AIA Engineering's Q4FY19 results (Outperformer) - Volumes surprise positively

Q4FY19 result highlights

• Adj. PAT grew +5% yoy to Rs1.53bn: on 52% yoy drop in other income (high base, Rs19m forex loss) and higher depreciation (+62% yoy, capex). However, lower tax rate led to higher than estimated PAT.
• Volume uptick drives 19% yoy revenue growth: to Rs8.87bn. Volumes +20.6% to 80,033 tons (strong traction in mining +34% yoy growth) led by shift of customers to high chrome media and as also despatch of orders delayed in 3Q19. Realizations fell 0.9% yoy led by adverse revenue mix and aggressive pricing to push volumes.
• Margins contracted 80bps yoy to 21.6%: led by adverse revenue mix and lower realisations (aggressive pricing to drive volumes). Hence, EBITDA grew +15% yoy to Rs1.91bn.
• FY19 adj. PAT +18% yoy to Rs5.1bn: Revenues increased 25% yoy to Rs29.7bn led by 16% yoy volume growth to 265k tonnes (production 290k tonnes) and 7.8% yoy increase in realisations at Rs112/kg (+8.4% benefit of rupee depreciation). OPM declined by 40bps yoy on adverse revenue mix and volatility in commodity prices resulting in 23% yoy growth in EBITDA.

Conference call highlights: (1) AIAE maintains volume guidance of incremental 40-50ktons each year led by market share gains in the mining segment (2) EEMS collaboration continues to yield gains and AIA expects to deliver its first order for a gold mine in 1Q21 (3) FY19 capex was at Rs2.06bn while combined capex for FY20E/21E is estimated at Rs6bn for expansion to 490ktons (4) Capacity expansion: 50k in 1Q20, another 50k grinding media and 50k mining liner by Dec-20; (5) All 8 Wind Mills (2.1 MW each) have been installed at capex of Rs1.04bn and is expected to drive power cost savings going forward

Impact on financials: FY20/21E EPS maintained at Rs62.5/72

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. Accordingly, we estimate 15% volume CAGR would translate into 16% earnings CAGR over FY19-FY21E as margins to see 170bps expansion to 23.2% on enhanced pricing and cost efficiencies. We believe valuations will remain rich at 24x FY21E earnings considering the long term structural growth drivers (likely upside on volumes, margins) & oligopolistic nature of the industry. Outperformer. ​