The Budget 2021 had been a boon for the infrastructure sector. FM did what was expected of her and that was – To begin a new investment cycle that could save the economy from the Covid induced recession.
Fair point. She has been commended well also in various global media forums also.
So what an Investor in search of Alpha should do?
Remember the last capital cycle of 2006-2011 which we had seen. During that time L&T had become 5 x in just 5 years. It became a Megatron of Rs 1.25Lakh cr market cap company from a midcap warrior of Rs 25k cr market cap.
About Action Construction Equipment
So what could be the next L&T? My bet is on Action Construction Equipment Limited (ACE ).
This blog explains the merits and demerits of ACE in detail. Also, we’ll see the simplified business model, segment-wise revenues, and key growth drivers for the business.
The blog also details the industry competitiveness and management quality of the company.
Action Construction Equipment Ltd is the market leader in the Indian crane industry. The company is based out of Faridabad, Haryana. The company operates across 4 segments. It caters to various sectors such as Infrastructure, Agriculture, construction, warehousing, manufacturing, etc through the following portfolio of products:
Segment-wise Revenue Contribution:
In FY 20 the respective contribution has been as shown below:
Why Revenue has not been growing?
As evident from the chart below, the revenue has been dwindling since FY19.
The reason is not stock specific as the crane industry has been under pressure as evident from the crane industry volume shown below:
Let us zoom in to the EBITDA Margins in recent quarters to see whether the company has started recouping the lost ground (during a pandemic) or not.
What is driving the margin?
Let us have a closer look at segments PBIT
Now it becomes clear that the profitability has been driven by Cranes (the usual suspect) and Material Handling.
Main Profitability Drivers are these 2 segments only, so let us dig deeper in these 2 sub-sectors:
The Crane industry was down by 20% in Q2 FY21 and the demand shifted from multi-featured cranes to the hydra.
Only Compactors have been the biggest gainer in Q2 with a growth of 47% followed by Backhoe Loaders that grew by 43.6% in Q2
Whereas in Q3 FY21, the Crane industry grew by 28%, but due to COVID-19 and cash flow issues in markets, the pick and carry crane industry has shifted to the price-sensitive hydra segment.
The compactor industry grew by 27% and backhoe loaders grew by 11%.
2 Key products in this segments are- Pick & Carry (Mobile) Crane & Tower Cranes
No. of Mobile Cranes Sold
No. of Tower Cranes sold
Material Handling Equipment
In this segment, the main product is Forklift.
Comment: Above 15% ROCE is ok but to be watched carefully in coming quarters and an increased number is desirable
Comment: Debt-t0-Equity is less than 0.4 which provides a comfortable balance sheet
Working Capital Days
Comment: Considering Lead Time of 12 days for making 1 typical crane the working capital days of below 20 gives an inside view of the industry and establishes the fact that ACE is the market leader as they control the cash payments and do not deal in credit sales
Should You Buy the Stock?
We have analyzed the stock deeply and presented our findings in the video here. You can watch the video to gain a complete perspective. Whereas a quick summary of these 10 points is presented below for your reference:
The Investment Thesis
The Investment Antithesis
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Disclaimer: All the Information provided in the article is for general guidance and educational purpose. Don’t consider this as a Recommendation from our side.