rating : buy 617 eyeing no.1...

March 4, 2014

Initiating Coverage

ICICI Securities Ltd | Retail Equity Research

Eyeing No.1 position… Scalable opportunity in the mining segment, resurrection of operating margins back to historical levels and aspirations to become the largest player globally make AIA Engineering (AIA) an interesting play in the oligopolistic high chrome mill internals (HCMI) industry. After penetrating the cement market well, AIA has shifted its focus to the relatively large mining segment and made significant inroads into the same (share has risen from 18% in FY10 to 54% in 9MFY14). This traction will enable AIA to post revenue CAGR of 17% with margins reviving to historical levels of 22-23% over FY13-16E. Consequently, PAT CAGR of 21% and strong cash flows will fund the aggressive capex plans of AIA. Hence, initiate with BUY.

Big conversion opportunity knocking for HCMI players globally… Current global consumption of high chrome mill internals, which is equally applied in the cement and the mining space, is at ~6,00,000 tonnes per annum (TPA). With almost 80% penetration achieved for HCMI in cement space, the mining segment provides next leg up for HCMI players. It is estimated that at least 1.2 MTPA mining segment volumes for mill internals can be converted from forged media into HCMI, going ahead. Hence, we believe this will create an opportunity 4x that of current HCMI consumption of 3,00,000 TPA for HCMI players in mining. With significant cost savings achieved (~30-40%) through lower wear rate, increased productivity & lower power consumption, HCMIs are making inroads into mining sector. …as AIA eyeing No.1 position by FY16E with aggressive capex programme Successful penetration in the mining segment (58% volume CAGR over FY10-13) and presence of strong conversion opportunity (80% of the 1.5-2 MT global opportunity per annum from forged media to HCMI still remains unexploited) has prompted AIA to undertake an aggressive capacity expansion plan. From a capacity of 2,60,000 tonnes in FY14E (60,000 tonne brownfield capacity is expected to be added in Q4FY14E), AIA plans to add another 1,80,000 tonnes of greenfield capacity in Gujarat by FY16E. This will make AIA the largest HCMI player globally as the current capacity of 200,000 tonnes (9MFY14) will grow 2.1x to 440,000 tonnes by FY16E. AIA will then overtake the current market leader Magotteaux (Belgium). Strong performance deserves rerating in valuations, going ahead Strong volume growth and recovery of margins will drive a strong 21% PAT CAGR for AIA over FY13-16E in an environment wherein engineering companies are facing visibility challenges. Given the asset light balance sheet, manageable capex levels (under | 650 crore in FY14-15E), which is largely funded by internal cash flows (CFO to average | 230 crore over FY13-16E) and manageable debt, we expect AIA to command at least 10% premium to its historical averages over FY10-12. Hence, we arrive at a target price of | 617/share. Exhibit 1: Key financials

(Year-end March) FY12 FY13 FY14E FY15E FY16ENet Sales (| crore) 1,416.7 1,751.3 2,014.4 2,320.4 2,774.0 EBITDA (| crore) 272.6 310.2 448.0 526.0 625.8 Net Profit (| crore) 179.7 210.8 299.0 322.0 372.0 EPS (|) 19.1 22.4 31.7 34.1 39.4 P/E (x) 28.9 24.6 17.3 16.1 13.9 EV / EBITDA 18.2 15.8 10.9 9.5 8.0 RoE (%) 14.5 14.8 18.0 16.8 16.9 RoCE (%) 18.8 17.3 21.9 21.1 21.4

Source: Company, ICICIdirect.com Research

AIA Engineering (AIAENG)| 560

Rating Matrix Rating : Buy

Target : | 617

Target Period : 12 months

Potential Upside : 10%

YoY Growth (%) YoY Growth FY13 FY14E FY15E FY16ENet Sales 23.6 15.0 15.2 19.6EBITDA 13.8 44.4 17.4 19.0Net Profit 17.3 41.8 7.7 15.5EPS 17.3 41.8 7.7 15.5

Current & target multiple FY13 FY14E FY15E FY16E

P/E (x) 24.6 17.3 16.1 13.9Target P/E (x) 27.2 19.1 17.8 15.4EV/EBITDA (x) 15.8 10.9 9.5 8.0Mcap/Sales (x) 2.9 2.6 2.2 1.9RoE (%) 14.8 18.0 16.8 16.9RoCE (%) 17.3 21.9 21.1 21.4

Stock Data Bloomberg/Reuters Code AIAE.IN/AIA.BOSensex 20200Average Volume 79117Market Cap (| crore) 5152.052 Week H/L 582/200Equity Capital (| crore) 18.9Face Value (|) 2Promoters Stake (%) 61.7FII Holding (%) 26.6DII Holding (%) 5.6 Comparative return matrix (%)

1M 3M 6M 12MAIA Engineering 15.6 33.9 70.0 71.8Cummins India -3.9 9.1 11.5 -11.3SKF India -1.8 4.7 38.4 15.5Thermax -9.3 -0.5 7.3 9.0 Price movement

20002500300035004000450050005500600065007000

200250300350400450500550600

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13

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-13

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13

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-13

Oct-1

3

Dec-

13

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(|)

AIA Nifty (RHS)

Analyst’s name

Chirag J Shah [email protected]


Company background AIA Engineering (AIA), established in 1979, is India’s largest manufacturer and supplier of corrosion and abrasion resistant high chrome mill internals (HCMIs), which are used as wear parts in crushing (or grinding) operations in cement, mining and thermal power plants (or mills). AIA’s product portfolio includes tube mill internals (such as grinding media, shell liners and diaphragm), HRCS castings and crusher parts for cement, mining and thermal power plants (see appendix for detailed presentation). The company manufactures mill internals through its listed subsidiary, Welcast Steel Ltd (market capitalisation: | 19 crore), in which AIA holds a 75% equity stake (acquired in FY05). Further, AIA expanded its client list by acquiring Paramount Centrispun Castings (PCCL) in February 2008, as the latter supplied HCMI to ACC, Gujarat Ambuja Cement, Kudremukh Iron Ore Company, Hindustan Zinc, Bharat Aluminium Company, Lafarge, etc.

The company caters to HCMI demand of original equipment manufacturers (OEMs) and replacement market, with the latter accounting for over 80% of volume sales in the cement sector. AIA supplies mill internals in the international markets through its wholly-owned marketing subsidiary, Vega Industries Ltd, which has offices in the US, the UK, Canada, Philippines, Australia and the Middle East.

As on FY13, AIA’s total manufacturing capacity stood at 200,000 metric tonnes (MT) and it is planning to raise capacity to 4,40,000 MT by FY16E. This includes both brownfield (60,000 MT) and greenfield expansions (1,80,000 MT). This will help make AIA the biggest player in HCMI segment, a position currently held by Belgium based Magotteaux (current capacity of 3,50,000 MT). In FY13, AIA’s consolidated revenues increased ~24% to | 1751 crore on the back of 13.4% volume growth and 9% YoY growth in realisations. AIA’s strategy of penetrating the mining segment seems to be paying off as 50% of volume or 75,000 MT in FY13 came in from this segment vs. 18500 tonnes in FY10.

Exhibit 2: Company milestone

C ollabora tion with S legten for redesign of line rs and other m ill inte rna ls

C om menced production of H igh C hrom e Media

Joint venture with Magotteaux Inte rnationa lS A, Be lgium.

Incorpora ted as Ahmedabad Induction Alloys to m anufacture castings a lloys

Acquisition of 100% stake in V ega, U K

E nds agreement with Magotteaux

1978 1985 1988 1991 2000 2003 2006 2007 2009 2010-2011

C apacity enhanced by 50000 tonnes to 115000 tonnes

L aunches IP O to ra ise |150 crore

Afte r com manding lion 's share in cem ent space , AIA forays into supply of H C MI to the m ining segment.

C apacity enhanced by 50000 tonnes to 165000 tonnes


Shareholding pattern (Q3FY14)

Share Holding Pattern Holdings (%)Promoters 61.9Institutional Investors 32.2Others 5.9

Institutional holding trend (%)

25.2 26.8 27.0 26.6

7.8 6.4 6.2 5.6

05

1015202530

Q4FY13 Q1FY14 Q2FY14 Q3FY14

(%)

F II D II


Exhibit 3: Business structure of AIA Engineering

AIA Engineering

Manufacturing subsidiaries

DCPL foundries Pvt. Ltd.

Marketing units

Vega Industries(Middle East) F.Z.E.

Vega Industries Ltd (U.K.)

Vega Industries Ltd (U.S.A)

Vega Industries Ltd (China)

Vega Industries Ltd (RSA)

Welcast Steels Ltd

100% subsidia ry of AIA

100% subsidia ry of V ega Middle E ast

100% subsidia ry V ega Middle E ast

100% subsidia ry of V ega U .K .

100% subsidia ry V ega Middle E ast

D irect sa les to Asia (ex India ), Africa (ex-R S A), S outh Am erica

D irect sa les to E uropean region

D irect sa les to North Am erica and part of C entra l Am erica

D irect sa les in S outh Africa

D irect sa les in C hina

Manufactures grindingm edia

A listed entity where in AIA holds 75% equity

AIA holds 100% equity

Manufactures grinding m edia



D irect sa les to Asia (ex India ), Africa (ex-R S A), S outh Am erica






Exhibit 4: Trend in capacity addition and production over FY08-13

1000030000500007000090000

110000130000150000170000190000210000

F Y 08 F Y 09 F Y 10 F Y 11 F Y 12 F Y 13

(ton

nes)

C apacity P roduction


Exhibit 5: Trend in sales and PAT over FY08-13

200400600800

100012001400160018002000

F Y 08 F Y 09 F Y 10 F Y 11 F Y 12 F Y 13

(| cr

ore)

507090110130150170190210230

(|cro

re)

R evenues P AT


Exhibit 6: List of acquisition done in the past by AIA Engineering

C om pany Y ear C urrent shareholding (% ) Am ount (| crore)P aram ount C entrispun C astings 1991 100 1.7

R eclam ation Welding L td. 1993 100 1.6G ray C ast F oundry 2004 100 0.4

C entricast E nterprises P vt. L td. 2004 100 0.3

Welcast S tee ls L td. 2005 75 12.9

D C P L F oundries L td. 2012 70 0.0P olplex Minera l P vt. L td. 2013 50 0.0



Investment Rationale Current global consumption of high chrome mill internals is at ~6,00,000 tonnes per annum (TPA), equally applied in the cement and the mining space. With almost 80% penetration achieved for HCMI in the cement space, mining segment provides the next leg up for the HCMI players. It is estimated that at least 1.2 million tonnes per annum (MTPA) mining segment volumes for mill internal can be converted from forged media into HCMI, going ahead. Hence, we believe this will create an opportunity 4x that of the current HCMI consumption of 300,000 TPA for HCMI players in mining. With significant cost savings achieved (~30-40%) through lower wear rate, increased productivity and lower power consumption, HCMIs are increasingly making inroads into mining sector. This presents a strong scalable opportunity for existing HCMI players like Magotteaux and AIA.

Hence, scalable opportunity in the mining segment, resurrection of operating margins to historical levels and aspirations to become the largest player globally make AIA Engineering (AIA) an interesting play in the oligopolistic high chrome mill internals (HCMI) industry. After penetrating the cement market well, AIA has shifted its focus to the relatively large mining segment and has made significant inroads into the same (share has risen from 18% in FY10 to 54% in 9MFY14). This traction will enable AIA to post revenue CAGR of 17% with margins reviving to historical levels of 22-23%, over FY13-16E. Consequently, PAT CAGR of 21% and strong cash flow generation will fund the aggressive capex plans of.

High chrome mill internals industry Grinding media is primarily used as a consumable in crushing and grinding mineral ores, grinding cement clinker, other crushing operations in utilities and recycling of concrete as aggregates. Total annual global consumption of grinding media is ~3 MT driven by the mining sector (annual requirement of ~2.5 MTPA) while that of the cement segment is pegged at 0.3-0.35 MTPA. On a broad basis, grinding media can be divided into two categories a) forged media and b) high chrome mill internals (HCMI). As far as the HCMI industry is concerned, we believe the cement sector is mostly penetrated (current consumption is pegged at 300,000-350,000 tonnes and expected to grow in the range of 3-4%, going ahead). The mining segment will provide the next leg of growth for the HCMI industry as only 20% of the 1.5-2 MT opportunity has been converted to HCMI from the conventional forged media segment. Hence, we believe potential scalability is present for the HCMI industry as consumption is pegged at ~6,00,000 tonnes.

Exhibit 7: Dynamics of grinding media industry in a nutshell

G rinding Media

F orged m edia

H igh chrom e m edia /m ill inte rna ls

K ey players: Molycop, G erdau, ME E lecm eta l, Arce lor, S C AW K ey applica tion: E xtraction of ore from m inera ls like copper, gold, iron ore , pla tinum . Mainly used for m ining applica tions

K ey players: Magotteaux, AIA E ngineering, E standa , C hristian P fe ffie r, C hinese players K ey applica tion: C em ent, coa l based utilities and m ining ( copper, gold, iron ore , pla tinum )

C om position of raw m ateria ls: 100% scrap stee l

C om position of raw m ateria ls: 70% scrap stee l and 11-30% fe rro chrom e (depending on the nature of the user industry)

T he annua l consum ption of grinding m edia is pegged a t 3 MT P A. O ut of th is, the m ining segm ent itse lf consum es ~2.5 MT of consum ables

G rinding m edia finds applica tions inthe cem ent, utilities and m ining space. T he m ain dem and com es from replacem ent m arket, which form s 70-80% of the dem and



High chrome mill internals (HCMIs) such as grinding media, heat resistance castings, diaphragm, etc. are critical components for grinding operations used extensively in cement and thermal power plants. With significant cost savings achieved (~30-40%) through lower wear rate, increased productivity and lower power consumption, HCMIs are increasingly making inroads into the mining sector. This has, till now, been served by forged media (manganese steel, nihard iron, hyper steel and forged steel internals). Applications of HCMI differ in all three segments as the cement sector has most diversified applications of HCMIs across the production process (limestone crusher, coal mill, raw mill and cement finishing mill) while segments like utilities require HCMI application for crushing and grinding coal. Exhibit 8: Applications of various HCMI products across verticals/sector Industry Products Objective

Utilities Grinding media, shell liners, diaphragm, vertical mill parts Crushing and Grinding of coal

Grinding media, shell liners, diaphragm, vertical mill parts, crusher parts and castings

Mainly used in limestone crushers, coal mill, raw mill and cement finishing mill

Cement

MiningGrinding media, shell liners, diaphragm,

Extraction of minerals from ores of gold, iron ore, platinum and copper


Exhibit 9: Cement manufacturing process finds significant applications of HCMI products

Source: Dscrusher.com, ICICIdirect.com Research

700045

Rectangle


Replacement demand accounts for ~85-90% of the total global demand for HCMI due to the high wear and tear rate of mill internals such as grinding media, which needs to be replaced every 30 days and forms ~80% of the total global (ex-China) replacement demand. The remaining demand comes from other mill internals such as liners and diaphragm that need to be replaced every two or three years. The strong visibility of demand from the replacement segment provides a stable revenue stream for HMCI manufacturers such as Magotteaux and AIA.

HCMI industry: Mostly dominated by two players The HCMI market is mainly dominated by two key players i.e. Magotteaux (Belgium) and AIA (India). Belgium-based Magotteaux leads the global HCMI market with a share of ~35% while AIA, though the second largest globally with ~25% share, is the largest HCMI manufacturer in India (market share ~90% in cement sector and ~70% in thermal utilities sector). Although mill internals form just 1.5-2% of production costs in cement and around 10% in mining, the criticality of internals is very high since product failure could result in hampering production. On account of this, customer loyalty/stickiness stays and would not shift very easily to any new entrants even on lower costs. Quality of grinding output is key to ensure quality of the end product for mining and cement operators. Hence, customers insist on long-drawn and thorough trials of grinding media before any new vendor can be empanelled for supplies. This acts as an entry barrier, resulting in very few new grinding media suppliers entering the market. In terms of capacity, Magotteaux commands a capacity of 468,500 tonnes out of which HCMI capacity stands at 350,000 tonnes (300,000 tonnes of metals). The capacity of Magotteaux is spread across 13 countries across the globe. On the other hand, AIA has a present capacity of 2,00,000 tonnes, which is expected to get aggressively ramped by >2x up to 4,40,000 tonnes by FY16E. If executed on time, the current expansion will help AIA dislodge Magotteaux as the leader in the HCMI industry. Other key players include, Estanda (8000 tonnes), Christian Pfeiffer (7,000 tonnes), Anhui (12,000 tonnes), thereby virtually making the HCMI industry a duopoly/oligopoly kind of market.

Exhibit 10: Composition of capacity for AIA and Magotteaux

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60000

50000

68500

50000

050000

100000150000200000250000300000350000400000450000500000

AIA Magotteaux

(tonn

es)

HCMI LCMI Forged Steel Balls Castings JV Capacity



Exhibit 11: Key HCMI players C om pany L ocation C apacity (tonnes)AIA E ngineering India 200000

Magotteaux Be lgium 240000C hristian P fe iffe r Ita ly 7000

E standa S pa in 8000

S caw Meta ls* S outh Africa 100000

Anhui C hina 12000

Source: Company, ICICIdirect.com Research *SCAW is a JV wherein Magotteaux has 50% stake in the JV or 50000 tonnes of capacity.

On the forged media side, Molycop (US) is the largest player in the world with a capacity of 1.3 MT of capacity. However, Molycop has ~3.5x the installed capacity of the next largest competitor, which includes players like ME Elecmetal, SCAW, Gerdau, Donhad and Arcelor whose capacity ranges between 50000 and 225000 tonnes.

Mapping opportunity for HCMI industry: Globally, the cement segment is a well penetrated opportunity for the HCMI industry [HCMI serves 80% of the global cement industry (ex-China)] while the utilities opportunity is relatively non-scalable. The next up leg for the industry is envisaged in the mining space (gold, copper, platinum and iron ore) where the industry estimates that conversion opportunity of 1.5 MTPA from forged media to high chrome media can provide huge volume gains for HCMI players. If quantified, this can be 3x the current volumes of the cement segment. Based on empirical data, replacement demand for grinding media for 1 tonne of cement produced is pegged at 100 gm whereas OEM demand for one tonne of new cement capacity is pegged at 300 tonnes. On similar lines, replacement and OEM requirement for other mill internals (liners, crushers and diaphragms) is pegged at 75 gm (for one tonne of cement production) and 23 tonnes (for one tonne of capacity added). In the utilities segment, replacement demand is pegged at 15 gm per MW/hour of power produced while 0.15 tonnes of grinding media is required for one MW of new capacity commissioned. Exhibit 12: Thumb rule to compute/forecast HCMI products demands across segments

C em ent Industry Q ty.G rinding m edia

New capacity (tonne of grinding m edia per MT of capacity com m issioned) 300

R eplacem ent or per tonne of cem ent produced (gram s of grinding m edia ) 100

O ther m ill inte rna ls (line rs, diaphragm s and other crushers parts)New capacity (tonne of grinding m edia per MT of capacity com m issioned) 75R eplacem ent or per tonne of cem ent produced (gram s of grinding m edia ) 23

U tilities S egm entH C MI required per MW of e lectricity generated (in gram s) 15H C MI required for 1 MW of new power capacity com m issioned (in tonnes) 0.15

Source: Company DRHP, ICICIdirect.com Research


Cement segment: Steady performance in well penetrated vertical The importance of HCMI (vs. conventional media) for grinding operations in the cement sector is evident from the fact that HCMI serves more than 80% of the global (ex-China) mill internals demand. The Chinese market is primarily served through conventional media. We believe HCMI demand from the cement sector will be muted as cement consumption is expected to grow from 3750 million tonnes in CY12 to 4442 million tonnes in CY16E, implying a CAGR of 4.3% coupled with the high rate of penetration already made by HCMI in the cement industry. We believe a few players like AIA have been able to maintain their market as they have continuously explored newer geographies in order to maintain the steady performance. Exhibit 13: Trend in world cement consumption

200

700

1200

1700

2200

2700

3200

3700

4200

4700

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E

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E

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E

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Source: International Cement Review, ICICIdirect.com Research

Given that global cement demand is expected to grow at a CAGR of 4.3% over CY12-16E, we expect demand for high chrome grinding media (replacement demand) to grow in the range of 3.2% over CY12-16E. On an absolute basis, HCMI demand globally (ex-China) would be pegged between 300,000 and 320,000 tonnes per annum.

Exhibit 14: Dissecting replacement demand of HCMI in global cement market

C em ent C Y 12 C Y 13 C Y 14E C Y 15E C Y 16EWorld production (m illion tonnes) 3750 3949 4099 4276 4442G rinding m edia required per tonne of cem ent produced is 100 gm 100 100 100 100 100T ota l replacem ent requirem ent of grinding m edia from cem ent sector (tonnes) 375000 394900 409900 427600 444200O ther m ill inte rna ls required per tonne of cem ent produced (gram s) 23 23 23 23 23T ota l replacem ent requirem ent of other m ill inte rna ls from cem ent sector (tonnes) 86250 90827 94277 98348 102166T ota l replacem ent dem and for H C MI in globa l cem ent space (tonnes) 461250 485727 504177 525948 546366G rowth in H C MI dem and from cem ent replacem ent m arke t 5.3 3.8 4.3 3.9C hina cem ent consum ption (m illion tonnes) 2160 2290 2360 2450 2520R eplacem ent D em and in C hina (m illion tonnes) 265680 281670 290280 301350 309960G loba l dem and ex-C hina (m illion tonnes) 195570 204057 213897 224598 236406% share of C hinese m arkets 57.6 58.0 57.6 57.3 56.7

T ota l H C MI m arket globa lly ex-C hina assum ing that 90% is re flected by replacem ent dem and 260760 255071 267371 280748 295508G rowth (% ) -2.2 4.8 5.0 5.3

Source: International Cement Review ICICIdirect.com Research

With respect to domestic markets, we expect cement consumption to grow at a CAGR of 6% over FY13-16E to 280 million tonnes per annum (MTPA) in FY16E. Coupled with this, we expect cement capacity to rise to 365 million tonnes (MT) in FY16E from 313 MT in FY13, implying an average capacity addition of 17 MT over the same period. This will translate into a replacement opportunity (grinding media + other mill internals) of ~34600


tonnes in FY16E from ~28,800 tonnes in FY13 for HCMI players like AIA (90% market share in domestic markets). With respect to OEM markets, the volume opportunity will be at 6750 TPA in FY16E from 7875 tonnes as the run rate in FY13 as rate of capacity addition will decelerate in FY16E.

Exhibit 15: Domestic demand for cement sector for HCMI industry will grow at a CAGR of 4% over FY13-16E

D om estic cem ent opportunity F Y 10 F Y 11 F Y 12 F Y 13 F Y 14E F Y 15E F Y 16EC em ent capacity (m illion tonnes) 228.0 270.0 292.0 313.0 329.0 347.0 365.0

C apacity added (m illion tonnes) 24 42.0 22.0 21.0 16.0 18.0 18

P roduction (m illion tonnes) 199.0 208.5 223.8 234.2 243.9 259.8 281.1

C apacity utilisa tion (% ) 87.3 77.2 76.6 74.8 74.1 74.9 77.0

G rinding m edia opportunityH C MI replacem ent dem and (tonnes) 19,900 20,850 22,380 23,420 24,390 25,980 28,105.0 H C MI O E M dem and (tonnes) 7,200 12,600 6,600 6,300 4,800 5,400 5,400 T ota l dom estic grinding m edia opportunity 27,100 33,450 28,980 29,720 29,190 31,380 33,505

O ther m ill inte rna ls opportunity H C MI replacem ent dem and (tonnes) 4,577 4,796 5,147 5,387 5,610 5,975 6,464 H C MI O E M dem and (tonnes) 1,800 3,150 1,650 1,575 1,200 1,350 1,350 T ota l dom estic other m ill inte rna ls opportunity (tonnes) 6,377 7,946 6,797 6,962 6,810 7,325 7,814

T ota l H C MI dom estic opportunity in C em ent 33,477 41,396 35,777 36,682 36,000 38,705 41,319 S hare of replacem ent m arket (% ) 73.1 62.0 76.9 78.5 83.3 82.6 83.7


Utilities: Smaller segment with more focus on domestic opportunities

Though not a big opportunity in terms of size, we expect utilities to add capacity (coal based power plant) at a run rate of 14000-16000 MW per annum, in India, over FY14E-16E. This will take the coal based capacity in India to ~160,000 MW in FY16E from ~130,000 MW in FY14E. Taking into account fresh capacity additions over FY14-16E and replacement demand, the utility segment opportunity would result in a CAGR of 6% over FY13-16E for HCMI products. Players like AIA, which have long-term contracts with power equipment OEMs will stand to benefit from the same.

Exhibit 16: HCMI product requirement to grow at CAGR of 6% over FY13-16E

D om estic utilities opportunity F Y 10 F Y 11 F Y 12 F Y 13 F Y 14E F Y 15E F Y 16E

O pening therm a l capacity (coa l, in MW) 77648.9 84198.4 93918.4 112022.4 130220.4 145220.4 159220.4C apacity added (C oa l, in MW) 6549.5 9720 18104 18198 15000 14000 16000

C losing capacity (C oa l, in MW) 84198.4 93918.4 112022.4 130220.4 145220.4 159220.4 175220.4

P L F 's(% ) 82 79 72 68 62 65 65

E ffective e lectricity genera ted (MW) 66357 70356 74139 82363 85387 98943 108693H C MI replacem ent dem and (tonnes) 7166.6 7598.5 8007.0 8895.2 9221.8 10685.9 11738.9H C MI opportunity for new capacity (tonnes)_ 982.43 1458.00 2715.60 2729.70 2250.00 2100.00 2400.00T ota l p.a . opportunity in dom estic utilities (tonnes) 8149 9056 10723 11625 11472 12786 14139S hare of R eplacem ent dem and (% ) 87.9 83.9 74.7 76.5 80.4 83.6 83.0 Source: CEA, Company, ICICIdirect.com Research

Rectangle


Mining segment: Conversion opportunity in the offing for HCMI players… Currently, consumption of grinding media requirement is mainly dominated by the mining sector. Consumption in the mining sector stands at ~2.5 MT, which comprises ~83% of the overall grinding media consumption. Most of the demand for grinding media is met by the forged media industry. With significant cost savings achieved (~30-40%) through lower wear rate, increased productivity and lower power consumption, HCMIs are increasingly making inroads into the mining sector. As per AIA management, out of the 2.5 MT of annual consumption at least 1.5 MT can be converted from forged media to high chrome media. It is estimated that less than 20% of this 1.5 MT opportunity has been converted into high chrome media (source: FY13 annual report of AIA). Hence, currently HCMI products consumption stands at ~300,000 tonne (20% of 1.5 MT). Exhibit 17: Assessment of opportunity in mining segment for HCMI players

Mining dem and for overa ll grinding m edia (m illion tonnes per annum ) 2.5-3

Addressable opportunity for conversion to H C MI (m illion tonnes per annum ) 1.5-2O pportunity a lready converted (% ) 20

Addressable opportunity that still needs to be captured (m illion tonnes per annum ) 1.2


We believe there exists a large opportunity for high-chrome grinding media to replace ball mill applications wherein the ball size is between 1 inch and 4 inches. Thus, high-chrome grinding growth would be driven by replacement of ball mill (forged media) in the secondary crusher/high pressure grinding roll used in ore mining applications. In mining operations, mainly in gold and copper, HCMI is used in the secondary and tertiary crushing while forged media is mainly used in semi autogenous grinding (SAG) mill where the ball sizes are of larger size in the range of 4-6 inches. According to Wood Mackenzie, growing demand for copper and gold coupled with declining ore head grades will result in increased ore milled. This, in turn, will lead to increased demand for grinding media products (forged and high chrome media based). It is estimated that copper and gold production will increase at a CAGR of 12% and 8%, respectively, over CY13-17E. With respect to copper ore, North America and South America are expected to witness strong production CAGR of 14% over CY13-17E. On the other hand, gold production in North America and South America is expected to witness 12% and 14% CAGR, respectively, over CY13-15E. Exhibit 18: Mining production growth to create strong opportunity for grinding media players

12

8

14

12

14 14

0

2

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Source: Wood Mackenzie, Molycop, ICICIdirect.com Research


Exhibit 19: Trend in production of gold and copper over CY12-17E

Source: Wood Mackenzie, Molycop, ICICIdirect.com Research

Given the robust outlook for copper and gold mining, key players like Molycop (largest forged media player) and AIA (second largest HCMI players) have set out their capacity expansion plans to capture the upcoming mining opportunity. Molycop plans to add capacity to the tune of 160,000 tonnes or 12% of the current 1.3 MT capacity. On the other hand, sensing the conversion opportunity in the HCMI industry, AIA is planning to increase its capacity by 2.2x to 440,000 tonnes by FY16E end from the current 200000 tonnes. AIA’s expansion has been bifurcated into greenfield capacity of 180,000 tonnes (FY16E) and brownfield capacity of 60,000 tonnes (by Q4FY14E). The incremental capacity is fully dedicated to mining applications mainly in gold and copper metal.


…AIA eyeing No.1 position by FY16E with aggressive capex programme as… Successful penetration in the mining segment (58% volume CAGR over FY10-13) and presence of strong conversion opportunity (80% of the 1.5-2 MT global opportunity per annum from forged media to HCMI still unexploited) has prompted AIA to undertake an aggressive capacity expansion plan. From a capacity of 260,000 tonnes in FY14E (60,000 tonne brownfield capacity is expected to be added in Q4FY14E), AIA plans to add another 180,000 tonnes of greenfield capacity in Gujarat by FY16E. Thus, AIA post FY16 will become the largest HCMI player globally as the current capacity of 200,000 tonnes (as of 9MFY14) will grow 2.1x to 440,000 tonnes by the end of FY16E. AIA will then overtake the current market leader Magotteaux, which currently has a capacity of 360000 tonnes. Historically, over FY07-13, AIA has increased its capacity thrice. The capacity has grown at a CAGR of 20.6% over FY07-13 as it grew 3x from FY07 (65,000 tonnes) to 200,000 tonnes in FY13. Over this period, AIA had acquired a Bangalore based company Welcast Steels, which had capacity of 50,000 tonnes while the other two capacity programmes were in-house (undertaken in FY09 and FY11). Going ahead, with capacity addition of 240,000 tonnes (60,000 tonnes in Q4FY14E and 180,000 tonnes in FY16E), capacity is set to rise at a CAGR of 30.7% over FY13-16E.

Exhibit 20: Trend in capacity addition

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Capex dedicated for further ramping up of mining volumes. The current brownfield expansion of 60,000 tonnes is mainly dedicated to grinding media balls of higher size up to 120 mm, which will be mainly used for mining application. Similarly, the greenfield expansion is also dedicated to further strengthening its positioning in the mining segment. Out of 180,000 tonnes of greenfield expansion, two-third or 1,20,000 tonnes will be for grinding media while the remaining 60,000 tonnes will be for mining liners. Hence, post the expansion, the share of mining liners in the overall capacity would rise from 15% in FY14E to 23% in FY16E. The rising share of mining liners will be highly margin accretive for AIA, as these entail relatively higher value addition and realisations, which will add to margins going ahead. AIA is focusing aggressively on the global conversion opportunity in the mining segment as the 1.5-2 MTPA conversion opportunity from forged media to HCMI still remains largely unexploited (management estimates only 20% of the opportunity has been exploited till now). This, we believe, has prompted AIA to undertake such an aggressive capex plans. Going ahead, we except overall volumes to grow at a CAGR of 13.6% over FY13-16E (235,662 tonnes in FY16E from 160,800 tonnes in FY13). However, in


the overall pie, share of mining will inch up from ~46% in FY13 to ~63% in FY16E. This means mining volumes will rise ~2x from 73,500 tonne in FY13 to ~1,49,000 tonnes, implying a CAGR of 26.5% over FY13-16E.

Exhibit 21: Volume to witness 16% CAGR over FY13-16E

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Exhibit 22: Mining segment share to rise to 63% by FY16E

55.6 46.5 45.4 37.4 33.5 29.8

35.8 45.1 45.7 54.4 58.8 63.2

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Post capacity expansion, what would FY17E look like for AIA Though we are pencilling in our explicit forecast till FY16E, we are making ball park calculations for FY17E volumes and revenue forecast as this will be the fiscal wherein the full impact of capex gets reflected in the financial performance of AIA. In our calculations, we assume modest 70% capacity utilisation levels. AIA may clock volumes of ~3,00,000 tonnes. In terms of segmental composition, the share of mining is expected to further inch up to 69% from 63% in FY16E and 46% in FY13. In terms of revenues, we expect revenues to touch | 3300 crore in FY17E as our realisation assumptions stand at a modest | 110000/tonne. On a normalised basis, AIA’s capacity utilisation has averaged at 71% over FY10-13. Going ahead, we expect the utilisation to average 85%, based on the penetration in the mining segment. The increase in utilisation rate is mainly owing to 13.6% volume CAGR over FY13-16E.

Exhibit 23: Trend in capacity utilisation

61.5 66.274.0

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Penetrative strategy into mining segment starts paying off… AIA is currently the second largest HCMI player globally. By sensing the conversion opportunity in the mining segment in FY10 (from forged media to high chrome mill internals) the company is strongly hedged against the already penetrated cement sector both domestically and internationally. Since FY10, AIA has been commanding 90% share in the domestic cement sector while in the global market (ex-China), the share stands at ~25%. Given the peak penetration in the cement sector and tempering of growth rates in capacity addition, AIA’s shift towards the mining segment was natural. The conversion opportunity i.e. 80% of the 1.5-2 MT remains unexploited vis-à-vis a relatively small 300,000-350,000 tonnes per annum cement opportunity. This implies that the opportunity size in mining is almost 3x that of the cement segment. Hence, AIA entered the mining sector in FY10 when cement segment volumes comprised ~80% of the overall volumes while the share of mining segment stood at 18%. In terms of volume, the mining segment stood at ~18,500 tonnes while that of cement stood at ~75,000 tonnes in FY10. Exhibit 24: Scenario in FY10

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The gestation period for entering the mining segment per client ranges from six to nine months. At the same time, one has to take pricing cuts in order to make a breakthrough given clients are highly sticky with their existing vendors. This was one of the key challenges that AIA faced during the initial period of entry. Coupled with this, convincing mining clients to switch over from traditional forged media to high chrome based media was another challenge in front of AIA as costs and risks involved in conversion are high owing to factors such as pricing risk and performance risks. Pricing risks: In order to gain entry, suppliers of grinding media have to supply at lower rates to incentivise the client to use new media given the client is risking the production process by using a new grinding media against tried and tested media. Also, cost of using HCMI is high when compared to forged media (generally 20-30%), which may be a disadvantage at the initial point but the benefits accrued from usage of HCMI outweigh the high capital costs. Benefits of using HCMI as grinding media manifest in the form of a) higher extraction of the metal and b) lower wear and tear of the grinding and crushing equipment.


Mining foray apprehensions on volume traction and margins receding While making the mining foray, apprehensions were there whether AIA would be able to win big ticket global mining client, garner volume growth and, if penetrated, whether AIA would get back to its historical EBITDA margins. AIA has successfully addressed the above risks, in our view, thereby making inroads into the mining segment. a) Big mining OEMs are its customers: Since the foray, AIA’s mining segment supplies to mines of global mining majors like Rio Tinto, BHP Billiton, Vale, Arcelor, etc. Currently, as of Q3FY14, AIA is serving 30-40 mining locations while it is actively pursuing another 20-30 mining sites in various stages of active discussions for getting converted into AIA’s clients. b) Over FY10-13, mining volume CAGR 58%; likely to remain strong: In its first year of mining foray (FY10), AIA managed to garner ~18,500 tonnes of mining volume, which comprised 18% of overall volumes. However, with successful penetration in the global mining space over FY10-13, AIA’s mining segment volume grew 5x to 73500 tonnes, implying a CAGR of 58% over FY10-13. Hence, the share of the mining segment has risen to ~46% and 54% in FY13 and 9MFY14E, respectively. These trends are only going to get stronger as we expect mining volumes to register CAGR of 26.5% over FY13-16E as mining segment volumes are expected to reach a level of ~149000 tonnes by FY16E. Similarly, volume composition is expected to get massively skewed in favour of the mining segment as we expect the share at 55%, 59%, 63% at the end of FY14E, FY15E, FY16E, respectively.

Exhibit 25: Mining segment volumes to continue inching up in absolute and relative terms …

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Exhibit 26: Share of mining segment in overall volumes

35.845.1 45.7

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c) Scalable penetration and price revisions lead to margin uptick: While penetrating the mining segment over FY10-13, AIA faced margin headwinds given the nature of sticky clients. Therefore, the company had to offer discounts on its products to win clients in the segment. Once entry is established, the same level of pricing continues through the initial trial phase of 9-12 months. However, this does not ensure client win, which can further create headwinds for margins. Consequently, AIA’s margins peaked in Q1FY10 at 26% and made a low of 17.7% over FY13 to make a mark in the mining space. However, with the mining segment gaining traction and AIA getting a stronghold with its clients, EBIDTA margins have hit a trough and started making a comeback in FY14 as margins have averaged over 22.3% over 9MFY14. Even AIA’s management has indicated normalised margins of 22-23% in the long run. This is despite the fact that the share of mining volume is expected to inch up to 63% in FY16E from 18% in FY10. This clearly shows that AIA has gained scale in the mining segment and a stronghold with its mining clients. This will help it to achieve strong overall volume CAGR of 13.6% over FY13-16E. Exhibit 27: Realisation of AIA vs. Magotteaux

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A IA E ngineering Magotteaux*



Exhibit 28: Quarterly margin trends strong indicator of mining segment penetration strategy of AIA over FY10-13

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Exhibit 29: Margins to stabilise at 22-23% even though mining share to rise to 63% by FY16E

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Min ing segment vo lume sha re E B IT D A Margins (R H S )



Key Financials Revenues to witness ~17% CAGR on 13.6% volume CAGR over FY13-16E On the back of robust volume CAGR of 13.6% driven mainly by the mining segment, we expect AIA to post revenue CAGR of ~17% over FY13-16E. Hence, revenues are expected to reach | 2774 crore in FY16E from | 1751 crore in FY13. In 9MFY14, AIA reached a turnover of | 1503 crore, implying growth of 16% YoY. In terms of segmental volume growth, the mining segment is expected to lead the pack as it is expected to witness 26.5% volume CAGR over FY13-16E as cement and utilities segments are expected to post moderate CAGR of -1.3% and 5.6%, respectively, over the same period.

Exhibit 30: Revenues to grow at CAGR of ~17% over FY13-16E

9731172

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Exhibit 31: Mining segment to drive growth, going ahead…

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We do like the quality of revenue growth that AIA has posted historically and also that it is likely to register, going ahead. In any given fiscal, revenue growth is mainly explained by volume growth rather than realisation growth. On an average, over FY10-13, ~78% of the revenue growth is explained by volume growth. Even going ahead, over FY14E-16E, our expectation is that ~82% of the revenue growth will be volume driven as compared to realisation growth.

The revenue is expected to grow at a CAGR of ~17% during FY13-16E. This will be mainly led by 13.6% CAGR in volumes over the same period.

Exhibit 32: Revenue growth mainly led by volume growth

20.4 20.923.6

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G rowth in S a les G rowth in volum es sold G rowth in rea lisa tions



As mentioned above, our forecasts assume almost negligible realisations growth, which ranges between -0.6% and 0.6% over FY15E-16E. However, realisations have less scope to improve from the 9MFY14 average of ~| 116000/tonne as it already factors in a steep depreciation of exchange rate and upward adjustments of realisations in the mining segment in FY14E. Hence, going ahead, we have built in a realisation of | 115000-116000/tonne over FY15E-16E.

Exhibit 33: Trend in realisations

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Margin recovery commences in FY14E; likely to stabilise in 22-23% range We believe most of the margin pressure is a thing of the past and AIA would be able to claw back to its previous margin range of 22-23%. In order to make inroads into the mining segment, AIA had to take price cuts in order to win clients. The same was reflected in EBITDA margins, which fell from 23% in FY10 to 17.7% in FY13. However, given the successful entry of AIA in the mining segment, margins have started clawing back to historical levels of over 20%. The same is reiterated by the fact that 9MFY14 EBITDA margins of AIA have been at 22.3%. Going ahead, we expect margins to improve 450 bps YoY with improvement in margins in FY14E at 22.2%. The same is expected to be contained in the 22-23% range over FY15E-16E. This is despite the fact share of mining volumes is expected to rise to 63% by FY16E. Exhibit 34: Exiting lower margin projects to help drive margins

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We expect operating margins to improve from 17.7% in FY13 to 22.2% in FY14E. The same consistency is expected to be maintained over FY15E-16E between 22% and 23% even though AIA will pierce into the mining segment


However, a depreciating rupee has been another positive for margin improvement for AIA, given that over 60% of sales (FY10-FY13) of AIA come from export market. However, this positive impact is limited to a certain extent as AIA follows a three month hedging policy for its receivables. Going ahead, over FY10-13, we believe the export share should rise over 75% given the incremental mining volumes will come from international geographies. Exhibit 35: Export sales as percentage of overall sales

57 53.6 52.8 58.0 60.6

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In terms of raw materials, AIA’s products mainly use scarp steel (70-80% composition) and ferro chrome (20-30% composition) as its key raw materials. Over the past few years, prices of raw materials have been stable. Going ahead, given the global trends, we expect raw materials to be in a comfortable range from a cost perspective. Hence, we expect the raw material to sales ratio to hover in the range of 35-36% over FY13-16E.

Exhibit 36: RM as percentage of sales

05

101520253035404550


(%)


Exhibit 37: Trend in raw material prices

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Volume traction & margin restoration to drive PAT at 21% CAGR over FY13-16E We expect AIA’s profitability to witness strong trends on the back of robust 13.6% volume CAGR and return to historical margin level of 21-22% over FY13-16E. Hence, PAT is expected to grow at a CAGR of ~21% over FY13-16E to | 372 crore vs. | 211 crore in FY13.

Exhibit 38: Net profit to grow at ~21% CAGR in FY13-16E

164.5183.2 179.7

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Minuscule leverage, strong CFO to ensure smooth capex execution The greenfield capex of 180,000 tonnes involves an expenditure of | 650 crore, which will be executed across FY15E-16E. AIA expects to fund the capex by internal accruals and debt. The company expects to raise debt in the range of | 300-350 crore while the rest will be funded by internal accruals. We believe the mode of capex commitment will not create any kind of pressure on AIA’s balance sheet as the company currently has a cash balance of | 580 crore and debt of | 130 crore. The current debt/equity ratio at the end of FY14E will be at 0.1x and remain at the same levels even after assuming incremental debt of | 300-350 crore by FY16E. Our forecasting assumes peak debt of | 350 crore by FY16E end. Historically, AIA has been able to generate cash flows from operations (CFO) in the range of | 100 crore over FY10-13. With an improvement in volume growth in FY15 and resurrection of EBITDA margins in the range of 22-23% over FY14E-16E, we expect AIA’s CFO to average at | 230 crore over FY13E-FY16E.

We expect net profit to grow at a CAGR of 20.8% in FY13-16E. Profits are expected to go up from | 211 crore in FY13 to | 372 crore in FY16E

Exhibit 39: Strong balance sheet as leverage at 0.1x is negligible

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Exhibit 40: Generates strong cash flow from operations

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Strong performance to lead to RoE improvement to 17-18% by FY14E-16E

AIA’s RoEs had hit a low of 14.5-14.8% over FY12-13 given margins have taken a hit in those fiscal owing to its penetrating strategy in the mining segment coupled with strong cash reserves sitting on the balance sheet. However, as the financial performance is getting back to a strong growth path from FY14 onwards, we expect AIA to report RoEs of ~17-18% over FY14E-16E.

Exhibit 41: Strong return ratio on the back of sustained earning growth

20.818.0 17.2

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Exhibit 42: AIA’s balance sheet possesses high cash and liquid investments

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A strong operational recovery will lead to a massive improvement in RoEs from 14.8% in FY13 to 17% in FY16E

Rectangle


Risk & concerns Delay in shift of HCMI in mining sector

Globally, mill internals demand of the mining sector is provided through conventional media, which is cheaper than HCMI. Although the potential savings from using HCMI ranges between 35% and 40% due to less wear and tear, players in the mining sector may delay full adoption of HCMI. This delay can adversely impact volume growth for AIA and, hence, profitability. Also, if SAG mills or other grinding media gain acceptance in smaller-size grinding applications, this would lead to lower penetration of HCMI. We have run a sensitivity analysis to asses the impact of deviation from base volume assumptions on the overall profitability for AIA in FY15E. We estimate that if AIA overshoots the base case volume target of 15% by 100 bps and 200 bps, the EPS would then get positively impacted by 1.2% and 2.1%, respectively. On the contrary, if volumes miss the base case scenario by 100 bps and 200 bps, the similar negative impact on the EPS would be to the tune of 0.9% and 2.1%, respectively.

Exhibit 43: Sensitivity volume growth on EPS of FY15E

V olum e

(200 bps) (100 bps) Base C ase 100 bps 200bps

E P S (|/share) 33.4 33.8 34.1 34.5 34.8

C hange in E P S (% ) -2.1 -0.9 0.0 1.2 2.1

P AT (| crore) 38.6 39.1 39.4 39.9 40.2

F Y 15E


Currency volatility may impact earnings consistency

AIA’s revenues are highly influenced by volatility in the exchange rate as ~60% of revenues are from the international market, which we believe will be over 75% by FY16E. A significant appreciation/depreciation of the rupee vis-à-vis currencies of countries where AIA does business can have a significant bearing on revenues and profitability. However, as a risk mitigation measure, AIA does follow a hedging policy of covering its three month receivables.

Litigation can have adverse impact on profitability of company

Recently, AIA ended litigation on an out-of-court settlement basis with Magotteaux. The litigation referred to a lawsuit filed in the US court by Magotteaux referring to infringement of a patented product by AIA. The out of court settlement led to an outflow of ~| 31 crore from AIA towards settlement charges and impacted profitability of Q3F14. Hence, if suck kind of litigation happens then AIA’s profitability will be hampered.


Volatility in key input prices may impact margins and earnings

Scrap steel and ferro chrome are two key major raw materials. Even though AIA mostly sources raw material from domestic players, the pricing is based on global benchmarks. Hence, any distortion in raw material costs can have a significant bearing on the EBITDA margins and profitability. We have run a sensitivity analysis to asses the impact of RM cost to sales ratio on margins and EPS for AIA in FY15E. We estimate that if AIA’s RM to sales ratio overshoots the base case assumption by 100 bps, 200 bps, EPS would then get negatively impacted by 5%, 10%, respectively. On the contrary, if the RM to sales ratio is lower by 100 bps, 200 bps for FY15E, EPS would be positively impacted by 5%, 10%, respectively.

Exhibit 44: Sensitivity of RM to sales ratio on EPS of FY15E R M to S a les R atio

(200 bps) (100 bps) Base C ase 100 bps 200bps

E B IT D A Margin (% ) 24.7 23.7 22.7 21.7 20.7

E P S (|/share) 37.5 35.8 34.1 32.4 30.7

C hange in E P S (% ) 10.0 5.0 0.0 -5.0 -10.0

E B IT D A (|crore) 667.4 640.4 625.8 586.3 559.3

P AT (| crore) 43.4 41.4 39.4 37.5 35.5

F Y 15E



Valuation AIA making strong inroads into the mining segment, as witnessed from the 4x ramp up in mining volumes over FY10-13 and chalking out aggressive capex plans to become the No. 1 player in the global HCMI industry, will drive revenue CAGR of ~17% over FY13-16E. Revenue growth will be driven mainly by volumes, which are expected to witness a CAGR of 13.6% over the same period. Coupled with this, operating leverage will also aid margins as a hike in realisation in the mining segment will help AIA get back to its normalised EBITDA margin range of 22-23% over FY14E-16E. This is despite the fact that AIA will further acquire new clients in the mining segment, which are initially margin dilutive in nature. Strong volume growth and recovery of margins are expected to drive a strong 21% PAT CAGR for AIA over FY13-16E in an environment wherein engineering companies are facing massive visibility challenges.

Given the asset light balance sheet, manageable capex levels (under | 650 crore in FY14-15E), which is largely funded by internal accruals/some debt and strong cash flow generation (CFO averages at | 230 crore over FY13-16E), we use P/E multiples for fair valuation of stock price.

In order to derive the target multiple, we have divided the trading history (one year forward P/E multiple) into three phases and study various variables that drive earnings and, hence, investment multiples ascribed to AIA.

Phase 1: (FY07-09) cement segment was the bread and butter

Over this phase, most of AIA’s revenues came from the cement segment as AIA commanded 90% and 25% market share in domestic and international markets, respectively. Working on a low base, revenue exhibited strong CAGR of ~40% while capacity grew at a CAGR of 59%. On the profitability front, average EBITDA margins stood at 25% while PAT CAGR stood at 35%. In terms of P/E multiple, AIA traded at average one year forward P/E multiple of 17.3x. However, upward re-rating of the same was limited as cement segment was mostly penetrated with HCMI both globally and domestically. Hence, question of scalability restricted upward rerating of investment multiples. Going ahead, the key question was that of scalability. Hence, from FY10 AIA forayed into mining in order to gain scale.

Phase 2: (FY10-FY12) In search of foothold in mining segment

Going ahead, the key question was that of scalability. Hence, from FY10, AIA entered the mining segment to grow and eliminate the concentration risk of being exposed to cement segment. Mining segment volumes in FY10 stood at 18540 tonnes. Over the period, AIA did penetrate the mining segment as by FY12 end mining segment volume stood at 64,000 tonnes or 42% of the volume share of AIA. Hence, AIA’s volume CAGR stood at 17% while capacity CAGR was at 10%. However, while doing so, AIA’s margin profile weakened as average margins stood at 20% despite sales exhibiting strong CAGR of 21% over the same period. However, PAT CAGR was at a minuscule 4.5%. This led to scepticism on AIA’s ability to scale back to the historical profitability profile. Hence, P/E multiples on an average hovered at 15x on a one year forward basis below averages seen over FY07-09.

Phase 3: (FY13-16E) Eyeing No.1 position in HCMI industry by FY16E

After hitting a low of 17% on EBITDA margins in FY13, AIA made a strong comeback on every parameters during 9MFY14 as 1) volume growth in mining for 9MFY14 stood at 24% YoY to 69000 tonnes (already surpassed FY13 mining volumes of 64000 tonnes), 2) share of the mining segment is expected to scale up to 63% in FY16E from 54% in FY14E and 46% in FY13, 3) EBITDA margins have clawed back to 22.3% in 9MFY14. Going ahead, the management expects margins to be in the 22-23% range and 4) AIA has


charted out an aggressive capex plans to almost increase the capacity by 2.2x to 440000 tonnes by FY16E. This will take AIA to the No.1 position in the HCMI industry and the capex will be funded without having leverage on the balance sheet (D/E ratio is expected to be at 0.1x by FY16E).

Target multiple should be above historical mean:

Given that AIA is traversing Phase 3, which will help it to scale its volume trajectory globally coupled with a profitable growth profile (21% PAT CAGR over FY13-16E), we believe AIA will attract premium valuations relative to its historical averages. Hence, even assigning 10% premium to the average multiple of Phase 2 (i.e. 15x) will give us a target P/E multiple of 16.5x for AIA.

In terms of discounting, we would take average EPS of FY15E and FY16E so that EPS can capture both the consistency of margins in FY15E and commissioning of the new capacity in FY16E. Hence, our target price works out to | 617/share.

Exhibit 45: Trend in key performance parameters and consequent P/E multiples that AIA got…

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12FY-10FYParameters (%) Sales CAGR 21.1Average EBITDA margin 20.8PAT CAGR 4.5Volume CAGR 17.4Capacity CAGR 10.1Average 1 yr forward P/E(x) 15.0

E16FY-13FYParameters (%) Sales CAGR 17.9Average EBITDA margin 21.3PAT CAGR 20.8Volume CAGR 13.6Capacity CAGR 30.1

yr forward P/E(x) ???1 Average

09FY-07FYParameters (%) Sales CAGR 39.8Average EBITDA margin 25.2PAT CAGR 35Capacity CAGR 59.3Average 1 yr forward P/E(x) 17.3

Phase 1

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Source: Bloomberg, ICICIdirect.com Research

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Exhibit 46: Trend in one year forward EV/EBITDA band

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Exhibit 47: Trend in one year forward P/BV band

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Exhibit 48: I-Direct Estimates vs. Consensus

P aram eters C onsensus I-D irect D evia tion over consensus (% )R evenuesF Y 14E 2012.8 2014.4 0.1F Y 15E 2327.0 2320.4 -0.3F Y 16E 2816.0 2774.0 -1.5

E B IT D AF Y 14E 447.3 448.0 0.2F Y 15E 514.7 526.0 2.2F Y 16E 596.2 625.8 5.0

P ATF Y 14E 285.2 299.0 4.8F Y 15E 328.1 322.0 -1.9F Y 16E 398.1 372.0 -6.6



Relative valuations: AIA operates in an oligopoly industry wherein its closest competitor Magotteaux, a subsidiary of Chilean conglomerate, Sidgo Koppers. Hence, we do not have a comparative analysis of valuations with Magotteaux as it is an unlisted company, thereby restricting alternative comparative metrics.

In such an instance, as an alternative, we have selected a set of companies that are present in the industrial products space and are leaders in their respective set of categories. The set of companies include Cummins India (leading engine manufacturer), SKF India (leading MNC in the ball bearing segment), Thermax (leader in heating & cooling solutions and CPP segment) and VA Tech Wabag (EPC solutions provider in the water segment). All these companies also boast a strong margin and cash flow profile with minimum leverage on their balance sheets.

Hence, we have compared AIA with these sets of companies across all business variables (revenue, EBITDA and PAT growth) and also on various valuations parameters (RoE, P/E, P/BV and EV/EBITDA). The conclusion that we draw is AIA stands tall across all parameters vis-à-vis the competitors average (refer the below exhibits).

Exhibit 49: Growth profile of AIA vs. peers

F Y 13 F Y 14E F Y 15E F Y 16E F Y 13 F Y 14E F Y 15E F Y 16E F Y 13 F Y 14E F Y 15E F Y 16EC um m ins 11.3 -10.0 10.2 13.8 19.1 -18.4 11.1 16.8 29.3 -21.0 9.2 12.6S K F India -8.8 1.5 11.1 8.7 -14.2 -7.6 18.1 10.7 -8.8 -8.2 21.9 9.0T herm ax -11.6 -3.0 25.9 9.2 -14.9 -11.3 23.3 28.1 -4.2 -18.9 29.9 8.2V A T ech Wabag 11.4 26.2 19.7 25.4 17.2 18.2 26.3 21.5 22.5 17.8 26.0 21.5Average 0.6 3.7 16.7 14.3 1.8 -4.8 19.7 19.3 9.7 -7.6 21.7 12.8AIA E ngineering 23.6 15.0 15.2 19.6 13.8 44.4 17.4 19.0 17.3 41.8 7.7 15.5

R evenue G rowth (% ) E B IT D A G rowth (% ) P AT G rowth (% )


Exhibit 50: Profitability profile of AIA vis-à-vis peers

F Y 13 F Y 14E F Y 15E F Y 16E F Y 13 F Y 14E F Y 15E F Y 16E F Y 13 F Y 14E F Y 15E F Y 16EC um m ins 18.5 16.7 16.9 17.3 34.5 24.2 23.8 24.5 16.9 14.9 14.7 14.5S K F India 12.3 11.2 11.9 12.1 17.5 14.7 15.3 15.5 8.6 7.9 8.6 8.6T herm ax 10.6 9.7 9.5 11.1 20.6 15.0 17.0 18.2 8.3 7.0 7.2 7.1V A T ech Wabag 10.0 9.1 9.6 9.3 13.3 14.0 15.7 16.4 5.6 5.3 5.5 5.4Average 12.8 11.7 11.9 12.5 21.5 17.0 18.0 18.6 9.9 8.7 9.0 8.9AIA E ngineering 17.7 22.2 22.7 22.6 14.8 18.0 16.8 16.9 12.0 14.8 13.9 13.4

E B IT D A Margin(% ) R O E (% ) P AT Margin (% )


Exhibit 51: Valuation metrics of AIA vis-à-vis peers

F Y 14E F Y 15E F Y 16E F Y 14E F Y 15E F Y 16E F Y 14E F Y 15E F Y 16EC umm ins 20.0 18.3 16.3 4.6 4.2 3.9 16.6 14.9 12.8S K F India 18.7 16.1 14.5 2.7 2.4 2.1 12.7 10.7 9.7T herm ax 23.5 18.1 16.8 3.9 3.5 2.6 15.6 12.9 9.8V A T ech Wabag 15.3 12.1 10.2 2.0 1.8 1.6 8.7 6.9 5.7Average 19.4 16.2 14.5 3.3 3.0 2.5 13.4 11.4 9.5AIA E ngineering 17.3 16.1 13.9 3.1 2.7 2.4 10.9 9.5 8.0

E V /E B IT D A (1 yr forward)P /E (1 yr forward) P /B (1 yr forward)


700045

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Key Financials Exhibit 52: Income statement

(| C rore)(Y ear-end March) F Y 12 F Y 13 F Y 14E F Y 15E F Y 16ET ota l opera ting Incom e 1,416.7 1,751.3 2,014.4 2,320.4 2,774.0G rowth (% ) 24.6 23.6 15.0 15.2 19.6R aw Materia l E xpenses 656.5 663.6 734.6 800.3 963.7E m ployee E xpenses 64.2 80.9 98.7 111.5 130.4O ther expenses 423.4 696.6 733.1 882.6 1,054.1T ota l O pera ting E xpenditure 1,144.1 1,441.1 1,566.4 1,794.4 2,148.2E B IT D A 272.6 310.2 448.0 526.0 625.8G rowth (% ) 21.2 13.8 44.4 17.4 19.0D eprecia tion 29.4 34.5 43.4 61.2 82.3Interest 4.4 5.5 8.6 21.1 31.4O ther Incom e 13.3 21.3 26.6 37.9 44.0P BT 252.0 291.6 422.6 481.6 556.1O thers -1.0 0.0 0.0 0.0 0.0T ota l T ax 71.5 80.0 123.6 159.6 184.1P AT 179.7 210.8 299.0 322.0 372.0G rowth (% ) -1.9 17.3 41.8 7.7 15.5E P S (|) 19.1 22.4 31.7 34.1 39.4


Exhibit 53: Balance Sheet (| C rore)

(Y ear-end March) F Y 12 F Y 13 F Y 14E F Y 15E F Y 16EL iabilitiesE quity C apita l 18.9 18.9 18.9 18.9 18.9R eserve and S urplus 1,219.6 1,402.7 1,638.7 1,892.9 2,186.6T ota l S hareholders funds 1,238.4 1,421.5 1,657.6 1,911.8 2,205.4T ota l D ebt 50.1 160.9 180.9 280.9 330.9D eferred T ax L iability 19.3 21.0 21.0 21.0 21.0Minority Inte rest / O thers -1.0 0.0 0.0 0.0 0.0T ota l L iabilities 1,345.6 1,662.6 1,948.7 2,332.9 2,706.5

AssetsG ross B lock 495.0 547.5 736.0 1,023.0 1,313.6L ess: Acc D eprecia tion 137.5 169.9 212.5 272.9 354.3Net B lock 357.5 377.6 523.4 750.1 959.3C apita l WIP 18.1 31.6 31.6 31.6 31.6T ota l F ixed Assets 375.5 409.1 555.0 781.7 990.9Investm ents 0.5 9.0 9.0 9.0 9.0Inventory 301.1 403.0 406.6 530.5 594.7D ebtors 377.4 342.2 426.1 493.2 592.2L oans and Advances 143.8 215.1 251.5 288.6 305.8O ther C urrent Assets 3.4 0.8 2.7 1.4 3.5C ash 134.5 261.7 263.4 181.2 167.4T ota l C urrent Assets 960.2 1,222.8 1,350.3 1,494.9 1,663.7C reditors 98.6 112.6 127.8 148.0 177.7P rovisions 54.6 80.9 102.3 118.4 142.1T ota l C urrent L iabilities 153.3 193.6 230.1 266.3 319.8Net C urrent Assets 806.9 1,029.2 1,120.2 1,228.5 1,343.9O thers Assets -1.0 0.0 0.0 0.0 0.0Applica tion of F unds 1,343.0 1,658.5 1,944.6 2,328.8 2,702.4



Exhibit 54: Cash flow statement

(| C rore)(Y ear-end March) F Y 12 F Y 13 F Y 14E F Y 15E F Y 16EP rofit a fte r T ax 179.7 210.8 299.0 322.0 372.0Add: D eprecia tion 29.4 34.5 43.4 61.2 82.3(Inc)/dec in C urrent Assets -134.2 -135.3 -125.8 -226.8 -182.5Inc/(dec) in C L and P rovisions -24.2 40.3 36.5 36.3 53.5O thers 2.3 3.3 3.0 5.0 5.0C F from opera ting activities 50.8 150.3 253.1 192.6 325.2(Inc)/dec in Investm ents -0.5 -8.6 0.0 0.0 0.0(Inc)/dec in F ixed Assets -106.1 -68.5 -188.5 -287.0 -290.6O thers -1.0 0.0 0.0 0.0 0.0C F from investing activities -83.9 -104.6 -208.5 -307.0 -310.6Issue/(Buy back) of E quity 0.0 0.0 0.0 0.0 0.0Inc/(dec) in loan funds 29.0 110.8 20.0 100.0 50.0D ividend pa id & dividend tax -33.2 -44.5 -63.0 -67.8 -78.3Inc/(dec) in S ec. prem ium 0.0 0.0 0.0 0.0 0.0O thers -1.0 0.0 7.6 0.0 0.0C F from financing activities 21.4 81.6 -43.0 32.2 -28.3Net C ash flow -11.7 127.2 1.7 -82.2 -13.7O pening C ash 146.2 134.5 261.7 263.4 181.2C losing C ash 134.5 261.7 263.4 181.2 167.4


Exhibit 55: Ratio analysis

(Y ear-end March) F Y 12 F Y 13 F Y 14E F Y 15E F Y 16EP er share data (|)E P S 19.1 22.4 31.7 34.1 39.4C ash E P S 22.2 26.0 36.3 40.6 48.2BV 131.3 150.7 175.7 202.7 233.8D P S 3.0 4.0 5.7 6.1 7.1C ash P er S hare 14.3 27.7 27.9 19.2 17.8O perating R atios (% )E B IT D A Margin 19.2 17.7 22.2 22.7 22.6P BT / T ota l O pera ting incom e 18.6 17.3 21.7 21.4 20.6P AT Margin 12.7 12.0 14.8 13.9 13.4Inventory days 72.6 76.1 76.0 76.0 76.0D ebtor days 101.9 74.0 80.0 80.0 80.0C reditor days 26.6 24.4 24.0 24.0 24.0R eturn R atios (% )R oE 14.5 14.8 18.0 16.8 16.9R oC E 18.8 17.3 21.9 21.1 21.4R oIC 14.4 14.4 17.1 14.5 14.4V a luation R atios (x)P /E 28.9 24.6 17.3 16.1 13.9E V / E B IT D A 18.2 15.8 10.9 9.5 8.0E V / Net S a les 3.7 2.9 2.5 2.2 1.9Market C ap / S a les 3.8 3.1 2.7 2.3 1.9P rice to Book V a lue 4.2 3.6 3.1 2.7 2.4S olvency R atiosD ebt/E B IT D A 0.2 0.5 0.4 0.5 0.5D ebt / E quity 0.0 0.1 0.1 0.1 0.2C urrent R atio 6.3 6.3 5.9 5.6 5.2Q uick R atio 5.4 5.0 4.7 4.9 4.7



Appendix AIA Engineering is India’s leading manufacturer and supplier of HMCI that are used for grinding clinker (in cement plants), coal (in thermal power plant) and mineral ores (in mining plants). The grinding process is conducted through two types of mills – tube mills (or horizontal mills) and vertical mills. AIA also provides process improvement services such as mill audit, designing, alloy selection, supervision during installation of wear parts and optimisation of the grinding system.

Tube mill operation

During the rotation of the mill, the grinding media are lifted and made to fall on the feed thereby, grinding the feed. Since the grinding media are hard, repeated operation has the potential to damage the shell of the mill. In order to protect the shell, liners are used. Liners are also utilised for aiding and controlling the lifting action of grinding media. The mill is divided into two chambers while the two chambers are separated by diaphragms, grates and back plates. Diaphragms, grates and back plates are used to screen the feed with predetermined size that are allowed to enter the second chamber.

The primary mill internals manufactured for tube mills are:

• Grinding media

• Diaphragms

• Head liners

• Shell liners

Exhibit 56: Tube mill


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Exhibit 57: Tube mill parts – diaphragm


Vertical mill operation In vertical mill operations, feed materials are made to pass between rotating table liners where the grinding take place. These mill internals are subject to wear and tear, which results in less efficiency during grinding operations and consequently, less output. The mill internals manufactured for vertical mills are:

• Rollers and table liners

• Crusher parts

• Heat resistant castings such as dipping parts

Exhibit 55:Tube mill parts - grinding media


Exhibit 56: Tube mill parts - liners



Heat resistant castings Exhibit 62: Heat resistant castings – dipping tubes


Exhibit 58: Vertical mill parts - rollers


Exhibit 59: Vertical table parts – table liners


Exhibit 60: Vertical mill parts – blow bars


Exhibit 61:Vertical mill parts – hammers


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RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: > 10%/ 15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai – 400 093

[email protected]

ANALYST CERTIFICATION We /I Chirag J Shah PGDBM research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

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rating : buy 617 eyeing no.1...

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