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Action Construction Equipments Ltd Research Report - 16th Dec 2015

Capital Goods | Published on Mar 18th 2015

IT

Action Construction Equipment (ACE) is among the leading crane manufacturers in the Indian construction equipment (CE) market with a share of 35% in the Pick and Carry crane market. ACE’s product portfolio comprises of a range of Cranes, Backhoe Loaders and Forklifts, Tractors, and Harvesters. Business set to turn-around: Recent announcements in the Union Budget 2015-16 strengthen our view that Cranes, CE, and Material Handling (MH) business segments are up for revival. Considering ACE’s strong market positioning, wide pan-India dealership network, long-standing relationship with customers who give repeat business, and wide range of product portfolio, we expect segment volumes and blended realization to catch-up from here-on. We expect ACE to post an18.8% top-line CAGR during FY2015-17E to Rs838.5cr. Demand recovery, coupled with cost cutting initiatives at the floor level, higher localization initiatives, focus on lowering imports, and expected decline in Mild Steel (forms biggest raw material component) prices, strengthens our view that ACE is well positioned to absorb fixed costs and experience margin expansion. Accordingly, EBITDA margins of the company would expand from 3.0% in FY2015E to 8.2% in FY2017E. Since its last round of capex in FY2011-12, with the onset of infra capex down-cycle, poor demand led Cranes, CE and MH division plants to run at sub-50% capacity utilization levels. ACE’s Management highlighted that there is no need for the company to pursue any major capex, until their revenues cross Rs1,200cr. In absence of any major capex, we expect entire benefits of EBITDA margin expansion to trickle down to PAT level (PAT margins to expand from 0.9% in FY2015E to 4.6% in FY2017E). In-line with strong growth in profitability and improved cash flow generating potential, RoEs would improve from 1.7% in FY2015E to 11.3% in FY2017E. Compelling valuations at current levels: We are optimistic that ACE would be able to maintain its numero uno position in the domestic Pick and Carry cranes segment. Further, the company’s wide range of product offerings, wide pan-India distribution network, and recent cost cutting initiatives, put ACE in a strong position. Given the backdrop of strong earnings growth and RoE expansion, we assign a P/E multiple of 14.0x to our FY2017E EPS of Rs3.9 and arrive at a price target of Rs54 for the stock. Being a turnaround story, we alternatively checked ACE’s stock on EV/sales multiple. At target P/E multiple of 14.0x, the implied FY2017E EV/sales multiple comes in at 0.75x, which is comforting. Given the 28.4% upside from the current market price of the stock, we initiate coverage on ACE with a BUY recommendation.

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CMP 42
Target Price 54
Investment Period12 Months

Stock Info

MCAP BSE (Rs in Cr)497.72
MCAP NSE (Rs in Cr)495.74
P/E (x)36.99
EPS (Rs.)1.36
BV (Rs.)28.53
Div Yield (%)0.40
FV (Rs.)2.00
P/BV (x)1.76
EV/Sales (x)0.97
EV/EBITDA (x)19.26

Shareholding Pattern (%)

Promoter68.0
Public & Others22.0
Corporate4.0
Foreign4.0
Institution2.0
Grand Total100.0

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