Maintain ‘buy’ on AIA Engineering with unchanged TP of Rs 2,043

By: |
October 15, 2020 3:30 AM

Uncertainty of global growth due to the pandemic, the company is still gauging the overall impact of Covid-19 on global economies and has deferred any future guidance.

Capex of Rs300 million has been done in Q1FY21 and Rs600 million during FY20 for the same purpose (deadline remains unchanged at March’21).Capex of Rs300 million has been done in Q1FY21 and Rs600 million during FY20 for the same purpose (deadline remains unchanged at March’21).

AIA Engineering (AIAE) has finally reached a settlement with respect to the case filed against it by Magotteaux, for patent infringement relating to Sintercast products. According to the full and final binding settlement, Magotteaux agreed never to litigate the issue before any other forum; all proceedings and claims, including related damages, are fully and finally settled; AIAE cannot claim the litigation expense from Magotteaux. Currently, the contribution from technology under consideration is <10% of AIAE’s overall revenues and the company has moved to a more advanced technology. Given the medium- to long-term growth drivers and continuation of mill liner capex plans despite the Covid-related slowdown, we maintain ‘buy’ on the stock with an unchanged target price of Rs2,043.

Case settlement eliminates high legal expenses and risk of high arbitration claims. In FY14, AIAE had paid $6million (Rs320million) to Magotteaux with regards to a similar patent infringement case, involving Sintercast products in the US. This was after a US district court passed a judgment in favour of Magotteaux. The settled case under consideration was for claims of $60million before the arbitration tribunal, ICC, dismissed it in August 19.

Uncertainty of global growth due to the pandemic, the company is still gauging the overall impact of Covid-19 on global economies and has deferred any future guidance. We believe the recent increase in Covid cases in Latin America, wildfire in Amazon, etc. are likely to keep demand subdued in the near term.

Mill lining capex plans unchanged; grinding media postponed by a year, company has earmarked capex of Rs2.5 billion for FY21, of which Rs1.6 billion will be for 50ktpa mill liner facility and remaining Rs900 million for maintenance and peripheral works for the plant. Capex of Rs300 million has been done in Q1FY21 and Rs600 million during FY20 for the same purpose (deadline remains unchanged at March’21). Due to weak near-term demand, grinding media capacity addition has been deferred to FY22 from March 2021 earlier.

Superior performance in tough environment; maintain ‘buy’, despite the overall challenging environment, AIAE is continuing with its capex plans to fuel long-term growth. We believe volumes will normalise from FY22E.

Maintain ‘buy’ with an unchanged target price of Rs2,043.

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