AIA Engineering Limited analyst Q&A

Thank you. The first question comes from the line of Bhoomik a Nair from D AM C apital. Please go ahead.

Yes, you mentioned in the end th at there would be kind of a flattish volume. I remember th at in the p revious call, we h ad mentioned about some growth and the benefits of the conversion efforts that we have taken to kind of start playing out sometime in this year, at least. So in...

I reiterated that, I'm sorry, I'm interrupting you. I s aid, we are not giving any specific guidance about the growth in this ye ar and our targets. And I said that we'll probably come back to you by end of Q2, let us see. We have not said that nothing will happen, but lot of efforts are going on, and I wanted to clarify that 100% from next year, we are on track. This year we are waiting little bit more for a few outcomes.

Okay. Okay. Fair point. From a U.S. perspective, given that there will be the 50% duty, do you think our volumes will be at risk if it were to come to play?

Can you repeat last part? I couldn't hear.

I was saying that if the 50% t ariff was to come into pl ay as anticipated, assuming no relief on that aspect for a minute, would th at mean that our volumes wou ld get imp acted out there on the U.S. bit of volume?

No. So Bhoomika, as I clarified two things. One, this l ast round of 50% is reciprocal tariff and not sectoral. Sectoral tariff was in February, it was increased to 25%, the whole world k nows. Correct.

Yes, yes.

Today also my clients, my customers are p aying 50% sector al plus 10% CVD and they're continuing mine. Obviously, the negotiations around the corner, will this continue and whether a part of it you wi ll bear or not. So th at is a continuous dialogue, which our s alespeople are doing. And therefore, our supply as we see continue to go a little halting, but they continue. Nobody has said we will not continue. The people are also in the hope sooner rather than later there will be some -- we were noting of BTA happening. People were hopeful th at in BTA the tariff will come to a reasonable level. As we all know, the whole world knows, this h as now become a little political, more political rather than really economically, the rational decision-making process does not make any sense. But as we speak, people are saying, that's all I can say at this point in time.

Okay. F air point. Understood. So the other thing is in t erms of our Chin a and Gh ana, you mentioned that there are -- it is taking a little longer than anticipated because of the approvals, etcetera, and land acquisitions as such. So what would be a reasonable time line to look at for - - if I underst and correctly, China will be first oper ational followed by Gh ana. What would be the right time line to look at for that plant to be operational?

That's what I shared that our hope was to start with that initial land and approval this quarter, it looks like it's a little -- it's much longer dr awn out th an what we h ad imagined, right? It's our first time going in there, which is where it looks like we will -- I'll be able to sh are a plan, hopefully, next quarter or fair chance it goes to the quarter after that. And which will be ex actly wh at h appened. I c an't sh are 12 months from approval and the approval is m aybe 15 months away, right? So just give us a quarter more, we'll share a little more idea actual our teams out there, lot of work is going on, so that work in progress is there.

Okay. Fair point. Lastly, if I look at the margin profile this qu arter has been quite he althy. So anything that you can call out in terms of what attributed to this margin being sharply up?

Okay. So Bhoomika, one, if you knock off the treasury income, gain of INR19-odd crores, we are t alking about, about 29% to 30% oper ating margin, which I definitely agree th at this is slightly on the higher side, there are two factors. One tax provision annual 2% it will be more, in this quarter it is less point number one. Point number two, there is a good, very good product mix th at has also given us a tailwind. Now therefore, I would believe th at on an operational margin this 29% or 30% c annot be read as a sustainable long term. Of course, we are talking of 23%, 24% as a minimum. I believe we want to stick to that as a very, very sustainable, it should be less than that. We are doing better. I believe we might do better, but let's stick it at that.

Okay. Fair point. I will come back in the queue then. Thank you so much and all the best.

Thank you. Th e next question comes from the line of Priyankar Bisw as from JM Fin ance. Please go ahead.

Thanks for the opportunity and m y first question is again coming b ack to the -- from the previous questions like -- this very high level of pricing that we are seeing on -- I mean, almost like a INR170 per kg, do you expect th at to sust ain at le ast in a very ne ar term, I me an compared to forged it seems to be a very high level of premium. So what is your take on it?

Priyankar I think realization when we have always maintained, it is not just a margin reflector, it's also the product mix that we do in a quarter. You -- there are -- there is also the price pass- through with this quarter has seen freight reduction, some level of freight reduction, some level of raw material reduction. So some of these costs h ave reduced, which will get p assed on over a period. So two things have happened this qu arter, price, product mix le ading to a little higher re alization and lower cost. And hence, you're seeing that price -- there is an abnormal margin this quarter, which we think will normalize over the next two quarters.

Okay, understood. And also, if I m ay come b ack, like I remember in the previous c alls, you used to highlight like signific ant opportunities in L atin America, p articularly in copper. So what is our progress there currently? I me an what are the st ates or any prospects th at we are looking for near term conversion?

I think we are status quo there like S anjay bhai was explaining the previous participant, our efforts are on. We are on it. We are m aking all efforts tow ards it. We rem ain excited and confident about it. We hope to get back to growth stage soon. There have been breakthroughs. We are hoping that, that culminates into something meaningful that we can speak about. We have decided to spe ak about it after we get th at breakthrough rather than positing it about and when and how because it's been deferred for some time . So we are hoping that it converts into a contract and a tangible order and hoping that gate opens up for further volume.

Yes, I hope so as well, let's say, within the next couple of ye ars maybe you see some volumes. And just last one question from my side. Previous year in FY '25, in some of the calls, you had mentioned that in certain mining geographies, there were some excess inventory that was there of grinding media. So that kind of led to sort of a destocking thing. So is it behind us? So h as those volumes kind of resumed?

Yes, there are two, three different things th at were h appening, two customers going to a restocking, they're back to -- that volume looks to be back, that will normalize, yes.

That’s all from my side.

Thank you. The next question comes from line of Devaan Shah from D.D Enterprise. Please go ahead.

Sir, I'm an individual investor. I h ave some two, three minor queries only. Regarding the cash we are holding on the books, is it for Welc ast bec ause the Welc ast buyb ack w as not gone through. So any plan to like utilize the same cash, which we are holding on the books?

No, Devaan bhai, I think there is some confusion here. Welc ast never h ad a new buyback, it was a delisting attempt, which w as not successful. And th at w as a very, very insign ificant amount actually. So this cash has been conserved for quite some time, considering the fact that we are very, very optimistic about the tremendous growth potential that the business has. And therefore, given the f act th at at any point in time some or the other opportunity could unfold, we are a bit conservative and in the past also we have said that once we believe that the business has all the endeavors that we are giving for growth they are sort of stabilized. We will look at options for reducing the level of cash. But at this point in time, we agree we are admitting that we are maintaining a little higher level of cash that we want to do so more on a conservative basis given the potential that we have.

Okay. So the other question is -- like can you just tell me like who is going to be over there for next 5 to 10 years for the management controlling because the owner, whose age is very much near to the like retirement or something like th at. So is there any follow-on plan also is there like we are going to get it from the m anagement or you're going to get it like profession al management outside of the company. So any follow-up plans for that?

Please understand one thing. There is no question of any management outside of the company. We are, in fact, professionalizing this for over last 3, 4 years. There's a very proper succession plan strategy, which is under implement ation. The idea is that the whole m anagement and the organization should run quickly on professional ground and all the efforts are on. So there's no question of any outsider coming and running, etceter a. But, yes, a proper succession pl an is under implement ation and it will be properly and form ally implemented over a period of next 1, 1.5 to 2 years.

Okay. That’s all from my side. Thank you.

So my first question was on power and fuel costs. So if I look at your power and fuel cost as a percentage of s ales, from FY '20 it w as close to 10% and then it h as been f alling, so FY '22, 9.2% and now FY '25, 7%. So as the renewable power mix incre ases, where do you think this will settle?

Renewable, see, at this point in time, we are, I think, about 35% -- 30% to 35% as the renewable level in terms of our actual credit that we are getting in terms of gener ation through wind and solar in our billing. We are investing about -- we are putting another 100 -- total 60- plus megawatts, which will take us to about 100 megawatts. So according to me, there should - - there is a very decent scope of further reduction. It should settle 7%, 7.5%.

Sir, 7% already in FY '25 only you re ach. So it should go close to 5.5% or 6 %, right, in the next two years?

Yes. It should reduce further. It will reduce further. There will definitely be s avings and you can take around 6% to 6.5%, you're right.

Okay. And my next question w as, so your -- in this quarter, the margins were very good. One of the reasons you told us w as that product mix f avoured realizations and the freight cost w as low, but w as there also a raw material cost imp act, like, ferrochrome or alloys you got at a cheaper price?

As always versus 100% p ass-through. So you are very right. In a given quarter, if the prices have gone down, but our s ales realizations are as per the previous agreed level, there would be a different push up on the m argin. However, in the next qu arter, so I explained to Bhoomik a one of the e arlier participants that yes, there are two f actors. One is the knockoff, this other income, treasury income, etcetera. So it around 30% at the operating level EBITDA, correct. Now that is slightly higher th an what we normally will do at about 27%-odd. That is what the run rate with which we h ave been gener ally reporting. There are two, one is our t ax rate this quarter, if you have seen, it’s about 20% against normally about 23%, 20.8%. So at PBT level -- PAT level you will see impact. Second, there is a very clear-cut strong t ailwind of the product mix. So the bigger castings as we c all them, its disp atch comes more and they are very profit able. So therefore, there is a little bit of a push. And then as Kunal explained, there will be a pass-through effect, which will come in the next quarter, which will normalize. So if you see according to that, so we are okay. We should look at the normal level of margin only rather than extrapolating this.

Okay, sir. Got it. And my last question was, you have given some light on this, th at you lost I think 30,000 tons of destocking volumes were lost. So you said there were some recoveries out of that 30,000 tons. How much have you recovered?

But, 30,000 tons w as not a destocking account. There w as one customer where we lost some volume. It w as -- I think we will not be able to bre ak down every single customer th at way. But the destocking th at customer is b ack up, the volume is b ack up now. Then there w as a 8,000 tons, 10,000 tons, I think, 7,000 tons, 8,000 tons, 10,000 tons difference on that account. There were other customers who have reduced purchases on that account. I'm not sure wh at is the current level there. But the billing process ch anged related to that one customer that's back to regular invoicing. So th at will reflect full ye ar, will be the full potenti al, that reduction h as been made.

Okay, sir. Thank you and all the best.

Thank you.

Thank you. The next question comes from the line of Bh avin from SBI Mutu al Fund. Please go ahead.

Hi. Good evening, Kunal. Good evening, Sanjay Bhai.

Yes, sir.

Yes. Good evening.

Could you t alk about the mill liners, we commissioned a plan, h ave you seen st abilization? How is th at r amping up and if you could also t alk about, bec ause th at would h ave -- our strategy was to actually first get into the existing customers so th at they know AIA, they know the AIA qualities that cross-sell opportunity was one that would have helped us.

Correct. That's true. Beyond the mill liner, as you know, we'v e also -- the metal mill liner, we've also added the rubber composite c apability. So I think as we went into the sp ace as we understood the overall offering. One is it h as taken longer than what we imagined. But having said that, it has -- this was our time where we have rightsized our offering. We've done some amount of trials, right? Customer went b ack and tell your references of this ore, of this met al or for this size of the mill. So a lot of th at was, who's going to give us the first trial. Who's going to allow us a trial that allows us subsequent sale or subsequent size and con -- ore configuration? I think that's what has taken us time. I think, so if you -- Sanjay Bhai can speak more, but for today's Board meeting, for ex ample, there w as a 2-hour discussion just on the sh arpness and the potential for the mill lining solution, right? How it's all coming together. And the solution is for us to sell liners and grinding media together. So that's the customer we are looking at. So, there were some customers where we h ad the ch ance to sell just lining, but we w ant to keep the capacity available because we are fully committed and believe in the solution where disproportionate benefits can accrue by using our design m aterial, our design and our material of linings along with our grinding medi a. Both are in sync to actually deliver the full solution that we are pitching to customers. We are hoping that we have good news to share soon.

Just to add to wh at Kunal said, what we are bringing on t able now is something very unique, which very honestly mining industry h as not seen before. And that solution h as been already tried and tested in a couple of mines with excellent results. B ased on th at, we are now approaching on a combination of a solution which -- where cost becomes, I would s ay, secondary or terti ary. Primary, it is the grinding efficiency, the throughputs and how we are doing a combination of different types of liner designs, very unique, which incre ases the grinding efficiency and the over all benefits which a mine gets is unim aginable. I think th at is what is giving us tremendous confidence. Very soon, we should h ave some very good news to share. That's all I can say at this point in time.

And what would be the utilization of the plant currently?

I think we h ave moved some of Odh av production also onto this pl ant. But the utiliz ation of the overall mill lining c apacity would still be sm all. I don't think we will be crossing 30,000 tons. We will still be between 25,000 tons and 30,000 tons for the full ye ar mill liners. And capacity would be in addition in excess of 70,000 tons, 75,000 tons.

30,000 tons, so both…

I mean, Odhav and…

It is a little lower than around 40% to 50%.

Less than 40%. Yes. Yes.

Yes.

75,000 tons is the capacity and utilization...

Yes. For some p art of it is fungible, but I would s ay, we are doing between 25,000 tons and 30,000 tons of 75,000 tons capacity broadly.

Okay. And just to understand directionally how different are the realizations for the mill liners versus the grinding media?

The selling price is, of course, a little more in middle liners, bec ause the c ost of the alloy is different and there is a lot more subsequent effort, right? You need to do dr awings, design, people need to tr avel for th at, collect inform ation, make wooden p atents, then a sample piece gets made, then a finish rod, then they're post -treatment. So the whole host of investment into patents and the engineering work that needs to be done before and after the product is made, is significantly higher, the cost on us, right? So when you f actor all of that, the selling price does go higher th an grinding medi a. But our m argin on the selling price, I think, is l argely comparable as a percent -- margin as a percentage is comparable.

Just trying to underst and because if you see our weighted average, we've been doing $1,600, $1,700 a ton. So I mean, just to get the differential in terms of realization?

But we also do vertical mill parts and that volume also shifts within vertical mill parts also, we do like six or seven products. So prices v ary from -- just to give you a sense from, let's s ay, INR180 to m aybe INR400 a kilo, right? Exactly bec ause we do m achining on some p arts. There are many other parts where metal dies have to be made or metal fabricated parts have to be made for the wooden pattern. So the investment v ary and the processing on the m aterial v aries and the effort as pre- production varies. So that is where for us, it's sometimes difficult to bre ak apart each piece and add up. And I understand that INR170 is a high figure. But like we said, that reflects a little bit of the higher dollar rupee and the product mix and the margin reflects some part of lower cost also.

Sure. And when we were looking at the export data country-wise, there was a very sharp drop in the volumes to Australia from 37,000 to 40,000 -odd we saw in '22, '23 to all about 15,000- odd us. If you could just help us understand the reason for sharp drop to Australia?

My request is, let us take this off-line.

Okay. And the -- just l ast p art when you s aid fl attish volumes this ye ar, there w as some inventory dr awdown th at w as their inventory correction by the customer, which w as there about 8,000, 10,000 which we expect to norm alize and there's some incre ase in the vol umes that can happen from the mill liners as we see. And despite that, the flattish volume guidance, is that, I mean, we just want to understand.

Bhavin Bhai, 8 or 10 also is flat for us. The ide a is that we have to get to 30,000, 40,000 tons and a 10 or a 15 or a 20 is still not volume incre ase th at excites us. I think S anjay bh ai is without having to nitpick into 5 or 7 or 12, he is just saying flat, saying it will vary your 10,000 tons, something else m ay go down, something else m ay come along. Overall this ye ar as we look going forward with new contracts coming in later in the year, factoring all of that, it looks like it will be a flat year. And when you say flat, it will be between minus 5 and plus 15.

Yes, Yes. And I’m very clear I also say that by the end of fiscal quarter, we should have much better cl arity on a few large contr acts or assignments th at we are working. So I think you kindly wait for a quarter more. I think we are working on so m any other projects. And with this novel approach, we are getting fantastic results. So it's just a matter of time, very honestly. That is why we s aid, otherwise, we would be not in a position to give at least this indic ation. But I think it w as an exciting response th at we are getting and hopefully, we should be absolutely on track in terms of normal growth from next year. And definitely, we are targeting some volume growth this year.

Sure. Yes, thank you so much.

Thank you. The next question comes from the line of Amit Khetan from L aburnum Capital. Please go ahead.

Hi, Sanjay Bhai and Kunal Bhai. So if I -- AIA faced challenges over the last 3, 4 years, right? But if we just look at the industry volumes over the l ast 5 ye ars, specifically mining, would you have a sense of how much the high chrome industry mining has grown in absolute terms?

No, but the competitor would h ave also g ained some sh are from you, right , by w ay of in countries where there are duty structures. We are trying to understand how much is in place at the industry level.

What I'm s aying is if volume h as moved between them to us or ask to them, the industry h as remained flat and there has remained still some total of what both of us are doing. That's what we are seeing. So th at has grown to expense we h ave, basically. If we have lost some volume, it's going to then gener ally, it would have gone to them or there's something the pl ant has shut or plant has reduced operation to whatever. So the high chrome sh are is what volume of both of us added up would reflect.

Got it. So bro adly over the last 5 years at an industry level h as been very limited conversions. Is that what you're trying to see.

Possibly. I mean, that's the total, whatever the math was to, yes.

Okay. Okay. And secondly, when you talk about -- forget about this year, but let's say about on a normal year when you're talking about 25,000 to 30,000, 35,000 conversion, new addition in volumes, how much of th at are you factoring in the new conversions? And how much is just a regain of old volume, which now because of…

I think there will -- earth is that given our exposure -- see, we are not per se, a one trick pony. There is one customer, one geography, one product line, right? We are selling to more th an 120 countries. We're doing cement and mining. Within mining, we're doing two or three old types. So given all of th at, there will always be m acro. What we are learning is an always a macro factor that will keep coming along in, putting some he adwinds that we need to figure out and work through. So wh at we are seeing is when we are seeing growth, when we are talking about growth, it is all new conversions from forged to chrome. Now some volume that's gone away, it will come back. That is basic arithmetic between us and the competitor wh atever the m acro situation may be. We are not considering th at when we're talking about growth coming back, all the growth figures that we want to hopefully share soon.

So just to add, it's a fact that over l ast few ye ars, you might not h ave seen a great amount of conversion. This is a function of two, three things. One, to the effic acy of our solution is universally accepted by the customer. There is always a great deal of resistance on their part in converting due to a wide v ariety of re asons. So wh at we decided th at we must m ake it so potent that we leave -- that the customer would definitely f all for it. So there is a local factor, there is a local competition. Today, I'm s aying that now with the mining liner rel ated solution plus the D P-related benefit that we are offering, plus a very unique type of grinding medi a solution that we have got as a package it becomes so compelling th at we have started getting very good results. A couple of projects have shown extremely encour aging results and the clients s ays right now, they are in the process of negoti ating some significantly large higher volume of orders, th at has given us confidence that we have now approached many mines. So wh at is h appening is th at we h ave also climbed up the le arning curve in terms of our capability and our potential to break into mining based on efficiencies rather than cost. Mining industry, each mine is typically INR50,000 crores kind of a company. For them small volumes or small savings are not relev ant. What is relev ant is if we offer something which is a game changer, that is where the whole conversion h appens. I think we h ave climbed up to m anage curve and it's just a matter of time. We would st art seeing definitely better tr action in the coming quarters.

Got it. Got it. Thank you. That’s very helpful.

Thank you. As there are no further questions from the p articipants, I now hand the conference over to management for closing comments. Thank you, and over to you, sir.

Thank you so much. As always, Sanjay bhai and I remain available offline to cl arify or speak on any other questions. Thank you so much, and have a great evening, everyone. Thanks.

Thank you.

Thank you. On behalf of AIA Engineering Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.