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AIA Engineering Limited (AIAE) is a dominant player in High Chrome Mill Internals (HCMI), a Global Duopoly. Highly engineered consumables are used for grinding and crushing in mining and cement industry and offer a sizeable play on global mining consumables space in grinding media for gold, copper and iron having an addressable market opportunity of ~2-2.5 mn tons. Mining offers immense growth prospects as only 20? 25% of consumables have shifted from conventional forged products to high chrome, where AIAE’s solutions are superior to peers with strong value proposition. In addition to grinding media, the company is also very bullish in the Mill Liner segment where it is manufacturing and supplying Metal Liners based on unique patented Mill Liner design. In Cement Industry which has been one of the mainstays of growth all these years has matured in usage of High Chrome Mill Internals use and AIAE has attained strong market share of 95% domestically. Company’s growth is linked mainly to the overall growth of the industry and gaining higher market share. AIAE’s technological leadership over the years in high chrome mill internals, strong growth opportunity in mining sector and superior financial metrics of growth, margins, cash flows and ROIC are key business moats. Hence we Initiate BUY and value the stock at 30x FY26E with a TP of ?4,225

High growth opportunity in mining as it shifts to high chrome media

AIAE is focused on three major ores namely iron, gold and copper which have an annual addressable replacement market of 2?2.5mn MT for mill internals. Mining industry is undergoing a shift from conventional forged grinding media to more efficient and cost saving solution of high chrome grinding media. While 15?20% market has converted to high chrome, 80-85% market would convert gradually providing a decadal growth opportunity. Compared to the opportunity size of 2?2.5mn MT, AIAE’s supplies are ~200,000 MT in FY23E, with likely volume addition of ~40,000 MT every year. AIAE is also a dominant supplier of such products for the cement industry with a domestic market share of 95% and global (exChina) market share of 35%

Mill Liners addition enhances AIAE’s value proposition significantly

Along with high chrome grinding media, the commissioning of a dedicated mill liner plant has enhanced AIAE’s value proposition materially. Its solutions are now superior to peers in terms of lower wear rates, better through?puts, savings in capital and operating costs and improved ore recovery in down process. Similar to the market share dominance achieved by AIAE in the cement industry, it is poised to attain a similar leading market share in mining industry worldwide.

Business strength well validated through the underlying strong financial metrics

AIAE has grown revenues/EPS CAGR of 11%/17% over FY13-23. Over this period, margins have shown good consistency with an average gross/EBITDA margin of 62%/24% reflecting ability to pass on variations in raw material and freight costs. Average OCF/EBITDA of 57% and sizeable FCF have led to a strong balance sheet (net cash of INR 25.6bn in Mar-23). Average post-tax ROIC of 23% remains strong and reflects prudence in capital allocation.

Capex to spur growth

To capitalise on the conversion trend from forged media to high chrome mill internals in the mining industry, AIAE plans to expand capacity from 440,000mt to 520,000mt by FY24 through brownfield capex of ?2bn. The company has a healthy balance sheet (net cash of ? 25bn as of FY23) with negligible leverage and strong free cash flow generation.

Outlook

AIAE’s strategy is to serve as a complete solution provider for grinding media and mill liners. The company has indicated that core client industries remain strong and that it does not anticipate any major macroeconomic challenges for its customers in the mining, cement and utilities verticals over the next 12 months. To capitalise on the conversion trend from forged media to high chrome mill internals in the mining industry, AIAE plans to expand capacity from 440,000mt to 520,000mt by FY24 through brownfield capex of ?2bn. The company has a healthy balance sheet (net cash of ?25bn as of FY23) with negligible leverage and strong free cash flow generation. AIAE’s technological leadership over the years in high chrome mill internals, strong growth opportunity in mining sector and superior financial metrics of growth, margins, cash flows and ROIC are key business moats. Hence we Initiate BUY and value the stock at 30x FY26E with a TP of ?4,225