Private Client Research

Rating

Buy

Sector

Engineering - Industrial Equipments

Company

AIA Engineering Ltd

Engineering - Industrial Equipments

July 11, 2018

Sensex: 36265.93

CNX Nifty: 10948.30

NSE: AIAENG

BSE: 532683

Reco Price

Rs. 1670.00

Price Target (1 Year)

Rs. 2010.00

Upside

20.36%

Date

July 11, 2018

Sensex

36265.93

CNX Nifty

10948.30

Exchange

Code

NSE

AIAENG

BSE

532683

Stock Data

CMP (Rs)

1647.05

Face value (Rs)

52 Week Range (Rs)

1709.75 - 1273.00

Market cap (Rs Crores)

14476.76

Price To Book Value (x)

5.43

P/E Ratio (x)

33.82

EV/EBIDTA (x)

21.95

One Year indexed Stock Performance

AIA Engineering Ltd Sensex

Return (%)

12m

36m

Absolute

6.38

1.90

19.00

64.66

Sensex

2.21

5.11

14.23

29.70

Shareholders

(in %)

30-Jun

Promoter

0.00

Public

100.00

Others

0.00

Total

100

+91 22 6639 3000

research@stockaxis.com

Demand revival from the mining sector, capacity expansion to become the largest high-chrome casting producer, strong financials and a sound management to result in growth

Largest high-chrome casting producer:
AIAE is the second largest high-chrome casting producer (by capacity) in the world. The company’s Greenfield plant at GIDC Kerala is expected to be commissioned in two phases. The first phase will add 50,000 TPA capacity in F.Y. 2018-19 while the second phase will add another 50,000 TPA capacity in F.Y. 2019-20. This will take the installed capacity to 4,40,000 TPA, with a total capex of Rs. 350 crores. This capacity expansion will result in the company emerging as the Number One high-chrome manufacturer in the world.

60% of the revenues from mining segment:
AIAE caters primarily to the iron ore, platinum, gold and copper mines. 75% of its revenue comes from exports to over 120 countries. The company exports grinding media to key mining markets like Africa, South America and South Asia. Its total production in Q4FY18 was 66375 MT, out of which 57% i.e. 37591 MT was consumed by the mining segment. Similarly, in Q3FY18, 62.93% of the total sales of 51392 MT i.e. 32346 MT came from the mining segment. Due to global slowdown in the mining segment, the company witnessed a low volume growth over the last 3 quarters. However, we expect an increase in demand within the next few quarters.

Financials:
AIAE saw a sharp rise in operating margins from the 20-24% range during FY12-14 to 29% in FY17 on the back of depreciation of the Indian Rupee. However, the management acknowledges that these gains are temporary in nature and will be passed on to customers gradually as it adopts a predatory pricing approach to acquire new customers. The net sales jumped by 8.87% on a YoY basis to Rs. 2445.13 crores, with its PAT Margin at 18.13% as on FY18. Also, its order book as on 1st April 2018 stood at Rs. 744 crores.

Industry

With improving prices of metals in the recent past, AIAE has been targeting metal groups of gold and copper. It is also looking at improvement in traditional iron ore and platinum, leading to stability for miners and acceleration of conversion process from traditional to ferro chrome grinding media, in turn leading to improved growth outlook for AIAE.

Profile

AIA Engineering (AIAE), incorporated as Magotteaux (India) in 1991, is a joint venture enterprise with Magotteaux International Belgium. AIAE, an ISO 9001 certified company, specializes in the design, development, manufacture, installation and servicing of high chromium wear, corrosion and abrasion resistant castings used in the cement, mining and thermal power generation industries. The company not only services the replacement demand of these industries, but also fulfils the Original Equipment Manufacturer (OEM) requirement for new capacities added.

The company’s product portfolio consists of high chrome grinding media, vertical mill spares, diaphragms and mining liners. In the future, the company plans to set up a chrome mill internals unit at a suitable location. The company is also mulling certain backward integration opportunities including setting up of a captive power plant and a ferro chromium plant of a suitable size.

Profit & Loss Statement:- (Consolidated)

(Rs Crores)

DESCRIPTION	Mar-16	Mar-17	Mar-18	Mar-19 E	Mar-20 E
Net Sales	2098.39	2246.01	2445.13	2689.64	2958.61
Growth (%)		7.03	8.87	10.00	10.00
COGS	714.97	726.92	964.37	1075.86	1183.44
Gross Profit	1383.42	1519.09	1480.76	1613.79	1775.16
Gross Profit Margin (%)	65.93	67.64	60.56	60.00	60.00
Power & Fuel Cost	211.16	242.53	252.14	268.96	295.86
% Of Sales	10.06	10.80	10.31	10.00	10.00
Employee Cost	102.43	106.71	113.16	123.72	133.14
% Of Sales	4.88	4.75	4.63	4.60	4.50
Manufacturing Expenses	280.73	340.70	334.23	376.55	414.21
% Of Sales	13.38	15.17	13.67	14.00	14.00
General & Admin Expenses	53.99	63.81	76.35	86.07	91.72
% Of Sales	2.57	2.84	3.12	3.20	3.10
Selling & Distribution Exp	111.11	118.46	149.34	161.38	177.52
% of Sales	5.30	5.27	6.11	6.00	6.00
Misc. Exp	11.27	8.37	15.94	13.45	14.79
% Of Sales	0.54	0.37	0.65	0.50	0.50
Total Expenditure	1485.66	1607.50	1905.53	2105.99	2310.67
EBITDA	612.73	638.51	539.60	583.65	647.93
% Margin	29.20	28.43	22.07	21.70	21.90
Other Income	101.94	104.44	121.81	135.00	150.00
Operating Profit	714.67	742.95	661.41	718.65	797.93
Interest	8.29	8.43	10.84	14.00	15.00
PBDT	706.38	734.52	650.57	704.65	782.93
Depreciation	65.52	72.48	65.58	70.00	75.00
Profit Before Taxation & Exceptional Items	640.86	662.04	584.99	634.65	707.93
Exceptional Income / Expenses	0.00	0.00	0.00	0.00	0.00
Tax	184.06	204.83	141.39	177.70	212.38
Profit After Tax	456.80	457.21	443.60	456.95	495.55
Adjusted EPS	48.44	48.43	47.00	48.41	52.50

Source: Stockaxis Research, Company Data

Valuation

For AIAE, volume growth in the mining segment has revived strongly since last year and a strong global mining outlook reiterates the confidence on the same. Led by improving volume visibility in long term contracts, low penetration (10-12%) and strong opportunity in global gold and copper mining, and with margin recovery to follow makes AIAE a preferable stock to own. It’s currently trading at 31.8x of its expected earnings of FY20. We recommend ‘Buy’ for a target price of Rs. 2,010.

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