Logistics costs starting to moderate; upgrade to ‘Buy; with unchanged TP of Rs 2230
With this, we expect Ebitda margins to gradually normalise in H2FY22F, further driven by the pass-through of raw material costs.
Freight and raw material costs witnessed a sharp uptick since the start of Dec-20; consequently the share price has declined ~17% vs NIFTY’s rise of 0.8% in the last 30 days. In our view, current prices factor in headwinds – such as the challenges the company could face in passing through higher freight costs – adequately.
Freight rates have started to moderate: The decline in freight rates is in line with our expectations. With this, we expect Ebitda margins to gradually normalise in H2FY22F, further driven by the pass-through of raw material costs.
Our deep dive on mill liners suggests long-term value accretion based on products value proposition: Research papers and patents of EE Mill Liners (unlisted), AIAE’s technology partner for mill liners, suggests savings of >20% on power costs and a rise in yields on shorter mill downtime. These benefits were driven by patented mill circuit optimisation technology rather than through the use of mill liners per se. The benefits allow AIAE’s entry into mines, allowing the cross-selling of products such as grinding media.
Elevated ore prices could lead to global mining capacity expansion: The prevailing high metal prices make 10-15% of marginal mining capacity economically viable. These marginal-cost mines tend to benefit more from the rise in yields and cost savings offered by AIAE’s products, driving a further increase of ferrochrome as grinding media.
Upgrade to Buy: Our estimates are unchanged, and we continue to value AIAE at 28x FY23F EPS of Rs 79.7 to arrive at a TP of Rs 2,230, implying ~23% upside, and upgrade to Buy. Slower-than-expected moderation in freight rates is a key risk.