Buy AIA Engineering With Target Of Rs 355

AIA ENGINEERING LTDAIA Engineering's (AIA) Q3FY11 results were below our expectations. Revenues grew by 15% YoY to Rs2.93bn against our estimate of Rs3.1bn. Higher RM cost (which could not be passed on fully) adversely affected margins which fell by 540bps at operating level. Realisations however, improved to Rs97/kg vs Rs86/kg (YoY basis). Management has further reduced its volume guidance for FY11 and FY12 by ~4-5%. Rupee appreciation and volume growth remain key risks in the long run. At current price we believe the stock is fairly valued and therefore, recommend a HOLD with a target price of Rs355 (14xFY12E).

Improved realisations; flat volumes Realisations increased by 13% to Rs97/kg on YoY basis. Production was higher at 3,4787MT (vs 28405 in Q3FY10). Sales in volume terms improved by mere 2% to 30,100MT vs 29,513MT. Sales to overseas mining industry were healthy at 11,700 MT.

Margins contract OPM contracted by 540bps to 22.4% mainly due to higher raw material cost which could not be passed on to the customers completely. Margins are expected to return to normal levels once the rise in material cost is passed on completely to customers.

Outlook

The management further reduced its volume guidance to 120k-125k MT (earlier 125k - 130k MT) for FY11 and to 150k-155k MT for FY12 (from 160k MT) .Good traction of orders from overseas mining companies remains a key trigger going forward. Management has also sighted concerns of increasing competition and higher working capital going forward.

VALUATIONS AND RECOMMENDATION We further downgrade our volume estimates for FY12 by 3% and expect a CAGR of ~21% over FY10-FY12E. However, on account of higher commodity prices which eventually would be passed on to the customer, we have increased our estimates for average realisations by 9% for FY12. Resultantly revenue is expected to witness a CAGR of 22.5% (FY10-FY12E). Rupee appreciation and volume growth remain key risks in the long run. At current price we believe the stock is fairly valued and therefore, recommend a HOLD with a target price of Rs355 (14xFY12E).