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Short term bumpy; growth awaited

AIA Engineering (AIA) reported Q3FY22 sales growth of 21% YoY, 6% ahead of estimates, led by a sharp jump in realisation (36% YoY) on the back of raw material price pass-through. Volumes however, missed estimates with dip of 11% YoY/16% QoQ. Separately, high shipping costs eroded EBITDA (down 6% YoY) in-line with our estimates.

While bulk of the raw material costs have been passed to customers, the freight cost pass-through is expected to be gradual. While longterm growth story remains intact, near-term headwinds persist on slow conversion of customers given high freight and constrained supply-chains. Retain ‘HOLD’ with a target multiple of 30x rolling over to Q1FY24E EPS yielding a TP of INR2052.

Price pass-through results in sequential improvement

AIA’s Q3FY22 sales grew 21% YoY (6% above estimate) as realisations jumped 36% YoY. Sales volumes missed estimates down 11% YoY to 58,111MT as mining and cement volumes fell 5% and 22% YoY, respectively. However production was up 3% YoY at 75,764MT. Stock of 17,000MT was added due to longer transit and cargo. Management is hopeful of conversion of the same into sales in Q4FY22/FY23. Raw material prices have stabilised, with pass-through of prices resulting in sequential gross margins expansion of 669bps (down 370bps YoY) with EBITDA margins up 71bps QoQ. However, higher shipping costs resulted in EBITDA dipping 6% YoY and margin down 565bps YoY to 19%. Further, pass-through of elevated costs should result in normalisation of margins over the coming quarters.

Growth visibility elongated

Despite duties impacting volumes from Canada and South Africa, 9MFY22 volumes for AIA are flat YoY, as volume loss has been mitigated across other geographies and cement volumes. However, efforts to recoup volumes and meaningfully increase sales are likely to take 2-3 quarters given the high freight rates. Management anticipates new business growth to pick up driven by the American, African and Australian geographies, and gold, copper and iron ore. Further, trials at the mill liners

Outlook and valuation: Short term challenges; maintain ‘HOLD’

AIA is well-placed to capture demand led by mining expansion and replacement. However, outlook in the near-term remains impacted with high freight rates impacting volumes. Retain ‘HOLD’ with a target multiple of 30x rolling over to Q1FY24, yielding TP of INR2,052 (INR2,002 earlier) closer to average historic band.

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