AIA Engineering: Capacity addition and strong growth in mining to drive growth - Motilal Oswal

Key to operations of customers : AIA Engineering's mill Internals for grinding mills help pulverize minerals, coal, limestone and cement - a key part of the production process. Mill internals market globally is estimated at 3 million tonnes ($5Billion). Key global customers include Holcim, Lafarge, Cemex, FL Smidth. Anglo Platinum, Rio Finto, CVRD, Arcelor Mittal & BHP Billiton. At 2Lakh tonne of capacity, AIA still has scope to improve its share of the customers needs.

Capacity addition and strong growth in mining to drive growth AIA has raised capacity from 65000 tonnes in FY05 to 200000 tonnes in FY13 and is adding 50% to 300000 tonnes by Dec'14. This will be through a greenfield plant and a brownfield expansion at a current location. The 50000 tonne brownfield expansion is likely to come in by Dec'13 and will drive volumes from 4QFY14. The capacity addition is key to growth as current utilization is at 82-85%. The mining segment is seeing a strong growth in demand for AIA's products. Mining sales have risen ~30% in FY13 in volume terms while overall volumes have risen 8%. We estimate AIA's overall volume growth during FY13- FY15E to be 12% with mining volumes rising 25%.

Strong Balance sheet and OCF, and low capex to drive higher payout : AIA has cash and equivalent of Rs. 465 cr and debt of Rs. 158 cr. Operating cash flow over FY13-FY15E is likely to be of the order of Rs. 400 cr with capex less than Rs. 350 cr. Given free cashflows, management has announced an increase in payout to 20% or more. Higher payout results in higher valuations (as per the Wealth Creation Study 2011) - a positive for investors

RISKS to our Investment Recommendation: (1) USD/INR volatility results in uncertainty on sales since 70% revenues is exports (2) Sharp fall in mineral prices could impact growth plans of customers and impact volume offtake and (3) Spike in raw material cost could impact margins as it gets passed onto customers with a delay.

Valuations & View: AIA trades at 13xFY14E and 11.4xFY15E earnings as compared to average valuations of 16x for the last 5 years. We value the company at average P/E giving us a target of Rs. 400. We have, conservatively estimated a 13% revenue and 15% profit growth CAGR over FY13-15E. We see scope for upsides from margin expansion with our estimates of 19.3% being conservative as compared to management expectation of 20%. The rise in payout from a 16% 4-year average prior to FY13 to 20%+ guided by the management should lead to a rerating of the stock.

Source : Equity Bulls

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