AIA Engineering's Q1FY19 results (Outperformer) - Volume momentum continues; Outlook strong

Q1FY19 result highlights

• Adj. PAT grew 18.7% yoy to Rs1.05bn: on higher revenues (+24.5% yoy) partly offset by higher tax rate at 33.4% (vs 31.3% in Q1FY18).
• Volume uptick drives revenue growth: of 24.5% yoy to Rs7.15bn. Volumes increased 13.2% to 64,211 tons as mining saw 15% yoy growth. Realizations +10% yoy led by pass through of higher RM costs.
• Margins fell 103bps 21.8%: due to high base and lag in pass through of higher ferro chrome prices. Margins are also impacted by aggressive pricing strategy adopted by AIA to gain market share. Benefits of rupee depreciation are only partially reflected in margins (avg realised exchange rate of ~Rs65 per US$ in Q1FY19) as AIA hedges its currency exposure. Hence, EBITDA +19.8% yoy to Rs1.56bn.

Conference call highlights: (1) Maintain volume guidance of incremental 40-50ktons each year (2) Supplies to Barrick Gold (18k ton order) have started (3) Brazil’s anti-dumping duty revision to 9.8% from 32.2% earlier will not have impact on volumes as duty is borne by clients, (4) Rupee depreciation benefit to be seen in 2Q19, aim to improve margins (5) Capex in FY19/20E capex of Rs5bn/Rs3bn for capacity expansion to 490ktons, (6) Setting up 8 wind turbines at Rs780mn capex to reduce power cost; benefits will accrue in FY20 (7) Of the 100kt capacity expansion, 50k on track to come up by 3QFY19, balance 50k in FY20, while 50k mining liner capacity by FY20.

Key positives: Robust volumes growth

Key negatives: Weaker than expected margins

Impact on financials: No change to FY19/20 EPS of Rs52/66

Valuation and view

AIA has seen market-share gains in 3m-tonne grinding media business in mining with its ‘total solutions’ approach. The EEMS collaboration is likely to strengthen AIA’s competitive strength and value proposition further to offer cost effective solutions and drive faster conversion in mining segment. Accordingly, we estimate 18% volume CAGR would translate into 20% earnings CAGR over FY18-FY20E as margins see 210bps expansion to 24% on improved pricing and cost efficiencies. We believe valuations will remain rich at 26.7x FY20E earnings considering the long term structural growth drivers on continued penetration into mining (likely upside on volumes, margins) & oligopolistic nature of the industry. Outperformer.