AIA Engineering’s Healthy realization and volume growth to sustain. Buy for target price of Rs 3420: Centrum

Healthy realization and volume growth to sustain

AIAE’s consolidated sales in Q4FY23 grew 17% YoY to Rs12.7bn, and was above our estimate of Rs12bn. Mining volumes grew 9% YoY to 48,249MT, while non‐mining segment volumes fell 12% YoY to 25,256MT. Realization for the quarter was up 15% YoY to Rs170,303/MT. Gross margin fell 200bps YoY to 54.6%. EBITDA grew 40% YoY to Rs3.2bn, thus leading to EBITDA margin of 24.8%, up 410bps YoY and above our estimate of 22.7%. Higher operating profit led to 38% YoY growth in PAT to Rs2.7bn, above our estimate of Rs2.2bn. For FY24E, AIAE targets to add 30,000 MT of volumes in the mining sector, while EBITDA margin is likely to sustain at 22% having further scope of expansion. We have marginally tweaked our earnings estimate for FY24E while our FY25E estimates remains unchanged. We retain BUY rating on the stock with unchanged target price of Rs3,420 based on 30x FY25E EPS.

Volume uptick will be key to topline growth

Total volume in Q4FY23 was up 1% YoY at 73,505MT, while volumes for FY23 was up 12% YoY at 291,342MT. Segment wise, mining reported 9% YoY growth in Q4FY23 volumes at 48,249MT, while FY23 volumes grew 12.6% YoY to 192,352MT. Non‐mining volumes fell 12% YoY to 25,256MT in 4QFY23, but was up 10% YoY in FY23 at 98,990MT. Mill liners volume in FY23 was 25,000‐26,000MT while AIAE is likely to add volumes of 10,000MT in FY24E. Its total rated capacity of the Mill Liner plant is 50,000MT. Globally, gold, copper and iron are seeing positive momentum in capex cycle. However, AIAE’s growth is not dependent on capex cycle, but it depends on conversion from forged media to high chrome media which is currently low at ~20%. Key global markets are North America, Latin America (Chile, Brazil and Peru), Australia and CIS countries. However, conversion of customers is an agonizingly long process. Non‐mining sector volumes are geared towards cement, thermal power and quarry industries. AIAE is not budgeting any growth in non‐mining sector as high chrome media penetration is fairly high.

Realization and margin are likely to remain healthy

Realization in Q4FY23 was Rs170,303/MT, up 15% YoY and it was partly aided by higher share of castings, without which it would have been 3‐4% lower. Realization in FY23 was up 23% YoY to Rs166,060/MT. Management believes that realization will continue to remain in Rs160,000/MT to Rs170,000/MT range based on current prices. Pass through of RM and freight cost is a continuous process and it happens as and when prices changes, but with a lag. In Q4FY23, Ferro Chrome prices were higher by 5‐10% QoQ compared to Q3FY23 level of Rs120/kg. EBITDA margin of 22% is sustainable with good scope for further margin expansion.

Maintain BUY with an unchanged target price of Rs3,420

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 an unchanged target price of Rs3,420 based on 30x FY25E EPS. Key risks is any major fall in prices of Ferro Chrome which would lead to a sharp decline in realization.