AIA ENGINEERING- Keeping pace: Edelweiss

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􀂄 Numbers in line with estimates; margin improves
AIA Engineering’s (AIA) Q2FY11 results were in line with our expectations as the
sharp increase in raw material cost was arrested by dip in other expenses. Revenue
recorded 18.4% Y-o-Y growth to INR 2,585 mn, led by strong pick up in volume
which grew 23.1% Y-o-Y to 28,448 tonnes even as realisation dipped marginally by
3.8% Y-o-Y to INR 90.9/kg. Exports contribution dipped to 53% of sales (from 60%
during Q2FY10) at INR 1,365 mn, up 4% Y-o-Y, even as domestic sales picked to
INR 1,220 mn, up 40% Y-o-Y to 47.2% of total sales. Higher ferro alloy prices
continued to put pressure on raw material cost, which increased by 34.6% Y-o-Y to
INR 1,289 mn (a 600bps surge to 49.9% of sales). This was negated by a equally
sharp dip in other expenses which was 9.3% Y-o-Y (a 649bps dip to 21.2% of sales)
despite a forex loss of INR 32 mn on the back of exchange rate volatility. EBITDA
improved 21.1% Y-o-Y to INR 624 mn as margin expanded 54bps Y-o-Y to 24.2%.
Despite reduced tax outgo, sharp fall in other income (down 70.7% Y-o-Y to INR 34
mn) led to a reduced growth in PAT to INR 449 mn, a growth of 7% Y-o-Y.


􀂄 Mining growth on track; de-bottlenecking, greenfield expansion on cards
AIA posted mining sales of 8,200 tonnes in Q2FY10, with 20,248 tonnes coming
from cement and utilities. Management guided that all segments—copper, platinum
and iron ore—are showing good traction; it expects to achieve mining volumes of
~40,000 tonnes (thus ~20,000 in H2FY11) and overall sales volume of 125,000-
130,000 tonnes in FY11 against 130,000–140,000 tonnes guided in Q1FY11. The
company has made significant progress on its 35,000 tonnes brownfield expansion,
which will take the installed capacity to 200,000 tonnes. This additional capacity is
expected to be available in the latter part of the current fiscal.

With the debottlenecking
complete and brownfield expansion almost complete, we expect to
see impact of the expansion Q3FY11 onwards, thus making H2FY11 revenue
contribution higher. Further, the company is looking to add additional capacity of
100,000 tonnes through a greenfield expansion, which is expected to be completed
by FY12 end at a capex of INR 1.75 bn. The company is sorting out issues of land
acquisition.

􀂄 Outlook and valuations: Positive; maintain ‘HOLD’
We like AIA’s niche business model and strong track record. The company has
successfully made headway in different segments like platinum, copper and gold,
besides iron ore, in mining. While the long-term outlook remains positive, we
believe current valuations of 21.9x P/E for FY11E and 17.9x for FY12E factor in the
upsides from mining and appear rich in the near term (in the backdrop of global
volatility). Accordingly, we maintain ‘HOLD/Sector Underperformer’
recommendation/rating on the stock.