, copper, and gold mines, with a modular strategic approach.
• Brownfield Expansion: The Non-Grinding Media Business is undergoing a brownfield expansion with a total expenditure of ₹200 Crores, with ₹110 Crores invested so far. Additional capacity of 20,000 Tonnes has been achieved, and ongoing expansion plans continue for 36,000 MT of grinding media, with a production target set for Decemeber 2024.
• Renewable Energy Investment: The company is investing in solar and wind projects, aiming for 60% to 70% of power from renewable sources, with planned completion by the end of FY2024-25.

Risk Landscape Changes #

• Increased Volatility: Prices of raw materials (scrap and ferro chromium) are increasingly volatile.
• Anti-dumping and countervailing Duties: The Company faces challenges from anti-dumping and countervailing duties initiated by authorities, stemming from a competitor’s petition.
• Global Economic Growth Concerns: The Company is exposed to risks from global economic slowdown.

ESG Initiatives and Metrics #

• Environmental Commitment: The company focuses on reducing, reusing, and recycling. Initiatives include adopting piped natural gas, installing flue gas recuperators, and increasing the proportion of renewable energy.
• Renewable Energy Capacity: Installed capacity of 37.38 MW of renewable energy (wind and hybrid wind+solar). Generated 85,127.199 MWh of renewable electricity in FY2023-24, offsetting 60,440 tonnes of CO2 emissions.
• CSR Initiatives: Contributions totaling ₹1,652.10 Lakhs in FY2023-24, covering education (₹647.34 Lakhs), sports (₹53.04 Lakhs), heritage/art/culture (₹95 Lakhs), healthcare (₹385 Lakhs), environment (₹291.72 Lakhs), and hunger eradication (₹180 Lakhs). Key programs include the Gyan Deep Programme, Chetana Empowerment Foundation, and partnerships with healthcare and environmental organizations.

Management Outlook #

• The management maintains a positive stance, aiming to increase sales in line with available opportunities.
• A strategic focus remains on transitioning from forged to chrome products.
• Challenges such as anti-dumping issues are being addressed with determination.

Detailed Analysis #

Financial Position: Balance Sheet Analysis #

3-Year Comparative Analysis (Standalone) #

Assets #

Liabilities #

Equity #

Significant Changes in Major Line Items (>10% YoY) #

• Right of Use Assets: Increased by 51.79% from FY23 to FY24, indicating significant lease acquisitions or modifications.
• Capital Work-in-Progress: Decreased by 14.13% suggesting the completion and commissioning of prior capital projects during the year, and less new invesments during the year.
• Current Investments: Increased significantly by 32.78%, indicating substantial investment activity.
• Cash and Cash Equivalents: Decreased by 56%, indicating significant cash outflow for investing or financing activities.
• Bank Balances (Other): Decreased by 25.31%, showing a reduction in short-term bank deposits.
• Other Financial Assets (Current): Increased significantly, by over 500% from FY23 to FY24, due to the substantial increase in interest accrued on fixed deposits.
• Deferred Tax Liabilities (Net): Increased by 30.67% from FY23 to FY24, driven by changes in temporary differences between book and tax accounting.
• Other Equity: Increased by 17.99%, mainly driven by the profit for the year.
• Trade Payables: Decreased significantly by 39.99% from FY23 to FY24, indicating quicker payment to suppliers or reduced purchases.
• Other Current Liabilities: Decreased by 46.06% from FY23 to FY24, this significant change is caused by reclassification of certain items.
• Current tax liabilities (net): Decreased by 32.30% from FY23 to FY24.

Working Capital Trends #

• Increase in Inventories: The 10.63% increase indicates a build-up of raw materials, work-in-progress, or finished goods.
• Decrease in Trade Receivables: A 3.66% decrease suggests improved collection efficiency, reduced credit sales, or potential write-offs.
• Significant Decrease in Current Liabilities (excluding borrowings): The large decrease, mainly driven by trade payables and other current liabilities, points towards aggressive liability management, which will impact future working capital cycles.

Asset Quality Metrics #

• Provision for Doubtful Debts:
  • The Group shows a minimal balance for impairment on trade receivables, indicating high-quality receivables. The low level of provision suggests effective credit risk management.

Debt Structure and Maturity Profile #

• Short-Term Borrowings: Constitute the majority of the debt, indicating reliance on short-term financing. This needs to be evaluated in the context of the Group’s cash flow generation and any potential refinancing risk. The Decrease of short-term borrowing by 8.35% is reflecting prudent management or reduced need for working capital financing.
• Long-Term Borrowings: No long term loans. This is a good indication of the Company’s internal cashflows.

Off-Balance Sheet Items #

• Contingent Liabilities: Significant amount (’ 52,000.60 Lakhs) related to various claims, guarantees, and letters of credit. This requires further breakdown and analysis of the nature and likelihood of these liabilities materializing.
• Capital Commitments: ’ 5,422.85 Lakhs indicate planned capital expenditures, which will impact future cash flows.

Industry Benchmark Comparisons (Hypothetical) #

Analysis of the Metrics: #

• Current Ratio: AIA’s current ratio of 9.08 is extremely high compared to the hypothetical industry benchmark. This suggests potentially excessive liquidity or inefficient use of current assets.
• Debt-Equity Ratio: AIA’s very low debt-equity ratio (0.07) compared to the industry indicates a highly conservative capital structure with minimal leverage.
• Inventory Turnover Ratio: The inventory turnover of 6.14 is slightly better than industry averages, suggesting good inventory management.
• Debtors Turnover (Days): AIA’s debtors turnover of 125.03 days is significantly higher than the hypothetical industry benchmark. This warrants further investigation – it may indicate lenient credit terms or issues with collections.
• Return on Equity (ROE): An ROE of 18.94% is at a good place, and is in line or slightly above the hypothetical industry average.
• Net Profit and Operating Margins: AIA far outperforms with 27.8% and 26.2% respectively vs 8%-18% for the industry.
• Capital Work in Progress: AIA has 10% as CWIP, which is slightly higher. It indicates ongoing expansion.

AIA Engineering Limited: Financial Analysis (FY 2023-24) #

Revenue Breakdown by Segment/Geography #

• Segment: Manufacturing of High Chrome Mill Internals.

Geography (Consolidated, FY 2023-24 vs. FY 2022-23) #

• India: Revenue increased to ₹1,45,622.20 Lakhs from ₹1,38,017.75 Lakhs.
• Outside India: Decreasing overall.
  • UAE: Decreased to ₹2,47,461.58 Lakhs from ₹2,68,694.37 Lakhs.
  • Australia: Decreased to ₹48,539.49 Lakhs from ₹57,303.12 Lakhs.
  • USA: Decreased to ₹56,539.80 Lakhs from ₹58,361.05 Lakhs.
  • Others: Increased to ₹29,480.18 Lakhs from ₹6,689.69 Lakhs.

Export vs. Domestic (Standalone) #

• Export: Increased to ₹2,76,941.76 Lakhs (FY 2023-24) from ₹2,75,384.06 Lakhs (FY 2022-23).
• Domestic: Increased to ₹1,29,262.39 Lakhs (FY 2023-24) from ₹1,22,046.82 Lakhs (FY 2022-23).

Cost Structure Analysis (Standalone) #

• Cost of Materials Consumed: Decreased as a percentage of revenue, from 49.73% (FY 2022-23) to 47.39% (FY 2023-24).
• Employee Benefit Expense: Increased as a percentage of revenue, from 2.73%(FY 2022-23) to 2.96%(FY 2023-24).
• Other Expenses: Increased as a percentage of revenue, from 21.49% (FY 2022-23) to 21.59% (FY 2023-24).

Margin Analysis (Standalone) #

• Operating Profit Margin: Increased to 26.20% (FY 2023-24) from 24.23% (FY 2022-23).
• EBITDA Margin: Increased to 38.40% (FY 2023-24) from 34.04% (FY 2022-23).
• Net Profit Margin: Increased to 27.80% (FY 2023-24) from 24.38% (FY 2022-23).

EPS Analysis (Standalone) #

• Basic and Diluted EPS: Increased to ₹119.75 (FY 2023-24) from ₹102.72 (FY 2022-23).

Cash Management Analysis #

Cash Flow and Liquidity Analysis #

OCF, ICF, FCF Components #

• OCF: Increased to ₹76,556.27 Lakhs in 2023-24 from ₹64,712.90 Lakhs in 2022-23.
• ICF: Decreased to ₹(61,987.79) Lakhs in 2023-24, from ₹(1,10,995.63) Lakhs in 2022-23.
• FCF: Improved given the higher OCF, although specific figures are not calculable without total Capex.

Working Capital Management Efficiency #

• Debtors Turnover: Improved to 125.03 days in 2023-24 from 132.59 days in 2022-23.
• Inventory Turnover: Slightly worsened to 59.42 days in 2023-24 from 57.67 days in 2022-23.
• Trade payables turnover ratio: improved to 23.17

Capex Analysis #

• Total Capex for the year was ₹21,075.73 Lakhs, focused on capacity expansion (Kerala GIDC, non-grinding media business).
• Ongoing brownfield expansion of Grinding Media shows that out of 200 cr capex, 110 cr invested so far.

Dividend and Share Buyback Trends #

• Dividend: A dividend of ₹16 per share was recommended for 2023-24, amounting to ₹15,091.26 Lakhs.
• Share Buyback: No share buyback occurred during the year. The Company initiated a voluntary delisting of equity shares of Welcast Steels Ltd during the year.

Debt Service Coverage #

• The Interest Coverage Ratio decreased to 52.82 in 2023-24, from 69.66 in 2022-23.

Liquidity Position and Cash Conversion Cycle #

• Current Ratio: Improved significantly to 9.08 in 2023-24 from 6.51 in 2022-23, indicates better liquidity.
• Cash and Cash Equivalents: Decreased to ₹5,004.76 Lakhs as of March 31, 2024, from ₹11,370.88 Lakhs as of March 31, 2023.
• Cash Conversion Cycle: Specific figures for the cash conversion cycle are not directly calculable.

Operational Metrics #

Key Performance Indicators #

Profitability Ratios (Consolidated) #

• Net Profit Margin: 23.80% (2023-24), 21.83% (2022-23), Not Available (2021-22). An increasing trend, demonstrating improved profitability.
• Return on Equity (ROE): 18.39% (2023-24), 20.22% (2022-23), Not Available (2021-22). A slight decline is seen.
• Operating Profit Margin: 26.38% (2023-24), 25.78% (2022-23), 19.57 (2021-22)
• EBITDA Margin: 33.88% (2023-24), 30.49% (2022-23), 24.96 (2021-22)

Liquidity Metrics (Consolidated) #

• Current Ratio: 8.01 (2023-24), 6.07 (2022-23), Not Available (2021-22). Increased in current year, indicating stronger short-term solvency.

Efficiency Ratios (Consolidated) #

• Inventory Turnover Ratio: 6.14 times (2023-24), 6.33 (2022-23). A slightly decreasing trend.
• Debtors Turnover (Days): 67.39 days (2023-24), 64.95 days (2022-23), Not Available (2021-22). A slightly Increasing trend, indicating slightly slower collection.

Leverage Metrics (Consolidated) #

• Debt-Equity Ratio: 0.07 (2023-24), 0.09 (2022-23), Not Available (2021-22). Very low leverage, with a slight decrease.
• Interest Coverage Ratio: 53.43 (2023-24), 68.75 (2022-23), Not Available (2021-22). Demonstrates a decrease.

Working Capital Ratios #

• Net Capital Turnover Ratio: 0.79 (2023-24), 0.93 (2022-23).

Key Observation #

Significantly higher current ratio and a negligible debt-equity ratio of the Company than the industry average.

Segment Performance Analysis #

Revenue and Profitability #

• Consolidated Revenue: Decreased by 1.53% YoY, from ₹4,90,876.87 Lakhs (FY2022-23) to ₹4,85,376.13 Lakhs (FY2023-24).
• Standalone Revenue: Increased by 2.45% YoY, from ₹4,04,476.35 Lakhs (FY2022-23) to ₹4,14,394.99 Lakhs (FY2023-24).
• Consolidated PAT (After Minority Interest): Increased by 7.54% YoY, from ₹1,05,592.89 Lakhs (FY2022-23) to ₹1,13,557.33 Lakhs (FY2023-24).
• Standalone PAT: Increased by 16.57% YoY, from ₹96,882.56 Lakhs (FY2022-23) to ₹1,12,944.99 Lakhs (FY2023-24).
• Consolidated EBITDA Margin: Increased from 30.49% (FY2022-23) to 33.88% (FY2023-24).
• Standalone Operating Profit Margin: Increased from 25.78% (FY2022-23) to 26.38% (FY2023-24).

Market Share and Competitive Position #

• Global leader in chrome mill internals production.
• Significant conversion opportunity in the Mining Industry (High Chrome Grinding Media penetration < 15%).
• Addressed Anti-dumping duty challenges in certain regions.

Key Products/Services Performance #

• High Chrome Mill Internals: Primary products for cement, mining, and thermal power generation.
• Grinding Media: Key product for the mining industry, conversion projects ongoing.
• Mill Liners: Growing segment, increased capacity with a dedicated greenfield plant, features patented Metal Liners.
• Sales Volume: 2,97,345 Tonnes, increased by 6,003 from 2,91,342 last year.
• New Alloys: New cost-effective alloys for Grinding Media in the mining industry are under development.

Geographic Distribution and Market Penetration #

• Export-Oriented: 71.20% of consolidated sales outside India (FY2023-24), 68.18% of Standalone.
• India: Strong market in the cement industry, growth expected via infrastructure investments.
• Global Presence: Worldwide presence with manufacturing facilities and offices/warehouses in 10+ countries.

Capex and ROIC #

• Total Capex: ₹21,075.73 Lakhs (including work-in-progress) during FY2023-24.
• Expansion:
  • Ongoing brownfield expansion projects in the non-grinding media business progressing as planned.
  • Ongoing brownfield expansion project for grinding media with a capacity of 36,000 MT is progressing well.
• Renewable Energy Investment: Additional Hybrid (Solar and Wind) Project of 33 MW, estimated at ₹30 to ₹40 Crores.

Operational Efficiency #

• Cost of Materials Consumed: 42.70% of revenue (FY2023-24), up from 42.08% (previous year).
• Debtor’s Turnover Ratio: Decreased to 67.39 (FY 2023-24) compared to 64.95 (FY 2022-23).
• Inventory Turnover (Days): Increased to 92.66 days (FY2023-24) from 92.19 days (FY2022-23).
• Implemented energy-saving technologies (flue gas recuperators, renewable energy).
• Circular economy model adopted (co-processing waste silica sand, reuse of foundry waste).
• Production Capacity: Total production capacity of 4,60,000 MT (3,40,000 MT Grinding Media, 1,20,000 MT Castings as of March 31, 2024).

Growth Initiatives and Challenges #

• Growth Initiatives:
  • Focus on mining sector conversion projects.
  • Expansion of mill lining product offerings.
  • Renewable energy investment for sustainability and cost reduction.
  • Operational excellence through automation and process optimization.
  • UQ-VEGA Grinding and Flotation Chemistry Centre for enhanced flotation performance.
  • Strategic partnerships with companies like EEMS, Ore 2 Metal.
• Challenges:
  • Navigating anti-dumping and countervailing duties.
  • Volatility in raw material prices.
  • Potential supply chain disruptions.
  • Competition from forged grinding media.
  • Ongoing Israel Gaza War, Russia Ukraine War.

Risk Assessment: High Chrome Mill Internals Manufacturing #

Strategic Risks #

• Severity: High
• Likelihood: Medium
• Trend: Increasing
• Mitigation Strategies: Product and solution diversification (Mill Liner segment), geographic diversification (global sales and distribution networks).
• Control Effectiveness: Partially effective
• Potential Financial Impact: Significant

Operational Risks #

• Severity: Medium
• Likelihood: Medium
• Trend: Stable
• Mitigation Strategies: Inventory management, multiple manufacturing facilities, supplier relationship management, brownfield and greenfield expansion.
• Control Effectiveness: Effective
• Potential Financial Impact: Moderate

Financial Risks #

• Severity: Medium
• Likelihood: Medium
• Trend: Increasing
• Mitigation Strategies: Passing on raw material cost increases to customers, dynamic pricing mechanisms, forward exchange contracts for hedging.
• Control Effectiveness: Partially Effective
• Potential Financial Impact: Moderate

Compliance/Regulatory Risks #

• Severity: High
• Likelihood: Medium
• Trend: Stable
• Mitigation Strategies: Compliance with international trade regulations, legal defence against anti-dumping claims.
• Control Effectiveness: To be determined
• Potential Financial Impact: Potentially High

Emerging Risks #

ESG Risks #

• Severity: Medium
• Likelihood: Increasing
• Trend: Increasing
• Mitigation Strategies: Investment in renewable energy.
• Control Effectiveness: Improving
• Potential Financial Impact: Medium

Cyber Security Risks #

• Severity: High
• Likelihood: Medium
• Trend: Stable
• Mitigation Strategies:
  • Secure user access and restricted administrator privileges.
  • Regular vulnerability assessments.
  • Email protection through Gmail filters.
  • Laptop hard drive encryption.
  • Regular training for users.
  • Secure SAP servers accessible only via VPN.
  • Disaster Recovery (DR) in place for SAP.
• Control Effectiveness: To be Determined
• Potential Financial Impact: High

Strategic and Management Analysis of AIA Engineering Limited #

Long-Term Strategic Goals and Progress #

• The company is strategically focused on expanding its market presence in the mining sector, aiming for the conversion of forged grinding media to high-chrome grinding media, indicating an aggressive growth plan.
• The company is strategically focused on increasing its market share in the Mining segment, and is building capacity to cater to the same; this represents a change from being majorly dependent on the Cement segment.
• The Company is focused on increasing capacity, as demonstrated by their Kerala GIDC expansions, and its commitment to renewable energy, and restructuring/debottlenecking initiatives.
• The goal of increasing renewable energy contributes to sustainability and potentially long-term cost savings, with a target of 60% to 70% power from renewable sources.

Competitive Advantages and Market Positioning #

• The company holds a “Consistently Unique” position, demonstrating robust financial metrics and a focus on high-margin products.
• AIA Engineering is leveraging its expertise in metallurgy and grinding applications to provide customized solutions, giving it an advantage in specialized markets.
• The company’s global presence, with manufacturing clusters and warehouses, enables efficient distribution and supports its global market share ambitions.

Innovation Initiatives and R&D Effectiveness #

• The annual report highlights several joint programs, together with the University of Queensland, designed to enhance flotation performance and optimal usage of their products, increasing the value added.
• The development of mill lining solutions for mines and the energy-efficient pulp lifter (EEPL) liner design show a commitment to product diversification and innovation.

Mergers and Acquisitions (M&A) Strategy and Execution #

• Acquisition of Vega Industries shows strategic positioning to improve capabilities.
• Acquisition strategy is focused in increasing market share and expanding its global footprint, creating a global sales force.
• The acquisition of a stake in Vega MPS Pty Limited indicates a strategic move to enhance mill lining solutions and optimization capabilities.

Management’s Track Record in Execution #

• The Company has added production capacity (20,000 MT of castings at Odhav), indicating that it has met a target, showcasing good management.
• Management achieved record-breaking financial results for FY 2023-24, with the highest-ever EBITDA in the Company’s history.

Capital Allocation Strategy #

• The company prioritizes capital expenditures (CAPEX) for brownfield and greenfield expansions, demonstrating its commitment to organic growth.
• There is a clear allocation of funds towards renewable energy projects, showing a commitment to sustainability and potential long-term cost reduction.

ESG Framework: AIA Engineering Analysis #

Environmental Metrics and Targets #

• AIA Engineering has invested in renewable energy, with 11 wind energy turbines and 3 hybrid (wind + solar) plants in Gujarat, totaling 37.38 MW of capacity.
• In FY 2023-24, 85,127.199 MWh of electricity was generated from renewable sources, offsetting 60,440 tonnes of CO2 emissions.
• The Company aims for 60-70% of its total power consumption to come from renewable sources by FY 2025-26 with projected investments of ₹ 30 to ₹ 40 Crores.
• The Company is implementing Zero Liquid Discharge (ZLD) practices, reusing treated wastewater for cooling and gardening.
• AIA Engineering employs flue gas recuperators on gas-fired heat treatment furnaces to recover waste heat.
• The Company addresses waste management through a hierarchical approach aligned with circular economy principles and has ongoing tree plantation initiatives.
• Scope 1 emissions for FY 2023-24 were 32,793.68 TCO2e, and Scope 2 emissions were 1,89,372.20 TCO2e.
• Scope 3 emissions have been updated to 139479, from a restated FY 2022-23 figure.
• Total energy intensity was 4.35 GJ/Lakh of turnover for FY24.
• Water withdrawal for FY24 was 2,71,051 kilolitres.

Social Responsibility Programs #

• AIA Engineering contributed ₹ 1,652.10 Lakhs to CSR initiatives in FY 2023-24.
• Major focus areas include education (₹ 647.34 Lakhs), healthcare (₹ 385 Lakhs), environmental sustainability (₹ 291.72 Lakhs), and eradicating hunger (₹ 180 Lakhs).
• Specific programs include the Gyan Deep Programme, scholarships, and partnerships with educational and healthcare institutions.
• Support is provided for sports, national heritage, art, and culture.
• Collaboration with the Akshaya Patra Foundation for mid-day meals.

Governance Structure and Effectiveness #

• The Board of Directors includes an Independent Non-Executive Chairman, a Managing Director, a Whole-Time Director, four Independent Directors, and two Non-Executive Directors.
• The Board has established committees: Audit, Stakeholders Relationship, Nomination and Remuneration, Corporate Social Responsibility, and Risk Management.
• Board and Committee meetings are held regularly, with details on attendance provided.
• The Company has a Whistle Blower Policy, a Related Party Transactions Policy, and a Code of Conduct to ensure ethical practices.
• Independent assessment/evaluations of NGRBC principles were not undertaken for P1, P3, P6, P7, P8 and P9.

Sustainability Investments and ROI #

• The Company invested ₹ 110 Crores in the current year out of planned ₹ 200 Crores on brownfield expansion, enhancing capacity and operational efficiency.
• Plans to invest additional ₹ 30 to ₹ 40 Crores in renewable energy projects (solar and wind) in FY 2024-25.
• Additional capacity of 20,000 Tonnes of castings has been achieved.
• Installed 11 Wind Energy Turbines at the Kutch and Jamjodhpur sites and 3 sets of Hybrid (Wind+Solar) at Amreli, Gujarat which have total installed capacity of 37.38 MW of renewable energy.
• The Company also did capital expenditure on Renewable energy solutions, cutting-edge energy-saving technologies, environmental and pollution control measures, rigorous fire & safety protocols, advanced LED lighting solutions, and comprehensive employee well-being initiatives.

ESG Ratings #

• CRISIL upgraded the Long Term rating to AA+/Positive and reaffirmed the Short Term rating as A1+.
• Dun & Bradstreet assigned a rating of 5A I, indicating a “Strong” overall status.

Regulatory Compliance and Future Preparations #

• The Company states compliance with EHS regulations, environmental laws (Water Act, Air Act, Environment Protection Act), and SEBI LODR Regulations.
• The Company has a Secretarial Audit Report, with no qualifications reported.
• Extended Producer Responsibility (EPR) is deemed not applicable, as clients handle waste disposal under applicable laws.
• No details of future ESG regulatory preparations are detailed, other than the ongoing renewable energy investments.

Future Projections and Guidance #

Management Guidance and Assumptions #

• Management’s focus is on providing comprehensive solutions to reduce the cost of consumable wear parts and the overall cost of ownership for customers.
• The assumption that the Company can pass on raw material price increases to customers with a lag of 3 to 6 months.
• Management continues to see Cement sector growth as low to flat.
• Management is optimistic about the prospect of conversion from Forged Grinding Media to High Chrome Grinding Media in the Mining Industry space.
• Management has strong confidence in emerging as a dominant global supplier.

Market Growth Forecasts #

• Addressable market opportunity in the Mining Industry is estimated at 2 to 2.5 million tonnes of annual consumption for gold, copper, and iron ore.
• High Chrome Grinding Media penetration in the Mining sector is currently less than 15%.
• India is positioned as a bright spot for the Cement Industry, supported by infrastructure investments.

Planned Strategic Initiatives #

• Continued investment in solutions for the mining sector, focusing on cost reduction, throughput increase, and improved process yield.
• Expansion into the Mill Liner segment for the Mining Industry, leveraging proprietary and licensed designs.
• Increase sales and distribution, direct engagement with mining operations personnel globally.

Capital Expenditure Plans #

• The Company’s is progressing on implementing the second phase of Grinding Media Greenfield expansion project with a capacity of 36,000 MT at Kerala GIDC near Ahmedabad and expected to come in production by December 2024.
• Ongoing one-time upgradation project at the Odhav plant cluster for non-grinding media parts, with a capacity of 20,000 Mt, which includes capacity de-bottlenecking, restructuring, and infrastructure creation.
• Further investment of ’ 30 to ’ 40 Crores in Renewable Energy Projects (Solar and Wind) in Financial Year 2024-25, aiming for 60% to 70% of power consumption from renewable sources by fiscal year 2025-26.

Efficiency Improvement Targets #

• Increased grinding efficiency and reduced power costs in mining operations through Mill Liner solutions.
• Reduction in operating costs for customers, including lower wear rates and reagent consumption.
• Operational debottlenecking and reorganisation of older plants at the Odhav facility.

Potential Challenges and Opportunities #

• Challenges: Volatility in raw material prices (scrap and ferro chrome), anti-dumping and countervailing duty processes, potential supply chain disruptions, and global economic uncertainty.
• Opportunities: Significant conversion potential from forged to high chrome grinding media in the Mining Industry, expansion of Mill Liner offerings, increasing demand in the Cement Industry in India.

Scenario Analysis and Sensitivity #

• Raw Material Price Volatility: The Company has demonstrated the ability to pass on increased raw material costs to customers with a 3-6 month lag, presenting resilience. However, Sensitivity analysis of a Re. 1 increase/decrease per kg of metal scrap/ferro chrome shows a ( ’ 2,686.90) Lakhs / ’ 2,686.90 Lakhs impact on profit before tax for FY 2023-24.
• Foreign Exchange Risk: Sensitivity analysis shows a 1% increase/decrease in the INR/USD exchange rate impacts profit before tax by (+/-) ’ 648.30 lakhs for FY 2023-24. Similar sensitivities apply to EUR, ZAR, CAD, AUD,CNY,CLP,IDR and GHS, and the impact has also been listed for each currency.
• Interest Rate Risk: A 50 bps increase/decrease in interest rates is projected to impact profit before tax by (+/-) ’ 227.30 Lakhs for FY 2023-24.
• Commodity price for scrap and ferro chrome, the Company has presented a sensitivity analysis stating that a Re. 1 increase/decrease per kg of metal scrap/ferro chrome would have a significant impact of (‘2686.90) / ’ 2686.90 Lakhs on PBT for FY 2023-24.

Audit and Compliance Analysis #

Auditor’s Opinion and Qualifications #

• The auditors, B S R & Co. LLP, issued an unmodified (clean) opinion on both the standalone and consolidated financial statements, indicating a true and fair view in conformity with generally accepted accounting principles in India.
• Observations were reported on the maintenance of the audit trail feature within the accounting software in both Standalone and consolidated financial reports.

Key Accounting Policies and Changes #

• The Company adopted “Disclosure of Accounting Policies (Amendments to Ind AS 1)” from April 1, 2023, which impacted the disclosure of accounting policy information, but did not change the policies themselves.
• Material accounting policies include revenue recognition upon transfer of control, measurement of inventories at the lower of cost or net realizable value, and depreciation of property, plant, and equipment using the straight-line method.
• Consolidation is presented on the basis of IND AS 27, 28, and 110.

Internal Control Effectiveness #

• The auditors’ report (Annexure B) provides an opinion that the Company, in all material respects, maintained adequate internal financial controls over financial reporting, and that such controls were operating effectively as of March 31, 2024.

Regulatory Compliance Status #

• The Company is reported to be compliant with the applicable environmental laws, including the Water (Prevention and Control of Pollution) Act, Air (Prevention and Control of Pollution) Act, and Environment Protection Act.
• The Company has complied with the provisions of the SEBI (Prohibition of Insider Trading) Regulations, 2015.
• The Company maintains a Whistle Blower and Vigil Mechanism Policy, compliant with the Companies Act, 2013, and SEBI LODR Regulations.
• The Company is not a Nidhi Company.
• The Company has not been declared a wilful defaulter.
• The Company complied with Secretarial Standards on Meetings of the Board of Directors and General Meetings.

Legal Proceedings and Their Potential Impact #

• There are pending litigations against the Company, primarily related to Central Excise, Service Tax, Goods and Services Tax, and Income Tax, and sales tax/VAT.
• The contingent liabilities for claims against the Company not acknowledged as debts are ’ 52,000.60 Lakhs in Consolidated and ‘49,881.07 in Standalone Financials.
• Management believes many of the issues raised by revenue will not be sustainable in law and does not envisage a material impact on the financial statements.

Related Party Transactions #

• All related party transactions were conducted on an arm’s length basis and in the ordinary course of business.
• Significant related party transactions include sales to Vega Industries (Middle East) FZC (a wholly-owned subsidiary), and purchase of goods from Welcast Steels Limited (a subsidiary).

Subsequent Events #

• Post year-end, the Company received a notice from the United States International Trade Commission regarding investigations into alleged dumping and subsidizing of certain grinding media from India. The Company is in the process of responding.
• In-principle approval was received from BSE Limited on 26 April, 2024, and the bidding window was opened from 07 May, 2024, to 13 May, 2024. As the Post Delisting Offer shareholding of the Company has not exceeded 90.00% of the total issued equity shares of WSL, the Delisting Offer is deemed to be unsuccessful in terms of Regulation 21 of the SEBI Delisting Regulations.

Analysis of Accounting Quality and Regulatory Risk Assessment #

• Accounting Quality: The adoption of amendments to Ind AS 1 for disclosure of accounting policies, along with consistent application of accounting principles, enhances the transparency and comparability of the financial statements. The use of estimates and judgments (e.g., useful lives of assets, provisions, and expected credit losses) is inherent in financial reporting, and the company appears to have established processes for these, including actuarial valuations for employee benefits.
• Regulatory Risk: The Company faces ongoing regulatory scrutiny, particularly related to tax matters and anti-dumping investigations. These represent potential, but as yet unquantified, financial risks. The continued compliance with various regulations demonstrates a proactive approach to managing regulatory risk.