Kotak Sec recommends 'buy' on AIA Engg; target Rs 1,870

Kotak Securities has recommended ‘buy’ on AIA Engineering for a target price of Rs 1,870, an upside of 19 per cent from the current level. AIA Engineering operates in a high technology oriented niche engineering segment, involving design, development, manufacture and installment of impact, abrasion and wear resistant, high chrome mill internal products. These are used as consumables in the grinding and crushing operation in the mills in the cement, mining and thermal power industry. The company has successfully developed new products and plans to foray into the high margin quarry segment. This relates to crushing of stones for the construction segment. AIA is planning to set up an initial capacity of 10,000 MT per annum. The company has consolidated capacity of 1,65,000 (65000+50000+50000) TPA of high chrome mill internals as of May 2008. The first phase of the expansion of 50,000 TPA was commissioned in June 2007 and the second phase of another 50,000 TPA was commissioned in May 2008. In 2007-08, the company sold 85,526 MT of high chrome mill internals, which is up 28.4 per cent on year on year basis. Kotak expects it to grow by 40.3 per cent to 1,20,000 MT in FY09E. Kotak has maintained their earnings estimates for AIA and expects it to report an earning per share of Rs 98.1 in FY09E. The market price of Rs 1,577 discounts FY09E earnings at 16.1, which the brokerage believes is attractive considering the clear growth prospects for the company going forward due to capacity expansion and strong demand for the products of the company. Kotak has also done one year forward rolling band analysis for AIA which revealed that currently the company is trading towards the lower end of the band of 10 - 25x one year forward earning estimates.