Q2FY24 Review: AIA Engineering: Q2 – strong margins offset slow vol. growth

7 Nov 2023 , 12:32 PM

AIAE’s Q2FY24 volume of 77.7kt missed IIFLe and translates into only 5.3kt of incremental volume in H1 to 151.8kt. Finalisation of contracts with new mining customers has seen uncertainties prompting mgmt. highlighting only 10-15kt of incremental vol in FY24 and slippage into FY25. Q2 Ebitda margin of 29.5% drove the beat aided by gains from lower RM costs, freight, INR depreciation and better mix. These would be passed on to customers over next few quarters driving normalisation to neat 25% in analysts of IIFL Capital Services view. Overall while they shift volumes to FY25, strong H1 margins drive 15% upgrade to FY24 EPS estimates. At FY25 PE of 31x stock is fairly priced. 

Uncertainty on near term volume delivery: 

AIAE reported volume of 77.7kt in Q2FY24 – down 1% YoY and up 5% QoQ. Hence H1 volume at 151.8kt is only 5.3kt higher YoY. While the company continues to work aggressively on conversion of new customers/mines, finalisation of contracts has been slower from new mines. Management highlighted possible slippage in achieving incremental volumes of 25-30kt for FY24 (over FY23 volume of 291kt) due to these delays with little control on finalisation timelines. When converted, these may aid FY25 volumes. Overall annual incremental volume guidance stays at ~30-35kt given the addressable market across target ores. Recent acquisition of 30% stake in a mining liner company is to expand design/product capabilities for liners which should deepen customer engagement and sustainability of volumes. 

RM price fall, freight, INR depreciation and mix drives Q2 margin: 

Q2FY24 Ebitda margin at 29.5% (up180bps QoQ, 600bps YoY) was a result of RM price volatility, freight cost reduction, INR depreciation and better mix. Management expects further pass through of these to customers over next few quarters which should drive normalisation of currently elevated margins. There would be support from falling power costs as company continues to invest in renewable power to cover 50% of its needs. Analysts of IIFL Capital Services build in 26.3% Ebitda margin in H2 and 25% over FY25-26 along with normalised NSRs.AIAE’s Q2FY24 volume of 77.7kt missed IIFLe and translates into only 5.3kt of incremental volume in H1 to 151.8kt. Finalisation of contracts with new mining customers has seen uncertainties prompting mgmt. highlighting only 10-15kt of incremental vol in FY24 and slippage into FY25. Q2 Ebitda margin of 29.5% drove the beat aided by gains from lower RM costs, freight, INR depreciation and better mix. These would be passed on to customers over next few quarters driving normalisation to neat 25% in analysts of IIFL Capital Services view. Overall while they shift volumes to FY25, strong H1 margins drive 15% upgrade to FY24 EPS estimates. At FY25 PE of 31x stock is fairly priced. 

Uncertainty on near term volume delivery: 

AIAE reported volume of 77.7kt in Q2FY24 – down 1% YoY and up 5% QoQ. Hence H1 volume at 151.8kt is only 5.3kt higher YoY. While the company continues to work aggressively on conversion of new customers/mines, finalisation of contracts has been slower from new mines. Management highlighted possible slippage in achieving incremental volumes of 25-30kt for FY24 (over FY23 volume of 291kt) due to these delays with little control on finalisation timelines. When converted, these may aid FY25 volumes. Overall annual incremental volume guidance stays at ~30-35kt given the addressable market across target ores. Recent acquisition of 30% stake in a mining liner company is to expand design/product capabilities for liners which should deepen customer engagement and sustainability of volumes. 

RM price fall, freight, INR depreciation and mix drives Q2 margin: 

Q2FY24 Ebitda margin at 29.5% (up180bps QoQ, 600bps YoY) was a result of RM price volatility, freight cost reduction, INR depreciation and better mix. Management expects further pass through of these to customers over next few quarters which should drive normalisation of currently elevated margins. There would be support from falling power costs as company continues to invest in renewable power to cover 50% of its needs. Analysts of IIFL Capital Services build in 26.3% Ebitda margin in H2 and 25% over FY25-26 along with normalised NSRs.