AIAE reported Q1FY19 15% y-o-y volume growth coupled with record production levels.
Q1FY19 reflected a turnaround, with strong volume growth y-o-y and importantly a record level of production (69.8kt). The high production level and strong orderbook of Rs 8.35 bn highlights a strong outlook for 2HFY19. The outlook is robust in terms of volume growth, INR depreciation and stabilising raw material costs.
Near-term volume and margin recovery is underway: AIAE reported Q1FY19 15% y-o-y volume growth coupled with record production levels. Thus, the 2HFY19 volume outlook looks strong to us. Further, management commented that with stabilisation of ferrochrome prices, margins will recover.
The company has added capacity while debt-laden peers have been unable to follow suit: AIAE is a net cash company while its global peers are debt laden. Further, with a low cost structure, it is able to exert pricing pressure while maintaining its Ebitda margin. The balance sheet strength should enable AIAE to invest in capacity right into FY20F.
INR depreciation to further increase competitiveness: INR depreciation will help reduce the pricing differential with conventional forged media and induce further penetration in mining. This, in our view, should support volumes. AIAE has risen 17% YTD (Sensex 11%), which adequately reflects the growth.
Valuation: Trading at 24x FY20F EPS of Rs 74.3; maintain Neutral
We increase our EPS estimates by 6% for FY20F to account for volume growth and margin recovery. We value AIAE at 25x
(1 SD to long-term P/E to account for superior growth profile) Sep-20 EPS to arrive at a target price of Rs 1,955 implying 9% upside. The key downside risks, in our view, are appreciating INR and slower adoption of High chrome media in mining.
While initially volume growth was less than our estimates they are witnessing strong growth
While company has been following an aggressive pricing policy since Q4FY17, volume growth is materialising only now, with strong growth led by mining in the past two quarters. The lag in volume growth is on account of the fact that customer conversion from forged media is a time-consuming process; however; once acquired customer retention is typically very high. Thus, we expect strong volume growth in the near term, and significant increases in production volumes highlight strong potential growth in the near term.