Volumes strong as margins surprise positively • AIA Engineering:: ICICI Securities, pdf link

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Volumes strong as margins surprise positively
• AIA Engineering (AIA) reported 20% YoY growth in volumes at
50400 tonnes vs. our estimate of 49900 tonnes. The key growth
driver for the volumes was the mining segment wherein the volumes
stood at 33000 tonnes, up 41% YoY and 50% QoQ. Volumes from
the cement and utility space stood at 17400 tonnes.
• With Q2FY15 realisation of | 109000/tonne, AIA reported 16%
growth in revenues at | 572 crore (I-direct estimate of | 568 crore).
The key positive was the ~290 bps YoY expansion in EBITDA
margins to 26.5%, which was 140 bps above our estimate of 24.5%.
Coupled with this high other income helped AIA beat PAT
expectations at | 108 crore
• The management commentary suggests they are quite confident of
achieving their set volume guidance of 200000-210000 tonnes. This
implies YoY volume growth of 14-19% in FY15E. AIA currently has |
827 crore of cash and | 106 crore of debt on balance sheet.
Opportunity in mining segment 4x that of cement for AIA
Current global consumption of high chrome mill internals (HCMI), which
is equally applied in the cement and the mining space, is at ~6,00,000
tonnes per annum (TPA). With almost 80% penetration achieved for
HCMI in cement space, the mining segment provides next leg up for
HCMI players. It is estimated that at least 1.2 MTPA mining segment
volumes for mill internals can be converted from forged media into
HCMI, going ahead. Hence, we believe this will create an opportunity 4x
that of current HCMI consumption of 3,00,000 TPA for HCMI players in
mining. Key focus areas in mining for AIA will be Gold and Copper metal.
Greenfield capex on track; AIA to be largest HCMI player by FY16E
Successful penetration in the mining segment (51% volume CAGR over
FY10-14) and presence of strong conversion opportunity (80% of the 1.5-
2 MT global opportunity per annum from forged media to HCMI still
remains unexploited) has prompted AIA to undertake an aggressive
capacity expansion plan. From a capacity of 2,60,000 tonnes in FY14E
(60,000 tonne brownfield capacity already added in Q4FY14E), AIA plans
to add another 1,80,000 tonnes of greenfield capacity in Gujarat by
FY16E. This will make AIA the largest HCMI player globally as the current
capacity of 260,000 tonnes (as of Q2FY15) will grow 2.1x to 440,000
tonnes by FY16E. AIA will then overtake the current market leader
Magotteaux (Belgium). The capex funding is planned via internal
accruals as AIA has carries a cash balance of | 827 crore as of Q2FY15
coupled with strong cash flow generation expected in FY15E and FY16E
(CFO of | 281 crore and | 397 crore, respectively). AIA will incur capex of
| 200 crore and | 400 crore during FY15E and FY16E, respectively.
Strong performance and prospects to rerate AIA; maintain BUY
We believe AIA has made strong/profitable inroads into the global
mining space. The same is reiterated from the massive capacity addition
programme that it has taken and continued traction in the mining
segment on a quarterly basis as evening Q2FY15, mining segment
volumes grew over 40% YoY. Coupled with this AIA has been
consistently surprising on the positive side. Going ahead, we expect AIA
to report a string 17% revenue CAGR, backed by a 24.1% volume CAGR,
over FY14-FY17E coupled with ~15% PAT CAGR. Hence, AIA has one of
the best earnings profile in our coverage. We value the stock at 20x
FY17E EPS to arrive at a target of | 1170 per share.

LINK
http://content.icicidirect.com/mailimages/IDirect_AIAEngineering_Q2FY15.pdf