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AIA Engineering: Margins under stress

Nov 20, 2012

AIA Engineering has announced the second quarter results of financial year 2012-2013(2QFY13). While the topline grew by around 27.1% YoY bottomline grew 4.0% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Top-line increases by 27.1% YoY in 2QFY13. Top line growth was boosted by strong volumes. However, realizations declined to Rs 103 per kg (on a QoQ basis) due to change in product mix.
  • Operating profits declined by 13.6% YoY while the margins fell considerably to 12.6% during the quarter.
  • Net profits grew 4.0% YoY due to increase in other income and fall in tax expenditure.
  • The current debt and cash stands at Rs 498 m and Rs 1.9 bn respectively.

Consolidated financial snapshot
(Rs m) 2QFY12  2QFY13  Change 1HFY12  1HFY13  Change
Income from operations  3,463 4,403 27.1% 6,153 8,778 42.7%
Expenditure  2,821 3,849 36.4% 4,963 7,423 49.6%
Operating profit (EBDITA) 642 554 -13.6% 1,190 1,356 14.0%
Operating profit margin (%) 18.5% 12.6%   19.3% 15.4%
Other income 1 47 3417.0% 70 112 59.8%
Finance cost  9 13 41.8% 15 28 87.7%
Depreciation 71 86 19.6% 141 170 20.8%
Profit before tax 563 502 -10.7% 1,104 1,269 15.0%
Tax 178 99 -44.3% 328 326 -0.7%
Profit after tax/(loss) 385 403 4.9% 776 944 21.6%
Minority Interest  (1) 2   (1) 4
Profit after tax and minoity interest  386 401 4.0% 778 940 20.9%
Net profit margin (%) 11.1% 9.1%   12.6% 10.7%  
No. of shares (m)         94.3  
Basic & diluted earnings per share (Rs)          10.0  
P/E ratio (x) *         16.2  
* On trailing 12 month basis

What has driven performance in 2QFY13?
  • Net sales increased 27.1% YoY during the quarter due to strong volumes. The company registered total volumes of 41,300 tons during the quarter. Out of that, approximately 21,000 tons came from the mining sector. However, the realization for the quarter stood at Rs 103 per kg, down from Rs 106 per kg in the previous quarter, due to change in product mix.

  • Operating profits declined 13.6% YoY primarily due to unfavorable currency impact. The total forex loss during the quarter was Rs 150 m. Adjusting for that, the margins stood at 16% for the quarter. It may be noted that the company hedges 50-60% of its overseas exposure. Thus, to the extent rupee moves unfavorably, operating profits get impacted.

  • Net profits grew 4.0% YoY due to increase in other income and fall in tax rates. Other income increased due to higher treasury income and dividend income from subsidiaries. Tax rate fell from 32% in 2QFY12 to 20% in 2QFY13 due to some prior period adjustments. Going forward, the tax rate is expected to be in the region of 30%.

What to expect?
Sustainability in margins is turning out to be a prime concern for the company. While unfavorable forex movement does play a part in it, what is more concerning is increasing competition in the mining segment which is impacting the realizations and thus margins. Management categorically stated that over the long term, their aim is to clock operating margins of about 20%. But it did not lay out a clear timeline or a strategy as to how. Considering that margins are governed by forex volatility the same can be scaled up once the realizations improve. However, considering stiff competition prevailing in the market, we do not see that happening soon.

As far as topline visibility is concerned, there is more clarity in that regards. Based on the 1HFY13 performance, management expects the full year volumes to be in the region of 160,000-170,000 tonnes. With respect to capex plans, management stated approximately 50,000 tons of capacity will come on stream by next December while the balance 50,000 tons by March 15. Based on these factors and current valuations we maintain our hold view on the stock.

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