WOW India - Broker RAP - AIA

Mining Industry to drive Demand for high Chrome..
In its report dated 31st January, 2007 Kotak Institutional Equities (Kotak) initiates an outperformer rating on AIA Engineering (AIA) at the CMP of Rs. 1,385.

Kotak highlights that the demand for high chrome products from the global mining industry will be driven by substitution of conventional products. Global demand for mill internals is around 3 mtpa, of which high chrome products account for only 15% at present. The mining sector consumes 2.5 mtpa of mill internals, of which only 5-10% is high chrome. Higher replacement and project demand from cement industry will also contribute to demand.

Kotak mentions that AIA is the dominant player in the domestic high chrome mill internals space with 90% share in cement industry and 70% share in the mining and utility industries. Kotak believes that AIA is on the verge of becoming the premier global supplier of high chrome mill internals with its (1) technical expertise, (2) relationships and (3) impending capacity addition of more than 3X. AIA has 20% (ex China) share in replacement demand from the global cement industry.

Kotak states that capacity additions will increase AIA''s volumes by nearly 2X over FY2006-09E. Based on Kotak''s projected volumes and marginal decrease in realisations, Kotak expects net earnings to grow at a CAGR of and 50% over FY2006-09E, respectively. Post capex, Kotak expects AIA to generate large free cash flows, which can be utilized for captive power set-up or capacity scale-up organically/inorganically.

According to Kotak slowdown in cement and mining and delay in shift to high chrome mill internals by the mining industry are the key risks to growth estimates. Also, any large capacity build-up by the leader - Magotteaux, could affect margins and therefore earnings for AIA.

Kotak points out that valuations may not appear compelling on FY2008 P/E basis, strong earnings growth and robust cash flows will keep valuations at a premium. Kotak estimates AIA''s consolidated EPS to grow at a CAGR of 20% for Sensex''s net earnings over the same period. Kotak anticipates revenues to grow at a CAGR of 38% over FY2006-09 and EBIDTA to grow at a CAGR of 47% over the same period

Thanks HK