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Soft volumes but robust margin drive earnings beat

AIAE’s consolidated sales in Q2FY24 fell 3% YoY to Rs12.9bn, 7% below our estimate. Mining volumes fell 4% YoY to 52,093MT, while non-mining volumes (cement + power) grew 5% YoY to 25,632MT. Realization fell 2% YoY to Rs163,893/MT. Gross margin expanded 110bps YoY/150bps QoQ to 57.8%. EBITDA grew 23% YoY to Rs3.8bn, leading to robust EBITDA margin of 29.5%, up 600bps YoY and above our estimate of 22.8%. Better margin profile was driven by product mix and significant reduction in freight charges. Higher operating profit and other income (up 94% YoY to Rs623mn) led to 32% YoY growth in PAT to Rs3.2bn, above our/consensus estimate of Rs2.7bn each. Profitability was enhanced by higher contribution from more profitable nongrinding media such as tube liner, mill liner and VSMS. For FY24E, AIAE expects incremental volumes of 25,000 MT in the mining sector as around 10,000MT is likely to shift to FY25. FY25E is likely to be a stronger year with minimum incremental of 40,000 MT. Based on higher margin profile, we increase our earnings estimate by 14%/6% for FY24E/25E and roll over valuation to Sept’25. Retain BUY with a revised target price of Rs4,360 (Rs3,975earlier) based on unchanged P/E of 32x H1FY26E EPS

Structural shift to high chrome intact; FY25 volume increase to be stronger than FY24

Total volume in Q2FY24 was flat YoY at 77,725MT. Segment wise, mining reported 4% YoY decline in volumes at 52,093MT while non-mining volumes grew 5% YoY to 25,632MT. AIAE expects incremental volume addition of ~25,000 MT in FY24 as there could be a shift of 10,000 MT to FY25. Though H1FY24 volume growth is limited (~5,500), shift towards high chrome media in mining sector is on-course. Volumes addition is likely to be stronger in FY25 as AIAE aims to add minimum of 40,000 MT. AIAE has earmarked capex worth Rs5bn spread over FY24 (Rs3bn) and FY25 (Rs2bn). With addition of new greenfield plant for grinding media (capacity of 80,000MT) and de-bottlenecking potential of 20,000MT, AIAE’s total capacity is expected to rise to 540,000 MT by endFY25. Mill liner addressable opportunity is at 300,000MT while AIAE’s current capacity is at 75,000 MT (incl. new 50,000 MT plant). For grinding media, 1mn to 1.5mn MT of conversion from forged media to high chrome media is likely over a medium term.

Realization sustained amidst volatile Ferro chrome prices

Realization in Q2FY24 was Rs163,893/MT, down 2% YoY. Realization is a function of raw material prices (Ferro chrome and MS scrap) and freight cost, which are passed through with a lag. Ferro Chrome prices in Q2FY24 were volatile as it moved from Rs120/kg to Rs100/kg and then returned to Rs110-Rs112/kg. For H2FY24, AIAE expects realization in range of Rs155/kg-Rs170/kg. Minimum sustainable EBITDA margin is 23-24%.

Maintain BUY with a revised target price of Rs4,360

AIAE’s technological leadership in high chrome mill internals, strong growth opportunity in mining sector and superior financial metrics are key business moats. We retain BUY rating on the stock with a target price of Rs4,360 based on 32x H1FY26E EPS. Key risks is any major fall in prices of Ferro Chrome which would lead to a sharp decline in realization.

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