AIA Engineering’s (AIA) 2% decline in revenue and 9% growth in EBITDA in Q4FY16 came 7% and 19% ahead of estimates, respectively. Sales beat was driven by 5.7% YoY volume growth with 13% YoY spurt in mining volumes. However, realisation declined 6% YoY. While management remained upbeat on achieving additional volumes of 120,000MT over FY17-19E, concerns remain on margins with management withdrawing guidance owing to variables like aggressive pricing strategy and emerging market currency volatility. With earnings CAGR of mere 4.6% leading to 270bps dip in RoCE over FY16-18E, we maintain ‘HOLD’. However, we remain structurally positive in the long term with scope to raise our conservative 54% capacity utilisation estimate for FY18.
Tepid volumes owing to challenging scenario
Sales declined 2% YoY with volume growth of 5.7% YoY at 53,502MT for Q4FY16 and down 0.5% YoY in FY16 to 185788mt (mining volumes grew 12.9% YoY to 28,594MT for Q4FY16 and declined 5% YoY to 100684MT for FY16). Management maintained that overall volumes remained flat in FY16 owing to certain strategic and conscious decisions taken by the company viz. restricting sales to Ukraine, reduction in South African market volumes owing to currency uncertainties and volume reduction owing to closure of one particular iron ore mine in Brazil. Realisation declined 6% YoY in Q4FY16 and 2% YoY in FY16.
Margin guidance uncertain; capex forecast maintained
Management has withdrawn EBITDA margin guidance (earlier 22-23%) citing emerging market currency volatility and competitive pricing strategy adopted by AIA. Though gross margin dipped 180bps to 62.3%, EBITDA margin grew 290bps YoY to 28.9% on hedging gains. Management guided for capex of INR1.5bn in FY17 and INR2bn in FY18.
Outlook and valuations: Fairly valued; maintain ‘HOLD’
Management highlighted its continued focus on market share expansion and hence maintained its strong capacity addition guidance. Concerns remain on margins led by aggressive pricing. With earnings CAGR of mere 4.6% leading to 270bps dip in RoCE over FY16-18E, we maintain ‘HOLD’, valuing the stock at 18x FY18E. However, we remain structurally positive in the long term with scope to raise our conservative 54% capacity utilisation estimate for FY18. Stock currently trades at PER of 18.7xFY18E
