AIA Engineering - Margins likely to hold; Buy with a target price of Rs 1481:
With gold, copper and iron ore customers expected to be added, AIA Engineering's volumes, we believe, would register a 16% CAGR over FY16-18. On the lower realizations expected (~Rs. 101 a kg, down 8% yoy), we anticipate sales recording a 13% CAGR over FY16-18. Our analysis suggests very limited downside on margins from present levels. With the greater likelihood of customers being added, we believe the stock will show re-rating because of the healthy, 15%, earnings CAGR over FY16-18 expected. Hence, we maintain our Buy call, with a revised price target of Rs. 1,481 (25x FY18 earnings).
Sales decline 8% yoy. Despite a 5% volume growth, sales declined 8% yoy to Rs. 5 bn. Lower sales realizations of ~Rs. 101 a kg (down 11% yoy) led to sales declining. In mining, high-chrome grinding-media volumes grew 23% yoy to 29,187 tonnes. In cement and aggregates, high-chrome grinding-media volumes declined 14% yoy to 18,385 tonnes.
EBIDTA margin improved 220bps yoy. The gross margins improved 630bps to 68.5% due to the increase in inventory of finished and semi-finished goods. Higher freight and warehouse costs led to a 3% increase in other expenses to Rs. 1.7bn. EBITDA per tonne declined 6% yoy to Rs. 30.9 a kg.
Management guidance. The company indicated that it has succeeded in primary mining activities. Hence, the addressable market for mining grinding media has increased from 1.5m tonnes to ~3.5m-4.5m tonnes. The company is confident of achieving obtaining an additional 120,000 tonnes mining-grinding-media volumes in the next three years.
Valuation. Our target price of Rs. 1,481 is based on 25x FY18e earnings. We maintain our Buy recommendation on the healthy growth expected in sales and earnings. Risk. Sluggish mining activities in user industries would affect sales growth and margin betterment.
Shares of AIA ENGINEERING LTD. was last trading in BSE at Rs.1302.85 as compared to the previous close of Rs. 1233.95. The total number of shares traded during the day was 11936 in over 1428 trades.
The stock hit an intraday high of Rs. 1318.75 and intraday low of 1235. The net turnover during the day was Rs. 15391300.