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Global growth recovery to fuel growth

AIA Engineering (AIAE) posted stable volumes and margins despite demand headwinds from overseas mining market. Company is largely back to pre-Covid levels in almost all geographies though new client engagement continues to be low due to travel restrictions. Travel restrictions have resulted in delay in equipment installation for the mill lining facility, and commencement is now expected by Jun’21. Company has incurred Rs880mn of capex in 9MFY21 while a major portion of the remaining Rs1.3bn-1.5bn is expected to be done in Q4FY21. The grinding media expansion is being postponed due to demand headwinds. Given the better than expected earnings, we raise FY21E/FY22E earnings by 10%/4% respectively. Given the medium to long term growth drivers and continuation of mill liner capex plans despite the Covid-related slowdown, we maintain BUY on the stock with a revised target price of Rs2,367 (previously Rs2,320).

* Stable volume growth: Overall volumes grew 8% YoY at 65,173MT wherein mining volumes were up 5.4% YoY at 43,397MT and non-mining volumes grew 14% YoY at 21,776MT. Overall volumes for 9MFY21 grew 1% YoY supported by 7.4% YoY growth in volumes at 131,200MT. Realisation, which is a combination of four factors – raw material prices, product mix, currency impact and competitive intensity – declined 7% YoY to Rs107,200/MT during Q3FY21.

* Case settlement eliminates high legal expenses and risk of high arbitration claims: Company has reached a settlement with respect to the case filed against it by Magotteaux, for patent infringement relating to Sintercast products. The settled case under consideration was for claims of US$60mn before the arbitration tribunal, ICC, dismissed it in Aug’19.

* Mill lining capex plans unchanged; grinding media postponed by a year: For the 50ktpa mill liner facility, company has spent Rs600mn during FY20, Rs880mn in 9MFY21 and the remaining Rs1.3bn-1.5bn is been planned to be spent in Q4FY21. Company has earmarked a total capex of Rs2.2bn-2.5bn for FY21, which includes Rs500mn for maintenance and peripheral works for the plant.

* Healthy cashflows and margins; maintain BUY: The inventory days increased to 133 from 122 in Q2FY21; company has increased its raw material inventory in anticipation of rising prices for the near term. We believe, as per the current trend, global growth will normalise and aid in demand improvement. Reduction in travel restrictions will also aid growth in new business development. Hence, given strong growth prospects, healthy cashflows and technical leadership, we maintain BUY with a revised target price of Rs2,367 (previously Rs2,320). We introduce FY23E earnings and roll forward our valuation to Sep’20E.

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