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AIA ENGINEERING LTD. (AIA)
PRICE: RS.313 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.355 FY12E P/E: 14.7X
q AIA Engineering has been witnessing meaningful demand in the mining
space; pickup in demand from cement sector remains bleak
q Margins pressure exists due to increasing input prices and additional expenses
related to new market creation; currently company is finding difficulty
in passing on these increases to the end user
q We maintain our 'ACCUMULATE' rating on the stock given the limited upside
to our target price of Rs 355 (Rs 370 earlier).
Conference call highlights
We have interacted with the management of AIA engineering to get an overall perspective
on the business environment in the domestic as well as international markets.
Following are the key takeaways of the conference call
n Company has been experiencing meaningful growth in demand from the mining
segment. However muted construction activity has negatively affected the demand
for mill internals from cement industry.
n We highlight that over the past few years, company has achieved incremental
revenue growth from the demand for mill internals from the mining sector. Company
has commendably gained market share in this space through FY08-11.
n In view of the significant growth in the mining segment, company has been looking
for expanding its offerings to various players in commodities like copper,
gold, platinum etc in addition to the iron ore players which currently forms a
major part of company's mill internal sales in mining industry.
n With an aim of expanding in new geographies and adding new customers in
mining space, company has been incurring additional expenses that are currently
dragging the margins downward. However management is confident of restoring
margins to the previous levels of close to 23-25% in future.
n Management has stated that the company is likely to add several clients in
FY12. However since majority of mines are likely to remain under trial runs in the
current year, meaningful business shall flow from FY13 onwards.
n Looking at the growing demand from the African region, company has set up a
30,000 MT capacity warehouse in the current quarter.
n Ferro chrome prices have stabilized at current levels. We highlight that the company
has witnessed a rising trend Ferro chrome prices over FY11 which negatively
affected the margins in the last few quarters.
n Company continues to maintain its leadership position in the industry. Its strong
debt free balance sheet accounted for low financial charges that resulted in the
PAT of Rs 397 mn for the quarter.
Looking to set up additional 1 lakh MT capacity
n Considering the pick up in demand for high chrome mill internals form the mining
segment the company has decided to set up additional 1 lakh MT capacity
around Ahmedabad.
n It would entail a capex of Rs.2.5 bn and it is expected to be operational by October
2012.
n We opine that this is positive in the long term as it would lead to the next phase
of growth for the company going forward in its core cash generating business
Financials
n We believe that AIA Engineering is well poised to benefit from the growth in the
mining space and impending recovery in the global cement industry.
n However, given that the company derives more than 60% of its revenue from
the export market, we believe that it is likely to experience a slowdown in volume
off take over FY12.
n In our projections, we build 9% growth in revenues for FY12 driven by the mining
segment. We highlight that the company has taken certain pricing measures
in last two quarters which is likely to get reflected through 2HYFY12E.
n Company has been witnessing a rising trend in the ferro chrome prices in the last
few quarters. This has negatively affected the overall operating margins of the
company.
n We believe that company would continue to experience margin pressure over
FY12 due to increase in input prices. However we opine that the overall operating
margins would stabilize at the FY11 levels of 19.6%.
n In our projections we build 8.5% YoY growth in net profit for the company
amounting to an EPS of Rs 21 in FY12.
Valuation and Recommendation
n We continue to remain positive on the long term growth prospects of AIA due to
strong business model with quality products and expanding markets of mill
internals for the mining segment.
n However in view of the limited upside from our DCF based price target of Rs 355
(Rs 370 earlier) we maintain 'ACCUMULATE' rating on the company's stock.
