AIA Engineering's Q2FY19 results (Outperformer) - Rupee depreciation aids profits; Strong outlook
Q2FY19 result highlights
- Adj. PAT grew 39.9% yoy to Rs1.21bn: on higher revenues (+31.7% yoy) and forex gains (Rs257mn) in the quarter
- Volume uptick drives revenue growth: of 32% yoy to Rs7.41bn. Volumes +13.7% to 61,695 tons (mining +18% yoy growth). Realizations +16% yoy led by depreciating rupee and improved product mix.
- Margins steady at 21.1% (-10bps yoy): due to higher production than sales (10,567 tons; shipping, clearance delays etc). Hence, EBITDA grew +32% yoy to Rs1.48bn. Benefits of rupee depreciation are partially reflected in other income with Rs257mn forex gain (avg realised exchange rate of ~Rs70 per US$ in Q2FY19) as AIA hedges its currency exposure.
Conference call highlights: (1) Maintain volume guidance of incremental 40-50ktons each year (2) Collaboration with EEMS yielded gains as AIA received an order for a gold mine wherein it provided mill lining design, which helped to improve operational efficiency of the mine and higher production. (3) Once volumes are billed in 3Q19 and further benefits of rupee depreciation accrue should drive improved margins in 3Q19. (4) Capex in FY19/20E of Rs3bn/Rs5bn for capacity expansion to 490ktons, Rs680mn done in 1H19 (5) 2 Wind Mills (2.1 MW each) are installed at Rs260mn while the balance 6 have been ordered (6) Of the 100kt capacity expansion, 50k on track to come up by 4QFY19, balance 50k in Mar-20, while 50k mining liner capacity by FY20.
Impact on financials: FY19/20E EPS raised by 3% and 1% to Rs53.5/66.8
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 as is already visible in the quarter. Accordingly, we estimate 18% volume CAGR would translate into 21% earnings CAGR over FY18-FY20E as margins see 160bps expansion to 23.5% on improved pricing and cost efficiencies. We believe valuations will remain rich at 26x 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.
AIA Engineering Limited manufactures and markets a range of high chromium consumable wear parts (mill internals). The Company employs alloy-casting process for manufacture of the products, which entails designing and choosing the high-chrome alloy composition in relation to the end application. The Company produces a range of high chrome mill internals, which are used as wear parts in the process of crushing/grinding in the cement, mining, utility, thermal power and aggregate industries. The Company's services include mill audits, turnkey installation and commissioning projects, stock assessment and management, and performance monitoring. The Company manufactures and supplies Grinding media, Shell liners and Diaphragms (partition wall, discharge diaphragms, drying chamber diaphragms and dopple rotator diaphragms) for tube mill applications. In addition to grinding media, it also provides shell liners for ball mills. The Company has its operations in approximately 120 countries.
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