AIA Engineering rises 3% as lower input costs drive strong margin performance

Shares of AIA Engineering climbed more than 3 percent on January 30 after the company reported strong operational performance along with a significant jump in net profit. At 2:22pm, the scrip was 2.2 percent higher at Rs 2,661.25 on the BSE.

The company’s total revenue from operations jumped nearly 45 percent on-year to Rs 1,226.9 crore in the December quarter. In the corresponding period last year, AIA Engineering had posted a revenue of Rs 848.1 crore.

The jump in sales was driven by 23 percent growth in volumes as well as healthy realisation increase of 18 percent on-year to Rs 169 per kg.

ICICI Securities pointed out that the company achieved its highest-ever realisation of Rs 169 per kg, up 18 percent YoY and 1.4 percent QoQ, on account of the company’s ability to pass on all the remaining increased input freight costs.

Net profit of the castings and forgings player more than doubled to Rs 352.5 crore from Rs 138.2 crore a year ago.

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Operating margin expanded sharply to 29.8 percent during the December quarter from 19 percent last year. This was primarily because of favourable product mix and a sharp drop in input costs.

The company’s management has maintained its EBITDA (Earnings before Interest Tax Depreciation and Amortisation) margin guidance in 22-24 percent range, as realisations for AIA Engineering could go down due to a trickle-down effect of lower raw material prices in new contracts, said JM Financial Institutional Securities.

In order to maintain margins, the company has renegotiated its pricing terms to include freight cost as a complete pass through, which would potentially improve margins going forward, the brokerage firm said.

The management highlighted that customer conversions have stepped up and majority of the additional volumes in the coming year would be from new customers in different geographies.

ICICI Securities has upgraded its rating on the stock to ‘buy’ from ‘add’ with a revised target price of Rs 3,258 from Rs 2,994. “We, thereby, remain positive on AIA from a long-term perspective, led by strong business moat, increasing capacity, robust balance sheet with Rs 23 billion cash and RoE/RoCE (Return on Equity/Return on Capital Employed) of 19 percent/23 percent in FY23E, respectively,” the brokerage said.

AIA Engineering has been able to address the key competitive challenges of passing on commodity and freight costs by consistently taking price hikes, and delivering volume growth despite loss of business from key geographies, which has fortified its position as a market leader, said the domestic brokerage firm.

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“On strong volume growth and stable margin, indicating its ability to pass on incremental costs, we increase our FY23E and FY24E EPS estimates for AIAE by 14.5 percent and 9 percent, respectively,” said ICICI Securities.

Even Nomura has raised its earnings per share estimates for FY24 and FY25 by 2 percent and 5 percent, respectively, to factor in higher other income from its increased net cash position. The foreign brokerage firm has maintained its ‘buy’ recommendation on the company’s stock with a hike in target price to Rs 3,185 from Rs 3,150 earlier.

As on December-end of 2022, cash on books was about Rs 23 billion, of which Rs 700 million will be spend for capex in FY23 and Rs 3 billion in FY24.Talking about the capital expenditure plan, the company said for the first nine months of FY23 capex was around Rs 1.3 billion, mainly towards mill liner capacity. It expects further spending of Rs 700 million over Q4 of FY23.