Stabilising ferro-chrome prices and rising volumes key drivers but valuation turning expensive. Q1FY19 reflected a turnaround, with strong volume growth year-on-year and, importantly, a record level of production (69.8kt). The high production level and strong orderbook of Rs 8.35 bn highlight a strong outlook for H2FY19. The outlook is robust in terms of volume growth, rupee depreciation and stabilising raw material costs. AIAE reported 15% y-o-y volume growth in Q1FY19 coupled with record production levels. Thus, the H2FY19 volume outlook looks strong to us.
Further, management commented that with stabilisation of ferrochrome prices, margins will recover. AIAE is a net cash company while its global peers are debt laden. Further, with a low-cost structure, AIAE is able to exert pricing pressure while maintaining its Ebitda margin. The balance sheet strength should enable AIAE to invest in capacity expansion right into FY20F. Rupee depreciation will help reduce the pricing differential with conventional forged media and induce further penetration in mining. This, in our view, should support volumes. 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 TP of Rs 1,955 implying 9% upside. The key downside risks, in our view, are appreciating rupee and slower adoption of high chrome media in mining. AIAE has engaged in aggressive pricing in recent quarters in an effort to: (1) increase adoption of high chrome (HCMI) grinding media in the mining industry against conventional forged media, and (2) gain market share against peer Magotteaux (unlisted). The intent of such aggressive pricing was new customer acquisition. As part of this strategy, AIAE has provided new customers with high discounts to induce them to switch from conventional forged media to HCMI media.