Management has reduced its volume guidance for FY2020 to ~2,85,000 Tonnes (earlier ~3,00,000) due to uncertainity over a major iron ore mining client in Brazil. We have downgraded our FY20/21E earnings estimate to Rs.5.3bn/6.8bn respectively (earlier Rs.6bn/7bn), post factoring Q1FY20 performance and uncertainity over Brazil client. At our revised estimates, the stock is trading at 29/30X FY20/21E earnings. We change our recommendation on the stock to ADD from SELL with a revised target price of Rs.1,800 (earlier Rs. 1,705), valuing the stock at 25X FY21E EPS and 17.7X FY21E EBITDA (in line with consensus estimates)
We believe given the opportunity size and management’s commitment for EBITDAat 21%-22% offers long term visibility on growth and profitability. For the nexttwo years, we expect earnings growth of 14.5% CAGR to reach Rs. 70.5 whichis adequately reflected in the price. Hence, we maintain ‘HOLD’ rating by valuing AIA at 27x (decadal average) FY21 earnings for a target price of Rs. 1903. Key downside risk is rise in key inputs like ferro chrome and scrap metal and upside risk is strong volume growth.
AIA’s relentless pursuit for market share gains by offering strong value propositionfor its customers has played out well over the years.We believe given the opportunitysize and management’s commitment for EBITDA at 21%-22% offers long term visibility on growth and profitability. For next two years, we expect volume growth of14.7% CAGR to reach 3.45 lakh tn and earnings growth of 15.4% CAGR to reachRs. 71.1 which is adequately reflected in the price. Hence, we maintain ‘HOLD’rating by valuing AIA at 27.7x (decadal average) FY21 earnings for a target price of Rs. 1969. Key downside risk is rise in key inputs like ferro chrome and scrap metaland upside risk is higher realization driven by currency gains.
Strong visibility ramp up of mining segment along with focus on building in- house power capabilities to hedge power cost to help stabilise margins at current levels from FY20E onwards. We expect overall revenues and PAT to grow at a CAGR of 14.5% and 12.0%, respectively, over FY19-21E. We believe that AIA could benefit significantly from expected incremental sales volumes contribution from mining segment, technical collaboration with EEMS and recovery in non-mining segment. We revise our target price to RS 2050/share (30x FY21E EPS) and maintain BUY rating.
We roll forward our estimates on FY21E earnings and value AIA Engineering at PER 23x FY21 earnings and arrive at revised target price of Rs 1705 (Rs 1700 earlier). We retain ‘REDUCE’ rating on company’s stock.