AIA Engineering - Healthy operating margins lift earnings - ICICI Securities

AIA Engineering (AIAE) has reported better-than-expected earnings in Q2FY21, supported 16% YoY growth in mining volumes and 350bps YoY improvement in EBITDA margins led by benign commodity cost. The company is largely back to pre-Covid levels in almost all geographies; however, new client engagement has taken a back seat due to travel restrictions. We believe client acquisition will pick up once travel situation normalises. The mill lining facility commencement schedule remains unchanged for Mar'21 and the company has incurred Rs650mn of capex for the same in H1FY21 while the remaining Rs1.25bn is likely to be done in H2FY21. The grinding media facility plans remain postponed and will continue in FY22. Given medium- to long-term growth drivers and continuation of mill liner capex plans despite Covid-related slowdown, we maintain BUY on the stock with an unchanged target price of Rs2,043.

- Pickup in mining volumes: Overall volumes grew 12% YoY at 68,575MT wherein mining volumes were up 15.8% YoY at 46,750MT while non-mining volumes grew 4.6%YoY at 21,825MT. Overall volumes in H1FY21 declined 2.5% YoY supported by 8.4% YoY growth in mining volumes at 87,805MT. Realisation, which is a combination of four factors - raw material prices, product mix, currency impact and competitive intensity, declined 5% YoY to Rs108,250/MT.

- Case settlement eliminates high legal expenses and risk of high arbitration claims: The 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 worth 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, the company has spent Rs600mn during FY20, Rs650mn of capex in H1FY21 and the remaining Rs1.25bn is likely to be spent in H2FY21. The company has earmarked total capex of Rs2.5-3bn for FY21 which also includes Rs500mn for maintenance and peripheral works for the plant to be done in H2FY21; hence, capex of total Rs1.75bn will be done in H2FY21.

- Healthy cashflows and margins; maintain BUY: Despite the overall challenging environment, AIAE witnessed reduction in net working capital to 39.3% of sales from 43.8% in Mar'20, leading to Rs4bn of cashflows during H1FY21. We believe volumes will normalise and cashflows will improve in FY22E; hence, maintain BUY with an unchanged target price of Rs2,043.

Shares of AIA ENGINEERING LTD. was last trading in BSE at Rs.1663 as compared to the previous close of Rs. 1699.5. The total number of shares traded during the day was 2663 in over 1049 trades.

The stock hit an intraday high of Rs. 1701.8 and intraday low of 1621.5. The net turnover during the day was Rs. 4388960.

Source : Equity Bulls

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