Buy AIA Engineering; target Rs 1940: Ask Securities

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Buy AIA Engineering; target Rs 1940: Ask Securities

Ask Securities is bullish on AIA Engineering and has recommended buy rating on the stock with target price of Rs 1940.

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Ask Securities is bullish on AIA Engineering and has recommended buy rating on the stock with target price of Rs 1940.

Ask Securities report on AIA Engineering:

AIA Engineering, India's largest high chrome mill internal supplier, is expected to generate revenue growth of 43% CAGR and profit growth of 40% CAGR over FY07-09E. This would mainly be driven by major capacity expansion to 265,000 MT by FY09E. The market for high chrome mill internals is set to multiply over the next few years, given its benefits over conventional forged products, and expected conversion to high chrome mill internals by the mining sector. AIA's technical expertise and skills in metallurgy provides it a huge opportunity to tap this market. Our DCF analysis gives us a fair value of Rs 1,940 at which the stock will trade at a PE of 19.7x FY09E earnings and an EV/EBITDA of 14.4x. We believe AIA will continue to trade at such premium due to its scalable business model, strong growth visibility, high operating margin and limited competition. We initiate coverage with a Buy rating.

Investment highlights

Conversion to high chrome mill internals to drive demand:

The market for high chrome mill internals is set to multiply over the next few years, given its benefits over conventional forged products. Growth will be led by the mining sector, which accounts for nearly 80% of the global mill internals market. Technical expertise and skills in metallurgy provides AIA Engineering (AIA) a huge opportunity to tap this market.

Capacity expansion at an optimum time:

AIA has embarked on an aggressive capacity expansion to meet the growing requirements of cast mill internals. The expansion is coming at an optimum time given that the domestic cement and mining segments too are in a capex mode. AIA's capacity will increase from 115,000 tpa at present to 265,000 tpa in FY09E to meet the incremental requirements.

Technical barriers to limit competition:

AIA has inherited the technical expertise in high chrome media from Magotteaux, its erstwhile partner. AIA and Magotteaux together control nearly 90% of the high chrome market globally. Competition is limited due to lack of technical knowledge among competitors. With limited competition globally and manufacturing operations in India, we believe AIA is in a sweet spot.

Investment concerns

Rupee appreciation will impact earnings:

Exports account for 50% of AIA's revenues at present and will increase to nearly 70% of revenues by FY09E. In a scenario of sharp appreciation in rupee, revenues as well as profitability will be impacted to an extent.

Valuations

DCF gives a fair value of Rs1,940, initiate coverage with Buy:

In our view, aggressive capacity addition will drive the 53% volume CAGR over FY07-09E, which will lead to 43% revenue CAGR and 40% net profit CAGR for AIA over FY07-09E. Our DCF analysis gives us a fair value of Rs 1940, at which the stock will trade at a PE of 19.7x FY09E earnings and an EV/EBITDA of 14.4x. We believe AIA will continue to trade at such premium due to its scalable business model, strong growth visibility, high operating margin and limited competition. We initiate coverage on AIA Engineering with a Buy rating.