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Stable performance set to continue

AIA Engineering (AIAE) is on track to deliver ~30,000te incremental volumes (in line with management guidance) each year in FY23 and FY24, led by steady demand, likely gradual easing of logistics issues and capacity expansion. Company has recently entered into a non-exclusive agreement with SAL Steel Ltd for supply of key raw material ferro-chrome for three years. The deal is likely to result in increased supply of ferro-chrome from the domestic market (currently ~15% of the requirement is imported). As per our channel checks, volumes from Canada and South Africa are also likely to show improvement in FY23. Company is endeavouring to increase its market share on the back of its capability to offer customised solutions, improved product basket and easing of logistics issues. With the recent decline in commodity prices, we expect blended realisations to moderate though EBITDA margin is likely to remain intact. Strong business moat, credible management and robust balance sheet give us comfort on the company. Maintain ADD with the target price unchanged at Rs2,720.

* Ferro-chrome supply agreement to strengthen local sourcing: AIAE has entered into a 3-year ferro-chrome supply agreement with SAL Steel Limited (SAL). Additionally, the company has agreed to provide a secured inter-corporate deposit of Rs1.25bn to SAL, which will be used by the latter for loan repayment and working capital requirements.

* Rise in commodity and freight costs has been managed efficiently: In FY22, outward freight expenses grew 84% to Rs4.2bn. Its proportion in export revenues increased to 15.2% vs 10.2% in FY21. As per the FY22 annual report, to offset the supply-chain disruption, AIAE increased its inventory (against confirmed orders) to ensure timely deliveries to the customer. Inventory days rose to 125 in FY22 from 95 in FY21. Travel and conveyance expenses, which had declined by 56% in FY21 due to pandemic-led lockdown, rebounded by 55% YoY in FY22 indicating revival in travel and thereby new customer conversion.

* Capacity expansion after a long hiatus bodes well: AIAE’s mill liner capacity of 50,000mtpa is close to commissioning and expected to be fully utilised in 4-5 years (as per the FY22 annual report, global mill linings market is estimated at 300,000mtpa). Additionally, the company has revived its brownfield capacity expansion plan for 80,000mtpa of grinding media at its Kerala plant. With this, total capacity is set to reach 520,000mtpa, from 390,000mtpa currently.

* Maintain ADD: The strong upswing in commodity cycle since the onset of pandemic is expected to drive capex from major mining players. AIAE is therefore beefing up its capacity to meet the anticipated increase in grinding media demand. Given easing global supply-chains, we expect new markets in Australia, Africa and the Americas to start contributing meaningfully to volume growth. Company’s ability to pass on the increase in raw material and freight costs, would help sustain margins going forward.

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