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Add AIA Engineering Ltd For Target Rs.2,074

Likely Canadian volume loss to impact growth

AIA Engineering (AIAE) reported 13% YoY growth in volumes to 60,318te for Q1FY22 led by sharp 92% YoY recovery in non-mining segment, while mining volumes declined 10% YoY. Due to price increases and favourable product mix, realisation grew 12% YoY to Rs122/kg supporting margins. New client engagement continues to be low due to travel restrictions. Growth prospects will be impacted if import duty of ~22% is imposed in Canada (the matter is before a tribunal and an outcome is expected by the end of Aug-21).

Factoring-in near-term growth headwinds, we cut FY22E/FY23E earnings by 1.7%/11.6% respectively. Given the impact of likely loss of volumes from Canada and slowdown in new client acquisition due to the pandemic, we downgrade the stock to ADD (from BUY) with a revised target price of Rs2,074 (previously: Rs2,348).

* Reduction in mining volumes due to loss of sales from Canada: Overall volumes in Q1FY22 grew 13% YoY to 60,318te wherein mining volumes dropped 10% YoY to 36,967te, and non-mining volumes recovered sharply on a low base by 92% YoY to 23,351te. Average realisation (a combination of four factors – raw material prices, product mix, currency impact, and competitive intensity) grew 12% YoY to Rs122,673/te during the quarter.

* Canadian import duty and travel restrictions to impact near-term growth: Canadian government has proposed a 22% import duty on grinding media from India and this is now under evaluation. Final adjudication is expected by the end of Aug’21. AIA currently sells ~24,000te per annum to Canada, which will be under cloud until clarity emerges.

* Mill lining capex plans delayed: AIAE’s 50ktpa mill liner facility is likely to be completed by H2FY22 given delay in equipment transportation due to the pandemic. Company has earmarked a total capex of Rs2bn for FY22; of this, Rs1.1bn will be towards mill liners, Rs300mn towards windmills and the rest on general maintenance. Given lower utilisation and near-term growth headwinds, grinding media expansion has been delayed.

* Downgrade to ADD due to likely loss from Canada and slowdown in new client acquisition: Travel restrictions are impacting new client acquisition which in turn is slowing down incremental volume growth. Canadian government has proposed 22% import duty and the tribunal’s final decision is expected in the last week of Aug’21. Given the uncertainty over mining volume growth and impact on new client acquisition due to the pandemic, we downgrade the stock to ADD (from BUY) with a revised target price of Rs2,074 (previously: Rs2,348).

Outlook and valuation

AIA Engineering (AIAE) is currently in capex mode; hence overall RoCEs are low given the initially lower utilisation of new facilities. We however believe commencement of new capacities will support medium to long term growth FY23E onwards. Mill liner is a high-margin segment and the planned 50ktpa capacity will support overall growth with margin improvement from FY23E. Factoring-in these upsides, we have assigned a multiple of 30x FY23E earnings, valuing the stock at 10% premium to 1-year forward +1 SD of 27x.

Uncertainty persists over near to medium term growth till resolution of the Canadian government’s proposal to levy of 22% duty on grinding media imports from India (decision by the tribunal is expected by end of Aug’21). Continuation of the pandemic scenario is also impacting overall new client acquisition and growth. Factoring-in the same, we downgrade the stock to ADD (from BUY) with a revised target price of Rs2,074 (previously: Rs2,348).

Key risks: (i) Unfavourable outcome of the Canadian adjudication,

(ii) delay in normalisation of travel restrictions, which will impact new client acquisition

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