AIA Engineering's Q3FY20 reults (Neutral) - Volumes disappoint again;guidance cut
Q3FY20 result highlights
- Adj. PAT grew 21% yoy to Rs1.56bn: on strong margins and lower tax.
- Revenues decline 4% yoy to Rs6.94bn: Volumes grew 1.7% yoy to 60,263 tons. Volumes were muted due to a copper mine seeing site closure and longer than anticipated time to converting new clients. Moreover, realizations fell 5.8% yoy to Rs111.3/kg led by lower ferro chrome prices (partially offset by depreciating rupee).
- Margins expanded 216bps yoy to 24.9%: led by improved revenue mix and currency benefits. Hence, EBITDA grew +4.6% yoy to Rs1.73bn. Sharp increase in other income (+59% yoy; Rs200mn forex gains and Rs250mn treasury gains) and lower finance cost (-38% yoy to Rs13mn) supported PAT growth.
- PAT was boosted by reversal of deferred tax liabilities: (DTL) led by shift to new tax regime (18.7% tax rate for the quarter vs 31.1% in 2Q19).
Conf call highlights: (1) While maintaining its flat yoy volume guidance, mgmt. was cautious of volumes being marginally lower for FY20. Apart from an iron ore mine closure in Brazil earlier (re-start timeline unknown), another copper mine site closure is further impacting volumes (overall ~25k tons). (2) Expects incremental volumes of 20-30K tonnes in FY21E led by new customer acquisitions and increasing wallet share from existing customers via new solutions; (3) Value proposition intact – EEMS offering has allowed AIA to offer a complete solution from optimising design to process to supply, etc enabling lower wear rates, power costs as also higher throughput; (4) Lower RM prices will likely drive higher margins, albeit to be passed to clients with a lag; (5) Working capital has reduced led by inventory rationalisation (6) Capacity expansion: 50k mining liner by Dec-20 and 50k grinding media by Mar-21 (delayed by 3 months); capex of Rs2bn in FY20 (Rs860mn in 9MFY20) and ~Rs3.5-4bn over FY21-22E. Net cash position of Rs17bn.
Impact on financials: FY20/21E EPS upgrade by 10/8% to Rs66/71
Valuation and view
AIA has a strong value proposition, particularly with the EEMS tie up that would enable market share gains and customer stickiness over the long term. However, elongated trials and approvals for customer conversion with muted volumes in FY20 is disappointing. Accordingly, earnings growth is muted at 15% CAGR over FY19-21E (post tax cut). Accordingly, we believe valuations at 25x FY21E earnings are capturing the positives. Maintain Neutral.
AIA Engineering Limited manufactures and markets a range of high chromium consumable wear parts (mill internals). The Company employs alloy-casting process for manufacture of the products, which entails designing and choosing the high-chrome alloy composition in relation to the end application. The Company produces a range of high chrome mill internals, which are used as wear parts in the process of crushing/grinding in the cement, mining, utility, thermal power and aggregate industries. The Company's services include mill audits, turnkey installation and commissioning projects, stock assessment and management, and performance monitoring. The Company manufactures and supplies Grinding media, Shell liners and Diaphragms (partition wall, discharge diaphragms, drying chamber diaphragms and dopple rotator diaphragms) for tube mill applications. In addition to grinding media, it also provides shell liners for ball mills. The Company has its operations in approximately 120 countries.
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