AIA Engineering - Short-term pain for long-term gain; visit note; Hold : Edelweiss PDF link

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AIA Engineering (AIAE IN, INR 357, Hold)

Our recent meeting with the AIA Engineering (AIA) management indicates that the company is positive on volumes in the mining business. Concerns, however, remain on flat cement segment demand and overall slowdown in the European market. We consider better traction in mining a positive, though EBDITA margin is likely to reel under pressure as the company seeks aggressive expansion in the segment. We maintain our cautions approach and maintain ‘HOLD’ with target price of INR357.

Humungous mining opportunity, though margin pressure inevitable

AIA started providing mill internals to mining industry in 2007-08 with 7000MT, and is expected to reach 60,000MT in current year (45,900 MT YTD). Management expects huge opportunity in the mining industry, which represents approximately 85% (2.5MT per annum) of the total mill internal demand, primarily dominated by traditional mill internal providers. The company expects this segment to grow at 18-20%; however, to gain footprint with large clients, the company will have to sacrifice margin for a few more quarters. We expect AIA’s blended EBDITA margin to hover around 20-21% for few more quarters.

Cement demand flattish, but positive on US crusher opportunity

Management expects cement sector demand to remain flattish for the time being and expects to do 70000MT in FY12E. However, the company is looking aggressively to tap 50000MT crusher parts opportunity in the US market for recycling concrete and expects to supply 10000 -15000 MT over the next two-three years.

Outlook and valuations: Short term concerns persist; maintain ‘HOLD’

We like AIA’s niche product mix and its aggressive strategy to cater to the highly potential mining segment. However, we believe margin pressure and concerns over European market and slowdown in the cement sector will remain as overhang on the stock. At 15.9x FY13E, we maintain ‘HOLD/Sector Underperformer’.

AIA Engineering - Short-term pain for long-term gain; visit note; Hold

Regards,