Increasing preference for high chrome cast grinding media in the global mining sector augurs well for AIA Engineering to achieve volume growth, now that foundry capacity is in place. AIAE management is confident of adding 125k tonnes incremental volumes over FY16-19.
However, aggressive price- led strategy will drive moderation in Ebitda margin to 25% over this period. We still expect 11% EPS Cagr over FY16-19, and healthy longer-term visibility. Strong cash generation and ROE (25% ex-cash) lend support to FY18ii PER of 25x.
Demonstrated superiority vs. forged grinding media has helped high chrome cast media to gain share in global grinding media consumption. This trend should continue as mining output stabilises and focus on cost continues.
AIAE is well placed to increase volumes by 125k tonnes over FY16-19, with sufficient capacity and aggressive sales strategy. Increasing exports from China, where domestic consumption has slowed, is a key risk. However, a fragmented supplier base and perception of inferior quality of Chinese media would be an advantage for AIAE.
Healthy return and cash flow profile: Healthy Ebitda margin has driven robust free cash generation over last three years. Even as margins contract, we estimate healthy cash generation to continue, supported by moderation in capex.