AIA Engineering says freight drove Q2 operating EBITDA decline

AIA Engineering Limited said export freight reached about 10% of Q2 FY27 sales, above its normal 7%-8% range, contributing to a 2.5%-3% year-on-year decline in operating earnings before interest, tax, depreciation and amortisation, or EBITDA. Partial freight pass-through lifted realisation by Rs 178 per kg but did not fully offset the cost increase.

Why did AIA Engineering’s Q2 EBITDA decline?

AIA Engineering’s Q2 FY27 operating EBITDA declined mainly because export-freight costs rose by more than 3.5% year on year. Management said the decline was about 2.5%-3% at the operating EBITDA level and nearly 5% on a total reported EBITDA basis, with freight the principal operating cost pressure during the quarter.

Freight was about 10% of Q2 sales, compared with the company’s stated normal 7%-8% range. Management cited exceptionally high freight costs during the quarter and said that some easing had become visible by the November 3, 2026 earnings call. The company sold 61,500 metric tons in Q2, while production was 63,600 metric tons, so the margin pressure occurred despite production exceeding sales volume.

AIA Engineering reported Rs 361 crore of Q2 EBITDA on Rs 1,093 crore of revenue and Rs 19.5 crore of other operating income. Management said gross margins remained broadly comparable directionally, indicating that higher export logistics expense, rather than a broad deterioration in product-level gross margin, accounted for the main operating earnings pressure.

How much freight did AIA Engineering recover through pricing?

AIA Engineering recovered part of the freight increase through a Rs 178-per-kg rise in realisation, which management said was largely attributable to freight being passed on. However, management said the company could not pass through freight on a spot basis, leaving a timing mismatch between higher shipping costs and customer-price recovery in Q2 FY27.

The increase in realisation did not fully neutralise freight at about 10% of sales. Management described the elevated freight cost as a temporary effect of geopolitical conditions and said it hoped either that cost levels would normalise or that pass-through would become sustainable. It did not provide a target date for returning freight to the normal 7%-8% sales range.

The cost increase extended beyond a single quarter. Management said export freight had grown by more than 3.5% year on year in both Q2 and H1 FY27, while H1 revenue was Rs 2,246 crore and EBITDA was Rs 786 crore. That indicates freight affected first-half profitability as well as the quarter’s result, although management noted that some reduction in rates had started to emerge.

Did gross margin or other income worsen reported earnings?

Freight was the main reason for the operating EBITDA decline, while lower non-operating income widened the decline in reported EBITDA. Management said gross margins were broadly comparable directionally, but total reported EBITDA fell by nearly 5%, compared with the 2.5%-3% decline cited for operating EBITDA.

Q2 non-operating income fell to Rs 71.7 crore from Rs 98 crore in the comparable prior-year quarter. In H1 FY27, it was Rs 182 crore, compared with Rs 207 crore in the corresponding prior-year half. Management separately said the reduction in other operating income was mainly due to lower foreign-exchange income, while characterising other operating income as primarily export benefits.

The working-capital cycle remained about 129 days in both Q2 and H1 FY27, according to management. It included about 41 days of raw-material inventory, 79 days of work-in-progress and finished goods, and 87 days of receivables. The unchanged cycle supports management’s presentation of freight, rather than an abrupt working-capital shift, as the unusual cost issue affecting the quarter.

What could change AIA Engineering’s freight pressure and volumes?

AIA Engineering said lower freight rates or more durable customer pass-through could reduce the Q2-type pressure, but neither outcome was presented as a committed target. Management said elevated freight remained a planning variable even as it internally worked towards returning to annual volume growth of at least 25,000 to 30,000 metric tons in FY28 and FY29.

The volume plan is not formal guidance. H1 sales were 126,000 metric tons, only slightly above about 124,000-125,000 metric tons in the corresponding prior-year half. Mining sales were 39,700 metric tons in Q2 and about 79,000 metric tons in H1, with management describing year-on-year growth as modest in both periods.

Management said Mexico-related import duties had affected some volume during the preceding 12 months, although it did not expect further duty-related reductions. It also said dispatches to one Chile mine were low for nearly two months after that mine stopped production, with normal traction resuming in the current quarter. These developments help explain why quarterly volume movements were affected by specific markets and customer operations.

AIA Engineering’s strategy remains focused on supplying liners and next-generation diaphragm systems, or NGDS, as a package, with grinding-media demand expected to follow. Management said trials at mining sites, including large mines, had been extended and could begin yielding results in the second half of FY27, but gave no timeline commitment. It spent Rs 86 crore on capital expenditure in H1 and expects about Rs 250 crore more in H2, including a corporate-house land transaction and Rs 50 crore to Rs 75 crore of maintenance and incremental spending.

Conclusion

AIA Engineering’s Q2 FY27 earnings pressure was primarily a shipping-cost issue: freight rose to about 10% of sales against a normal 7%-8% range, and the Rs 178-per-kg increase in realisation only partly recovered that increase. Gross margins were broadly comparable, while lower non-operating income contributed to the wider, nearly 5% decline in total reported EBITDA.

The next developments to watch are whether sea and air freight continue to ease, whether customer pass-through becomes sustainable, and whether liner and NGDS trials produce volume gains in the second half of FY27. Management is also planning about Rs 250 crore of H2 capital expenditure after Rs 86 crore in H1, while saying it may provide firmer volume commentary in a future quarter.