AIA Engineering Limited (AIAENG) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the AIA Engineering Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to the management of AIA Engineering Limited. Thank you, and over to you.

Thank you so much. Hello, everyone. Good evening. This is Kunal. And as usual, we have Sanjay Bhai and I doing this call for the first quarter of fiscal year '27. Uneventful quarter where most of the line items and commentary, I think, reflects all that we have spoken over the last few quarters. I will nevertheless sum up the headline figures and numbers, and we can get into Q&A after that. So we are at about -- we had 64,644 tons in the first quarter. That compares to 60,000-odd tons that we did in the first quarter last year and translating into sales of INR 1,153 crores and EBITDA of INR 424 crores and a profit after tax of INR 301 crores. The tax item when you look at sequential numbers, if you recall, the tax amount in the fourth quarter had a refund that we had gotten and which is why that number was a little lower than what we have historically. This time, because it's the first quarter, tax will normalize. I think it's at about 23%. It will normalize at about 21.5%, 22% overall. I think the rest of the figures, we have a data sheet that we had uploaded. I think numbers remain at par. operating income, which is export benefits at INR 14.78 crores, treasury income at INR 85.3 crores and foreign exchange currency gain of about INR 25 crores, leading to a total other income of INR 110 crores plus the INR 14 core, INR 124 crores, sorry. I think working capital at par, no major update on tonnages. I think they are broadly the way we have seen. From a business standpoint, I think our -- what we had explained and spoken about last quarter was about the new generation discharge system. That system, we believe, dramatically influences operating conditions in terms of throughputs and finance and other variables that influence the working conditions at the mine site. It solves for the top 3 issues at the plant site, most importantly, the falling yield of gold and copper metal -- and that's an intervention that's very unique to us. It's a sum total of everything that the company has done over these many years. It is a new system and the trial and commercial implementation follows a whole life cycle. We've done similar work at cement plants where the mill sizes and the throughputs are significantly lower. So for example, a typical cement mill for 1 million ton plant would be, let's say, 30 tons an hour and a 20% improvement is 6 tons of improvement, and it is a material improvement at a cement plant. That 30 tons an hour can be as high as 2,000 tons, 3,000 tons an hour in a mining site. And anything that we do as an intervention is now an order of 80x more abusive operating condition and the process knowledge and design implications on systems are something that we are learning, we are applying, we are going through iterations. So when we took this -- the strategy is to -- the mill sizes vary from what we would call a small size to a larger size without getting into the minutiae, or the details. I mean that's not beyond the point relevant. The point is that we start with safer mills, then go to medium-sized mills and then the larger mills. All 3 are a pocket of opportunity. We've had successful trials at the smaller sizes. Now we are doing at the medium and the larger sizes. And this journey of doing the trial, it is certain in a way that it could take 3 months, it could take 2 years because every mine site is different, operating conditions are different. And all of that will lead into an optimized design and optimized system that delivers on the throughput, right? So having said that, we continue our work on grinding media, the recovery improvement, the reagent improvement that our portfolio of grinding media. Then there is the mill lining and the discharge system now as a solution. And in that, we have -- I think for the next 3 quarters or 4 quarters, our updates may continue to be planned in terms of just saying status quo because some things may perform, some things may need an iteration. And that is an iterative process. I don't think we'll be able to forecast on what it means. So having said that, this quarter has been continues at status quo. All numbers, I think there is no large macro events that have impacted us or we worry about. We will continue to keep doing the same for next year or more. And hopefully, there are good news to share on top of that. With that caveat, I'll have Sanjay Bhai share his thoughts, and we can go into Q&A.

Thanks, Kunal. So good afternoon, everyone. A couple of points from my side. If you would have seen Q4 to Q1, you may observe a decline in the EBITDA percentages reported at 36% and operating at around 2.8%, 2.9% I just want to draw your attention to that sort of preempting certain questions. So one is if you compare Q4 to Q1, there's a sharp drop. So the foreign exchange gain, which was about INR 65 crores in Q4 has come down to about INR 25 crores. That's point number one, the part of the other nonoperating income, but then it never gets reported. Second is you would have seen major is the product mix. So in the past, we have said that in a given quarter, if the product mix is extremely favorable in terms of bigger castings going more, then the needle will move into a much better margin. So in this quarter, the product mix has not been that great in terms of the value added products that have gone. So that is second major contributor. Third is on the other expenses front there is sort of, you know the ongoing trials and other expenses also are booked to the revenue. So that is additional other expenses plus additional freight because of the movement of freight. So these are the three main factors why Q4 to Q1 appear to be on the lower side. Other than that Kunal is already explained. So let us open the house for Q&A.

[Operator Instructions] The first question is from the line of Ronak Agarwal from ithoughtPMS.

I have 2 questions. My first question is on the South America mining conversion. Last quarter, you did mention that the second mine trial was ongoing and you were expecting an outcome in a couple of months and that the client has also immediately placed an order for second mill conversion after the first trial. Could you please give us an update? Has the second trial concluded? And what was the customer -- what was the outcome?

Nothing, like I said, we will refrain from sharing specific input because that does not feed into ultimately the question is on sustainable growth and tonnage. So idea is that we are doing trials most trials go to an iterative phase, right? So to carve out one and say it has worked well, again, does not feed into it. So I think allow us to take the time to go through that, and we'll keep sharing -- I think the material input was that the is a solution that we envisage is a game-changer for the mining companies and trials risk aversion, the conservative nature, the supply chain, the pricing, there are all sorts of hoops that we have to jump and cross for ultimate sale to happen. I think we are in Stage 1 today, which is trials.

And yes, this is ongoing. Nothing to share that ultimately helps give more clarity.

The update is still work in progress, and we will wait for the final outcome. It might take a little longer than anticipated because of certain technicalities, but it is work in progress. That's the short answer.

Okay. Sir, my another question is this quarter, if we see the mining volumes are down by 5,400 tons Q-on-Q. So is this decline purely due to timing issue? Or what's the issue we can just say?

As I said, we don't have a quarterly run rate kind of a tracking. It's annual. So it's more of a timing issue, a product mix issue and order execution cycle issue.

Sir, my second question is on the competition from China. Are you seeing any Chinese player undercutting us on the pricing and posing a real threat to the conversion, especially in the market where we don't currently have antidumping duty protection.

Not really. Chinese today have made a dramatic entry into the forged space, where as much as the top 2 mines, I think, in Chile today use Chinese forged media. So China has become the largest producer of forged and are very important -- and there are like 20 forging companies now in the freight supplying to all sorts of mines across the world. So forged product has seen a dramatic presence of forged presence in the market. As far as chrome is concerned, because there is an Etsy Forged is one product, one grade material and then it's a distribution business. While in our case, it's a custom business, right? So each mine site needs a custom solution, one needs to engage. There's an process behind it. So to that extent, I don't think Chinese presence in high chrome is there today. I mean we don't see Chinese coming on board. Now that may change in the future. All of these are questions of conjecture. So to answer your question, as we speak today, I think chrome continues to be with limited companies who build this front-end solution engineering capabilities.

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

I have a couple of questions. So firstly, on this NGS, can you explain a little bit on the economics of this product, sir? Like how is -- what is the replacement cycle? And is the revenue driven by volume like mill liner is sold by kg -- how is this sold? How is it priced?

Happy to do that. See, ultimately, the idea is our goal is to sell to become a meaningful player, not just become a meaningful player, but offer an intervention in terms of benefits out of the solution, wherein AIA becomes the go-to sticky partner for customers in the mining space, right? That's been our current business. That's what we are building out for the future. the purpose is it's not a new product that gets sold differently, right? It will continue to be a per kilo because kilogram is a metric. Our product is not like P is not sold in grams, right? So is sold in units or numbers. In our case, our metric continues to be a unit of measure continues to be which is kilogram. But the idea is to sell it as a solution. So we are not going to be selling the discharge system as a sold product, right? The trial phase may have elements where we are doing because the grinding media, there's other liners and then there is the discharge system. So there are 2 or 3 moving parts. And we are working with the clients because the risk appetite is different for every customer, right? Ideal solution is where the whole package comes from us. If they implement this, then there are -- there could be possible changes in operating conditions inside the mill requiring a different grade alloy of grinding media and which is where we'll be selling the full set. So if this comes along, the product mix category and profile may not be very different. Like today, what we're doing, let's say, 30% exams are saying, let's say, 25% of my volume is 75% is grinding media and 25% is casting. I think because that also comes from cement, which is a solution, which is grinding media and liners. And of course, the rest of mining where we sell grinding media and liners, but today, they have been sold separately. Going forward, it will be part of a solution. So I don't think our pricing or unit of measure or a different metric to look at will change.

Okay, sir. I think this is helpful, but just double clicking on it a little bit. So I just want to understand like NGDS like how -- what is the revenue driver? Like if it's like run for 3 months, this much revenue will accrue or if the mine is saving 25 million, so then they'll pay 20% of that as revenue, like what is exactly how will it determine that how much revenue we can get -- like in mill liner, we know.

Separate 2 parts to it. What I'm saying is I'm selling a car and a car is giving me INR 1 lakh of selling price per car and I'm earning x percent of operating margin. Those 2 will not change once the solution comes in. Arvind Bhai?

Okay.

The purpose of having [Foreign Language] That is the pricing that you're saying, right? Ultimately, what part, what volume, what percentage will come to us at the end of it, it will translate to a selling price and a margin, correct? Both these figures will be in line with where we are. That's what I'm trying to tell you because it's still a combination of grinding media and lining, which is non-grinding media portion from our current business. So that profile does not change. The other question that you ask is which is what is the benefit and how does the customer look at it. The idea is not [Foreign Language]. The point is that it brings along the stickiness because this is a unique combination of today is buying linings from a different company. There is no discharge system conversation and grinding media comes from a third company. They are all consumables being consumed without any consequence on operating conditions in his own -- we are a unique company, which is what we're doing for the rest of the business also where we are taking ownership of the operating condition. We are going to be selling all of these 3 as a solution. In return, what does AI get, it gets that stickiness that comes along with such a business, right? It's a recurring consumption product, and that brings stability and allows us to then build on it. So that does not necessarily translate into a very different margin profile is all I'm trying to tell you.

Okay, sir. And sir, my understanding is that NGDS can be sold in mills where the grinding media and mill liner is from other suppliers also. So if I can understand, sir, what is the stand-alone TAM for NGDS, like revenue TAM.

[Foreign Language] NGDS is not something I can sell on its own. NGDS is part of the lining conversation I cannot sell without grinding media. All of it will become like a solution. I'll be selling the whole package. There is no stand-alone TAM, [Foreign Language] first of all, technically can't sell it. I need grinding media as part of the solution for the whole benefit to accrue to the customer.

[ Liners ].

Liners. Grinding media, liners and NGDS together forms a package that gets sold to the customer.

Okay, I'll take it offline and I'll just take -- move on to my other question. in Q1 FY '27, so Sanjay Bhai mentioned that the product mix was not as favorable. But I think when I calculated, the realization was highest ever, I think, INR 180 plus. So -- and also like for the past 2 quarters and past couple of years, I think realization has been very high, but INR 165 would you like to revise upward the realization guidance?

You tell me what will be the dollar next year, what will be the cost of ferrochrome, what will be the cost of scrap? How much competition will have give me those 4 things, I can calculate and give you that. The point is INR 160 is an indicative what will be the shipping price. My selling price is influenced by 6 parameters. One of the most important being the product mix. And product mix also changes because the customers' operating conditions change, buying cycles change, right? So there's a product mix conversation, product timing conversation, my cost conversation, the currency input shipping price. So if it has become INR 180, we are not stripping it out to say that INR 10 came from more shipping, INR 2 came from extra foreign exchange, right? -- idea of INR 100 to INR 150 was what we had shared 1.5 years ago based on operating conditions and variable costs that we -- that existed at the time, right? I mean, yes, we can change it to INR 180, but that does not serve. I think today, the conversation in front of us is where does growth come from? What are we doing to build out that growth. And once we have a little better visibility, hopefully, these are easier questions to solve for, right?

Okay, sir. And sir, for FY '27, will we hit 280,000 to 290,000 metric tons of volume and the outcome of the other 2 trials which were going on, like Peru Copper and [ Dhanagold ], that's all?

So as I said, in the beginning of the call, as Kunal also said, the trials are going on. And we were very clear even in the first last quarter's conversation when we have the that we are going to give our growth guidance once we have that perfect clarity of how things are going to come. So at this point in time, we are not giving any guidance. What we are saying is trials are going on. It is work in progress. We are getting decent responses, but there are technicalities which entail our team to engage more, give some more solutions. That process is going on. It may take a little longer time than what we had anticipated. So we have to ask you to maybe wait for one more quarter before which we will give you any exact guidance. Of course, our target is a much bigger growth that we are anticipating. We want conversions to happen faster. That process is work in progress, and that is the reason why we are maintaining status quo at this point in time. I can't give you an exact specific number about the -- but of course, target is to see whether to what extent we can increase the volume.

Sure, sir. But any indicative like are you confident of crossing 280,000

I have frankly no specific answer to give on this.

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

So my first question is, see, we have always discussed a lot about conversions in Latin America -- but recently, what we are seeing is that at least some of your pages on Mega that we are also making some inroads it seems in Philippines, Middle East as well. So yes. So could you just elaborate because since you guys have discussed LatAm so much, could you elaborate on the other geographies, whether we are making some meaningful progress, whether we are seeing some traction -- and potentially, what is the competition that we face in these geographies?

So Par, 2 things. One, why LatAm because we are taking trials with very large mines there, point number one. Point number two, itself is a huge market. We are talking about more than 500,000 tons of plus the whole gamut of products that go into concentrated market. Therefore, we talk a lot of LatAm, but you are right, other markets are important. If you look at the whole world, then of course, Philippines and other markets are quite important, but they are much smaller than the Lat America that we are talking about. So when we say that between the 3 that we are talking about the opportunity is at least 1 million, 1.5 million tons 30%, 40% of that is coming from only one geography, naturally all our concentration will be on that geography. Having said that, other markets are important, and we will continue working in all other markets. [Foreign Language]

Because what I recall is like in other big markets, even Australia used to be also quite a large market at one point in time. So is there some headway we are seeing in, let's say, the countries like Australia, Indonesia and even Africa for that matter, which are key geographies?

Australia is iron ore and gold market, and we've done -- we've got a reasonable presence over there. I think as a company, work that we are doing in South America, which is almost a 1 million ton market, okay, in a geography where there is an extraordinary problem of falling yield, right? And there is a solution that nobody else is offering, allowing us for a sticky proposition with reasonable margins and a sustainable growth for a few years is what we are trying to solve for, correct? [Foreign Language] While we are doing that [Foreign Language] we are very happy for other business to come along, but that does not move the needle, right? So we'll work on all of that. I don't have meaningful updates to share on all of that because all of that Australia total market, maybe another 20,000 tons I can do, right? Brazil and Canada, where already there are duty actions and an incumbent who is using the global tariff situation to their advantage, right? If there is a global macro geopolitical shipping macro uncertainty environment, in that case, we feel we continue to believe that the strategy to focus on South America, can be 300,000 tons, 400,000 tons market for us, 300,000 tons, 400,000 tons market for us and solve for a few things at the same time is something that excites us. The rest of the world will continue. And hopefully, we'll have some progress to share, but it may still not be needle moving beyond the point.

Okay. That's very clear. So what I understand is like if your strategy with the NGC and the others are to work out, so in the long term, let's say, 5 years to 10 years, then probably we could even see, let's say, the volumes doubling from current levels, as you said, it can be 300-400 kt market, so is that the right way to think?

That's where I'm getting a concentrated opportunity solving all of this requires a serious and deep effort that requires us to now choose the amount of bandwidth we have and where we apply ourselves that we are disproportion now applying ourselves, right? That does not take away the opportunity elsewhere. And now that the trials are on pace and we have put that in motion, hopefully, the rest of the strategies and geographies and other things that we're putting in place will show some progress, but nothing to report at this time, Priyankar. I think the opportunity has not changed. There is a large opportunity in front of us. We have the solution. We have the bandwidth, we have the network, we have the hopefully, a few things will come together. Beyond that, for us to now, I think we will share more once that volume comes along. It's not appropriate to keep speaking saying I will do this tomorrow and day after. I think we just need to get the space and time to go work and come back and deliver on sustainable growth.

Okay. Just one more question, if I can squeeze in. So parallel to this NGC, you had also developed a full suite of mill liners is what I understand, capabilities like both, composite, ceramics, all of this. So how would you compare, let's say, with your competitors who are predominantly focused on, let's say, a composite? And also, let's say, because of this new technology, what sort of cross-sell opportunities you are seeing, particularly for the mill liner area?

So Priyankar, one needs to understand that one is a material conversation the other is a solution conversation. I don't think comparing the 2 is the right way to look at it. So if I'm -- when I make a metal liner or if I make a rubber liner or if I make a composite liner, right? So now the choice of material is determined by the operating conditions, right? There is one material that serves that the nature of operating conditions. So for example, SAG mills is predominantly a metal liner material I'm metal liner player or if I'm a rubber liner player or composite for example, rubber and composite metal and composite I can only bring intervention and innovation on the material squeeze a little more then it's a cost metal [Foreign Language] I will sell it at 1.8, 10% correct? Why? Definition, the material itself does not have any magic to the solution. Are you getting me. The material can only go so far. The magic comes from the design conversation that we are having. The design intention only happens if you understand the process. And none of the incumbents across the spectrum deal with process. When I go to a cement plant and I tell them, you have a 50 ton per hour mill and I'm going to improve that by 20%, that requires me to take ownership of the whole grinding process itself, right? So we are, when we think of ourselves, we are grinding. We are grinding experts and design experts, metallurgists. And that combination comes to design a solution. So someone may make a post wall which is an indistinct product. It is a question of distribution. Now there is nothing else you are adding to a consumer. If I am a conventional liner maker, I know I'm just a vendor, not some. So you know, today in India you have two telephony providers. That does not make them better than maybe telephony in China. It's a CD, it's a GSM technology or whatever technology has been used. The question is the money they could pour or the distribution. These are other elements then where some people have advantage in a market or with the customer. We are in a very different, you know, offering altogether. So, so liner is at best a liner life conversation or a cost conversation, which is limiting [Foreign Language] because you got better material. That's it. It's an insignificant intervention at the customer then. Or if I'm a [ forge ball ] maker, I have a insignificant influence at the customer's operating conditions. He will buy it from another vendor or a third vendor or one of 34 players in China making the product. [Foreign Language] But there is nothing beyond that, right? So what when you shift that and go and say, I am a copper producer, I've gotten grinding milk where I'm grinding 2,000 tons per hour. Can you help me improve throughput by 10%, reduce power by 10%, improve recovery by 2% or 3% or 5%. Now these are hard problems that we are solving with the customer. This is exactly our legacy is not a part manufacturer. Legacy is a solution provider. Because this is exactly what we did in cement is what we started with mining at. If somebody comes, someone asks NGDS [Foreign Language], I don't want to sell NGDS. I'm not a part supplier. If I am not talking with the customer on how do I make your life extraordinarily better or a plant manager performance extraordinarily better, I should not exist. Understand? Priyankar? So the Liner is in sync with grinding media and together that becomes a solution. Is what we are attempting to go to the customer with and you know, offer and discuss the throughput power recovery improvement that is mindsight.

So Kunal Bhai, if I understand this correctly. So this is a completely solutions approach. Pardon?

Yes.

Kunal Bhai, if I can just go ahead, so just to verify that I am understanding it right. So, this is a fully solution of course that you are offering course I can just wait. So just to clarify that I'm understanding it. Right. So this is a fully solutions approach that you are offering. Of course the design is the key strength among other things. But since a mind has several variables to look at. So how do you like go ahead with. Because the computations would be significantly complex so require a lot of computer. How have you solved that problem then?

But that's what we are solving for last 30 years. That's my business. Can I solve that for a smaller mill and a smaller operating condition at a cement mine site? That's a cement size is exactly what I'm what I deal with. There is complex simulation that we work upon. There is a lot of process flow, fluid flow dynamics that we work upon. Right. There is metallurgy, there is process of that. The intervention, sorry is not just designed intervention is also process. The grinding itself that's independent of process. And then there is material. So there is material science. Right. There is design and then there is process. Understanding the grinding to say for this set of operating conditions. Let me try this design in this alloy or this material for it to then deliver on the benefits that we speak about. And in that mix we've now introduced the NGDS. Absolutely. A solution approach. Compared with every other incumbent who's talking about a product. They are a vendor to a their customer. And there is a tender -- RFQ. And they are supplying a price and they are winning some and losing some. If not one, then the second or the third or the fourth person gets the business. I don't think AIA exists. And which is where unfortunately I'm not able to provide a lot of these standard modeling questions. If I had to make 10% margin I may be in a very different space where I could have continued to grow on the back of distribution, for example. But that's not where I exist. AI does not exist in that plain vanilla commodity product or a product less sales. It's a solution less sales. And that requires us to solve these harder problems. But with that comes this beautiful bit about our business where the customer partners with us because I make them look good. Right. We are solving for things that possibly they on their own are not able to do.

The next question is from the line of Ankur Periwal from Axis Capital.

Yes. First question on Sanjay Bhai, your initial comment wherein you said that on a relative basis you know the quarter's volumes were. They were slightly inferior product mix. Were you referring to a quarter on quarter or was it year on year? And second related question here, the realization increase that we are seeing, is this a function of the product mix change or is it RM inflation pass through and hence you know, the higher growth there.

So first I was talking [ QA Q ]. So the sequential basis Q4 versus Q1. Correct. And the product mix change was also there. But as Kunal explained, as the freight goes up, as the raw material prices go up, as we do, the pass through the realizations will go up. Other expenses will also go up. Correct. So it's a function of product mix. It's a function of the pass through mechanism that we built on the freight, ocean freight, def. freight and all the costs that have shot up in the current quarter. And plus of course the raw material pass through effect and the product mix. So it's a multiple functions where you know, you might have seen that the realizations have actually gone up. But then if you see carefully, my other expenses would have also gone up.

Correct. So that was the question. The increase in other expenses. You mentioned freight cost being one of the factor. So basically your realization increased because of higher freight. And similarly it is showing in the, in the cost line item. Is that the right way to look at it?

Correct.

Fair enough. And one more clarification on the ongoing trial expenses you mentioned. One is this.

Yes. They are also part of other expenses. They are also part of other expenses plus raw materials.

Sure. But these trial expenses should be there in last quarter as well. Right. And probably will continue. Or was there some significant jump that you know.

The intensity and the volume and the other things might change. It will go as per the requirement of the customer, as per the outcome at a particular stage. Whatever is required, we have to immediately handle it. You know, this is a continuous process.

Sure sir. So you know, keeping the, the freight rate pass through aside and you know this ongoing trial expenses also aside on a, on a pure product by-product-basis, you know, let's say a contribution or a gross margin. The way you look at it, there will be a reasonable uptick there on an year-on-year basis, quarter on quarter there is a dip. Is that the right understanding?

Gross margin.