Buy AIA Engineering, target Rs 1,970: SBICAP Securities

SBICAP Securities has a buy call on AIA Engineering with a target price of Rs 1,970.

The current market price of AIA Engineering is Rs 1,694.50.

Time period given by the brokerage is one year when AIA Engineering price can reach the defined target.


Investment rationale by the brokerage:
Strong operating performance: The company’s Q3FY19 sales rose 27 per cent YoY to Rs7.3bn owing to volume growth of 15 per cent YoY and realization growth of 10 per cent YoY helped by improved product mix. EBITDA margin rose by 57bps YoY led by a dip in raw material costs. Higher depreciation led by commissioning of windmills and high base of last year due to lower tax rate resulted in only 11 per cent YoY growth in PAT.

Record production, deferred deliveries led to inventory build-up: The company produced 74,600 tons of grinding media in Q3 driven by new client wins such as Barrick. However, the sales of 59,235 tons could not match production as some clients deferred the delivery of orders (due to their own inventory positions). Thus, AIAE is likely to achieve sales of 250-255k tons in FY19 as against its earlier guidance of close to 280k tons. The deferment has increased the inventory days to nearly 75 from a normal of nearly 60. The management expects dispatches in the coming quarter to be higher than or at least equal to production and maintains the earlier guidance of 40-50k tons incremental volumes per annum.

Capex guidance maintained albeit with minor delays: The company spent Rs1.6bn in 9MFY19 and expects to incur Rs2.3bn of capex in FY19 (vs. the planned outlay of Rs3bn due to delayed delivery of critical equipment by a vendor). The management said that 50k tons of grinding media capacity is expected to be commissioned in Q1FY20. There are no changes to capex plans and a further 50k tons of grinding media and mill liners will come online by Q1FY21.

Change in estimates: We pare our FY20e/FY21e revenues estimate by 4 per cent/5 per cent. We also moderate our margin expansion trajectory given the management’s focus on improving market share. Consequently, both our EBITDA and PAT estimates for FY20e/FY21e are further reduced by 7 per cent each.

Valuation: We maintain BUY with a TP of Rs1,970 (25x-FY21e EPS; nearly 5-year avg). We foresee revenue/PAT CAGR of 22 per cent/19 per cent over FY18-21e and RoE of 17.8 per cent in FY21e. Key risks – 1) Irrational price competition by Chinese players, 2) currency fluctuations (exports account for nearly 75 per cent of sales); and 3) cyclical decline in mining volumes.