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Spark Capital: AIA Engineering 3QFY13 Results Review - Uncertainties on margin persist, Revise rating to Reduce due to price correction




Spark Capital Advisors(India) Private Limited


13 Feb 2013





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Uncertainties on margin persist, Revise rating to Reduce due to price correction AIA Engineering (AIAE) reported 3QFY13 revenue of Rs. 4.2bn, up 20.0% yoy, with a better than expected EBITDA margin of 19.9% which was driven by a combination of improvement in product mix, lower forex loss and marginal price increase. Volumes during the quarter was muted at 38.0k MT (4.1% yoy growth) primarily on the back of slack mining volumes (16.5k MT) due to inventory stuck in transit. The management expects mining volumes to recover in 4QFY13 and maintains its guidance of overall volumes of ~160k MT for FY13E and expects volumes to increase by ~15% yoy to 180-190k MT in FY14E. While mining segment is expected to maintain relatively better growth (26% volume growth in FY14E), volumes in the non-mining segment, especially cement, is expected to remain flat due to weak demand from both international and domestic markets. The management expects EBITDA margins to move upwards of 20%, but we believe that margin expansion is contingent on favorable currency terms and improvement in pricing environment which is unlikely in the near term. At the CMP of Rs. 320, the stock trades at 12.5x FY14E earnings. We assign a multiple of 13x FY14E earnings thereby resulting in a target price of Rs. 331. Considering the recent correction of stock (14% in past 3 months) we revise the rating from ‘Sell’ to ‘Reduce’ Highlights of the quarter’s performance and outlook Weakness in mining volumes expected to be temporary – Sales volumes during the quarter at 38.0k MT grew by a muted 4.1% yoy primarily due to weak mining segment’s growth (5.7% de-growth yoy) which was on the back of delivery delays of 2.5k MT material. The management expect mining volume to bounce back in 4QFY13 and expects ~180 -190k MT and ~100k MT of overall and mining volumes in FY14E respectively Margin expansion contingent on higher realization in mining and forex fluctuation – Blended realization improved (15%yoy) during the quarter to 109k/ton on the back of benign forex hedging and relatively higher contribution from cement segment which also led to improved EBITDA margin of 19.9%. While management is optimistic on EBITDA margin moving upwards of ~20%, we believe downside risk to margin persists due to volatility in forex rates and higher contribution (33% value terms in FY14E vs. 26% in FY12) of lower margin mining segment. Capacity expansion plans – AIAE expects Rs. 4.0bn (including Rs. 2.5bn for mining liners) worth of capex to be incurred over the medium term and is expected to spend ~Rs. 750mn and ~Rs. 850mn in FY13E and F4E respectively (excluding the capex for mining liners) primarily to increase grinding media capacity by 60-70k MT

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