AIA Engineering's Q4FY18 results (Outperformer) - Volume uptick; Outlook strong
Q4FY18 result highlights
- Adj. PAT grew 27% yoy to Rs1.46bn: on higher revenues (+19% yoy) and lower tax. Reported PAT at Rs1.5bn (+32% yoy; tax write back).
- Volume uptick drives revenue: growth of 19% yoy to Rs7.43bn. Volumes increased 14% to 66,374 tons as mining saw 27% yoy growth. Realizations +3.6% yoy led by pass through of higher RM costs.
- Margins hold on at 22.4% (+40bps): led by pass thru of higher ferro chrome prices. Hence, EBITDA +21% yoy to Rs1.67bn.
- Mining volumes drive growth in FY18: FY18 revs +10% yoy to Rs23.7bn led by +7% volumes (+9.4% mining). OPM fell 560bps yoy to 21.9% due to higher RM costs & rupee appreciation. Hence EBITDA fell 12.5% yoy to Rs5.4bn and PAT fell 5.6% yoy to Rs4.3bn.
Technical collaboration for mining liners: with EEMS for patent applications and technical know-how to improve performance of mills, particularly to cut power costs for clients. This would be a unique solution and would enable faster client conversion in mining segment. AIA is setting up a Rs2.5bn plant (50kt capacity) to be operational by end-FY20. Revenue potential of Rs6-7bn with similar margins, despite royalty payout to EEMS. Mkt size of mill liners is estimated at 300-500kt.
Conference call highlights: (1) Maintain volume guidance of incremental 40-50ktons each year (2) Plan to setup 8 wind turbines at a capex of Rs1bn to reduce power cost; (3) FY18 capex at Rs1.38bn; FY19-20E capex at ~Rs8bn (4) Of the planned 100kt capacity expansion to 440kt 50k to come up by 3QFY19, balance 50k in another 8-10 months.
Impact on financials: 7%/5% upgrade in FY19/20 EPS to 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 and translate into a 20% earnings CAGR over FY18-FY20E as margins see 240bps expansion to 24.3% on improved pricing power. We believe valuations of 23x FY20E earnings are attractive considering the long term structural growth drivers on continued penetration into mining (likely upside on volumes) & 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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