AIA Engineering Ltd - Q2FY21 Result Update - YES Securities

Growing share via value added offerings; Retain 'BUY': We retain FY22 volume estimates at 296k MT assuming i) Increase in annual grinding media volumes by 20-25k MT on a normalized base of FY20, ii) Approx. 10k MT contribution from mill lining solutions & ~70bps margin expansion over FY20-22 led by benefits of INR depreciation (~75% exports), launch of relatively high margin value added mill lining solutions & operating leverage play. The stock is currently trading at 24x FY22E earnings. It deserves premium multiple due to strong business MOAT. We remain optimistic on the business prospects with adjusted ROE (ex-cash) of 28% by FY22E, healthy FCF generation, prudent capital allocation & strong balance sheet. Retain 'BUY' with TP of Rs1948 at 28x FY22 EPS.

Management outlook: AIAE has ramped up its operations & supply chain arrangements to pre-Covid levels now. Demand continues to improve at decent rate across all geographies. However, its management refrained from giving out guidance for FY21 as 2nd wave of pandemic has started in few countries. Mgmt. seems confident of achieving volume of ~130kMT in H2FY21. (Total volumes of ~250kMT in FY21E).

Growth prospects intact: Mining market continues to be AIAE's growth engine. It represents a large opportunity for conversion of conventional forged grinding media to high chrome grinding media. Management is extremely bullish on medium to long term business prospects from Gold & Copper mining. Annual consumption of grinding media for the mining segment is estimated at 2.5mn tons with less than 20% of the same converted to high chrome, thus offering a sizeable growth opportunity of conversion.

Value added offerings like EEMS product solutions to aid in growth FY22E onwards: AIAE increasing its wallet share with Mill linings which has ~0.3mn tons global market and represents a growth opportunity. It is focusing on effective penetration through, a) Ability to offer significant reduction in the grinding media cost through use of high chrome media in place of forged media resulting in much lower wear rates, b) Reduction of costly consumables in the down process by using high chrome grinding media & thereby improving recoveries, c) Optimization via unique high chrome mill lining solutions resulting into higher throughputs & cost reduction.

Resilient performance in Q2FY21: AIAE has delivered volume growth of 12% yoy in a challenging environment, which in our view is certainly commendable. Brazil & South Africa markets are also opening up gradually like India. Gold plants are running at full throttle, copper is largely linked to electronics customers and consumption there hasn't shrunk as well. Iron ore is linked to infrastructure, and AIAE sees reasonable encouraging signals from its customers on that front.

New client acquisition may incur some delay in near term due to travel restrictions: There will be gradual recovery in developmental activities and customer acquisition in near term for mill liners as crucial activities like exchange of information and physical experimentation on the customer end have not recovered yet fully. Mgmt. believes the activities to gather steam once international travel restrictions are lifted. Mgmt. also expects all countries to come up with an infrastructure stimulus which would ultimately increase the demand for AIAE's customers products as infra stimulus would boost demand for cement and iron ores.

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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