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Canadian issue to impact near-term growth

AIA Engineering (AIAE) has reported stable volumes in Q4FY21 despite demand headwinds, supported by healthy growth from the cement segment. Increase in raw material prices has impacted gross margins and the company is taking price increases which will reflect with a lag in its financials. New client engagement continues to be low due to travel restrictions. The imposition of import duty in Canada will impact near-term growth till the outcome of the final adjudication by August 2021. Factoring in near-term growth headwinds, we cut FY22E/FY23E earnings by 16%/6%, respectively. Given medium to long term growth drivers and continuation of mill liner capex plans despite covid-related slowdown, we maintain BUY on the stock with a revised target price of Rs2,335 (previously: Rs2,367).

Stable volume:

Volumes marginally declined 3% YoY at 79,377MT wherein mining volumes dropped 10% YoY at 49,642MT, while non-mining volumes grew 10% YoY at 29,735MT. Overall volumes in FY21 were flat at 266,302 MT with 2% growth under mining at 5% decline under non-mining segments. Average realisation, which is a combination of four factors – raw material prices, product mix, currency impact and competitive intensity – grew 6% YoY to Rs107,124/MT during Q4FY21.

Canadian import duty and travel restrictions to impact near-term growth:

Canada has currently imposed 32% import duty on the grinding media being imported from India and it is evaluating the issue currently. The final adjudication is expected by the end of August 2021. AIA currently sells ~24,000 tonnes per annum to Canadian geography, which will be impacted until clarity emerges. Travel restrictions due to the second wave of covid are further impacting new business development.

Mill lining capex plans delayed:

The 50ktpa mill liner facility is likely to be completed by H2FY22 given delay in equipment transportation due to the pandemic. The company has earmarked a total capex of Rs2.1bn for FY22 and has spent Rs1.2bn in FY21. Given lower utilisation and near-term growth headwinds, grinding media expansion has been delayed.

Healthy cashflow and RoE; maintain BUY:

Inventory days have reduced, which led to overall easing out of working capital. Easing of travel restriction will open up new client acquisition post the normalisation of covid scenario. Though near-term growth headwinds persist, given healthy cashflow, technical leadership and efficient low cost manufacturing capability, we maintain BUY with a revised target price of Rs2,335 (previously: Rs2,367). We roll forward our target multiple to 30x FY23E earnings from September 2022 earnings.

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. Given medium to long term growth drivers from recovery of global demand, mill liner facility commissioning, we maintain BUY on the stock with a revised target price of Rs2,335 (previously: Rs2,367).

Key Risks are:

(i) Un favourable outcome for the Canadian adjudication

(ii) Delay in normalisation of travel restriction will impact new client acquisition

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