Niche engineering

PENNY WISE

Mid-cap engineering stock, AIA Engineering, looks richly valued after its recent run-up.

Among the mid-cap engineering stocks, AIA Engineering, has had a dream run on the bourses in past two months.

Ever since its listing in December 2005, the company has witnessed almost three-fold rise in its stock price to Rs 1339 and currently trades at a price-earnings multiple of 28 times and 19 times respectively for FY07 and FY08 estimated earnings.

Though the company's prospects are undoubtedly bright, analysts are cautious about the stock's consistent northward journey and rich valuations.

Says Deepak Jasani, head of retail research, HDFC Securities, "The current stock price of AIA seems to capture the positives for the next few quarters and prospective investors should buy the stocks on sharp declines."

AIA Engineering, a niche player, has a near monopoly in the manufacture of "milling internals" used in grinding operations of cement, mining and power. It is also one of the largest players globally. The company derives 70 per cent of its sales from the cement sector and a large part of the remaining 30 per cent from the power utilities sector.

Now, it is planning to tap the mining sector mainly in the exports market as it is largely untapped. For this, the company is expanding its current capacity of 65,000 tonne a year and will add 50,000 tonne a year by March 2007, and another 100,000 tonne in FY08, and another 50,000 tonne in FY09. Thus, exports revenues, which form about 46 per cent now, are expected to go up along with improved margins.

In order to ensure availability of raw materials, it is also looking at setting up or buying an existing ferro alloy plant in order to integrate backwards at a capex of Rs 30 crore. The company recently raised around Rs 120 crore mainly for the additional capex.

If the company can manage to utilise the increased capacity, obviously, there will be a major boost to its sales and profits over the next few years, and it might be able to improve margins due to larger operations. Analysts expect the company's sales and profit to grow at 40 per cent and 50 per cent respectively between FY06 and FY08. 
 

FINANCIALS (CONSOLIDATED)
Rs crore	H1FY06	H1FY07	% chg
Net sales	170.30	246.80	44.92
Operating profit	29.79	61.40	106.11
OPM (%)	17.49	24.88	-
Net profit	20.86	46.20	121.48
NPM (%)	12.25	18.72	-

The company's consolidated sales and profit grew 35 per cent and 95 per cent year on year respectively in FY06. Even in H1 FY07, the company's consoliadated net sales grew about 45 per cent led by an increase in both volume and realisation.

Profits (operating profit as well net profit) more than doubled leading to a phenomenal expansion in marginsof about 700 basis points. The company had order book of around Rs 330 crore, about 1.1 times its FY06 revenues.

Thus, analysts are confident about AIA Engineering's business prospects and the sustainability of high growth in revenues and profitability and its superior margins of over 20 per cent. However, valuations are certainly a concern. Says Syed Sagheer, analyst, PINC Research, "Rs 1100 levels is a good level to enter the stock."