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�� Moderate revenue growth; realisation up
AIA Engineering’s (AIA) Q3FY11 earnings were below our expectations, primarily
due to dip in EBITDA margins. Revenue, however, was in line with our estimates,
up 15.2% Y-o-Y, at INR 2,933 mn, led by increase in realisation (up 12.9% Y-o-Y,
to INR 97.4/kg, led by increase in prices of ferro chrome). Volume growth was flat
at 2.0% Y-o-Y, to 30,100 tonnes. Contribution from exports increased to 62.2% of
sales (from 57.5% during Q3FY10), at INR 1,826 mn, up 24.4% Y-o-Y. Domestic
sales remained flat at INR 1,107 mn, up 2.7% Y-o-Y, to 37.8% of total sales. The
company reiterated its volume target of ~120,000 tonnes for FY11, which seems
fairly achievable, given its 9mFY11 volume stood at 85,948 tonnes. The company
has stocked up its inventory of 7,000–8,000 tonnes as a result of increased
business enquiries from South Africa.
�� Spike in input prices hits margin; PAT declines
Prices of ferro chrome, a key input, have increased from INR 45.7k/ tonnes to INR
60k/ tonnes during 9mFY11. While the company is able to pass on higher input
prices to its customers, there is normally a lag of 3-4 months. Therefore, higher
ferro chrome prices continued to put pressure on the raw material cost that
increased sharply by 39.4% Y-o-Y (up 947bps Y-o-Y to 54.5% of sales) during the
quarter; this was, however, partially negated by decrease in other expenses (down
299bps Y-o-Y to 21.7% of sales). Hence, EBITDA margin was down 671bps Y-o-Y,
to 19.4%, and EBITDA declined 14.4%, to INR 569 mn, Y-o-Y, during the quarter.
Higher other income and lower tax rate, however, helped limit the PAT decline to
INR 463 mn, down 5.8% Y-o-Y. Order backlog was at INR 4.1 bn, up 17.1% Y-o-Y.
�� 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. The recent foundry acquisition in South India will help
augment the company’s capacity in the important southern market.
We cut our margin estimate to account for increased raw material pressure.
Accordingly, we trim our earnings estimate for FY11E and FY12E by 6.8% and
7.0%, respectively. While the long-term outlook remains positive, we believe
current valuations, of 18.5x P/E for FY11E and 15.2x for FY12E, factor in upsides
from mining, and appear rich in the near term. Accordingly, we maintain
‘HOLD/Sector Underperformer’ recommendation/rating on the stock.
�� Mining growth on track
The mining segment contributed 38.9% to total volumes sold by AIA. Mining sales were
up 105.3% Y-o-Y, to 11,700 tonnes (31,700 tonnes during 9mFY11), and are close to
the company’s volume target of ~40,000 tonnes and overall sales volume of ~120,000
tonnes during the year. With the de-bottlenecking and brownfield expansion complete,
production is up 22.5%, to 34,787 tonnes. Inventory build-up has, however, led to lower
sales.
�� Acquired foundry in South India
AIA acquired 70% stake in DCPL Foundries (9,000 tonnes p.a.), Trichy, in December
2010, for a consideration of INR 7 mn. This acquisition is likely to help the company
augment capacity in the important market in South India. Management indicated that it
can scale up this capacity to 35,000 tonnes, as it already has the required land for
expansion.
�� Other key highlights from the concall
�� Deprecation increased due to capitalisation of its 10,000 tonnes plant at Girnar,
Gujarat.
�� The company has guided capex of INR 2-2.3 bn over the next two years for the
brownfield expansion at Ahmedabad.
�� Management has indicated sales volume of 150,000-160,000 tonnes for FY12, led
by increase in mining volume at 60,000-70,000 with stable volume from the cement
business at 70,000-80,000 tonnes.
�� Certain book keeping numbers
• Net cash - INR 3.3 bn
• Net Block - INR 2.7 bn
• Debtor - INR 2.6 bn
• Inventories - INR 1.5 bn
�� Company Description
AIA, an ISO 9000 certified company, is a niche player in the value-added, impact
abrasion, and corrosion resistant high chrome metallurgy segment with current capacity
of 185,000 mtpa. It manufacturers products like grinding media, liners, diaphragms, and
vertical mill parts (collectively referred to as mill internals) in high chrome metallurgy.
These products find application in crushing and grinding operations in cement, thermal
power and mining plants, where they are used to crush/grind clinker, coal and mineral
ore, respectively. High chrome metallurgy offers lower wear rate than the conventionally
used parts of manganese steel, nihard iron, hyper steel, and forgings. The company
offers complete solutions in grinding to optimise the productivity of grinding mills.
�� Investment Theme
We like AIA’s business model as the lion’s share of mill internals’ demand arises from the
mining industry, followed by cement. The annual global replacement demand for these
two sectors is estimated at ~3 mn MT, with demand from the mining sector at ~2.4 mn
MT. However, 90-95% of the mining demand is currently being serviced by conventional
and forged mill internals. With the industry moving from cost of parts to total cost of
ownership, there is a huge opportunity for AIA to convert users to high chrome mill
internals. Also, while ferro chrome grinding media results in 3-4% net production cost
savings, the shift from forged grinding media to ferro chrome does not involve any
upfront capital cost.
�� Key Risks
Venture into global mining
AIA is planning to cater to the untapped global mining industry with its increased
capacity. This is an unchartered territory for the company.
Fluctuating raw material prices
Even though price escalation clauses have been built into customer contracts, any
substantial increase in the raw material prices can adversely affect AIA’s performance. In
addition, shortage of domestic/imported raw materials may adversely affect its growth
prospects.
Dependence on end-user industries
AIA is dependent on growth prospects of cement, mining, and power sectors for product
sales. Any slowdown in these industries may result in margin contraction or restrict
volume growth.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
�� Moderate revenue growth; realisation up
AIA Engineering’s (AIA) Q3FY11 earnings were below our expectations, primarily
due to dip in EBITDA margins. Revenue, however, was in line with our estimates,
up 15.2% Y-o-Y, at INR 2,933 mn, led by increase in realisation (up 12.9% Y-o-Y,
to INR 97.4/kg, led by increase in prices of ferro chrome). Volume growth was flat
at 2.0% Y-o-Y, to 30,100 tonnes. Contribution from exports increased to 62.2% of
sales (from 57.5% during Q3FY10), at INR 1,826 mn, up 24.4% Y-o-Y. Domestic
sales remained flat at INR 1,107 mn, up 2.7% Y-o-Y, to 37.8% of total sales. The
company reiterated its volume target of ~120,000 tonnes for FY11, which seems
fairly achievable, given its 9mFY11 volume stood at 85,948 tonnes. The company
has stocked up its inventory of 7,000–8,000 tonnes as a result of increased
business enquiries from South Africa.
�� Spike in input prices hits margin; PAT declines
Prices of ferro chrome, a key input, have increased from INR 45.7k/ tonnes to INR
60k/ tonnes during 9mFY11. While the company is able to pass on higher input
prices to its customers, there is normally a lag of 3-4 months. Therefore, higher
ferro chrome prices continued to put pressure on the raw material cost that
increased sharply by 39.4% Y-o-Y (up 947bps Y-o-Y to 54.5% of sales) during the
quarter; this was, however, partially negated by decrease in other expenses (down
299bps Y-o-Y to 21.7% of sales). Hence, EBITDA margin was down 671bps Y-o-Y,
to 19.4%, and EBITDA declined 14.4%, to INR 569 mn, Y-o-Y, during the quarter.
Higher other income and lower tax rate, however, helped limit the PAT decline to
INR 463 mn, down 5.8% Y-o-Y. Order backlog was at INR 4.1 bn, up 17.1% Y-o-Y.
�� 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. The recent foundry acquisition in South India will help
augment the company’s capacity in the important southern market.
We cut our margin estimate to account for increased raw material pressure.
Accordingly, we trim our earnings estimate for FY11E and FY12E by 6.8% and
7.0%, respectively. While the long-term outlook remains positive, we believe
current valuations, of 18.5x P/E for FY11E and 15.2x for FY12E, factor in upsides
from mining, and appear rich in the near term. Accordingly, we maintain
‘HOLD/Sector Underperformer’ recommendation/rating on the stock.
�� Mining growth on track
The mining segment contributed 38.9% to total volumes sold by AIA. Mining sales were
up 105.3% Y-o-Y, to 11,700 tonnes (31,700 tonnes during 9mFY11), and are close to
the company’s volume target of ~40,000 tonnes and overall sales volume of ~120,000
tonnes during the year. With the de-bottlenecking and brownfield expansion complete,
production is up 22.5%, to 34,787 tonnes. Inventory build-up has, however, led to lower
sales.
�� Acquired foundry in South India
AIA acquired 70% stake in DCPL Foundries (9,000 tonnes p.a.), Trichy, in December
2010, for a consideration of INR 7 mn. This acquisition is likely to help the company
augment capacity in the important market in South India. Management indicated that it
can scale up this capacity to 35,000 tonnes, as it already has the required land for
expansion.
�� Other key highlights from the concall
�� Deprecation increased due to capitalisation of its 10,000 tonnes plant at Girnar,
Gujarat.
�� The company has guided capex of INR 2-2.3 bn over the next two years for the
brownfield expansion at Ahmedabad.
�� Management has indicated sales volume of 150,000-160,000 tonnes for FY12, led
by increase in mining volume at 60,000-70,000 with stable volume from the cement
business at 70,000-80,000 tonnes.
�� Certain book keeping numbers
• Net cash - INR 3.3 bn
• Net Block - INR 2.7 bn
• Debtor - INR 2.6 bn
• Inventories - INR 1.5 bn
�� Company Description
AIA, an ISO 9000 certified company, is a niche player in the value-added, impact
abrasion, and corrosion resistant high chrome metallurgy segment with current capacity
of 185,000 mtpa. It manufacturers products like grinding media, liners, diaphragms, and
vertical mill parts (collectively referred to as mill internals) in high chrome metallurgy.
These products find application in crushing and grinding operations in cement, thermal
power and mining plants, where they are used to crush/grind clinker, coal and mineral
ore, respectively. High chrome metallurgy offers lower wear rate than the conventionally
used parts of manganese steel, nihard iron, hyper steel, and forgings. The company
offers complete solutions in grinding to optimise the productivity of grinding mills.
�� Investment Theme
We like AIA’s business model as the lion’s share of mill internals’ demand arises from the
mining industry, followed by cement. The annual global replacement demand for these
two sectors is estimated at ~3 mn MT, with demand from the mining sector at ~2.4 mn
MT. However, 90-95% of the mining demand is currently being serviced by conventional
and forged mill internals. With the industry moving from cost of parts to total cost of
ownership, there is a huge opportunity for AIA to convert users to high chrome mill
internals. Also, while ferro chrome grinding media results in 3-4% net production cost
savings, the shift from forged grinding media to ferro chrome does not involve any
upfront capital cost.
�� Key Risks
Venture into global mining
AIA is planning to cater to the untapped global mining industry with its increased
capacity. This is an unchartered territory for the company.
Fluctuating raw material prices
Even though price escalation clauses have been built into customer contracts, any
substantial increase in the raw material prices can adversely affect AIA’s performance. In
addition, shortage of domestic/imported raw materials may adversely affect its growth
prospects.
Dependence on end-user industries
AIA is dependent on growth prospects of cement, mining, and power sectors for product
sales. Any slowdown in these industries may result in margin contraction or restrict
volume growth.
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