Rating Rationale
November 14, 2019 | Mumbai
AIA Engineering Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.638 Crore (Enhanced from Rs.150 Crore)
Long Term Rating CRISIL AA+/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL ratings on the bank facilities of AIA Engineering Limited's (AIA) continue to reflect strong market position in the high-chrome mill parts and components market globally, 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.
 
Revenues registered a strong growth of 26% in fiscal 2019 driven by increasing penetration in the exports mining business, while profitability was healthy at 22-23%. AIA commissioned a 50,000 MT capacity in August 2019 and is expected to add another 50,000 MT by December 2020. Further, the company plans to add 50,000 MT of mill liner capacity by December 2020. Given the sizeable potential available in high-chrome grinding media for mining globally, increased capacities will enable AIA to scale-up further and strengthen its market presence. Besides, economies of scale arising from the single large location, along with the company's strong operating efficiency, will enable it to maintain healthy margins of over 22-23%.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of AIA and its subsidiaries, Welcast Steels Ltd (74.85% stake) and Vega Industries (Middle East) FZC (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
* Strong market position
Market position is driven by robust market share, superior technology, presence across key market segments, efficient aftersales services, and longstanding client relationship in all end-user segments.
 
* Diversified revenue profile
Revenue mix benefits from diversity across end-user segments and geographical coverage. AIA sells mill parts and components to the cement, mining and power industries. Further, within the mining segment, AIA services different mineral ores such as iron, copper, gold, and platinum in several geographies.
 
* Robust financial risk profile
Financial risk profile continues to be robust, supported by healthy cash generation, low debt and strong liquidity. Gearing has remained below 0.15 time over the last decade and will continue to be strong. Besides robust liquidity, marked by liquid surplus of over Rs 11 billion as on March 31, 2019, will comfortably fund the large capital expenditure (capex) of Rs 250 crore planned in fiscal 2020 towards enhancing grinding media capacities to 490,000 tonne per annum (tpa).
 
Weaknesses
* Large working capital requirement
Operations are working capital intensive, marked by large inventory and debtors; 121 days and 87 days respectively as on March 31, 2019. AIA has to maintain high inventory due to stocking requirement across several geographies to ensure timely supplies to customer given the criticality of the product. Besides, debtors are moderately high due to extended credit cycles to overseas clients. However incremental working capital requirements are largely funded from internal cash accruals with negligible reliance on external debt.
 
* Susceptibility to fluctuations in raw material prices and volatile forex movements
Operating margin remains susceptible to fluctuations in the prices of raw materials (particularly, steel scrap and ferrochrome) and adverse rupee-dollar exchange rate movements, as exports account for 75% of sales. For instance, the AIA's operating profitability declined to 18-20% in fiscals 2012 and 2013 and subsequently improved to over 28% from fiscal 2015 to 2017. While margins are exposed to these risks, CRISIL expects the profitability to sustain at over 22-23%.

Liquidity: Strong
AIA has strong liquidity, with cash and marketable securities of about Rs 1100 crore as on March 31, 2019. The fund-based bank limits remain largely unutilised. Company is expected to generate healthy cash accrual of above Rs 350 crore over the medium term, sufficient to cover the annual capex requirement of Rs 250 crore. Company will maintain strong liquidity, supported by healthy cash accrual notwithstanding the ongoing capex.
Outlook: Stable

CRISIL believes the business risk profile will continue to benefit from the company's strong market position and diversified revenue profile. Furthermore, the financial risk profile is likely to remain robust over this period, supported by healthy cash accrual and large liquid surplus, notwithstanding the ongoing capex.

Rating Sensitivity Factors
Upward factors
* Revenue growth of over 15% on a sustained basis while maintaining healthy profitability at over 25% driven by increasing market penetration.
* Efficient working capital management and sustenance of the robust financial risk profile.

Downward Factors
* Significantly weak operating performance due to a sustained decline in revenue or profitability to less than 15%.
* Large debt-funded capex or acquisition, weakening gearing to over 1 time and steeply depleting available cash surplus to less than Rs 200 Cr.

Change in key management and the consequent impact on the business performance will continue to be rating sensitivity factors.

About the Company

AIA was incorporated in 1978 as Ahmedabad Induction Alloys Pvt Ltd, by 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 subsidiaries in India and nine marketing entities overseas. Capacity of 390,000 tpa, is being expanded to 490,000 tpa.
 
For the first six months of fiscal 2020, consolidated net profit was Rs 292 crore on net sales of Rs 1,430 crore, against Rs 226 crore and Rs 1,456 crore, respectively, during the corresponding period of fiscal 2019.

Key Financial Indicators (Consolidated)
Particulars Unit 2019 2018
Revenue Rs crore 3,069 2,445
Profit After Tax (PAT) Rs crore 511 444
PAT Margin % 16.7 18.1
Adjusted debt/adjusted networth Times 0.04 0.04
Interest coverage Times 68 56

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)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs.Cr) Rating assigned with outlook
NA Cash Credit*% NA NA NA 75 CRISIL AA+/Stable
NA Cash Credit&& NA NA NA 25 CRISIL AA+/Stable
NA Letter of credit & bank guarantee NA NA NA 25 CRISIL A1+
NA Term Loan NA NA Mar-2021 15 CRISIL AA+/Stable
NA Bank Guarantee NA NA NA 70 CRISIL A1+
NA Letter of credit$ NA NA NA 228 CRISIL AA+/Stable
NA Fund-Based
Facilities^^		 NA NA NA 100 CRISIL AA+/Stable
NA Working Capital
Demand Loan#^		 NA NA NA 100 CRISIL AA+/Stable
*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
Name of Entity Extent of Consolidation Rationale for Consolidation
Welcast Steels Limited Full Subsidiary, business synergies
Vega Industries (Middle East) FZC Full Subsidiary, business synergies
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  315.00  CRISIL AA+/Stable  06-11-19  CRISIL AA+/Stable  02-05-18  CRISIL AA+/Stable  19-05-17  CRISIL AA+/Stable  12-02-16  CRISIL AA+/Stable  CRISIL AA+/Stable 
        30-08-19  CRISIL AA+/Stable               
Non Fund-based Bank Facilities  LT/ST  323.00  CRISIL AA+/Stable/ CRISIL A1+  06-11-19  CRISIL A1+  02-05-18  CRISIL A1+  19-05-17  CRISIL A1+  12-02-16  CRISIL A1+  CRISIL A1+ 
        30-08-19  CRISIL A1+               
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 70 CRISIL A1+ Cash Credit & Working Capital demand loan** 100 CRISIL AA+/Stable
Cash Credit*% 75 CRISIL AA+/Stable Letter of credit & Bank Guarantee%% 50 CRISIL A1+
Cash Credit&& 25 CRISIL AA+/Stable      
Letter of credit & Bank Guarantee 25 CRISIL A1+ -- 0 --
Fund-Based Facilities^^ 100 CRISIL AA+/Stable -- 0 --
Term Loan 15 CRISIL AA+/Stable -- 0 --
Working Capital Demand Loan#^ 100 CRISIL AA+/Stable -- 0 --
Letter of Credit$ 228 CRISIL AA+/Stable -- 0 --
Total 638 -- Total 150 --
*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 
**Interchangeable with usance bill discounting, export packing credit, foreign bills discounting, and letter of credit
%šnk guarantee is a sub-limit (of Rs 20 crore) of the total limit
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings
CRISILs Criteria for Consolidation
Understanding CRISILs Ratings and Rating Scales

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