AIA Engineering: Trial run pricing to impact margins - Views on News from Equitymaster

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  • Jun 8, 2012 - AIA Engineering: Trial run pricing to impact margins

AIA Engineering: Trial run pricing to impact margins

Jun 8, 2012

AIA Engineering has announced the fourth quarter and full year results of financial year 2011-2012. While the topline grew by around 28.8% YoY bottomline grew at a meager pace of 0.1% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Top-line increases by 28.8% YoY in 4QFY12.
  • Operating profits increase by 24.5% YoY during the quarter due to healthy growth in topline
  • Net profits were relatively flat during the quarter and grew at a modest pace of 0.1% YoY.
  • The company has recommended a dividend of Rs 3 per share for the fiscal under consideration.
  • The consolidated debt/equity ratio of the company stood at 0.04x at the end of the year.
  • It may be noted that the company has changed its accounting policy when it comes to recognizing export benefits. Earlier these benefits were recognized on receipt basis and now they are recognized on accrual basis. This change has boosted the current year profits by Rs 323.3 m.

Consolidated performance snapshot
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Income from operations 3,529 4,546 28.8% 11,607 14,167 22.1%
Expenditure 2,857 3,709 29.8% 9,114 11,434 25.4%
Operating profit (EBDITA) 672 837 24.5% 2,492 2,733 9.7%
Operating profit margin (%) 19.0% 18.4%   21.5% 19.3%  
Other income 103 35 -65.7% 247 133 -46.3%
Finance cost 8 11 38.3% 20 44 116.8%
Depreciation 66 79 18.2% 254 294 15.9%
Profit before tax 701 783 11.7% 2,465 2,527 2.5%
Tax 180 249 38.1% 629 715 13.7%
Profit after tax/(loss) 521 534 2.6% 1,836 1,812 -1.3%
Minority Interest (3) 9.77   2 7 287.0%
Profit after tax and minoity interest 524 524 0.1% 1,834 1,805 -1.6%
Net profit margin (%) 14.8% 11.5%   15.8% 12.7%  
No. of shares (m)         94.3  
Basic & diluted earnings per share (Rs)         19.1  
P/E ratio (x) *         18.8  
*On a trailing 12 month basis

What has driven performance in 4QFY12?
  • Net sales increased 28.8% YoY during the quarter due to strong volumes and increase in blended realizations. It may be noted that the company operates in a single segment namely "manufacturing of mill internals" and hence segmental breakdown of revenues is not available.

  • Operating profits increased 24.5% YoY due to strong sales performance during the quarter. However, operating margins declined marginally to 18.4% during the quarter from 19% in 4QFY11. It may be noted that margins of the company are expected to remain under pressure in the future as well as the company has adopted a penetrative pricing policy to gain access in the mining segment.

  • Net profits were relatively flat during the quarter. Increase in tax expenses, interest cost and fall in other income impacted the profitability. For the full year, profits were down by 1.6% YoY. It may be noted that a change in accounting policy relating to recognition of export benefits boosted the profits by Rs 323.3 m during the year. Also, the company incurred notional mark-to-market losses of Rs 82.9 m on derivative contracts as at the end of the year.

What to expect?
Going forward, top line growth is expected to remain robust considering the huge replacement demand potential in the market. However, margin sustenance is a key challenge for the company. In order to get new customers on its rolls, the company offers a trial run of its products. And pricing in the trial run is lower so as to entice new customers. This has impacted the margin profile of the company in the past. Rupee volatility is another area of concern as the company exports majority of its products. Based on these factors and current valuations, we maintain our HOLD view on the stock.

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