1
May 18, 2018
AIA Engineering Ltd
Earnings Revision (%)
YE Mar FY18E FY19E
Sales (%) 0.9 0.2
EBITDA (%) (7.1) (6.3)
PAT (%) (10.6) (11.1)
Source: Karvy Research
India Research - Stock Broking
HOLD
Recommendation (Rs.)
CMP (as on May 17, 2018) 1567
Target Price 1729
Previous Target Price 1565
Upside (%) 10
Stock Information
Mkt Cap (Rs.bn/US$ bn) 147.8 / 2.2
52-wk High/Low (Rs.) 1710 / 1273
3M Avg. daily value (Rs. mn)
120.6
Beta (x) 0.6
Sensex/Nifty 35149 / 10683
O/S Shares(mn) 94.3
Face Value (Rs.) 2.0
Shareholding Pattern (%)
Promoters 61.7
FIIs 23.1
DIIs 10.4
Others 4.8
Stock Performance (%)
1M 3M 6M 12M
Absolute 10 8 13 5
Relative to Sensex 8 5 7 (8)
Source: Bloomberg
Relative Performance*
Source: Bloomberg; *Index 100
Analyst Contact
De Arul Kaarthick
040 - 3321 6280
arul.kaarthick@karvy.com
For private circulation only. For important information about Karvy’s rating system and other disclosures
refer to the end of this material. Karvy Stock Broking Research is available on Thomson Reuters &
Bloomberg (Code: KRVY<GO>)
Exhibit 1: Valuation Summary
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Net Sales 20984 22460 24451 28285 33084
EBITDA 6093 6347 5357 6273 7704
EBITDA Margin (%) 29.0 28.3 21.9 22.2 23.3
Net Prot 4568 4572 4436 4552 5492
EPS (Rs.) 48.4 48.5 47.0 48.3 58.2
RoE (%) 20.3 18.1 15.5 14.2 15.0
PE (x)* 19.4 32.5 30.6 32.5 26.9
Source: Company, Karvy Research; *Represents multiples for FY16 -FY18 are based on historic market price
Adding New Product Lines for Growth
AIA Engineering revenue grew by 14.9% and earnings grew lower by 32% in
Q4FY18 due to lower depreciation and higher other income. Volume growth
was at 13.9% and realization growth was a mere 0.9% in Q4FY18. For the
full-year, Volume grew by 6.6% and realization grew by 2.1%, while FY18 earnings
de-grew by 3%. Going forward, we expect volume growth at 14% to ~298 thousand
tons (ttn) and realization growth at 2% to Rs. 111 in the next two years. We estimate
EBITDA/tn to grow at 5% for the next two years and reach Rs. 26k/tn. We expect
11% earnings growth for the next two years to Rs. 58.2; however, volatile Ferro
Chrome (FeCr) and scrap metal prices impact margins are signicantly going
forward. This apart, AIA is entering a signicant CapEx phase and benets of the
same is expected to ow in from FY21E. Hence, we maintain our ‘HOLD’ rating for
a target price of Rs. 1729 valuing AIA at 30x FY20E EPS.
$150mn mill liner opportunity: AIA has entered an exclusive technical
agreement with patented technology from EE Mill Solutions LLP, USA (EEMS)
for development of low chrome based mill liners used in the mining sector. The
value proposition for miners is ~10% reduction in power costs and lower cost of
ownership. Existing organized players account for ~60-70% volumes and market
size is ~$100-150mn annually. AIA is adding 50k tn capacity at a cost of Rs. 5 bn in
its existing facility and expects to commission in next 18-24 months.
Reducing power cost: AIA is planning to add 16.8MW of Wind Turbine
Generators (WTG) of 2.1MW capacity at a total cost of Rs. 1.04 bn in two phases.
Phase I shall commence with 2 WTG in FY19 and rest at a later stage depending on
performance. We expect the project benet to start owing in from FY20 and could
save ~Rs. 52 mn annually in phase I and Rs. 197-220 mn annually (~9% of power
cost) when all WTG is commissioned
Valuation and Risks
AIA would be funding the entire Capex from internal accruals which eectively
increase gross block by 66%. However, volumes and cost saving could come in
only from FY21E, also volatility in input prices could impact margins in near term.
Hence, we maintain our ‘HOLD’ rating by valuing AIA at 10 year average of 1yr
forward PE of 30x FY20E EPS of Rs. 58.2 for a target price of Rs. 1729 for an
upside potential of 10%.
L
L
L
L
L
L
Result Review
Industrials - Capital Goods
AIA Engineering Ltd
Bloomberg Code: AIAE IN
80
90
100
110
120
May-17
Jun-17
Jul-17
Aug -17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar -18
Apr-18
AIA Eng ineering Ltd
Sensex
2
May 18, 2018
AIA Engineering Ltd
Key takeaways from quarterly earnings
FY18 volumes grew by 6.6% and realization grew by 2.1%. Growth came in mainly
due to product mix and price increase in terms of pass-through of costs. Mining
volumes grew by 9.6% and Cement volumes grew by 2.6% for the year. Volumes
from India in the cement segment stands at 20%.
FeCr and scrap metal prices have stabilized at higher levels and Rupee at the
current levels could act as a tailwind. However, management expects to maintain
protability net of currency and other scal benet gains.
$100-150mn mill liner opportunity:
AIA has entered into an exclusive technical agreement with US-based technology
developer EE Mill Solutions LLP, USA (EEMS) for the development of low chrome
based mill liners used in the mining sector based on a patented technology of
EEMS. This positions AIA as a total solutions provider dierentiating it from
traditional suppliers of mill liners.
AIAs value proposition for its mining customers is ~10% reduction in power
costs and lower cost of ownership. Management indicated there are 2 large
players and 3 small players accounting for ~60-70% of volumes and none of
the traditional players have grinding media. The annual revenue opportunity is
~US$ 100-150 mn and AIA shall pay a royalty to EEMS for its technology.
AIA is planning Rs. 5 bn of investment for ~50k tn capacity at existing facility as
land and environmental clearance are already in place. Management expects to
commission the facility in next 18-24 months and another 12-18 months’ timeline
to clock at least ~40k tn of mill liner volumes.
Investment in Wind Power: AIA already has a 2.1MW of wind turbine operational
in Kutch and is planning to add 16.8MW of WTG of 2.1MW capacity at a total cost
of Rs. 1.04 bn in two phases. Phase I shall commence with 2 WTG in FY19 and
rest at a later stage depending on the performance. We expect the project benet
to start owing in from FY20 and could save ~Rs. 52 mn annually in phase I and
Rs. 197-220 mn annually (~9% of power cost) when all the WTG is commissioned.
Anti-dumping measure in Brazil: Management expects an announcement on
anti-dumping duty in June-July’18. The interim duty stands at ~32% which could go
down to ~12%, but not sure of any outcomes.
CapEx: For FY19 it is pegged at Rs. 5 bn and for FY20 the same is pegged at
Rs. 3 bn. In terms of facility, Rs. 4 bn for grinding, balancing line and 2 years of
OpEx, Rs. 2.5 bn for mill liner facility and Rs. 1 bn for WTG.
Capacity: Existing capacity at ~3.4 Lakh tn and by end of FY20 it will be 4.4 Lakh
tn of grinding media and plus ~50k tn of mill liners.
Input price volatility could
impact margins.
AIA is entering into a
signicant CapEx phase
for next two years.
3
May 18, 2018
AIA Engineering Ltd
Exhibit 2: Q4FY18
YE Mar (Rs. Mn) Q4FY18 Q3FY18 QoQ (%) Q4FY17 YoY (%)
Turnover (net) 7439 5722 30.0 6476 14.9
Op. Expenditure 5773 4453 29.6 4876 18.4
EBITDA 1666 1269 31.3 1600 4.1
Depreciation 140 179 (21.9) 209 (33.2)
EBIT 1526 1090 40.0 1391 9.7
Interest 29 11 161.9 14 99.8
PBT 1497 1079 38.8 1376 8.8
Other Income 495 321 54.1 249 99.0
Tax (net) 475 235 102.3 473 0.5
PAT 1518 1165 30.2 1153 31.7
EBITDA Margin (%) 22.4 22.2 22 bps 24.7 (231) bps
EBIT Margin (%) 20.5 19.0 147 bps 21.5 (96) bps
PAT Margin (%) 20.4 20.4 4 bps 17.8 260 bps
Source: Company, Karvy Research
AIA is available at 26.9x
of FY20E EPS and in the
last decade AIA has traded
at 29.7x of 1 yr forward
earnings.
Tax was lower on account
of reversals in short-term
provisions related to liquid
investments provided in
the earlier years.
Exhibit 4: AIA Engineering - PE Valuation
Source: Bloomberg, Karvy Research
Exhibit 3: Change in Earnings Estimates
YE Mar - Consolidated (Rs. Mn)
FY19E FY20E
Old New % Change Old New % Change
Net Sales 28034 28285 0.9 33024 33084 0.2
EBITDA 6756 6273 (7.1) 8223 7704 (6.3)
EBITDA Margin (%) 24.1 22.2 (192) bps 24.9 23.3 (161) bps
Adj. PAT 5091 4552 (10.6) 6175 5492 (11.1)
EPS (Rs.) 54.0 48.3 (10.6) 65.5 58.2 (11.1)
Source: Karvy Research
0
10
20
30
40
50
60
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Average
+1SD
-1SD
Exhibit 5: S&P BSE Capital Goods Index - 10 yr PE Valuation
Source: Bloomberg, Karvy Research
19
24
29
34
39
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
S&P BSE Capital Goods Index
Average
+1SD
-1SD
4
May 18, 2018
AIA Engineering Ltd
Financials
Exhibit 6: Income Statement
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Revenues 20984 22460 24451 28285 33084
Growth (%) (3.9) 7.0 8.9 15.7 17.0
Operating Expenses 14891 16114 19094 22012 25380
EBITDA 6093 6347 5357 6273 7704
Growth (%) 4.2 4.2 (15.6) 17.1 22.8
Depreciation & Amortization 655 725 656 940 1211
EBIT 5438 5622 4701 5333 6492
Interest Expenses 49 45 69 72 74
PBT 5389 5577 4632 5261 6418
Other Income 1019 1044 1218 1018 1158
Tax 1841 2048 1414 1727 2084
Adjusted PAT 4568 4572 4436 4552 5492
Growth (%) 6.0 0.1 (3.0) 2.6 20.7
Source: Company, Karvy Research
Exhibit 7: Balance Sheet
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Cash & Cash Equivalents 1181 2416 1812 2140 2679
Sundry Debtors 4304 4948 6002 6471 7659
Inventory 3891 5341 5534 6450 7636
Loans & Advances 19 41 45 45 45
Investments 9464 9586 10910 7268 6614
Gross Block 9991 10685 12073 17073 20573
Net Block 6526 6504 6514 10110 12398
CWIP 378 426 968 968 968
Miscellaneous 2083 2639 3801 6319 6982
Total Assets 27847 31901 35585 39769 44981
Current Liabilities & Provisions 3796 3933 4666 4793 5139
Debt 253 3 2 32 37
Other Liabilities 496 712 735 735 735
Total Liabilities 4544 4648 5403 5559 5910
Shareholders Equity 189 189 189 189 189
Reserves & Surplus 23038 26984 29904 33933 38793
Miscellaneous 76 80 89 89 89
Total Networth 23227 27173 30093 34121 38981
Minority Interest 759 802 891 891 891
Total Networth & Liabilities 27847 31901 35585 39769 44981
Source: Company, Karvy Research
Volume growth is
estimated at 14% and
realization growth at 2%
to Rs. 111 in the next two
years. EBITDA/tn to reach
Rs. 26k/tn by FY20E.
Internal accurals could
be used to fund the entire
CapEx program for the
next two years which could
eectively increase Gross
Block by 67%.
5
May 18, 2018
AIA Engineering Ltd
Exhibit 8: Cash Flow Statement
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
PBT 5389 5577 4632 5261 6418
Depreciation 655 725 656 940 1211
Interest 49 45 69 72 74
Tax Paid (1841) (2048) (1414) (1727) (2084)
Inc/dec in Net WC 811 (2623) (978) (1283) (2053)
Others (84) (423) (1416) (1018) (1158)
Cash ow from operating activities 4979 1252 1549 2245 2408
Inc/dec in capital expenditure (1782) (761) (1388) (5000) (3500)
Inc/dec in investments (4582) (11) (1322) 3642 654
Others 1871 537 1218 1018 1158
Cash ow from investing activities (4493) (235) (1492) (340) (1688)
Inc/dec in borrowings 851 (436) 73 54 30
Dividend paid (2887) (443) (136) (136) (136)
Interest paid (49) 52 (69) (72) (74)
Others 0 3 0 0 0
Cash ow from nancing activities (2084) (824) (132) (154) (180)
Net change in cash (1598) 194 (76) 1751 540
Source: Company, Karvy Research
Exhibit 9: Key Ratios
YE Mar FY16 FY17 FY18 FY19E FY20E
EBITDA Margin (%) 29.0 28.3 21.9 22.2 23.3
EBIT Margin (%) 25.9 25.0 19.2 18.9 19.6
Net Prot Margin (%) 21.8 20.4 18.1 16.1 16.6
Dividend Payout Ratio (%) 37.2 16.5 17.0 11.5 11.5
Net Debt/Equity (x) 0.01 (0.05) (0.02) (0.03) (0.03)
RoE (%) 20.3 18.1 15.5 14.2 15.0
RoCE (%) 16.4 14.6 12.0 11.6 12.4
Source: Company, Karvy Research
Exhibit 10: Valuation Parameters
YE Mar FY16 FY17 FY18 FY19E FY20E
EPS (Rs.) 48.4 48.5 47.0 48.3 58.2
DPS (Rs.) 18.0 8.0 8.0 5.5 6.7
BVPS (Rs.) 246.3 288.1 319.1 361.8 413.3
PE (x) 19.4 32.5 30.6 32.5 26.9
P/BV (x) 3.8 5.5 4.5 4.3 3.8
EV/EBITDA (x) 14.6 23.2 25.3 23.4 19.0
EV/Sales (x) 4.2 6.6 5.5 5.2 4.4
Source: Company, Karvy Research; *Represents multiples for FY16 - FY18 are based on historic market price
Working capital intensity to
remain high.
Earnings to expand by 11%
in the next two years
6
May 18, 2018
AIA Engineering Ltd
Stock Ratings Absolute Returns
Buy : > 15%
Hold : 5-15%
Sell : < 5%
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