Buy AIA Engineering; target of Rs 607: ICICIdirect.com

ICICIdirect.com report on AIA Engineering

"AIA Engineering, scalable opportunity in the mining segment, resurrection of operating margins back to historical levels and aspirations to become the largest player globally make AIA Engineering (AIA) an interesting play in the oligopolistic high chrome mill internals (HCMI) industry. After penetrating the cement market well, AIA has shifted its focus to the relatively large mining segment and made significant inroads into the same (share has risen from 18 percent in FY10 to 54 percent in 9MFY14). This traction will enable AIA to post revenue CAGR of 17 percent with margins reviving to historical levels of 22-23 percent over FY13-16E. Consequently, PAT CAGR of 21 percent and strong cash flows will fund the aggressive capex plans of AIA."

"Current global consumption of high chrome mill internals, which is equally applied in the cement and the mining space, is at ~6,00,000 tonnes per annum (TPA). With almost 80 percent penetration achieved for HCMI in cement space, the mining segment provides next leg up for HCMI players. It is estimated that at least 1.2 MTPA mining segment volumes for mill internals can be converted from forged media into HCMI, going ahead. Hence, we believe this will create an opportunity 4x that of current HCMI consumption of 3,00,000 TPA for HCMI players in mining. With significant cost savings achieved (~30-40 percent) through lower wear rate, increased productivity & lower power consumption, HCMIs are making inroads into mining sector."

"Successful penetration in the mining segment (58 percent volume CAGR over FY10-13) and presence of strong conversion opportunity (80 percent of the 1.5-2 MT global opportunity per annum from forged media to HCMI still remains unexploited) has prompted AIA to undertake an aggressive capacity expansion plan. From a capacity of 2,60,000 tonnes in FY14E (60,000 tonne brownfield capacity is expected to be added in Q4FY14E), AIA plans to add another 1,80,000 tonnes of greenfield capacity in Gujarat by FY16E. This will make AIA the largest HCMI player globally as the current capacity of 200,000 tonnes (9MFY14) will grow 2.1x to 440,000 tonnes by FY16E. AIA will then overtake the current market leader Magotteaux (Belgium)."

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