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Favourable mix and lower freight continues to drive margin

AIA Engineering reported inline numbers. Net sales grew by 17% YoY (in-line with JMFe), as volume growth was flat at 73,505MT, but realisation increases by 15%YoY to INR 170/kg, on the back of favourable mix. EBITDA grew by 40% YoY (in-line with JMFe) to INR3.2bn, as margins reported a notable increase of 480bps YoY to 24.8% (90bps higher than JMFe) driven by favourable mix, price passthrough and decline in ocean freight rates. Adjusted PAT was higher by 39%YoY at INR12.7bn (7% below JMFe). The company guided for additional 30k volumes in FY24 (10-12% growth) with EBITDA margin in the range of 22-24%. Management highlighted that company is focussed on new customer conversions, which would offset any adverse impact of cyclicality. Further, the company intends to spend its cash on further expansion, where they intend to spend INR3-4bn on additional 20,000MT of nongrinding media capacity, renewable energy capacity enhancement and restructuring and debottlenecking. We forecast 14%/9% CAGR in sales/EPS over FY23-25E, as we expect easing raw material prices, freight rates and higher utilisation levels to keep margins at elevated levels. We maintain BUY with revised TP of INR3,300, (25x Mar’25E EPS)

* Decent performance in challenging environment: Net sales were up 17% YoY/4% QoQ to INR12.7bn, as volume growth was flat YoY to 73,505MT. Mining volumes reported growth of 8.7% YoY, while non-mining volumes declined by 12% YoY, due to slower growth in cement and power utilities. Management highlighted that they foresee decent demand from both mining and non-mining segment across geographies and prime focus of the company would be to convert customers in geographies like Brazil and other Latin American countries. Management guides for additional 30,000MT volumes in FY24, of which 10,000MT will be contributed from mill liners (25,000 MT in FY23).

* Ease in price pass through mechanism to drive margin expansion: Operating margins improved by 410bps YoY to 24.8% and EBITDA reported growth of 40% YoY. Bulk of this improvement was due to favourable sales mix (higher castings vs chrome), and lower ocean freight rates. Other income was up 65% YoY, due to healthy cash balance, resulting in PAT growth of 40%. Management maintained its EBITDA margin guidance in 22-24% range, as realisations for the company could go down due to trickledown effect of lower RM prices in new contracts and change in mix.

* Will continue to expand capacity: Management guided that it will utilise its cash balance to expand capacity as utilisation levels have moved up to 66% even as 50,000MT liners capacity was commissioned in FY23. They intend to spend INR1.5bn on new capacity, while 2.5bn will be spent towards wind energy and debottlenecking of capacity.

* Maintain BUY with revised TP of INR3,300: AIA commissioned its mining liner plant during 2QFY23 and plans to add grinding media capacity of 80,000MT. Therefore, with additional volumes flowing in and reversal of margins to 22-24% range, we forecast 14%/9% sales/EPS CAGR over FY23-25E. We maintain BUY with revised TP of INR3,300, based on 25x Mar’25E EPS. Key risk: sharp drop in metal prices and anti-dumping duty imposition in any of the end markets..

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