Hold AIA Engineering; target of Rs 860: Edelweiss

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Edelweiss's research report on AIA EngineeringAIA Engineering’s (AIA) 4% and 2% YoY decline in revenue and EBITDA, respectively, in Q3FY16 came 3% below our estimate each. 50bps jump in EBITDA margin to 30.1% led by hedging gains was the key positive. Key negatives were: (1) flat volume growth YoY in Q3FY16 and 2.7% dip in YTDFY16; and (2) mining volumes dipped 1% YoY to 24,094MT for Q3FY16 and fell 11% YoY to 72,236MT for YTDFY16. This was due to depreciation of emerging market currencies, de-stocking at miners’ end and slow conversion to ferro chrome grinding media in current environment of commodity pressure at global miners’ end; and (3) postponement of guidance of additional volumes of 120,000MT to FY16-19E (from FY15-18E). We believe AIA is structurally well poised taking cue from the ~1.5mnMT ferro chrome conversion opportunity and it did well with mere 4% overall volume decline in the current slowdown. However, strong capacity addition (~29%) of 80,000MT in FY16 and further 100,000MT addition at FY17 end will be slowly utilized in the current mining slowdown. With earnings CAGR of mere 4% over FY16-18E as the company reverts to long-term EBITDA margin (guidance of ~22%) leading to 549bps dip in RoCE over FY16-18, we maintain ‘HOLD’, valuing the stock at 18x (20x earlier) FY18E. Management highlighted its continued focus on market share expansion and hence maintained its strong capacity addition guidance. However, owing to lower volume visibility in short term, earnings CAGR of mere 4% leading to 549bps dip in RoCE to 22% over FY16-18E due to high capex over next 2 years, we maintain ‘HOLD’ valuing the stock at 18x (20x earlier) FY18E. Stock currently trades at 17.8xFY17E. For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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