Add AIA Engineering Ltd For Target Rs.2,209 - Yes Securities
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* Our View: We have introduced FY23E volume estimates at 326K assuming i) incremental volumes from mining markets, ii) incremental contribution from mill lining solutions, and ii) ~75 bps margin expansion over FY21‐23E led by the benefits of INR depreciation and addition of relatively higher margin mill lining solutions. We believe company deserves a premium multiple due to its cost leadership, product superiority, and strong business MOAT. We remain positive on AIAE’s story of multi‐year shift from forged media to HCMI led by healthy FCF generation, prudent capital allocation, and strong balance sheet. Post our Q2FY21 result note, the stock has rallied by 15% which leaves us with limited upside in the near term. Hence, we downgrade stock to ‘ADD’ from ‘BUY’ rating with a Target price of Rs2209 at 28x FY23E earnings.
* Growth prospects intact: Mining market continues to be AIAE’s growth engine. It represents a large opportunity for conversion of conventional forged grinding media to high chrome grinding media. Management is extremely bullish on medium to long term business prospects from Gold & Copper mining. Annual consumption of grinding media for the mining segment is estimated at 2.5mn tons with less than 20% of the same converted to high chrome, thus offering a sizeable growth opportunity of conversion.
* Value added offerings like EEMS product solutions to aid in growth FY22E onwards: AIAE increasing its wallet share with Mill linings which has ~0.3mn tons global market and represents a growth opportunity. It is focusing on effective penetration through, a) Ability to offer significant reduction in the grinding media cost through use of high chrome media in place of forged media resulting in much lower wear rates, b) Reduction of costly consumables in the down process by using high chrome grinding media & thereby improving recoveries, c) Optimization via unique high chrome mill lining solutions resulting into higher throughputs & cost reduction.
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