Bhadresh Shah
The fact that AIA Engineering has attracted a galaxy of stock pickers should alert you that something is going on. I analyzed this and found that AIA did have a unique “moat” which gave it an edge over competitors. I also posted a detailed interview of Bhadresh Shah in which he explained his vision for AIA and a couple of research reports (see Why Are Prashant Jain, Kenneth Andrade & Other Stock Wizards Bullish On AIA Engg?).
Then, Hem Securities’ recommendation of the stock is also significant. Hem has an uncanny ability to home in on winning stocks like Tata Elexsi, Vaibhav Global, Va-Tech Global etc. I have analyzed the performance of their latest stock picks. With a stellar track record like that you know that you just cannot afford to ignore their stock picks.
Now, AIA Engineering has reported block-buster Q4FY14 results. Let’s take a quite note of it.
| Quarterly results of AIA Engineering | |||
|---|---|---|---|
| (Rs cr) | Mar 2014 | Mar 2013 | YOY |
| Operating Income | 576.65 | 457.47 | 26.05 |
| Total Expenses | 411.42 | 365.51 | 12.56 |
| Operating Profit | 165.23 | 91.96 | 79.68 |
| Other Income | 11.91 | 5.69 | 109.31 |
| PBDIT | 177.14 | 97.65 | 81.40 |
| PBT | 163.92 | 87.28 | 87.81 |
| Adjusted Net Profit | 119.59 | 63.75 | 87.59 |
AIA’s net profit for the quarter ended March 2014 surged 87.59% to Rs 119.59 crore from Rs 63.75 crore in the same quarter previous year. Net sales for the quarter rose 26.05% to Rs 576.65 crore compared with Rs 457.47 crore for the prior year period. The EPS for the quarter stnds at Rs 12.68, a growth of 87.57% growth over the same quarter in the preceding year.
These good results have been followed by a host of upgrades by brokerages:
ICICI Direct Target Price Rs. 796
Firing on all cylinders…Strong visibility and growth call for revision; maintain BUY
AIA made a strong comeback on every parameters during FY14 as 1) volume growth in mining for FY14 stood at 31 percent YoY to 96000 tonnes, 2) share of the mining segment is expected to scale up to 63 percent in FY16E from 54 percent in FY14 and 46 percent in FY13, 3) EBITDA margins have clawed back to 24 percent in FY14. Going ahead, the management expects margins to be in the 22- 23 percent range and 4) AIA has charted out aggressive capex plans to almost increase the capacity by 2.2x to 440000 tonnes by FY16E. We expect AIA to be well on track to achieve strong volume CAGR of 19 percent over FY14- 16E and comfortably bring in new capacity with profitability intact. Hence, we upgrade the target P/E from 16x to 18.5x and assign a target price of Rs 796 on FY16E EPS
Click here to download ICICI’s report on AIA (pdf)
HDFC Securities (Target Price: Rs. 802 & 899)
At global level, AIA is the 2nd largest player in its segment after its Belgian rival Magotteaux. However, capacity expansion would make AIA much ahead of its competitors. AIA has significant global presence in around 90 countries under its wholly owned sub‐sidiary ‘VEGA’ and over 75% of its revenue comes from overseas market. Globally, only few players are operating high chromium grinding technology and in that space, AIA and Magotteaux together account for over 80% of the market share, while rest of the share is controlled by Chinese players. With the improvement in macroeconomic conditions across the globe and rising investments in core areas, AIA could be amongst the first to take advantage of the turnaround.
AIA managed to report positive y‐o‐y growth in past several quarters and that it achieved in a sluggish environment, where cement, mining and thermal power companies are witnessing underutilization of installed capacities is noteworthy. In FY14 it reported average y‐o‐y growth of ~20%. AIA has a strong net debt‐free balance sheet, with net cash and equivalents of Rs 659 cr in FY14. The strong cash flows help AIA to continuously fund its capex from internal accruals. The company has been on the conservative side of dividend payouts at below 20% ploughing back profits for its expansion program.
Company is currently operating at OPM and net margin of 28.7% and 20.3% respectively (Q4FY14). Management believes 22‐23% operating margins are sustainable. Profitability has improved in past few quarters due to significant control over operating expenses. Low debt burden and strong cash flows has provided moderate flexibility to the company for expansion. Improvement in margins aided key metrics. Cash & Investments constitutes 34% of total assets.
We have revised our FY15 estimates upwards to reflect growth post further expansion and opportunities in the mining sector. Revival in local mining and cement sector once manufacturing goes back on track would also one of the drivers for revenue growth. At the current market price, the stock trades at ~16x FY15 (E) EPS of Rs.43.4. Historically, the stock has traded in the range of 23‐19x its PE. The current valuation looks quite attractive given strong revenue and earnings growth, debt free balance sheet, robust cash flows and market leadership. The key thing to track will be mining volumes and corresponding margins. As visibility on this business line improves, the stock has the potential to trade at higher multiples.
Mining volumes have already showing initial signs of pick up over last few quarters. With huge conversion opportunity in the mining segment and AIA’s success in penetrating the mining segment, we expect AIA to post better top‐line in the coming years.
Based on better margin led by product mix improvement within mining, higher realization, expansion in capacity and mining sector opportunities, we feel investors could look to buy the stock at CMP and add on dips to Rs 585 ‐629 (13.5x‐14.5x FY15E EPS) for sequential targets of Rs 802 & Rs 889 (18.5x & 20.5 FY15E EPS) in the next 2‐3 quarters.
Click here to download HDFC Sec’s report on AIA (pdf)
The company delivered strong operational performance; stock price could remain firm (expect around 15-20% appreciation over 3-6 months). However, with expected rupee appreciation EBITDA margin could be softer (management expects around 20-22%) for FY2015. The on-going capacity expansion of 1.8 lakh ton is expected to get commissioned by Q1FY2016 and capex for the same to be around Rs400/250 crore in FY2015/16.
Most of the capex requirement would be met by the internal accrual of the company as the cash flow is very healthy; therefore the incremental capacity would add value on the bottom line.
On the negative side, stronger rupee would have some negative impact on the stock as 70% of its revenue is export driven. Given the strong balance sheet and consistent cash generating ability, we are positive on the stock.
Prabudas Liladhar (as part of their best Modi Sarkar stocks to buy)
We have had a look at number of mid cap stocks which could turn out to be good investment bets over the next 18 ‐24 months. Though we do not have active coverage in the below mentioned mid cap stocks, we have a soft coverage. These stocks could turn out to be Midcap winners over the next 24 months as these stocks had suffered in the last five years due to a combination of domestic slow down and mid cap value contraction: AIA Engineering
Click here for PL’s report on Modi Sarkar stocks
Speaking for myself, I have a nice little chunk of AIA Engg in my portfolio. If you don’t, you need to carefully study all the research reports and take an informed decision.
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