AIA Engineering Ltd
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Good evening, ladies and gentlemen. Thank you for standing by. This is Aman, the moderator for your conference today. Welcome to the post results conference call of AIA Engineering Limited. We have with us today the management team of AIA Engineering Limited. [Operator Instructions] I would now like to turn the conference over to the AIA Engineering management team. Thank you, and over to you.
Thank you, Aman. A very warm welcome to all of you and joining us for the second quarter review of our financials. This is Kunal. And we also have Sanjaybhai here on the call with us. I hope you all got a chance to look at our numbers in our presentations. But nevertheless, I'll run through a quick summary on the quarter with some number highlights, and we can go into Q&A thereafter. So we've done 69,000 tonnes of -- or metric tonnes of sales this quarter against a production of 67,500 tonnes, with a net sales of INR 871 crores. This compares with INR 719 crores in the second quarter last year and approximately the same volume at 68,575 in the second quarter last year. The other numbers, we'll delve a little deeper into, but EBITDA is at INR 197 crores, profit before tax at INR 175 crores and profit after tax at INR 137 crores. Key highlights for this quarter, in terms of inflationary cost increases, they are around raw material increase in the pass-through cycle that we are in. And as you would have seen, there's almost a 6% increase in our cost of goods sold versus the previous period. And all of that is part of the pass-through cycle. We would hope that over the next few quarters a large part of that cost would be flushed out as we go forward. Our selling price has moved from INR 105 approximately in -- for average for the full year FY '21, moved up to INR 115, and it's now at INR 121 a kilo. So the price increase is also evident in our average selling price and which is moving up in line with the pass-through that's come along. We'll see further increase in these numbers as we flush out the raw material increases. There has also been a very steep increase in shipping costs. That forms part of the other expense line item in our published results, but there is also a steep increase, which is made good by other fixed expense not increasing in line with the top line, and hence, the impact is muted, but there is at least a 3% to 4% increase in shipping costs, which will also be -- will be passing on where possible over the next few quarters. So there is a clear hit of between 6% and 9% in the numbers on account of increase in costs, but we are happy to note that we could manage 70,000 -- 69,000 tonnes of sales despite 2 large impacts that -- or at least one large impact, which is on account of our Canadian business and which I'll explain a little more now, and there was an announcement that we made for a custom duty in South Africa, which also I'll just explain in a bit. So -- but parking that question aside, we are happy with the top line sales at 69,000 tonnes. This reflects -- at least half of that reflects new conversions, conversion from new customers or customers that we've been working on. And the balance is coming out of several geographies just consuming more in line with post-pandemic recovery that most economies are going through. And so we closed the half year at about 130,000 tonnes. I think a 260,000-tonne figure for this year is in the realm of possibility. Of course, that's subject to all the other known caveats around markets and COVID and other things. We may not -- we are still not in a situation to explain or give a guidance on growth and numbers for FY '23. We still believe that there's a large uncertainty around costs with commodity bubbles that have been created in costs -- in the shipping costs and availability of containers and COVID-related impacts, a lot of countries go into sudden lockdowns like you have seen in Australia in the past. We are hearing of similar things happening in U.K. or some parts of Europe. So we are -- as we all adjust to the new normal we are keeping just -- we are being cognizant of the risks that are present, and we would like to maybe wait for a quarter or two before we give a guidance on the next fiscal year before we try and preempt what will happen with our business. So moving on, our other income at INR 35 crores, that -- other, other income, operating income, which is export benefits is at INR 14 crores. Export benefits are only inclusive of duty drawbacks, which is at 1.6%. We have -- and a small amount of RoDTEP. As you all know, the government has withdrawn RoDTEP for grinding media, which is a large part of our export sales. And so this only includes what is going to be a benefit going forward, which is about INR 14 crores. Our treasury, ForEx and other income put together is about INR 35 crores for this quarter. Our working capital is largely in line. No significant impact there. But segment-wise sales, we've seen 48,000 tonnes in mining in the second quarter, which is up from 37,000 tonnes in the first quarter and almost at par with the second quarter last year, which was about 46,750 tonnes. So the second quarter is largely comparable to the second quarter of last year. But second quarter of last year had almost 11,000 tonnes of sales from Canada and South Africa while it's only 2,000 tonnes in this quarter. So the highlight for this quarter is that we've done 70,000 tonnes without -- with minimal sales coming in -- contribution coming in from South Africa and Canada. So I'd like to pause and just work through those -- the status on those businesses. For Canada, we have the duty structures in place. And we will -- we are adjusting to that new business reality and we will continue to pursue our business sales. We will have more updates on it. It will take another 2 quarters for us to organize ourselves around it, before we know what type of volume we can expect from there. There was also an announcement on a custom duty that South Africa has announced on imports of grinding media under our HS code. And so -- but the context to that is South African economy has been in deep doldrums over the last many years, and it came to ahead with the whole COVID episode. So post-COVID, from the middle of last year, the government's been applying lots of protective measures against a whole host of industries, but a lot of those are around any business got to do with fire and steel. And they've -- like, for example, they've banned export of scrap metal. So South Africa was a net exporter of scrap metal and which has been ground to almost zero few months back -- few quarters back and likewise. So they have taken many measures. As part of this process, they've also applied a custom duty to protect the local industry while that is a cost when a customer may want to import. But over the last year or so, there has been a rapid depreciation of our South African rand. Shipping has become -- because that corridor was severely impacted, so the shipping costs have gone up significantly. So on both those accounts, in any case, there was a reduction in business that had automatically accrued to that business. So for 6 months, this year, which was -- most of that period was without any custom duty, we had only done 4,000 tonnes versus, historically, we would have done about 12,000 tonnes, 14,000 tonnes, at least 12,000 tonnes, 13,000 tonnes in that -- in 6 months of a year. So there was almost a 70% drop without the duty being there. So the duty has only worsened that situation. So in any case, the market stopped being an important geography for us given their whole economic situation. So this quarter, for example, we've done only 1,500 tonnes to the South African market and small 500 tonnes in Canada. So a total of about 2,000 tonnes is what has come from Canada and South Africa. The rest, 67,000 tonnes is outside of that. And that -- I mean we are happy to inform and update everyone about this because there was a lot of concern about what happens to this year's targets and sales prospects given that at a point Canada was almost 25,000 tonnes and South Africa was another 20,000 tonnes, 25,000 tonnes. We're looking at a 40,000-, 50,000-tonne degrowth. And it looks like that we'll be able to salvage and not be very far away from what we did last year. And clearly, we are on a path to growth for -- from next year onward -- FY '23 onwards. I think that sums up most of the points we had. From a CapEx standpoint, this year's budget is about INR 200 crores, which is largely the Mill Lining project. We've done 2 wind mills for INR 30 crores and general CapEx. All put together, about INR 200 crores. We spent about INR 90 crores. We'll spend the balance this year, [indiscernible] there could be a little spillover next year. So about INR 120 crores is yet to be spent. Next year, we're looking at about INR 180 crores of -- INR 170 crores of broad spend, which includes another INR 120 crores in wind. And we are budgeting about INR 50 crores for maybe some land acquisitions, general purpose, et cetera. So that's -- about INR 280 crores of CapEx between now and end of FY '23 is broadly where we are. Our net cash end of this period is about INR 1,976 crores. I think that brings me towards the end of numbers and updates I wanted to share. We are still not -- the grinding media project continues to remain on hold till we see some more movement in the market. But otherwise, we are keen to finish up that expansion and, hopefully, that announcement is made soon. I think that's about it. Sanjaybhai, you would add anything?
Yes. Just a couple of very quick points. So one is on a qualitative side, because the figures, numbers are all there, Kunal has analyzed. So one is a significant increase in the freight cost, as we all know, is almost -- if you look at quarter-over-quarter is almost 40% up. And second, very important part is our ability, in most of the cases, to pass on that freight cost increase to most of our customers. So this is one point which I think I'm very happy to note and highlight. Similarly, as Kunal explained, a massive increase in the key raw material costs, ferro chrome,scrap, et cetera, almost 40% -- 50% jump as compared to the average rate that we saw last year. The process of passing over those costs always does take some time with a lag effect, but I think that process has started. And we believe that we should be able to do this passover. Third major point, in spite of all this increase, no major critical converted customer has said that they are now not willing to buy at this price. So that speak volumes about the company's ability and the resilience of the business model and the solution that the company is offering. I think, Kunal, with this qualitative remarks, let's throw the house open for Q&A.
Aman, can you please help us?
[Operator Instructions] Our first question is from the line of Ravi Swaminathan from Spark Capital.
Sir, my first question is with respect to the duties, once again, on Canada and South Africa. You had mentioned that the volumes are around 40,000 to 45,000 tonnes. I just wanted to get your sense, will the entire 40,000 to 45,000 tonnes would be at risk if these duties are imposed? And if at all, when they are imposed, so what kind of time line we can see for this? And what are the kind of mitigating efforts that we are taking either in terms of new geographies, like Latin America and other countries, et cetera, as they are larger markets to try and win share [indiscernible]
Yes, sure. So the duty does affect. It's not a small duty amount. So there is an impact on all -- material impact on all 45,000 tonnes of sales. But like I explained, 20,000, 25,000 tonnes of South Africa were anyway trickled -- would have trickled down to 6,000, 7,000 tonnes this year. So that is not a duty impact. That's what I want to try and separate out. While the announcement talked about custom duty, it is not an anti-dumping duty. It's a custom duty that a country has a process to apply to protect its local industry. The context to that, the duties come along because the economy is not doing well and the country is protecting its local industry by applying these various forms of protectionist measures across the board, right? And this happens to be one such product along. They'll do their own review and then apply a duty structure. But that got born out of the fact that their economy was struggling, okay? So if we speak of the duty being there or not, the impact is 7,000 tonnes, not more than that, right? So South Africa is just a function of the economy. The duty will only mean another 5,000, 7,000 tonnes goes away. So it's not material in the scheme of things. For Canada, for sure, we have -- see the duty came in as a large cost escalation for the customers, right? It requires both sides to understand what it means to work on a mitigation plan. Now whether out of that 25,000 tonnes we can keep 10,000 tonnes, 5,000 tonnes is a question of effort. I think it will take 2 quarters before we know where we are. But also more importantly, the shipping rates between India and North America are exorbitant right now, right? It is a deterrent to our conversations with the customer, right? So I think -- which is why we're seeing 2 or 3 quarters, it needs, for sure, for shipping rates to normalize, okay? Because India to North America shipping rates are the highest across the world, and that's just a large amount that the customer cannot eat in any case, right? So that's where -- so with both geographies, there is an overhang which is not duty driven. That's what I'm trying to tell you today. But so Canada is shipping-driven issue right now. South Africa has their own economy-related issues. Has the duty not been there we would have still lost this business given this all the abnormal shipping rate and there being a local producer in those countries, right? I think as it normalizes as the shipping rate normalizes in the next 2 to 3 quarters we'll be in a much better shape to give an answer on what it means. I think we should be able to recover some part of that business, how much and what amount will allow us some time on that.
And with the same shipping rates be a deterrent at least in the near term for you in Peru and Chile, that kind of Latin American countries?
So to an extent, yes. But as you know that our solutions offer value sometimes far higher than the incumbent that is being used, but please appreciate the delta between us and the conventional products they're replacing become substantially larger with the current shipping rates, right? So the customers also want to pause and reflect on what's going on. So shipping rate normalizing is a -- is important to our conversion process. And which is why when I explained we are not giving out estimate or guidance for this year is on that account. We don't know what's going to happen with shipping, which is an important variable to our conversion process. But when we speak with a lot of people that it looks like that it's not going to go away tomorrow, but it may not be here for 5 years, right? At some point, it's going to stabilize at a certain level, and that's where a lot more action is possible.
So Ravi, just to add, in some of the markets like Chile or whatever, Latin America or some other very important markets like Australia, et cetera, we were actually -- there is a positive traction in notwithstanding the higher shipping rates. So you see the problem is that each and every geography, each and every customer, the solution and the potency is not the same. So wherever we are able to offer much better value [indiscernible] people are comfortable. So it's a function of many, many factors. But to make it simple, as Kunal explained, just because of this anti-dumping duty or customs duty, we are not saying that the entire volume of 40,000 tonnes is lost. However, in today's context, in those specific markets, given the economies with which we are operating in today's situation, with this kind of freight and raw material rates, we don't want to commit on any volumes, but we feel that notwithstanding that little bit of duty impact we will still be able to recover some quantities in a normal situation. I'm repeating, in a normalized situation. And therefore, your assumption or your calculation arithmetically that 40,000 or 42,000 between these 2 countries is gone is factually not correct because anyway south Africa, Kunal explained, was anyway down the diminishing curve.
Got it. Got it. And so this year, sorry, for what -- I mean, you had mentioned I was not able to -- it was hard to hear. So you have mentioned that volumes can kind of be flattish this year for the company and for the [indiscernible]
Last quarter when Canada came along, we were looking at some reduction in volume for the whole year compared to previous year. It looks like that a flat volume is quite possible this year. We still have 2 quarters to work on it. But as we speak, it looks in the realm of possibility right now.
[Operator Instructions] The next question is from the line of Ashutosh Tiwari from Equirus.
So firstly, because this after the standard duty and this custom duty in South Africa, is there any change in thought process about the plant outside India or is just sticking to location in India only?
So it's both ways. While there is an intent to set up a plant outside of India, that's a combination of a lot of factors. One of them being our business is global in nature, right? That's where it's moved from local plants to produce where it's the most efficient to produce, right? That's where global supply chains are moving. So just to -- on a knee-jerk basis to go out and say, one country, there's a duty, so let's set up a local plant is a very short-term way to look at it, right? I think we need to be where it's most efficient to produce and supply from. And as we speak, it looks like India is still that location for us. So while we are conscious and willing to look at other locations or making efforts towards that, I think as we speak, India remains a destination of preference for all our manufacturing activities.
Okay. And secondly, on the Brazil side, are we seeing any improvement, like say, I think there was some volume period last year. Is that growing this year or what is sense over there?
Should -- we expect some volume to come from it. We don't want to [indiscernible] how much each year. First half, we have done about 3,500 tonnes in Brazil. So there is some volume that's starting to trickle in from Brazil, but difficult to -- given a whole host of caveats around it, we are not going out and seeing full year volume will be what.
Okay. And like, say, we've seen very good traction in the volumes this quarter despite Canada and South Africa, so is it like led by any particular mineral like gold or copper or any sense on that where we doing better today, which is doing basically...
See, gold and copper are seeing more traction per se. But this growth is a little -- is all-rounded. It's all -- it's actually gold, copper and iron, all 3 ores have done well.
Okay. And lastly, on the liner side, like say, plant is now -- will come by March or they go to some...
Yes. So all the visa process has started. We are seeing engineers come down. So current target is between February and March. So let's keep March '22 is a likely commission rate, plus minus there, but I think it looks like light at the end of the tunnel now.
Okay. And we had done some trials earlier. So has that, like say, the number of trials with different companies have expanded or whatever we have done to say 1 or 2...
For Mill Lining?
Yes, Mill Lining, yes.
So Mill Lining trial, look, all that will -- is what's contingent on the plant and obviously, travel, right? Customers don't want to talk remote about decisions which require and affect their operations. So all that work will start -- has started now or will start soon depending on travel restrictions. So once the plant starts, it will take a little more time for ramp-up, right, getting the conversions -- I mean getting customers to place orders. I think we'll have more clarity. We -- all our efforts, in any case, were constrained because of COVID and the plant couldn't come up. I think now that our plant is getting set up and some amount of travel has started, we are hoping that we'll have a clearer way forward in like 6 months' time.
So mostly, the volume impact of that plant will come through in FY '24 or in the second half of FY '23?
Exactly. Second half of FY '23, but very likely in FY '24 onwards, yes.
Okay. And currently, how much liner volumes we are doing in mining side?
Between 15,000 and 17,000 tonnes each year.
That's the mining work, okay. And lastly, on the cement side, how is the scenario now? Are we seeing very good pickup or India as well as outside India [indiscernible]
For mining?
No, cement, cement.
Cement is steady. We've done about -- non-mining is about 20,000 tonnes last 2 quarters. So I think from approximate 75,000 tonnes, we should do about 80,000 tonnes. But there is a strong pipeline. I mean there is a strong interest. A lot of cement companies are doing well, some talking of expanding capacity, many more are talking about that in India. So cement I mean there's a lot of action going on right now, but materiality to volumes is not so much. So...
[Operator Instructions] Our next question is from the line of Nitin Gandhi from KIFS Trade Capital.
Can you share some update on grinding media of Kerala unit? How much we have spent and how much is yet to be incurred? And...
We've not started. We paused that expansion in GIDC Kerala.
Okay. But we must have incurred [indiscernible]
For grinding media? No, we -- the whole project is on hold.
Our next question is from the line of Anupam Gupta from IIFL.
What I heard is, you said half of the mining volumes in this quarter came from new customers. So would you say that that was particularly sort of pent-up which happened or will that be a trend which can continue for some quarters as your trials and as your travel continues to pick up?
So plus/minus here or there a bit, it looks like it can continue, at least for next quarter or two.
Okay. Okay. And in terms of pricing both the raw material prices as well as freight, you are very confident that customers will accept the whole thing or will there be a slightly long-drawn [indiscernible]
It will be a long term -- longer-term process.
Okay. So basically, it's the margins which are right now in this quarter, let's say, if it is at 18%, coming back to, let's say, 1Q levels would be a slightly longer time frame is what should be [indiscernible]
So generally, any -- because price increase is also going on, right? So while the first passthrough comes along, like you've seen INR 105 is INR 121, there is a passthrough that's come along but the cost has gone further higher, right? So that is where -- if there is no further increase, which stabilizes at a certain level, in 2 quarters, most of it should be passed through.
Okay. Okay. And INR 121 was for 1Q, if I read right. 2Q, if I divide the revenue by volume it is INR 126. So what is the right number?
It is INR 126, my bad.
Okay. And just one last question. In terms of...
Q1 was INR 121 while -- my bad, Q2 was INR 126. So it's up from INR 105 per kilo to INR 126 in the current quarter.
Understand. Understand. And just one last question. In terms of your antidumping duties, so do you see, at least right now, let's say, whatever you've seen across the countries where you're operating in, do you see this risk coming in a few other countries as well or do you -- that will be not the right thing to look at [indiscernible]
We don't expect more actions in -- maybe a country or two but not many more. But that's our view, given what we understand on the market.
So will -- wherever Magotteaux is present, will those countries see action faster?
Difficult to speak on their behalf. But wherever they have local plants is where they may attempt to pursue action in that direction.
[Operator Instructions]
I think, Aman, if there is no more questions, we can bring curtains on this call. I think there are 3 more other -- 3 other conference calls. So everybody is...
Sir, one question has come up in the queue. It is from the line of Shradha Sheth from Edelweiss.
And congrats on a good set of numbers.
Thank you, Shradha.
Sir, just one question. With this antidumping you see and the custom duty in both Canada and South Africa, what will be our cost [indiscernible] on a like-to-like basis?
What will be our cost advantage?
In the sense, the pricing are different between us and Magotteaux, which -- what will be the difference post this duty?
So like I explained, the current duty that -- this conversion is only limited to Canada right now, right, because South Africa is anyways an issue, given where the economy is going, and there seems another -- it doesn't seem to likely to improve anytime soon, right? So we're not looking at South Africa. As far as Canada is concerned, the point is not to -- the point is to compete on a market price, right, whatever is the market price, which is a combination of a lot of local and other factors. I think even with the duty we should be able to work with the customer. A lot of customers want an alternate supplier, right? I mean a lot of customers as a practice have 2 vendors for their supply. So it's not just a question of price, being able to supply the right quality at the right time because this product if it's not available can stop their operations. So we would imagine that duty is just one part, one facet of this conversation with the customer, but supply consistency and quality and performance are the other aspects and based on which we are hopeful that we should be able to resume our business in Canada. But how far, how soon, how much is all in effort. So we will need some time to reflect and pass it on what will happen out of it.
Right. But just a ballpark [indiscernible] is not possible as to -- because of our solution-based approach. And hence, what is the pricing difference for such competition?
We don't know the competition costs, Shradha. So I mean that going -- that does not help us knowing what the other company's cost is, right? We have to work with what's in our hands, in our control and which is our solution that we design and offer.
Sure. And just lastly, I wanted to understand this incremental volume despite closing out in 2 geographies has mainly come from which geographies, possible to give some color?
It's India, there's Africa and there's South America. I mean I'll just leave it broadly to that extent. There's little growth in India. Some in -- a couple of countries in Africa and South America.
Our next question is from the line of Priyankar Biswas from Nomura Securities.
My question is like is there any key geographies where we still have, let's say, significant sales overlap with local Magotteaux manufacturing? Any geographies where it happens?
Any geography where, sorry?
Competition. Direct competition. I think if I read your question, your question is, what are the possibilities of other geographies where similar actions can happen? Is this your question?
You get a sort of like that, where Magotteaux has strong manufacturing.
Yes, yes. But -- so I think we've got plants in various countries. I think they've got a material size grinding media facility in the U.S. But we don't know where they're producing and where they're supplying to. So I think it will be an effort in...
So Priyank, let me add a couple of things, which is very important for all of us to understand. You see there is a market which we were -- or we have been directly competing and taking our business away from Magotteaux, correct? Now our entire focus for last few years is conversion of forged into high chrome. So whenever I'm converting from forged to high chrome, there is no direct competition with Magotteaux. We have solutions which Magotteaux does not have. We have the size advantage, the cost advantage, significant, very, very atypical benefits that we have, for example, the patented Mill Liner technology, what is available to us, what kind of DP related innovations that we have brought, I think many, many factors, Magotteaux is not there. So we are not taking away -- in a very large share of market, we are not taking out from Magotteaux but rather we are taking away from the local forge players, where the equations are mindbogglingly different. There is no direct comparison. So I think, to a very large extent, we don't expect any major new upset coming in, in terms of something which is very surprising or not expected. So [ Foreign Language ], you can take it like that, beyond what has happened, nothing further -- no further significant threat is perceived internally if we talk from this kind of an antidumping move or something like that. You get my point?
Yes, yes. And just adding on to that, see, foreign travel is actually one of the main drivers for customer acquisition for AIA. That I have seen for past several years. So now do you have any visibility on when are the key geographies opening up for...
No, no, no. Most of it are opening or about to open. Travel has, in fact, started this quarter. We have a decent amount of foreign travel expenses coming in. So I don't think it's a big worrying issue now. I think traction -- foreign travel has more or less started to almost all critical geographies. And there, I think we are now not worried about it. This will pick up, but it has already started. So in Q1, we were saying [ Foreign Language ]. Now we are not saying. In fact, it has started in most of the places.
So ideally, we should see some more conversion in the second half [indiscernible]
Yes, correct. You know, it is always a beginning of a process. That process has to continue depending on where we had left. In most of the cases, the dialogue and the action has started. It might take a month, 3 months, 6 months, 12 months, it all depends, project to project, customer to customer. But most importantly, now this is not a factor which we are worried, at least at this point in time. It has started.
The next question is from the line of Sandeep from JM Financial.
I joined a little late, so pardon if we have repeated this information. One was on the liner volumes. Have we given any guidance for next financial year? What is the volume that we are targeting? And second, on the metal-wise breakup, if you can give some color and your thoughts on how this mix should change going forward? Any particular metal where we are seeing a faster growth or a slower growth or any comment?
Sandeep, we don't give, frankly, separate volumes product-wise right from beginning. We have never given, okay? Whenever we have given some segmental data about mining versus cement, it was just to give an idea to the investors fraternity in general that, yes, things are moving the way we have perceived. All we can say that Mining Liners are doing a decent business notwithstanding the fact that -- so average 17,000, 18,000, 20,000 tonnes per year is what generally we believe which are happening till the new plant will come in production. The new plant, the bottleneck was engineers were not being able to travel, but I think now they have started. And we expect the implementation activity to commence with full swing now. And hopefully, by February, we should be ready. So we have conservatively given a target of March '22 as the date when the new Mill Liner plant will actually come in production. That means [ Foreign Language ] '22-'23, but full year would be '23-'24. So it is in '22-'23 partial and '23-'24, you should see more and more liner business coming to our fold. But very importantly, our strategy is the liner is sort of multi-product strategy where it will also add a lot of grinding media tonnage and vice versa. So it's not only the Mill Liner 50,000-odd tonne capacity we are talking about. We are talking about a significant incremental grinding media also following. If I enter a mine with a liner solution, I will always also push, as a line item, the grinding media and vice versa. You get my point?
Yes. Got it. So second was on the metal wise if you can also give some color, specifically, which of them are doing better or where you are foreseeing a faster growth versus the others?
I think we are all -- we've got a strategy for each of the metals, right? So it's just that gold and copper look to be structurally on a bull run just given the supply end use gold as a safe haven currency in itself and copper because of the electrical wave that's coming in, in terms of distribution, electric vehicles, et cetera. So both of those will see demand being generated and new capacity being added and where we have an extra bit of solutions in terms of being able to increase yields, et cetera. But with the Mill Lining solution we should be able to target all 3. So I think from where we are at a base that we are at, all 3 metals are of absolute interest.
And lastly, given the kind of cash balance what we have, any thoughts on having overseas acquisitions, especially in this disruptive time of COVID, would you want to have a facilities in one of your key geographies?
Not really. We are not looking to set up any facility outside of India at this time.
No, no. Even on the acquisition, no.
Or acquisition, yes.
Nothing on the agenda right now at all, nothing on the radar.
Our next question is from the line of Bhavin Vithlani from SBI Mutual Funds.
Could you just help us understand what is now the sea freight as a percentage of the FOB price currently?
Sea freight is a combination of the distance, et cetera. So the percent actually is not comparable. But for this quarter, on top line, I'm not saying export sale or FOB sales is about 10%, 11%, which is historically about 6%, 7%, 8%. Total freight, I'm saying, which includes export and domestic, total freight as a percent has gone up by 3% as a percent of sales.
The second question is, any probability of further litigation that we could do in Canada or in South Africa or like -- or was it like the ruling which has come is final that there is no further like how we have we can go from High Court to Supreme Court in India?
For now, never say never. But as of now, we don't have -- there's nothing on the table right now.
No, sir, the question was like, are there any higher courts that we can go or is there like international forum that we can...
There could be a different forum but generally not pursued, right? So I think in Canada, we'll have to just adjust to the reality and work with. In South Africa, it's a custom process. So as an individual company, how to participate, we'll see. But as of now, there is no other -- even if there are -- because it's a long drawn expensive process, I think there's no other plan to pursue because nothing that's typically pursued by exporters.
Sure. So just on a net basis, let's say, in countries like Canada or South Africa, our cost increase versus a competitor is in about 20%, if one takes freight into consideration.
No, say again. Can you repeat your question?
Sir, the cost increase that has happened after the duty action, our cost for the end consumer have gone up by 20% vis-a-vis what it was, say, a year ago compared to a competition.
Canada?
Canada and South Africa.
In general, I think. In general, correct?
Yes, yes.
So what's your question? If I understand correctly, are we able to pass it on?
The question is that our costs have gone up by 20% duty action plus the freight. So is the customer now looking to switch back to either a competition or the case that we are making high chrome versus the forged, has that competitiveness eroded?
There are 2 aspects which are being mixed up. So a duty portion is restricted to Canada and South Africa, correct? Freight is universally applicable, irrespective of whether there is a duty or not. So as Kunal explained at length, I will just very quickly summarize that in terms of our strategy, we believe that if in Canada today, if the freight part and the high cost position normalizes a bit, we are hopeful that notwithstanding the duty that is imposed, we should be able to revive and recover a portion of the market. Now how much we should be able to do, only time will tell. So that is one specific to Canada. Inasmuch as South Africa is concerned, the situation is more structurally not favorable because in South Africa what they have done is they have sort of banned exports of scrap. And therefore, the shipping lines are just not available to South Africa. Because if I want to ship, my customer wants to buy, but the freight is so much -- 10x more that it just becomes unviable for the customer because the ship has to come back empty. They say they reached South Africa and they can't get any outward load. Therefore, the two-way freight, if I have to bet, this doesn't become workable at all. So South Africa is more of a structural issue, which was there even when the freight was not high and, therefore, over the last couple of years, our South African volumes have been steadily going down. Now to top it all, if there's a little bit of customs duty, as Kunal extend, doesn't matter. Even without duty, South Africa was not a viable proposition no longer for us, till situation changes there. So from a bigger scheme of things, out of 40-odd-thousand tonnes, next year, we are hopeful that we should be able to recover some -- between the 2 geographies, we should be able to recover some volumes. Notwithstanding the fact that those volumes may or may not come, we still have enough avenues of growth, which is evident from the fact that this quarter we have done a 69,000 tonnes, irrespective of the fact that South Africa played a very, very small role in that and Canada was also practically absent. So what I'm trying to say that there are many, many more geographies where we are totally concentrated upon, other parts of Africa, like Ghana, et cetera, Australia, Latin America, there's a lot of business which is in offing. And therefore, this should not become a major consideration from our standpoint. Talking of freight, wherever there is a very steep freight, if the customer value addition is very high, I think in majority of the cases, we have been able to pass on the freight cost to the customer. And customer has agreed to pay, and he is paying. That means for him, even if a 25%, 30%, 40% higher freight is still okay because the value addition and the benefit that he's getting is significant. And this statement is true for almost all critical key customers where we have converted. So I think from a debt standpoint, we are not worried that we should not be able to pass on the freight. Having said that, it is not universally true in every case. It all depends, what is the value addition, what is the product mix, what is the customer, who is converted from which forge player, et cetera, et cetera. But broadly speaking, we should be okay to maintain our growth without any major problem, given the robustness of business model of our company.
Sir, just last question. Raw material to sales, we have seen, on a Y-o-Y basis, has gone up by about 9 percentage points. Where is it that we expect it to settle out? And consequently, what's the level of EBITDA margins that, on a sustainable basis, we could expect?
[indiscernible], 4% to 5%, not 9%. Having said that, we have always maintained that very -- the way in which freight costs we are able to pass on raw material costs also we should be able to pass on. Unfortunately, the speed at which the raw materials have gone up does not match with the speed at which we are able to pass over. So we take about 3 or 6 months to renegotiate the fresh set of orders that come. They come at a higher price. Whatever I have taken [Foreign Language]. So this is the way it works. But if you look at a 6- to 12-month long-term scenario, I think we should be able to comfortably pass.
The next question is from the line of Nitin Arora from Axis Mutual Fund.
Sir, just [indiscernible] aspect here. If you build today a plant or you buy any company, just to make a hedge, you stated that it's not a structure issue, but you never know U.S. is the only region, correct me if I'm wrong, which is left in terms of large sales, but between you and Magotteaux the overlap part. So the question I'm asking is more from a longer-term perspective. So when you see these things happening, are we still of the view that, okay, let them increase the duty, let them do anything [indiscernible] sort of will have a same business policy. The question I'm asking is, today, you put up a plant, will it become true margin and ROCE and ROE dilutive for you, given if you believe that the demand is going to be long-term structure and the kind of statement you're making that the demand is really strong. How do you -- how you are tackling both these aspects?
So first of all, like Sanjaybhai explained, there is not an unlimited extent where -- unlimited number of countries where such an action is possible, right? A lot of growth is coming from converting forged into grade -- high chrome, right? It's not competing with Magotteaux. So that's the first point. A large part of growth is coming to that extent -- from that area of the market. And from a duty standpoint, if point of Magotteaux is concerned, yes, they have a plant in the U.S. But every country, every scenario has its own set of conditions which cannot be just extrapolated. So whether U.S. will look at it in a way or not we do not know. The idea is that we are not a commodity producer that competes on price. Our fundamental model is to -- we make 20% plus of EBITDA margins. It's not possible to dump and say, I make 20% EBITDA margin, right? The customer is not a price-only determinant category, right? Our product affects his production, affect his operating conditions. He cannot -- but make sure he gets great vendors, offer proper price, supply pricing and buy the product. So to that extent, this is a fair price, fair competition market. Now certain countries have a certain way of looking at it. And I cannot get into the details and nuances on a call at this level. But I don't think that's something that we need to have a knee-jerk response and start looking at local plants. How many countries will have local plants then, right? So whether Magotteaux has got plant in U.S. does not mean we need to have a plant in the U.S. It just needs we continue doing more. They will pursue what they have to. Their country will have their own agenda. I think that's something that we'll have to take in our stride. When we are saying there is a reasonable demand across the world, there are lots of countries where Magotteaux does not have a plant, right? The more forging country companies may not have a plant. So that's the nature of the business that we are in. South African duty is not comparable to Brazil and Canada, right? So there are only 2 countries where there is some amount of duty imposed. Likewise, India has a duty for supply of grinding media from Thailand into India, right? So these are things which are very nuanced and cannot be generalized as we speak going forward, as long as we do what we do, which is add value to the customer, create solutions that add a multi-fold value to them, we are fine, right? That's what should hold us in good stead. If a country or two imposes a duty, that's something that's part of the game that we are in now.
So Nitin, just to very quickly add only one thing. While it is easy to speak, the fact of the matter is that before even 15 years, we had evaluated many other options. Before 10 years, we had looked at it. Today, if U.S. is, say, 5%, 7%, 8% of my total global market share, for example, you had mentioned about U.S. Now the problem is that if I have to set up a plant in U.S., it will take me 5 to 10, 5 years to just get the approvals. It's impossible. See, it's not so easy. We have to be very clear that we have to have economies of scale, we have to have globally efficient plants, we have to have that price advantage of 20%, 25% going forward. And the overall scheme of things, I think, as Kunal explained and as I also explained, it is the value addition that we are able to bring on table will determine. The very fact that Brazil over the last 1 year is -- okay, I'm not saying it is permanent, but we see that there is a consistent return of volumes, notwithstanding the long-term commitment. The fact remains, they are paying the duty. Whatever they are buying today, my customer is paying the duty. So you see, it is not only that 15%, 20% or 10% duty that determines. There are a host of other factors where we believe that even if I don't have a plant in any part of the world, most of the cases, my superiority of my solution does not get materially diminished, which makes a change in my philosophy that I will not be able to convert or I should continue converting a significant part of the customers going forward over the next 5 to 10 years. So I think this is an aberration. We will have to work with it. But it's not an aberration which makes me completely rethink my global strategy. This is what I'm trying to explain. That's all.
I got my answer. I respect that opinion, sir, but I was just asking not only because of the duty part. I mean it looks like a [indiscernible] every country you want to impose more antidumping duty. So the question was more that is there a change in strategy or we really want to rethink, what was our advantages is becoming a little [indiscernible] now. So the question was more from that, but I got a clear answer.
Yes, but this protectionism is also contextual like I was explaining. So I don't think for our product. There are only 2 suppliers in the world. I mean, generally, countries and companies understand this is required, right? Our customers are supporting us in this action. So I mean that gives us the confidence that we are okay. It should not be ground shaking.
We will take our next question from the line of Charanjit Singh from DSP Mutual Fund.
Sir, my first question is, as we try to make up for some of these lost volumes from Canada and South Africa, if you can touch upon, which are the geographies that would have done more advanced work in terms of our conversion as travel opens up could be faster and we should be able to make up for these lost volumes [indiscernible] from that perspective?
Which countries you are saying?
Yes, which regions you think that -- yes, yes.
All regions, Charanjitbhai. I think we are not focusing on a region. And gold and copper, which gives us the most excitement, are spread across the world, right? So you've got at least 4 -- few countries in Africa, you've got Chile, Peru, you've got Australia, you've got U.S., of course, Canada. So there are quite a few countries that have a lot of potential, and all of it should be passed in some form in the next phase of growth.
Okay. Okay. And Kunalbhai from a liner's perspective, we have been doing testing, our facilities also were to come on stream next year. So there, how the prospects are looking like from earlier, what our expectation was, now you had also highlighted the kind of power savings that we are showing to the customers. There has been really good success. So has there been any major positive change in terms of how you see the adoption of the volumes going forward?
We are very excited about what this means to us because strategically it allows us to sell more grinding media as a solution, right? Because what happened over the last 6, 8 months we need to pause our plant, commissioning of a plant and our people could travel. All our plants have shifted by 12 months. We were very clear that till the -- we don't get a visibility on when the plant is coming up, there's no point in trying to develop a solution and make the customer ready. Because once you are there, you need to start supply, right? So we are hoping the plant starts in end of '22 -- by March '22. And in 12 months of that, we ramp up. We start the process, start talking to the customers or we're starting to do that now. I expect -- so '24 is when you should see decent volumes to come in. '23, allow us some time. Whether it will be as soon as '23 or some part of '23 or maybe second half of '23, allow us some time on it.
Liner, Mill Liner.
Yes, yes, Mill Liner.
Okay. Sir, the other question is, as we see protectionism becoming more and more rampant across geographies, is there a thought process that certain part of the process which we could maybe do at the customer site and have some local presence going forward. Are there any thoughts -- I know you touched upon that, but is there a part of the process we can do still at the local site? Can we think about that?
Most countries have value-addition norms, where it will not be -- we would not want to do a [indiscernible] use, right, or engage in practices where you can pass it off by changing labels, right? Companies do that. I think that's not sustainable. If you really want to become a local player, that requires substantial value addition. And in our case, a lot of that is required is at the main factory, right? So eyewash will not work, and it's not something that we would like to pursue. Short of that, I really do not feel protectionism applies in our case. So genuinely, our internal view is we will be competing in the Canadian markets, okay? We have seen volume in Brazil. South Africa not comparing... [Technical Difficulty]
Sir, you are not audible. Hello? Ladies and gentlemen, it seems that we have lost the line for the management. We would request you all to stay connected while we reconnect them. Thank you. [Technical Difficulty] Ladies and gentlemen, thank you for patiently waiting. We have the management line connected. Over to you, sir. You may please go ahead.
Yes. Is Charanjitbhai on the line?
Yes, sir. He is connected.
So Charanjitji, first of all, from our point of view is that this is not protectionism in the sense that there are only 2 players adding value. Most of our conversations have respected the fact that there is not a commodity player where it's being sold at a very -- at below cost, which requires dumping-related protectionism, right? Nevertheless, there is a context, there is a set of data points and we end up in that situation sometimes, but that's not reflective of the business model, right? So -- and we will not take any knee-jerk actions in response to that to say, let's start looking at plants elsewhere, given that the markets are not in 1 or 2 or 3 countries, spread across the world, right? And a lot of it is in strategies, not just being closer to the plant. And the value-add we bring is not -- cannot -- the story cannot change because the cost is 10% more. Even if there's duty in every country it export to, even a 10% duty cannot change the story of what we are trying to build as part of the value add, right? So I don't think this is something that occupies management time. And we continue to be optimistic about it that maybe there's -- we may not see any more actions in this regards going forward.
Ladies and gentlemen, that would be our last question for today. I now hand the conference over to the AIA Engineering team.
Thank you. Thank you, Aman. Thank you, everyone. Wish you all a happy Diwali. And as usual, we -- Sanjaybhai and I remain available for any off-line questions, and look forward to connecting again at the end of third quarter. Thank you, guys, and have a good evening.
Thank you very much. Ladies and gentlemen, on behalf of AIA Engineering Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.