Is Action Construction Equipment The Next L&T?

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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 ).

Also Read on FinMedium:  Birla Corp Fundamental Analysis and Future Outlook

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:

Product Portfolio of Action Construction Equipment
Product Portfolio of Action Construction Equipment

Capacities

ACE Capacity Utilization
Plants are being utilized by almost 50% capacities only

Financial Analysis

Segment-wise Revenue Contribution:

Revenue Details of Action Construction Equipment
Revenue Details of Action Construction Equipment

In FY 20 the respective contribution has been as shown below:

Segment-wise Revenue Contribution of ACE

Why Revenue has not been growing?

As evident from the chart below, the revenue has been dwindling since FY19.

Net Operating Revenue of ACE

The reason is not stock specific as the crane industry has been under pressure as evident from the crane industry volume shown below:

Volumes of Crane Industry

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.

Significant improvement in EBITDA in Q2 & Q3 FY21
Significant improvement in EBITDA in Q2 & Q3 FY21

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:

Crane

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

Crane Industry in India

No. of Mobile Cranes Sold

Volume has been rising

No. of Tower Cranes sold

Volume has grown

Material Handling Equipment

In this segment, the main product is Forklift.

Financial Analysis

ROCE

Comment: Above 15% ROCE is ok but to be watched carefully in coming quarters and an increased number is desirable

Borrowing

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.

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Amitabh Vatsya

Amitabh Vatsya

Amitabh Vatsya is an active Investment Vlogger (http://youtube.com/c/Sadhansimplified) | Loves to share his ideas at http://wealthsutra.wordpress.com | Follow him @amitabhvatsya
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