AIA Engineering: Asit C. Mehta Recommends BUY with ₹5,106 Target Price, Highlighting Growth in High-Chrome Grinding Media
Asit C. Mehta Investment Intermediates Ltd. has initiated coverage on AIA Engineering Ltd (AIAE) with a "BUY" recommendation and a target price of ₹5,106 per share. The brokerage believes AIAE, currently trading at a 31x EV/EBITDA multiple, is undervalued due to its strong market position within a duopoly and the significant growth opportunities presented by the increasing demand for high-chrome grinding media in the mining industry. The valuation is based on assigning a 28x EV/EBITDA multiple to AIAE's estimated EBITDA for FY26E.
Key Takeaways from the Report:
- AIAE is a leading manufacturer of high-chrome grinding media and mill liners, primarily serving the cement and mining industries.
- The company benefits from a strong duopoly market position, particularly in India's cement industry, where it enjoys a 95-97% market share.
- The mining industry presents a substantial growth opportunity for AIAE, as the penetration of high-chrome grinding media is currently only around 20%.
- AIAE has expanded its product portfolio to include rubber and composite mill liners, catering to a wider range of applications.
- The company is expanding its manufacturing capacity to meet anticipated demand.
Crucial Insights from the Report:
The report emphasizes the substantial growth potential in AIAE's mining business. It highlights the conversion opportunity for customers to switch from traditional grinding media to the company's high-chrome alternatives. This shift is driven by factors such as improved operational efficiency, reduced power consumption, and lower wear rates.
AIAE has a long history of innovation and technical expertise in metallurgy and grinding applications. This, combined with its strong relationships with customers in the mining industry, allows it to develop tailored solutions for different ores and operating environments. As the report notes, customers often remain loyal to AIAE due to the high switching costs associated with new suppliers.
Furthermore, AIAE's financials have been impressive, with revenue, EBITDA, and PAT recording a CAGR of 19%, 20%, and 27%, respectively, from FY21 to FY24. The brokerage anticipates that EBITDA and PAT margins will remain stable at 29% and 24%, respectively, in the coming years. This positive performance underpins the report's bullish outlook.
Potential Risks and Challenges:
The report acknowledges several risks that could impact AIAE's performance. These include anti-dumping duties in certain foreign markets, supply chain disruptions, currency fluctuations, and volatility in raw material prices. Particularly, the ongoing challenges in shipping and freight, including container shortages and increased costs, could impact AIAE's ability to deliver its products and generate revenue, especially in the Americas region.
Forward-Looking Outlook:
The analyst anticipates that AIAE will continue to experience growth in the coming years. The mining industry presents a significant opportunity, and AIAE's expanded product portfolio and capacity expansion initiatives are well-positioned to capitalize on this potential. However, the analyst also cautions about the uncertainties in the global economy and the potential for disruptions in the supply chain and trade.
Valuation Methodology:
The analyst utilized an EV/EBITDA multiple to value AIAE. Given the capital-intensive nature of the company and its strong market position, the analyst believed the EV/EBITDA multiple was an appropriate valuation method.
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