* AIA reported promising set of result as Sales/EBITDA/PAT came in 17%/41%/110% ahead of our estimates.
* Net sales were down 21% yoy owing to 47% yoy drop in non‐ mining volumes & 6% fall in realizations which were function of unfavorable mix & decline in ferrochrome prices.
* Adjusted EBITDA margin (incl. FX gain of Rs380mn) was at 27.8%, up 290bps yoy due to favorable currency movements.
* Net cash position improved by Rs3bn qoq to Rs17.5bn due to improvement in working capital from Rs12bn to Rs9.7bn.
* Mgmt. is aiming for flat volume growth in rest of 9MFY21.
* We increase our FY21 earning estimate by 6% to factor in, i) Increase in volumes by 3% to 247k MT, ii) Realization cut of 2% & iii) Higher other income due to forex gain. We retain FY22 volume estimates at 296k MT assuming i) Increase in annual grinding media volumes by 20‐25k MT on a normalized base of FY20, ii) 10k MT contribution from mill lining solutions.
* Though AIAE’s client addition has largely skewed towards Gold & Copper segments in last 2‐3 years, management continues to remain bullish on prospects of, i) Gold mining due to recent rally, ii) Copper mining due to electronics, smart products & digitalization, should aid in incremental mineral volume demand.
* We believe AIAE is better poised for long term growth with a successful diversification move to address product adjacencies through value added offerings like EEMS product solutions with increased throughput & power saving benefits for customers.
* We are building in ~70bps margin expansion over FY20‐22 led by benefits of INR depreciation (~75% exports), launch of value added mill lining solutions & operating leverage play.
* We remain optimistic on the business prospects with strong adjusted ROE (ex‐cash) of 28%, healthy FCF generation, prudent capital allocation & strong balance sheet. Retain ‘BUY’ with TP of Rs1948 at 28x FY22 EPS
Risk To Our Call
* Delay in demand recovery & Unfavorable currency movement
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