AIA Engineering (AIAE) is on track to deliver ~30,000te incremental volumes (in line with management guidance) each year in FY23 and FY24, led by steady demand, likely gradual easing of logistics issues and capacity expansion. Company has recently entered into a non-exclusive agreement with SAL Steel Ltd for supply of key raw material ferro-chrome for three years. The deal is likely to result in increased supply of ferro-chrome from the domestic market (currently ~15% of the requirement is imported). As per our channel checks, volumes from Canada and South Africa are also likely to show improvement in FY23. Company is endeavouring to increase its market share on the back of its capability to offer customised solutions, improved product basket and easing of logistics issues. With the recent decline in commodity prices, we expect blended realisations to moderate though Ebitda margin is likely to remain intact. Strong business moat, credible management and robust balance sheet give us comfort on AIAE. Maintain ADD with the TP unchanged at Rs 2,720.
Ferro-chrome supply agreement to strengthen local sourcing: AIAE has agreed to provide a secured inter-corporate deposit of Rs 1.25bn to SAL, which will be used by the latter for loan repayment and working capital requirements.
In FY22, outward freight expenses grew 84% to Rs 4.2bn. Its proportion in export revenues rose to 15.2% vs 10.2% in FY21.
Maintain ADD: The strong upswing in commodity cycle since the onset of pandemic is expected to drive capex from major mining players. AIAE is therefore beefing up its capacity to meet the anticipated increase in grinding media demand. Given easing global supply-chains, we expect new markets in Australia, Africa and the Americas to start contributing to volume growth.
As per the FY22 annual report, grinding media consumption in the mining segment is estimated at 2.5mtpa with less than 20% of it converted to high chrome. Thus, the company has strong headroom for growth by tapping the unaddressed market even if capacity expansion in the mining sector is delayed.
Outlook and valuation
The mining sector is expected to undergo capacity expansion given the recent strong upswing in the commodity cycle . For its non-mining segment, AIAE witnessed a demand rebound during H2FY22 led by strong revival in construction and real estate activity.