1. AIA Engineering Ltd (NSE Code: AIAENG) – Alpha/Alpha + stock
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recommendation for Apr’14

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Content Index
1. Company Snapshot
2. AIA Engineering – Basic details
3. HCMI – Industry overview and AIA’s positioning
 Grinding media classification
 HCMI Industry – Oligopolistic
 HCMI demand dynamics
 AIA’s mining foray
 AIA’s cost advantage over Magotteaux
 AIA’s capacity expansion plans
4. AIA Engineering – Performance snapshot
5. Shareholding Pattern
6. Dividend Policy
7. Valuations
8. Risks & Concerns

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Company Snapshot (As on 10th Apr’14)
Current Market Price – Rs 560.10 Dividend yield – 0.71%
BSE Code – 532683 NSE Code – AIAENG
Market capitalization – Rs 5,280 cr. Total Equity shares – 9.43 cr.
Face Value – Rs 2.00 52 Weeks High/Low – Rs 586.40/Rs 275.00
Particulars (in cr.) FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 TTM
Income from operations 711.91 1033.67 966.77 1160.66 1416.67 1751.31 1960.90
Gross Profit 386.66 539.00 520.24 674.72 874.24 1097.01 1233.84
Gross Profit margin (%) 54.34% 52.14% 53.81% 58.13% 61.71% 62.64% 62.92%
Operating Profit 184.57 257.10 245.94 249.21 273.30 310.24 428.87
Operating Profit margin (%) 25.93% 24.87% 25.44% 21.47% 19.29% 17.71% 21.87%
Other Income 10.92 11.46 15.17 24.72 13.27 21.32 27.19
Depreciation -13.58 -20.25 -22.71 -25.40 -29.44 -34.48 -36.11
EBIT 181.91 248.31 238.40 248.53 257.13 297.08 419.95
EBIT Margin (%) 25.17% 23.76% 24.28% 20.97% 17.98% 16.76% 21.12%
Interest cost -1.68 -2.07 -1.40 -2.02 -4.39 -5.50 -5.54
Profit Before tax 180.23 246.24 237.00 246.51 252.74 291.58 414.41
Profit before tax margin (%) 24.93% 23.56% 24.14% 20.80% 17.67% 16.45% 20.84%
Net Profit 133.27 173.60 170.74 183.39 180.46 210.82 300.45
Cash flows from operations 22.80 194.98 130.31 34.92 93.66 162.25
Return on Avg. equity 24.20% 25.12% 20.40% 18.77% 15.78% 15.89% 19.91%

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AIA Engineering Ltd – Basic details
AIA Engineering was incorporated in 1978 as Ahmedabad Induction Alloys Pvt. Ltd. In
1992 AIA Magotteaux Pvt. Ltd was formed as JV between Magotteaux (world’s largest
player in high chrome mill internals (HCMI)) and AIA. In 2001 the JV ended and the
company got renamed as AIA Engineering Ltd as AIA’s promoters bought the
Magotteaux’s stake.
AIA is now the second largest high chrome mill internals producer in the world. It
manufactures grinding media, liners and diaphragms which are collectively known as
Mill Internals. These are used in crushing and grinding operations in cement, power
utility, and mining industries.
HCMIs for grinding and crushing equipment
The company caters to HCMI demand of original equipment manufacturers (OEMs) and
replacement market with the replacement market accounting for more than 70% of the
sales volume in the cement sector.
Technical Expertise – HCMI is a niche industry with very few players and AIA’s Joint
venture with Magotteaux enabled it to gain technical expertise in high chrome metallurgy.
AIA also entered into a technical collaboration with Southwestern Corporation for process
improvement and with Alstom for process know of high end mills for power plants.
Further, consistent focus on research & development has made AIA the second largest

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player in the highly technical and niche segment of HCMI.
International presence – Besides selling in India, the company supplies mill internals in
the international markets through its wholly-owned marketing subsidiary, Vega
Industries Ltd which has direct sales offices in different parts of the world.
AIA Engineering
Indian subsidiaries International Subsidiaries
Welcast Steels – AIA holds 74.84% stake Vega Industries (Middle East) F. Z. E. – engaged in
sales to Asia (ex-India), Africa (ex-South Africa) and
South America
DCPL Foundries – 100% subsidiary of AIA Vega Industries UK – engaged in sales in European
region
Vega Industries USA – engaged in sales in North
America and parts of Central America
Vega Industries RSA – engaged in sales in South
Africa
Vega Industries China – engaged in sales in China
Over the last few years the company has made significant inroads into the international
markets. During the last 4 years, revenue contribution from International markets
increased at 36% CAGR to Rs 1160.36 cr in FY 13 from Rs 521.02 cr in FY 10. In FY 13, 31%
of AIA’s revenue came from India, while balance 69% came from International markets.

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HCMI – Industry overview and AIA’s positioning
Grinding media – Grinding media industry can be classified into Conventional forged
mill internals and High Chrome mill internals.
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 global consumption of grinding media is ~3 MTPA (million tonnes per
annum) driven by the mining sector (annual requirement of ~2.5 MTPA) while that of the
cement segment is 0.3-0.35 MTPA.
Conventional forged media is mainly used in mining industry while cement and thermal
power units are largely dependent on HCMI. However, even in mining industry, HCMI is
fast becoming popular over conventional forged media as HCMI offers reduced wear rate,
better productivity, energy saving and better control on grinding process.
Grinding
Media
Conventional
Forged Media
High Chrome
Mill internals
Application – Mainly used for
mining applications like
extraction of ores from minerals
Application – Largely used in
Cement, thermal power units and
mining
Overall, HCMI costs 20% more than the conventional media but it generates gross savings
in the cost of mill internals to the extent of 50% on less wear of media, and higher
productivity.

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HCMI Industry – Oligopolistic
HCMI Industry can be characterized by technical expertise, limited competition and
customer stickiness and these are all important characteristics from investment
viewpoint.
Technical knowledge is critical and also acts as an entry barrier as industry players require
high expertise in metallurgy, grinding application and process technology. In the past,
steel players like Electrosteel tried to enter the industry but failed. Similarly, players like
L&T and ACC tried to backward integrate by setting up HCMI facility but were not
successful.
Secondly, though mill internals account for only 1-2% of the total production cost in
cement and around 5-10% in mining, they are highly critical to the overall production
process and their failure or inefficiency can result in loss of production for the company.
Thus, customer stickiness is very high in the industry and HCMI manufacturer
empanelment is a long-drawn process. Also, customers look for end-to-end solutions and
complete product range from HCMI manufacturers which is generally not possible in case
of small scale manufacturers.
Thus, above are the key factors behind there being practically only two key players in the
HCMI industry, AIA and Magotteaux. AIA together with Magotteaux, world’s largest
HCMI player cater to around 80% of global (ex-China) market. In India, AIA is the largest
HCMI manufacturer with ~90% market share in cement sector and ~70% in thermal
utilities sector.
The approximate capacity of key HCMI players at the end of Mar’14 is as below:
HCMI manufacturing capacity
Company Capacity (TPA)
Magotteaux 350,000
AIA 260,000
Anhui 12,000
Estanda 8,000
Christian Pfeiffer 7,000

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HCMI Demand dynamics
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 need to be
replaced every 30 days. The remaining demand comes from other mill internals such as
liners and diaphragms that need to be replaced every 2-3 years.
It is important to note here that replacement demand is very important as it ensures
steady revenue stream for HCMI manufacturers such as AIA, even when there’s
slowdown in new capacity addition in end user industries such as cement, mining, etc.
OEM demand comes from sales made directly to the customer when a new plant is set up
and the whole set of internals is required to be fitted in the mill.
HCMI Demand
Source Cement Industry Utilities
OEM Grinding media – 300
tonnes/1MTPA of new capacity
Other Internals – 100
tonnes/1MTPA of new capacity
Grinding media and other
internals – 2-3 tonnes/MW
Replacement Grinding media – 75 tonnes/1 MT
of cement produced
Other Internals – 23 tonnes/1 MT
of cement produced
Grinding media and other
internals – 30 grams/MWH
Annual global consumption – As far as current global consumption of HCMI is
concerned, it’s ~600,000 tonnes per annum (TPA) with almost equal off-take from cement
and mining industries. HCMI has already penetrated almost 85% of the requirement of
cement industry and the next leg of growth for HCMI players is expected from mining
industry.

9. Mining industry is the largest consumer of mill internals at ~2.5 MTPA, however HCMI
accounts for only 12% of the mill internals requirement and the rest is accounted for by
conventional forged media. As per the details shared by AIA, at least 1.5 MTPA mining
segment volumes for mill internals can be converted from conventional forged media into
HCMI. This conversion is expected on the grounds of cost savings achieved (~30-40%)
through lower wear rate, increased productivity & lower power consumption over
conventional media.
As per various reports, efficiency of HCMI over conventional forged media has been
already established in the Iron ore Pelletizing process. HCMI is most suited for Ball Mill
grinding in Pelletization process given its less wear characteristics, specific fine output
requirement and higher productivity.
Further, growing demand for copper and gold coupled with declining ore head grades is
expected to result in increased ore milled, which in turn will lead to higher demand for
mill internals.
Hence, in the coming years, growing demand and conversion from conventional media to
HCMI is likely to create an opportunity 4x that of current HCMI consumption of 300,000
TPA in mining.
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AIA’s mining foray
Till FY 10, Cement contributed to more than 80% of the sales volume of AIA. However,
with HCMI having already penetrated more than 85% of the mill internals requirement of
Cement and with slow capacity addition in Cement space, AIA started focusing on the
conversion opportunity in the mining segment.
In FY 10, mining industry’s contribution to sales volume of AIA was only 18% with 18,540
tonnes; however the same witnessed strong growth on small base and the contribution
stands increased to 46% with ~75,000 tonnes at the end of FY 13.

10. HCMI’s capital cost is ~20% higher than conventional media but the benefits from its
usage accrue at a later stage in the form of higher extraction of metal and lower wear and
tear. Thus, initially it was difficult to convince mining clients to switch to HCMI from
conventional forged media and in order to penetrate the market and establish its name in
mining industry AIA had to resort to pricing cuts.
Pricing cut strategy did impact the margins of the company in the interim; however it also
allowed the company to gain access to some of the largest miners like Rio Tinto, BHP
Billiton, Vale, etc. AIA now offers services for different mineral ores such as iron, copper,
gold, platinum and zinc for its client base in geographies such as USA, Canada, Brazil,
South Africa, Australia, etc., and a considerable portion of AIA’s growth in past several
quarters is on account of its ability to get bulk orders from mining segment.
Also, having established a good name in the industry, the management expects
resurrection of operating margins as already evident in 9M FY 14 results of the company.
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AIA’s cost advantage over Magotteaux
As discussed above, mining industry is witnessing conversion from conventional media to
HCMI and since mining industry’s requirements are large, they prefer large suppliers that
can provide end-to-end solutions.

11. In HCMI industry, only AIA and Magotteaux are the two big players and amongst the
two, we believe AIA is likely to be a key beneficiary of the above discussed conversion on
account of its low cost advantage over Magotteaux and planned capacity expansions.
Due to significant cost advantage of India over European countries, AIA is able to offer the
same services and products at 15-20% cheaper rates than Magotteaux. AIA’s management
continues to prefer expanding capacity in India (near the existing facility) to keep
operating cost under control while Magotteaux has relatively higher employee and
overhead costs due to the presence of its manufacturing facilities across different countries
(especially developed countries).
Further, easy availability of technically qualified manpower in India places the company
in a sweet spot. Thus, we expect AIA to gain market share as it offers customized solutions
of quality at par with Magotteaux but at a lower cost.
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AIA’s capacity expansion plans
At the end of FY 13 AIA’s production capacity was 200,000 tonnes and the same has now
been expanded to 260,000 tonnes through brownfield expansion.
The company is further planning to enhance this manufacturing capacity by setting up a
new facility with rated capacity of 180,000 tonnes. The first phase of this project of 100,000
tonnes is estimated to get commissioned by Mar’15 with the balance estimated to complete
by Oct’15.

12. The company has already acquired the land and has obtained necessary environmental
clearances and as per the management the CAPEX will be funded largely through internal
accruals.
Now, Magotteaux commands a capacity of 468,500 tonnes out of which HCMI capacity
stands at 350,000 tonnes. Thus, if executed on time, the current expansion of AIA will help
it dislodge Magotteaux as the leader in the HCMI industry, which will help it further in
pursuing business opportunity with large mining companies.
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AIA Engineering – Performance Snapshot
We already know that AIA serves industries such as cement, mining, power utilities, etc
and all these industries witnessed one of the worst slowdowns during the last few years,
however, despite the slowdown, AIA performed reasonably well on all the financial
parameters and also reported decent growth during the period.
The steady growth and strong financial performance of AIA can be attributed to the
oligopolistic nature of the industry, strong replacement demand and AIA’s foray into
mining industry.
While AIA’s mining foray allowed the company to overcome volume growth stagnation in
cement industry, as discussed above, the company had to resort to discounts to penetrate
the mining market and the same resulted in contraction in operating margins (24-25% to
18-19%) in the interim.

14. 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 22.40% for 9M FY 14. Even AIA’s management has indicated
normalized margins of 22-23% in the long run and this is despite the increasing share of
mining segment in the overall sales volume of the company.
It is important to note here that despite the recent improvement in realizations, AIA’s sale
prices are still 15-20% lower than that of Magotteaux and thus there’s scope for further
improvement. Or, the company can continue to keep the prices lower because of its cost
advantage and thereby gain market share from Magotteaux.
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15. As far as other financial parameters are concerned, AIA is a net interest earner, has
consistently reported positive cash flows from operations and has decent return ratios
(barring FY 12 and FY 13).
Overall, the financial performance is indicative of the high quality business of the
company.
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Shareholding pattern
Mar’14 Dec’13 Sep’13 Jun’13 Mar’13
Promoter and
Promoter Group
61.65% 61.65% 61.65% 61.65% 61.65%
India 61.65% 61.65% 61.65% 61.65% 61.65%
Foreign
Public 38.35% 38.35% 38.35% 38.35% 38.35%
Institutions 32.70% 32.22% 33.21% 33.20% 33.08%
FII 27.55% 26.63% 26.98% 26.82% 25.30%
DII 5.15% 5.59% 6.23% 6.38% 7.78%
Non-Institutions 5.65% 6.13% 5.14% 5.15% 5.27%
Bodies Corporate 2.64% 3.35% 3.61% 3.62% 3.63%
Custodians
Total 9,43,20,370 9,43,20,370 9,43,20,370 9,43,20,370 9,43,20,370
From a passive investor’s perspective it’s important for the ones running the company to
have high ownership as it aligns their interest in line with those of minority shareholders
and in the case of AIA Engineering the promoters own 61.65% equity stake.
Mr. Bhadresh K Shah is the Founder, Promoter and Managing Director of AIA
Engineering. He did his B. Tech in metallurgy from IIT Kanpur.
Mr. Shah has a career spanning over 28 years in the manufacture and design of various
kinds of value added, abrasion and corrosion resistant high chrome castings. He has been
instrumental in negotiating and developing several foreign collaborations and his
emphasis on manufacturing process improvements, new product development, quality

16. and adhering to international manufacturing standards has ensured that AIA’s products
are recognized domestically as well as internationally.
As on 31st Mar’14, the details of the major shareholders of the company and their stakes
are as below:
Name of the shareholder Category % stake in AIA Engineering
Bhadresh K Shah and PAC Promoter 61.65%
Nalanda India Equity Fund Public 8.40%
Small Cap World Fund Inc Public 4.98%
Genesis Indian Investment Public 4.04%
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Matthews India Fund Public 2.45%
HDFC Fund Public 2.24%
TATA AIA Life Insurance Public 1.14%
Burgundy Asset Management Public 1.13%
Pinebridge Investments Asia Public 1.01%
Dividend Policy
Dividend Payout ratio
FY 08 FY 09 FY 10 FY 11 FY 12 FY 13
Dividend
Payout ratio
5.64% 13.57% 13.82% 15.41% 15.68% 17.89%
For the last few years the company has been consistently paying out ~15% of its profits in
the form of dividends and has an uninterrupted history of dividends since listing.
Considering the fact that company has been expanding its capacity at regular intervals
and even now has a 400-500 crores CAPEX lined up, we believe that the dividend policy of
the company is appropriate as it enables it to expand without resorting to debt.
For FY 14 we expect the company to pay a final dividend of Rs 5/- per share. The dividend
yield at around current price is 0.90%

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Valuations
Debt free on a net basis with surplus Cash and
Cash equivalents (investments in various mutual
fund schemes) of ~400-500 crores

18. Before discussing valuations, let’s recall all that we have learnt about AIA Engineering
and the HCMI industry in the above sections:
 AIA manufactures HCMI which is largely an oligopolistic industry.
 AIA is the second largest company in the HCMI industry and is aiming to be the
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largest with 2.2x capacity expansion from FY 13 to FY 16.
 HCMI accounts for only about 20% of the overall grinding media requirement and
this is despite their cost and efficiency benefits over conventional forged media.
 Mining industry is going through a phase of conversion in which ~1.2-1.5 MTPA
grinding media requirement is expected to convert from conventional forged media
to HCMI and thus HCMI players like AIA and Magotteaux will be key
beneficiaries.
 The above mentioned conversion is likely to create an opportunity 4x the current
size of requirement in mining industry and thus very good potential for continuous
volume growth over the next few years.
 AIA has significant cost advantages over Magotteaux while the product and service
quality is at par with Magotteaux, thus AIA is likely to benefit both from market
share gains and overall increase in opportunity size.
 Strong and consistent operating performance of AIA in terms of growth, margins,
return on equity, cash flow generation.
 Debt free with surplus cash to the tune of ~8% of the current market cap.
 Experienced promoters with their interests directly aligned with those of minority
shareholders.
Despite all the above, at around current price of 560 the stock is available at 16.7 times FY
14E earnings. There’s no other comparable listed HCMI manufacturing company,
however companies like FAG, SKF, Thermax, Cummins, etc which are leaders in their
respective industries and have operating metrics similar to AIA are trading at 20-25 times
earnings.
Considering the quality of operations, oligopolistic nature of the industry, strong entry
barriers and very good growth prospects, we believe there’s scope for re-rating of AIA
stock to 20-22 times trailing earnings from current 16-17 times earnings.

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Risks & Concerns
Foreign Exchange fluctuation: The Company generates 2/3rd of its revenue from
International Markets which exposes it to Foreign exchange fluctuation risk. Basically,
appreciation of rupee against the dollar will impact the sales realization of the company.
Capacity expansion by Magotteaux: At the moment, there’s no such news of capacity
expansion by Magotteaux, however, if Magotteaux were to increase capacity then the
competition between the two would intensify and the pricing power of AIA may get
impacted.
Surge in ferro chrome prices: In case of steep rise in Ferro Chrome prices the substitution
economics for HCMI in mining would be adversely affected and it would become difficult
for the company to propose any miner to shift from conventional media to HCMI as the
differential cost benefit would diminish.

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