| AIA Engineering Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities of AIA Engineering Limited (AIA; a part of the AIA group).
Business performance was largely muted in fiscal 2020, as the Covid-19 pandemic led to a nationwide lockdown between March and June 2020, and subsequent restrictions thereafter. However, with easing of restrictions, operations started picking up with large export orders, and revenue and operating margin of Rs 2021 crore and about 24% were reported for the nine months ended December 31, 2020. Exports contribute around 79% of AIA’s turnover and grew at a healthy 3% in fiscal 2020. Profitability should remain healthy at 22-23%, driven by the premium product offerings and the company’s ability to pass on the impact of raw material price fluctuations to customers. Besides, a healthy order book, continued strong demand from the mining sector and planned capital expenditure (capex) expansion will support revenue growth over the medium term.
AIA commissioned a 50,000 MT capacity in August 2019, and may add another 50,000 MT by June 2021; the latter has been delayed due to the pandemic. The company has further postponed the last phase of expansion in the grinding media by 50,000 MT to the second quarter of fiscal 2022. This entire capex is to be funded via existing cash surplus and internal accrual. Given the sizeable market potential of high-chrome grinding media for mining globally, increased capacities will enable AIA to scale-up further and strengthen its market presence.
The ratings continue to reflect the AIA group's healthy market position in the high-chrome mill parts and components market globally, its well-diversified revenue profile (both in terms of end-user segments and geographic coverage), and robust financial risk profile. These strengths are partially offset by the large working capital requirement and susceptibility to fluctuations in raw material prices and volatile foreign exchange (forex) rates. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of AIA and its subsidiaries, Welcast Steels Ltd (74.85% stake) and Vega Industries (Middle East) FZE (100%). This is because of the close operational and financial linkages between all these entities, collectively referred to herein as AIA.
Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths
The AIA group has a strong market position in the in the high-chrome mill parts and components market globally, driven by superior technology, presence across key segments, efficient aftersales services, and longstanding client relationships in all end-user segments.
The revenue mix benefits from diversity across end-user segments and geographical reach. AIA sells mill parts and components to the cement, mining and power industries. Further, within the mining segment, the company services ores of different minerals such as iron, copper, gold, and platinum across various geographies.
Financial risk profile is robust, supported by steady cash accrual, low debt, comfortable debt protection metrics and strong liquidity. Gearing has been stable below 0.15 time over the past decade and will remain strong going forward. Besides strong liquidity at over Rs 14 billion in fiscal 2020, will comfortably fund the large capex of Rs 250 crore planned in fiscal 2021, for enhancing capacities to 440,000 tonne per annum (tpa).
Weaknesses
Operations are working capital intensive, marked by large inventory and receivables of 124 days and 82 days, respectively, as on March 31, 2020. The company has to maintain large stock of inventory across geographies. Besides, receivables are moderately high due to long credit cycles extended to overseas clients. However incremental working capital requirement may be funded from the strong internal cash accrual, with negligible reliance on external debt.
Operating margin remains susceptible to fluctuations in raw material prices (particularly, steel scrap and ferrochrome) and foreign exchange rates, with exporting account for 75% of sales. Operating margin for instance declined to 18-20% in fiscals 2012 and 2013, and subsequently improved to over 28% over fiscals 2015 to 2017. While the margin remains susceptible to the above-mentioned risks, CRISIL Ratings believes that profitability would sustain at 22-23% over the medium term, given the ability to pass on raw material price fluctuations to customers. |
Liquidity: Strong The AIA group has strong liquidity, with cash and marketable securities of about Rs 1800 crore as on December 31, 2020. The fund-based bank limits remain largely unutilised. Healthy cash accrual of over Rs 500 crore, expected in the medium term, should suffice to cover the capex requirement of Rs 100-150 crore, in the absence of long term debt. |
Outlook Stable CRISIL Ratings believes AIA’s business risk profile will continue to benefit from the group’s healthy market position and diversified revenue profile. Furthermore, the financial risk profile should remain healthy over this period, supported by steady cash accrual and large liquid surplus, notwithstanding the ongoing capex. |
Rating Sensitivity Factors Upward factors:
Downward factors:
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About the Group AIA was incorporated in 1978, as Ahmedabad Induction Alloys Pvt Ltd, by the promoter, Mr Bhadresh Shah. This company was reconstituted as a public-limited company with the current name in 2005. It manufactures high-chrome grinding media, liners, and diaphragms, collectively known as mill internals. These are used for crushing and grinding operations in grinding mills, in the cement, power utility, and mining industries. AIA has one manufacturing subsidiary in India and eight marketing entities overseas. Capacity of 390,000 tpa, is being expanded to 440,000 tpa.
For the first nine months of fiscal 2021, consolidated net profit was Rs 433 crore on operating income of Rs 2021 crore, against Rs 448 crore and Rs 2124 crore, respectively, during the corresponding period of fiscal 2020. |
Key Financial Indicators (Consolidated)
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
* Interchangeable with working capital demand loan /Export Packing Credit (EPC) /Pre-shipment Credit in Foreign Currency(PCFC)/Foreign Bills Discounted (FBD)/EPR %Letter of credit upto Rs.20 crs #Interchangeable with Bank Guarantee/EPC/PCFC/Foreign Bills Purchased (FBP)/FBD ^Interchangeable with Letter of credit and Capex Letter of Credit upto Rs.25 crs $Interchangeable with EPC/Letter of Credit/Buyers Credit/Bill Discounting/Working Capital Demand loan; Interchangeable with Bank Guarantee upto Rs.110 Crs &&EPC/PCFC/FBP/FBD/WCDL is sub limit of CC of Rs.25 Crore. ^^Fully interchangeable with Overdraft/Working capital/Pre-Shipment/Post Shipment/Letter of Credit & Bank Guarantee. |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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