Edelweiss has recommended hold rating on AIA Engineering with a target price of Rs 860 in its research report dated March 28, 2016.
Edelweiss's research report on AIA Engineering
We met management of AIA Engineering (AIA) to gauge the structural opportunity in the mining business. Management maintained its positive stance on the structural opportunity owing to: 1) conversion of traditional grinding media to ferro chrome media with levers like huge primary media market at 60% of overall grinding media market, but only ~15% of AIA’s sales; 2) strong addressable market (~1.5mn) in gold and copper, with AIA having mere ~40-50K MT volumes from these segments; and 3) potential from Latin American markets which are major producers of copper ore. Hence, AIA added 31% capacity in FY16, despite slower volumes currently. Further, they are targeting strong market share gains and ~80% capacity utilisation by FY19-20. Concerns remain on margins led by aggressive pricing. However, volume gains will remain sticky. We maintain ‘HOLD’ on slower volumes in short term and margin pressures. However we remain structurally positive in the long term with scope to raise our conservative 53% capacity utilisation estimate for FY18.
We like AIA’s aggressive capacity expansion strategy to capture market share and reap benefits of strong potential in mining segment. However, we believe margin pressure will remain an overhang on the stock. At 20x FY18E, we maintain ‘HOLD’.
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