Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of AIA Engineering Limited (AIA) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL AA+’ and has reaffirmed the ‘CRISIL A1+’ rating on the short-term facilities.

 

The outlook revision factors in the healthy ramp-up of operations by AIA over time, its continued strong position in the forged and high-chrome mill parts and components market globally, diversified revenue profile (both in terms of end users and geographic coverage), as well as sustenance of operating efficiency. Besides, the company’s financial risk profile remains robust, supported by healthy annual cash generating ability and balance sheet. These strengths are partially offset by large working capital requirement and partial susceptibility of profitability to fluctuations in raw material prices and foreign exchange (forex) rates.

 

Revenue remained flat for the first nine months of fiscal 2024, growing 2% on-year to Rs 3,704 crore (Rs 3,635 crore in the corresponding period of the previous fiscal), driven by a 4% increase in volume. Revenue is expected to grow 10% over the medium term, supported by volume growth of 6-8% from sales to existing customers as well as from converting clients that currently use forged media.

 

In the grinding media segment, the company continues to be one of the largest player globally and has a geographically diversified customer base. The company has also been consistently adding capacities over time. 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.

 

Operating profit for the first nine months of fiscal 2024 was Rs 1,036 crore and operating margin was ~28%, driven by improved operating efficiency and favourable product mix. Over the medium term, the operating margin is expected to remain strong at 22-24%, as impact of moderation in input prices, primarily iron and steel, is passed on to end-consumers.

 

The financial risk profile is robust, benefiting from healthy annual cash generation (Rs 600-700 crore), sizeable networth of over Rs 6,000 crore (estimated) as on March 31, 2024, and only modest working capital debt. AIA undertook capex of ~Rs 200 crore in fiscal 2023 and of Rs 200 crore for capacity expansion and modernisation in fiscal 2024, which was funded through accrual. The company is adding 80,000 tonne grinding media capacity at an estimated cost of Rs 200-250 crore, expected to be commissioned by December 2024. This, along with the routine maintenance capex of Rs 200-300 crore, will be funded through the existing cash surplus and internal accrual.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of AIA and its wholly owned subsidiaries, Welcast Steels Ltd and Vega Industries (Middle East) FZE, because of their close operational and financial linkages.

 

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:

• Healthy market position

High chrome grinding media accounts for 20% of the ~3 million tonne grinding media market. AIA commands a ~45% global market share in the high chrome grinding media segment and is the second largest player globally and the biggest in India. The company’s strong market position is driven by superior technology, presence across key segments, efficient aftersales services, and longstanding client relationships in all end-user segments.

 

• Diversified revenue profile

The revenue mix benefits from diversity across end-user segments and geographical reach. AIA sells mill parts and components to the cement, mining, thermal power plants and aggregate industries. Within the mining industry, the company services ores of different minerals such as copper, gold and iron across various geographies. It derived 70% of its revenue from exports in the past 2-3 years, and 30% from the domestic market. Revenue registered compound annual growth rate (CAGR) of 8% in the decade since fiscal 2015. Over the medium term, revenue is expected to grow at a CAGR of ~10% driven by healthy growth in volume.

 

• Sustained healthy operating efficiency

For fiscal 2024, the operating margin is estimated above 27%, in line with that in fiscal 2023, driven by favourable product mix and higher operating leverage. Over the medium term, the operating margin should sustain at 22-24% with changes in the product mix and volatility in raw material prices, primarily iron and steel. Strong bargaining power with customers enables AIA to pass on fluctuations in raw material prices, albeit with a lag of 1-2 quarters. Nonetheless, the company’s operating margin will remain healthy, driven by strong market position in the high chrome grinding media segment amid limited competition and low threat of substitution. Large capital requirement and technological expertise required in metallurgy to cater to the specific needs of individual mines add to the entry barriers to the industry.

 

• Robust financial risk profile

The financial risk profile is supported by large estimated networth of over Rs 6,000 crore as on March 31, 2024, healthy cash accrual, negligible debt leading to comfortable debt protection metrics and strong liquidity. Gearing was below 0.1 time over the past decade and will remain strong over the medium term. Besides, strong liquidity of over Rs 3,300 crore as on December 31, 2023, and healthy accrual of Rs 600-700 crore will comfortably fund capex for enhancing capacity to 520,000 tonne per annum (TPA).

 

Weaknesses:

• Large working capital requirement

The company had sizeable finished goods inventory and receivables of 71 days and 65 days, respectively, as on December 31, 2023. Grinding media is an operationally critical consumable for mines and AIA maintains substantial finished goods inventory across geographies to cater to the needs of its customers. The working capital requirement is expected to remain large over the medium term, and will be funded through a prudent mix of internal accrual, strong liquid surplus and external debt.

 

• Susceptibility of profitability to fluctuations in raw material prices and forex rates

The operating margin remains susceptible to changes in the prices of inputs (mainly steel scrap and ferrochrome) and forex rates, as exports account for 70% of sales. The company has maintained its operating margin, driven by its healthy market position and the criticality of its products. The company follows a proactive and adoptive hedging policy to limit the impact of fluctuations in forex rates on receivables. AIA hedges around 50% of its net forex exposure in most markets by way of six-month rolling forwards. Additionally, given its large exports, the company avails of a cover from Export Credit Guarantee Corporation of India Ltd (ECGC) to address counterparty risk. Besides, exports to risky countries are against letters of credit or on cash against documents (CAD) basis.

Liquidity: Strong

The company had cash and marketable securities of Rs 3,300 crore as on December 31, 2023. Fund-based limit of Rs 1000 crore was utilised moderately at 50% on average over the 12 months through January 2024. Healthy annual cash accrual of over Rs 800 crore over the medium term should suffice to cover capex of Rs 250-300crore per annum.

Outlook: Positive

CRISIL Ratings believes the business risk profile of AIA will remain healthy, backed by the company’s strong market position, established clientele and strong operating capabilities. The financial risk profile remains robust supported by healthy annual cash generation and absence of major debt.

Rating Sensitivity factors

Upward factors:

• More-than-anticipated revenue growth and operating profitability sustained ~25%
• Efficient working capital management and continued robust financial risk profile

 

Downward factors:

• Significant moderation in operating performance due to steep fall in revenue or decline in operating profitability to below 18% on a sustained basis
• Significant stretch in working capital cycle, sizeable debt-funded capex or acquisition weakening the capital structure with ratio of net debt to earnings before interest, taxes, depreciation and amortisation above 1 time on a sustained basis

 

ESG Profile of AIA

CRISIL Ratings believes that the ESG profile of AIA supports the company’s already strong credit risk profile. The industrial machinery and consumables sector has a moderate environmental and social impact, driven by raw material sourcing strategies and energy-intensive processes.

 

ESG highlights:

• The company has 14 Wind Energy Turbines at the Kutch, Jamjodhpur and Amreli sites which have installed capacity 31.8 MW and 5.58 MW of Solar capacity. In F.Y. 2023-24, AIA was able to generate 92,432 MWh of electricity by renewable sources and supply it to the grids.
• AIA is committed to ensuring the safety and security of its employees. There were no unresolved complaints related to sexual harassment, discrimination of workplace, child labour, forced labour, wages and other human rights issues in fiscal 2023.
• The governance structure is characterized by effectiveness in board functioning and enhancing shareholder wealth, presence of investor grievance redressal mechanism and extensive disclosures.

 

ESG is gaining importance among investors and lenders. AIA’s commitment to ESG will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors and the company’s access to both, domestic and foreign capital markets.

About the Company

AIA was set up in 1978 as Ahmedabad Induction Alloys Pvt Ltd by Mr Bhadresh Shah. It was listed on the stock exchanges with an initial public offering in 2005. AIA manufactures high-chrome grinding media, liners and diaphragms, collectively known as mill internals. These are used for crushing and grinding operations in the cement, power utility and aggregates and mining industries. AIA has one manufacturing subsidiary in India and nine marketing entities overseas. The capacity of 440,000 TPA is being expanded to 520,000 TPA.

 

For the first nine months of fiscal 2024, consolidated net profit was Rs 876 crore and operating income Rs 3,704 crore, against Rs 788 crore and Rs 3,635 crore, respectively, during the corresponding period of fiscal 2023.

Key Financial Indicators (consolidated)

Particulars	Unit	2023	2022
Revenue	Rs crore	4909	3523
Profit after tax (PAT)	Rs crore	1057	620
PAT margin	%	21.5	17.4
Adjusted debt/adjusted networth	Times	0.09	0.00
Interest coverage	Times	64.7	105.9

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity Levels	Rating assigned with outlook
NA	Cash Credit^	NA	NA	NA	150	NA	CRISIL AA+/Positive
NA	Letter of credit & Bank Guarantee	NA	NA	NA	35	NA	CRISIL A1+
NA	Bank Guarantee*	NA	NA	NA	75	NA	CRISIL A1+
NA	Export Packing Credit#	NA	NA	NA	375	NA	CRISIL AA+/Positive
NA	Export Packing Credit$	NA	NA	NA	100	NA	CRISIL AA+/Positive
NA	Export Packing Credit	NA	NA	NA	25	NA	CRISIL AA+/Positive
NA	Working Capital Demand Loan@	NA	NA	NA	100	NA	CRISIL AA+/Positive

* Letter of Credit is sub limit of BG Limit of Rs. 75 Crore.

^Interchangeable with Working Capital Demand Loan and Export Packing Credit. Letter of Credit /Bank Guarantee is a sub-limit of fund-based limit of Rs 150 crore

$EPC/PCFC/FBP/FBD/WCDL is sub limit of CC of Rs. 100 Crore.

@OD/EPC/PCFC/FBD/EBRD/ BG/SBLC/LC is sub limit of WCDL/FCDL of Rs. 100 Crore

#BG is sublimit of EPC of INR 110 Crores

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Welcast Steels Ltd	Full	Subsidiary, business synergies
Vega Industries (Middle East) FZE	Full	Subsidiary, business synergies