Q1FY24 Review: AIA Engineering: Healthy volume delivery

3 Aug 2023 , 02:35 PM

AIAE’s Q1FY24 result beat IIFLe, led by better realisation and healthy volume of 74kt that was up 9% and 1% QoQ (first QoQ jump in Q1 over past 5 years). Mining volume growth of 16.5% was the key driver. This lends comfort on the full-year incremental volume guidance of 30kt, with healthy contribution from mill liners. At 27.7% (up 480bps YoY), Q1 margin added to the surprise. The 480bps YoY expansion was driven entirely by operating leverage and 100% normalisation of freight rates; this will be passed on to customers. When combined with increased focused on customer-additionled volume growth, this should lead to more normal margins (guidance of 23-25%). Analysts of IIFL Capital Services increase they estimates by 5% for FY24/25, primarily as they fine-tune their realisation estimates. Retain BUY. 

Healthy volume delivery in Q1: 

In Q1FY24, AIAE reported volume of 74kt– growth of 9% YoY and 1% QoQ. This was driven by 16.5% YoY and 10% QoQ jump in Mining volumes, even as Non-mining volumes were weak (down 6% YoY, 18% QoQ). Historically, over the past 5 years, Q1 has always seen a QoQ dip in volumes. AIAE is benefitting from normalisation of supply chain and freight as well as focus on expanding customer base. Normalised freight costs has also restored the competitiveness of India-based manufacturing model. Management maintained the full-year incremental volume guidance of 30kt, including 9-10kt contribution from mill liners from the new plant. 

Margin surprise led by healthy NSR and fall in freight cost: 

Q1FY24 Ebitda margin came in at 27.7% – up 480bps YoY and 290bps QoQ; was higher than FY23 Ebitda margin of 25.3%. Gross margin was stable YoY, with the entire gain driven by operating leverage and fall in freight costs that are now back to normal levels seen before the surge. Better mix (higher share of large castings – mill liners) also aided margins. Management highlighted that RM price changes as well as change in freight rates is passed on to customers with a lag. The company maintained its full-year Ebitda margin guidance of 23-25%, given the increased focus on driving volumes through customer additions.