Thursday, February 9, 2012

>AIA ENGINEERING: Mining segment to drive future growth...

AIA Engineering (AIA) results were in line with our estimates. It reported 16% growth in revenue to Rs3.4bn (PINCe Rs3.3bn). OPM declined by 210bps to 20.3% YoY but improved by 250bps QoQ. Low tax rate resulted in 8.5% growth in net profits to Rs503mn (PINCe Rs463mn). Average realisations improved to Rs98/kg (vs Rs91 in Q2FY12) led by better product mix and price increases undertaken by the company in few contracts. We believe company’s endeavour to take price increase in the mining segment is really commendable. This could lead to improvement in margins going ahead.

Mining segment lead volume growth, margins improved sequentially
In Q3FY12, AIA reported 15% growth in sales volume YoY to 34,700 tons (37,500 tons in Q2FY12). Production grew by 12% YoY to 39,000 tons (37,000 tons in Q2FY12). Sales in the mining segment grew by ~50% to 17,500 tons (3% up QoQ). Realisations stood at Rs98 per kg (Rs97 per kg in Q3FY11) led by better product mix and price increase undertaken by the company in few contracts. Operating margins fell by 210bps to 20.3% but improved by 250bps QoQ led by better product mix and pass on of hike in material prices to the customers.

Company would continue to quote aggressively to acquire new mining clients but simultaneously go for price rise in existing customers. Historically company has demonstrated its ability to pass on the hike in prices to customers in cement industry. Management has indicated that gradually price rise would be taken in the mining segment as well where company has already demonstrated the quality of its products. Customer satisfaction, after sales service and product innovations would further lead to margin improvement. The size of the addressable opportunity in mining segment stands at 1.5mn tons p.a and management aims to capture 30% market share (vs 4% currently) in next 5-6 years. Capacity expansion of 100k tons (up by 50%) undertaken by management inspite of low capacity utilisation (70%) further strengthens our belief in the vast opportunity in the mining segment. Slowdown in the cement industry overseas is expected to persist in near future on account of global uncertainty.

Current order book of the company stands at Rs4.8bn. We believe capacity expansion of 100k tons and improved capacity utilisation of existing capacities would lead to volume CAGR of 22% (FY12E-FY14E). We introduce our FY14E estimates. After four consecutive years (FY09-12E) of flat growth in profits, we expect 24% CAGR in profits in FY12E-FY14E lead by higher volume growth and small improvement in margins. We increase our target multiple from 12x to 15x and upgrade our recommendation on the stock from ''SELL” to “ACCUMULATE” with a revised target price of Rs343 (15xFY13E).