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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