AIA Engineering's Q3FY19 results (Outperformer) - In line; Volume uptick key

Q3FY19 result highlights

• Adj. PAT grew 17% yoy to Rs1.29bn: on higher revenues (+27% yoy)
• Volume uptick drives 27% yoy revenue growth: to Rs7.3bn. Volumes +15.3% to 59,235 tons (mining +24% yoy growth). Realizations +9.2% yoy led by depreciating rupee and improved product mix.
• Sharp jump in production vs sales: Production for 3Q19 and 9M19 is higher than sales by ~15k/32k (vs historical trends of 2-5k) as there have been delays in offtake by customers. The production is based on orders received from the customers and hence management is confident that sales despatches would pick up over the next 2-3 quarters driving an uptick in sales and normalised inventories.
• Margins steady at 20% (flat yoy): as RM prices have stabilised. Hence, EBITDA grew +30% yoy to Rs1.65bn.

Conference call highlights: (1) AIAE has cut its FY19 incremental volume guidance to 20-25ktons (from 40-50) due to customer delays in volume offtake. However, it maintains volume guidance of incremental 40-50ktons each year led by market share gains in the mining segment (2) Vale’s production cut of 40-50mtpa unlikely to have an impact as AIA has not yet seen any slowdown; we note that Vale contributes to ~6% of FY19E volumes (3) EEMS collaboration continues to yield gains and AIA expects to deliver its first order for a gold mine in 1Q21. (4) FY19/20E capex of Rs2.3bn/Rs5bn for expansion to 490ktons (Rs1.56bn YTD capex) (5) 4 Wind Mills (2.1 MW each) installed at Rs520mn, while balance 4 have been ordered and will lower power costs in FY21 (6) Capacity expansion: 50k in 4Q19, another 50k & 50k mining liner by 1Q21.

Impact on financials: FY19/20E EPS cut by 4% and 6% to Rs51.3/62.7

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 and drive faster conversion in mining segment. While near term volumes are being impacted by slower offtake, we believe the strong value proposition will continue to drive volumes. Accordingly, we estimate 14% volume CAGR would translate into 17% earnings CAGR over FY18-FY20E as margins to see 140bps expansion to 23.3% on enhanced pricing & cost efficiencies. We believe valuations will remain rich at 26.5x FY20E earnings considering the long term structural growth drivers (likely upside on volumes, margins) & oligopolistic nature of the industry. Outperformer.