AIA Engineering rating: Buy — Execution in Q4 was better than expected

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June 29, 2020 1:00 AM

FY21/22 EPS up 12.3/11.8% given results and recovery in output; TP raised to Rs 1,890

Though new client development has taken a back seat due to the travel ban, it is likely to pick up once the situation normalises.Though new client development has taken a back seat due to the travel ban, it is likely to pick up once the situation normalises.

AIA Engineering (AIAE) has reported healthy execution in Q4FY20, supporting the overall earnings and cashflows. Operations have reached ~75% of pre-Covid-19 levels and the management is confident regarding normalisation of demand. Though new client development has taken a back seat due to the travel ban, it is likely to pick up once the situation normalises.

Factoring in better-than-expected execution and relatively quicker recovery in production, we raise FY21e and FY22e earnings by 12.3% and 11.8%, respectively. Given the medium to long-term growth drivers and continuation of mill liner capex plans, we maintain Buy with a revised TP of Rs 1,890 (previously: Rs 1,521).

Uncertainty of global macro growth: The company is still gauging the overall impact on economies due to Covid-19 and will wait to provide any future guidance.

Has taken price cuts in line with raw material price reduction: FeCr prices have stabilised at lower levels since Mar’19. The company has adjusted its pricing to it, leading to lower gross margins. As it has hedged 60% of receipts at INR/USD of 73, currency depreciation resulted in marginal forex-related loss in Q4FY20.

Superior performance in tough environment: Despite the challenging environment, AIAE is continuing with its capex plans to fuel long-term growth, earmarking Rs 2.5 bn for FY21e. We believe volumes will normalise from FY22e.

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