A Midcap Star: ACE

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Action Construction Equipment to encash the Infra boom

Background

Incorporated in 1995 by a technocrat, Mr. Vijay Agarwal with over 50 years of industry experience, Action Construction Equipment Ltd. (ACE) is an established and reputed brand with a significant presence across diversified sectors like Construction, Infrastructure, Manufacturing, Logistics and Agriculture.

The company is the world’s largest Pick & Carry cranes manufacturer with over 63% market share in the Mobile cranes segment and a majority market share of more than 60% in the domestic Tower Cranes segment.

Business Overview

ACE is a market leader in the Indian crane industry. The company is based in Faridabad, Haryana and operates across 4 segments.

It caters to various sectors such as Infrastructure, Agriculture, Construction, Warehousing, Manufacturing etc. through the following portfolio of products:

The capacity utilization across the product categories is below:

Over the past 10 years, the stock performance can be summarized as below:

Parameter Growth Multiplier (X)
Revenue Growth 2X
Profit Growth 2X
Market Cap Growth 5X

The Topline and bottom-line growth have been similar over a decade. The stock has rewarded its investors decently (5X bagger in 10 years)

Shareholding

The promoters hold 70% of the shares, which are unpledged and nearly 5 % is held by the institutions.

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Financial Performance

ACE’s profitability is driven by Cranes and the material handling segment over the past 4 years .

The balance sheet is robust with Debt: Equity ratio at 0.1.

Please check out the Detailed Analysis here:

Investment rationale

Sector Call

The company’s growth was driven mainly by the revival in construction and infrastructure activities over the last three quarters and strong growth was witnessed in the industrial and logistics sectors.

ACE derives majority of its revenue from Infrastructure and Real Estate sectors, which are expected to turn around after the Covid-19 induced lockdown.

The major demand divers are:

  • Upcoming Metro Projects across all major cities.
  • Development of City Roads, Bridges, Flyovers, Elevated Road Corridors, Water Sewerage, Transmission Lines and Distribution Infrastructure etc.
  • 100 Smart Cities being developed and rejuvenation of 500 others
  • The roads sector is likely to account for 18% capital expenditure over FY 2019-25 and Roads worth $200 bn to be built in the next 2 years

Improved quarterly Performance 

Q4FY21 was the best quarterly performance in the history of ACE. It registered the highest quarterly revenue, EBITDA and net profit. Operational revenues grew by 49.7% Y-o-Y to approx. Rs.457 crore. with an EBIDTA margin of 12.4%.

The EBIDTA during the quarter increased to Rs.57.5 crore. in comparison to Rs.26 crore. on a yearly basis, which is a growth of around 121%.

The PBT grew by 189% and the net profit grew by 183% Y-o-Y to Rs.51 crore and Rs.39 crore respectively while the PAT margins stood at 8.4%.

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Ability to Sustain Margins

Even with commodity inflation, Q4FY21 margins came in at 10.9%, up 196 bps Y-o-Y despite a decline of ~239 bps Y-o-Y in gross margins.

This was largely due to a decline in employee cost and positive operating leverage to an extent. Going ahead, the management has guided margins to be in the range of 11-12%.

This can be accomplished given the anticipated price hike by June end.

Also, a potential decline in commodity prices will improve the company’s overall margin spreads considering the price hikes will not be rolled back.

Growth levers in place

Total industrial land of ~90 acres with 50% utilisation is with ACE meaning the company can grow without much capex as the land is available.

The management expects a growth of 10-15% in the Crane segment for the current year and a 25% growth across the other three business segments i.e. Construction equipment, Material Handling and Agriculture

Risk Factors

  • Promoter holding has declined by over 2%
  • Further increase in steel prices, forcing another price hike, which can be detrimental to demand
  • Inability to capture market share in construction equipment (CE) & Agri segments may affect its overall performance

Conclusion 

ACE’s share price has moved 43% in the last 3 months. At the CMP of Rs.225, the company is a market leader available at a PE multiple of 32, which is not very high considering its market leadership in a market that is expected to grow post the lockdown.

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So, its PE shall reduce as and when its earning grows as there are multiple tangible drivers of demand.

The company showcases all traits of a market leader with the ability to maintain margins and market share, which is commendable in an environment where raw material i.e. Steel costs are rising.

Disclaimer: Stock mentioned are Not Recommendation ! These are only for educational purposes.

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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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