AIA Engineering Limited (AIAENG) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to AIA Engineering Limited Q2 and H1 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Kunal Shah from AIA Engineering Limited. Thank you, and over to you, sir.

Yes. Thank you so much. A very warm welcome to everyone. Good evening. This is Kunal. And I have Sanjay bhai along with me here on the call today. As I get into top line numbers, and we'll share a little update on the business, and then we can get on to Q&A. I think second quarter is largely in line with the first quarter of this year. No remarkable financial difference. Things look steady state by and large, as far as operating numbers are concerned. I'll still run through a quick summary, and then we'll get on to the business bit of things. We sold about 63,000 tons for a total of about 123,000 tons for the half year. That compares to about 120,000 tons that we have done half year last fiscal year. And up from 60,000 tons that we've done second year -- second quarter last year, we have done about 63,000 tons this year, which translated to INR 1,029 crores of top line and EBITDA of INR 395 crores and profit after tax of INR 277 crores for the quarter. So overall, from a financial number standpoint, the quarter looks largely okay and in line with the previous quarter. Further breaking up our other income, the total of which is about INR 98 crores, INR 33 crores of that belongs to foreign exchange. And in that sense, it's an operating other income. We also have INR 18 crores of export benefits and about INR 64 crores of treasury income. So the total other income is -- INR 98 crores is other income and export benefits, it's about INR 18 crores, so about INR 116 crores of other income for second quarter of this year, and almost similar to what we earned in the second quarter last year. Nothing remarkable from a working capital standpoint, all our debtors and stock, et cetera, are largely in line with what we have done historically. From a tonnage standpoint, we did 63,000 tons, of which about 38,000 tons came from mining and 24,000 from non-mining. And again, so there's a small increase in the non-mining bid. Mining bit continues to be flat between second quarter of last year and slightly up from the first quarter of this year. We've had some -- our average realization for the quarter is at INR 162, INR 163, and that reflects product mix. I think raw material costs are largely comparable to the first quarter. So no large difference between the two. There is -- there are some numbers around power and fuel and other operating metrics where some bit of renewable captive as it gets online, there is some implication, but largely comparable from an operational standpoint. Nothing that's a large delta change. From a business standpoint, also, things continue -- all things that we've spoken about in the past around work that we're doing with the mines, I think all our efforts continue. There's a very important development that we shared about our customer in Chile. We're not sharing the name because the customer would not prefer for us to speak about it on a public platform. But very interesting customer, they've shared a contract that will last over 18 months. And their consumption is going to be variable because it goes up and down, but our sale per year will vary between 13,000, 14,000 to 17,000, 18,000 tons, depending on the throughput and other things. So let's say, about 15,000 tons a year is volume that we expect out of that. But more importantly, over and above the win, it is an important endorsement. It's a very important customer, and it's our first breakthrough or a first win in that important South American market and first ever customer who's now using high chrome for their grinding media. So it's a big milestone for us from a directional standpoint and an endorsement of all that we are trying to say. Our solution is designed to offer far more benefits than a typical grinding media offering has been historically doing, and that includes mill liners and design changes within that and the whole solution engineering that we do. So we continue to remain very excited. We are digging in our heels and putting all the effort to make sure we have small wins and hopefully, bigger milestones and good news to share. I'll have Sanjay bhai share a little bit more on it, and then we can get to Q&A.

So thanks, Kunal, and a very warm welcome and a good evening to all of you. So as Kunal indicated and as we had hinted even during our first quarter call, there is a very, very, I would say, a remarkably exciting shift in terms of our approach as a package, what we are now offering, where a very unique liner-driven solution where as a package, the liner plus grinding media solution offers very exciting benefits to our end users. We had -- so that would very quickly improve the throughput significantly as well as reduce the power and other operating costs, which makes our solution unique. In a way, it takes us away from doing the risk of pricing and then antidumping and all other associated problems. And more importantly, as Kunal just -- we have also made that announcement, we have taken successful trials based on this new approach with quite a few mines. And as we speak now, two large mines are also under trial, very, very important mines, I would say, plus this recent order that we have won, all of that makes us confident that going forward, we had also indicated that by this year, we may expect some increase in the volume, maybe 5,000, 10,000, 15,000 tons. But from next year, we are very confident that we should be able to demonstrate year-over-year a sustained growth in terms of increase in volume, which has so far been one of the, I would say, a concern areas from the investor standpoint. I think with this, I think let the house open for Q&A.

[Operator Instructions] the first question is from the line of Balasubramanian from Arihant Capital.

Sir, what is the tangible evidence for conversion pipeline, especially for forged to high chrome side? And are you seeing any change in RFQ process from mining customers, especially requesting high chrome or integrated liner media solutions? Can you size the top 3 to 5 conversion opportunities in your pipeline?

So Mr. Bala, one is, of course, as you very rightly said, the proof of pudding is in eating. We have got one major order whose announcement we have made. On Chile, very important customer, where the order size is on 18 months is about 22,000 to 23,000 tons and about $33 million order. That is one straight evidence of a conversion, correct? More importantly, as I said, we have conducted successful trials in about 10 to 12 mines, including in India, very important mines, very important iron ore producing or zinc production mines. And overseas in Nigeria, in Ghana, in a few very other important locations where we have seen that the customers get the tangible benefits. Based on that now, currently, we are in trial, very, very advanced stage of trial where in the month of December and in the months of Jan, Feb of this fiscal itself, we will start getting the final outcome of those trials. These are very large mines, much bigger than what we have been conducting. So what is going to happen is that over the next 3, 4 months, you may come across a couple of other such announcements, where this is obviously, plus please understand our current business is ongoing. As you see from a sales or an EBITDA standpoint or from overall, everything is steady. And this approach, as you might have seen over the last 5, 6 years, we have had several issues, both in terms of antidumping investigations and a lot of other trade barrier-related problems. We believe that this solution takes us away from all those issues, and we are working very hard on it. So beyond that, at this point in time, I'm sorry, I'm unable to share.

Okay, sir. Sir, this new 75,000 ton mill liner capacity, what is the current utilization rate? And what is the time line to reach breakeven? And what kind of utilization we may expect in next 2 to 3 years' time frame? And how does the margin profile of the new rubber composite liners compared to your traditional grinding media? And when we can expect these lines to be materialistic revenue contributors maybe over the medium term?

This is Kunal. I think the mill liners are -- while we've spent and done CapEx and hence, talked about that particular product line, you will have to look at everything that we do as an offering because we are offering a solution. I think the tonnage of mill liners per se is not always important. It's a beachhead for us because that brings in a lot of process improvement. The volume may come from grinding media, right? Because we are selling things as a package, we're trying to sell things at a solution. I think we give overall guidance and the overall guidance that we give will include all mining parts that we are selling, which will be grinding media and mill liners. And mill liners, when we say that includes rubber liners also. I think it will be difficult for us to give a product-wise utilization or growth plan in that sense. So like Sanjay bhai said, we are making efforts. The first milestone is there. We'll share an overall guidance whenever we believe that we have enough visibility and confidence on that conversion number.

Okay. Sir, I think overall 4.6 lakh ton per annum capacity, I think we did nearly 1.28 lakh. I think it comes annualized run rate of around 2.6 lakh metric ton that range. It's almost 55% to 60% kind of utilization. And post that, what kind of utilization we may expect like 70%, 80% kind of rate? And what are the specific projects in terms of CapEx, whether we focused on debottlenecking or new product lines or geographic expansion side? I want to get more clarity on that CapEx, that would be very helpful.

So first and foremost, you're right, at current capacity utilization level around 55%, 60%. Please understand it's a mix of various products. So we have grinding media, we have liners, we have castings, we have a mix of all the products that we give, we give as a combined blended capacity. But two main products, one is castings, which includes liners and everything, tube mill, and all other cement, mining liners, et cetera. And the castings are what we call them as VSMS, that is vertical spindle mill spare parts, the bigger ones. And then there is the grinding media as a mix. We work on a very long-term customer acquisition and maintenance basis. So we have to always make sure that after all the efforts that we put in, and as we have explained in the past, it takes me almost 2 years more than that, in some cases, a little less than that in some cases to convince the customer that the solution is right. Now when a customer comes for an audit, our audit, he should never get that feeling that we don't have adequate capacity to take care of his requirements. And therefore, we are always a little ahead in terms of capacity creation because that process, even if it is a brownfield project today, it takes 1.5 years. If it's a greenfield, it might take 2 years, 3 years, you have to procure more land and start from the scratch. But on an average, theoretically, I can go up to 70%, 75%, 80% utilization. And therefore, we are constantly year-over-year consciously taking care that we always have some additional capacity available given the nature of our business and customer relationships.

Okay, sir. So what kind of CapEx numbers maybe in the next 2 years' time frame?

This year, we have already guided for a CapEx of about INR 180 crores. We have incurred about INR 40-odd crores. This includes, of course...

Investment in MPS.

Investment in my new -- I mean, the subsidiary company, MPS, plus my hybrid and renewable solar investment that I'm planning to make about INR 30 crores in this year, plus some maintenance CapEx, some general CapEx, et cetera, plus some investment that we'll be making in Ghana and China, that is the new facilities that we are in the process of creating. So on an average, I think if you want to take an average annual CapEx, currently, you may take a number of around INR 150 crores.

The next question is from the line of Raman from Sequent Investments.

Can you hear me?

Yes, yes, clear.

Sir, congratulations on a stable set of numbers as well as on winning a recent order from Chile. I just want to understand that we recently won a Chile order. Can we expect a volume uptick in the second half of the year because it's an 18 months order. So it will be -- if my understanding is right, it will be starting to be -- you will be starting to execute those orders from this coming quarter?

Yes. We expect the offtake to start from Q4 of this year, and it should go on as per the requirement of the customer. But as Kunal explained, on an average, on an annual run rate, you can take around 12,000 to 15,000 tons. So maybe this quarter, we may ship around 3,000 to 4,000 tons. This quarter, the last one, fourth quarter. We already started production.

Okay. And I just want to understand what will be the realization difference when it comes to our average realization, which are around INR 163 versus the Chile order. Is it a better realization?

Chile order you should -- it is not comparable for two reasons. We only share the blended average realization number where if it is grinding media, it has to be on the lower side. If it is castings, if it is liners, it has to be on the higher side. It ranges from INR 100, INR 110 a kilo all the way up to INR 300, INR 350 a kilo in terms of my different products. So this particular order is grinding media, so it will be always on the lower end of the spectrum. And hence, it is not comparable.

Okay, sir. And sir, with respect to volume growth, what is the volume growth are we expecting in FY '27?

So as I said in the beginning of the call, we believe that from next year onwards, at least 30,000 tons plus annual volume growth is what at the minimum level, we are expecting or targeting, I would say. Given the new initiatives that we have taken over the last 24 months, 12 to 24 months.

Sir 30,000 additional, right, from the...

Yes, of course, incremental. And that too, I want to make a cautionary statement here. We are waiting for the outcome of these couple of more very large successful orders, and then we would really give you a proper volume guidance by the end of this year. But this is the minimum I'm talking about, the minimum targeted, which has to happen. This is what we feel.

And by when are you planning -- when do you expect this -- the trial orders to be -- the trial products to be converted into orders.

I would like say, one order will be reaching the final stage of trials around December end. Another will be by Jan end or mid-February. But again, let me tell you, these are not -- where they are working, but these are really most important or extremely, I would say, game-changer kind of situations where then it can open up a very, very big opportunity because many people are waiting and watching for the outcome of these trials.

And sir, my final question is with respect to...

And already -- at any given point in time, already working with 20, 30 mining sites. But then it will be in different stages, some of them small, some of them medium. These are the ones which are relevant based on the new approach which we have adopted.

Understood. Understood, sir. Sir, my final question is with respect to the overseas operation. We have a unit in Ghana as well as China. What's the current capacity -- operational capacity? And what's the utilization of those capacities?

There is -- I think -- I don't know where you got that information from. We have only announced a plan and an intention to set up plants outside India. We want to be very careful. We'll be doing smaller modular plants. And as we stand right now, we're in the process of acquiring land, applying for approvals. We will share a firm plan once we have things on the ground. We have never set up a plant outside India. It's a greenfield facility. We have only announced an intention to set up two plants, and we are working towards strategy to do that. And once we have clarity and we'll be revisiting some of those decisions in terms of scale, size, capacity, and we'll share that update once we have absolute firm idea when we start implementing the plant. Till that time, our capacity continues to be in India.

So the entire 460,000 tons per annum capacity is in India?

Of course, yes.

Yes, yes, yes. Correct.

The next question is from the line of Varun Jain from Dolat Capital.

Sir, so I have a couple of questions. So my first question is that if I look at your H1 FY '26 and versus H1 FY '25 volumes, so in mining, there's a minus 2.5% degrowth, but the other segment is growing by almost 10%, 9.7%. So this is driven by cement or thermal or what?

Nothing to read. These are just timing things, my friend. There is nothing to -- there's no meaningful reason for that. It's just a quarter in the sales that added up to this.

And this 10%, will it continue for like this entire year? Like it was in...

I can't answer it. 250,000 tons, I can't explain for 2,000 tons plus and minus, no. I mean that will happen. I don't know between getting an order, producing it, dispatching it, delivering, invoicing, there are timing differences, companies have shutdowns, maintenance downtime issues. I mean, all that happens. So this is just an operational adjustment between 2 quarters, nothing more than that.

Okay. Okay. And the other question is that you have guided on EBITDA margins close to 24%, 25% as sustainable. So Q1, you said product mix was very good. So you got 29.5%. But even in this quarter, it's close to 28.3%. So will the margin remain at these elevated levels at 28% plus levels for the next 2 quarters also, or this quarter also has a favorable product mix or something?

I can understand your question if things are worse than what I told, 2%. If we have done better margin, I mean, I will let it be at that, right? Our guidance is what we believe we should share with everyone and what we are -- what we can defend. It continues to be at not even 24%, it's 20% to 22% operating margin. We've done better. There are many factors that come to play. We'll not be guiding a different number. That is something we -- our performance is up for there. As a policy, we'll not be guiding a profit figure beyond that.

No, sir, that is fine. If you are not guiding, but can you tell us the reason why in Q2, it was so high, 28.3%?

Exactly what you said, there is foreign exchange, there is raw material adjustment, there is transport cost, there is product mix, and it is impossible for us to strip out every single item and keep explaining there. So it's a combination of those things.

So I'll just clarify a few things. See, one, you are right, our margins are good. What we are factoring is that when I go for a significantly higher volume, that volume -- when I start getting the orders, so that volume is predominantly going to come from grinding media, correct? So today, my product mix is extremely comfortable. So I have a very high value-added, high profit-making products also as a part of the mix, which play a dominant role. But when a grinding media plays a dominant role, when my volumes go up sizably, naturally, the average realization and the margins would change, and that is why we are saying that we feel that while our guidance was 2022 on a more optimistic or a more positive note, I feel we have said that around '24 can look sustainable. We are doing better because we have an extremely favorable product mix. That's the primary reason we are doing very good. But as the product mix changes, this can change. Therefore, in all wisdom, we are saying, please don't factor anything beyond '24 or '25 on a long-term basis when, say, when I reach 300,000 tons or 350,000 tons or 400,000 tons, this can definitely change. And I can do better, but it's always better to guide or give a picture on a conservative side and then do a little better, and this is the reality of the situation.

No, I understand, sir. So I just have a last bookkeeping question. So in Q2 FY '26, your year-on-year realization has fallen, yet gross margin is up by close to 418 bps. So is this like some onetime low-cost inventory you had or something? And also in Q2 FY '26, this export incentive has risen very sharply. So just last...

No. So there are two aspects. One, again, although I may sound boringly repetitive, the fact of the matter is that a quarter-over-quarter gross margin movement cannot and will never indicate a sustainable trend because, for example, in one particular quarter, say, if I have shipped out of that 67,000 -- 63,000 tons, if I have shipped 15,000 or 18,000 tons of liners plus castings, the needle can move completely different. In the next quarter, if that number falls to 12,000 tons and my grinding media goes to 40,000, 50,000 tons, again, the needle will change. My more clear suggestion would be please look at us on a little longish maybe over an annual basis or a half yearly basis. And then don't try to work out the trend or don't read too much on one particular quarter. Having said that, we are very comfortable. We are profit making. We are generating good cash. Everything is comfortable. We are working very hard on now major breakthroughs and that can and will definitely make a difference in the times to come. But [Foreign Language] it should not be read as a trend setter.

Okay. Okay. And just, sir, one last question I want to squeeze in. This order which you got from Chile, is that your first ever order from Chile for high chrome grinding media?

I'll tell you. I'll tell you. I'll tell you. We all know that Chile, Peru, they are very important markets from the point of view of copper, gold or the minerals where we are targeting, correct? So we've been working on Chile for more than 2, 3 years. This is the first major order we got. And the idea was to show that this is a breakthrough. Internally, we are treating this as a breakthrough because we got that entry into a very tough market on a substantial basis, you get my point. And that becomes a trend set up according to us. It also becomes a very important reference point. So it's not the first order, but it is one of the first major breakthrough orders, I would put it like that.

Okay. So anything above 20,000 metric tons you would classify as a major order. Am I reading it right?

At the Board level, on the materiality, we had a discussion today. We are working on it. We will probably look at a 15,000 ton plus as a materiality threshold, but we'll come back to you.

The next question is from the line of Deepan Shankar from Trustline PMS.

So firstly, considering there is substantial potential for high chrome grinding media for further conversions in the market, what are the key challenges faced by the company in this kind of conversions? Especially what is the price gap between the forged grinding media and high chrome, and how the gap has widened over the past 3 years?

So my friend, I can -- the question that you asked is an extremely pertinent question, which goes to the very core of our activity. So first and foremost, let me elaborate a few things. I understand that you perhaps have not been tracking us for a very long time. So what our whole forte is that this particular market of grinding and crushing in mining, we are focused on platinum -- I'm sorry, gold, copper and iron. As an opportunity, this is about 2 million, 2.5 million tons. Predominantly, the penetration of high chrome solution vis-a-vis conventional forged or other material solutions, the penetration is 25%, 30%. So we are talking of a 60%, 70% opportunity, which is 1.5 million or even more for these three specific core. Challenges are many. We are in India. So our solution is not only based on cost savings. That is how we had initially started. The fact of the matter is as compared to a forged grinding media or any other material of construction for liners, our solution works in three directions. One, it straightaway saves cost of this consumable spare parts, which is 8% to 10% of this entire mining process cost, point number one. But that doesn't change the needle because there are multifarious challenges. These mines are extremely powerful, completely decentralized, localized, large operations. Nobody is interested if you go and say that, hey, I'm going to save you a few hundred thousand dollars, et cetera, et cetera. So then over the last 7, 8 years, we have now made us a very, very formidable force by changing our solution to one, not only on cost saving, but saving on sizably increasing the throughput of the mines for the same or similar cost they are incurring on the same products that they are buying conventionally. So if, for example, it's a gold mine where input, output ratios are extremely adverse. If I say that on a $5 million purchase of my grinding media or a liner or the package that I'm offering, if I'm improving your throughput, whose value is $25 million, $30 million in a year or $50 million in 2 years against a $5 million or $10 million that he pays me, he is not only saving on the cost of this material, but he is completely changing his equation of the balance sheet. Third, my solution now saves a lot of power cost. These operations, mining operations are extremely capital intensive. Our area of focus is grinding and crushing from the SAG mill stage up to primary tertiary, secondary tertiary and beneficiation. These are extremely capital-intensive operations where if I'm able to improve throughput, save power cost, my solution goes far beyond cost saving. And this is what we have earned over a period of last 3, 4, 5, 6, 7 years of very hard work. That is where I'm getting a little more confident when I talk that now I'm approaching mines not simply saying that I will save you money, but saying that I will improve your entire efficiency. And it will be a game changer for you and you pay me the same price you are anyway paying. This is a difference. But it's a bit complicated. Our mining customers are very difficult people. It takes a very long time for us to convert. But now the opportunity is massive, and we believe we are geared to take that opportunity. I think on this call, beyond this to spend more time on that question would be unfair for the other participants.

Okay. Okay. Sure, sir. And like when we look at the Magotteaux available financial information for the last 2 calendar years, they were able to grow at 10% to 14%. So have they gained more market share in this or most of that has only come from the grinding media, not from high chrome?

No, no, no, no. So Magotteaux, first, now our competition, frankly, has moved away, and we are still very, very focused on the forged grinding media players who are -- so Magotteaux in their own, so they have multiple plants. Magotteaux is a very complicated scenario. There are some 14, 15 plants in 12, 13 locations. Some of them good, some of them not so good. They also have licensee relationships. So beyond that, we can't comment. But Frankly, we are not really focused on Magotteaux as a competition.

Okay. Okay. Sir, lastly, in the last couple of quarters, we have been saying that there is inventory ramp down by large customers potentially could be 20,000 to 30,000 tons of volume. So are we expecting these volumes to come back at least by next year?

So it is not a question of volumes coming back, but our entire focus is on gaining incremental market share and volumes in new set of customers that we are talking. Of course, some of these volumes are bound to come back because now things have settled down quite a bit. But we offer our solutions to several mines across the geographies. And therefore, we are not really worried about one particular geography. We are rather agnostic if some volumes do not come back the way we anticipate from, say, Brazil or Canada, it's not that needle changer. But yes, overall, we are very focused on the new customer acquisition. And one point I forgot to mention on Magotteaux, they are also into non-high chrome, which can be giving more volumes. We are not into that segment at all.

The next question is from the line of Priyankar Biswas from JM Financial.

I heard from the commentary that right now, like trials are going on at 11 large mines. So if I look at it like a prospect pipeline, so if on an average, it's something like a 15 Kt types opportunity, each one of them, would it be right to assess that it's almost close to a 150 Kt type opportunity of all the 3 -- all the 11 mines were to eventually convert to high chrome? Would that be a fair assessment?

Earlier we were just trying to answer one gentlemen's question where we have been asked in 20 different ways to give some guidance, and we are trying to explain why we are not able to share a guidance, right? Sort of a guidance, what work are you doing? There are 10 mines we are working at it. I think we're doing work at more than 50 mines across the world in different stages. There are at least 8 or 10 where we are in advanced stage. There are maybe 10 or 15 where we are -- collective work that we may be doing, maybe prospecting work maybe more than 200,000, 250,000 tons, correct? But that's at various levels of work. And where does it convert, how long does it take, whether it's a there are plenty of things linked to that. The question is not the opportunity. The question is a larger context in which we operate, but as an incumbent. The incumbent has been around for a long time. The customers are conservative. It takes time for them to -- so all our effort is to make sure that our value proposition becomes better and sharper and more value added. That's what we are doing, right? And which is what finally -- and these are things only when we do hard things, do we make the kind of margin that we make. You get it. So the idea is that for us, these are hard things. These are things where there is no straightforward signaling to say, I will do this amount of growth. And which is where is our business at, right? So more than 10 mines, I think our prospecting work is far more. And to answer question, yes, there will be at least 200,000 to 250,000 tons of prospecting work that we're doing.

Okay. That's extremely clear. Also, like in the -- like, let's say, the copper belt of Latin America, can you give me a sense of what is the high chrome penetration there? The reason I ask is, if it is a very underpenetrated geography for high chrome, for example, then we can potentially see a lot of growth, I mean, multiyear types of growth. So what sort of...

Except of Brazil, Chile, Peru, which are the large copper producing region, there is absolutely none. We are -- what we broke -- the breakthrough that we did is the first high chrome in that region for copper.