Action Construction Equipment Ltd. 
26 September 2024By Majid Ahmed

Action Construction Equipment Ltd. 

Action Construction Equipment Ltd.

By Majid Ahamed

About the Company

The company is India’s leading material handling and construction equipment manufacturing company offering cutting-edge technology products with a majority market share in the Mobile Cranes and Tower Cranes segment. In addition to Mobile Cranes, The company’s portfolio includes Mobile/Fixed Tower Cranes, Crawler Cranes, Truck Mounted Cranes, Lorry Loaders, Backhoe Loaders/Loaders, Vibratory Rollers, Forklifts, Tractors & Harvesters and other Construction Equipment. ACE has a consolidated presence in all major Infrastructure, Construction, Heavy Engineering and Industrial Projects across the country.

The company operates primarily in Four segments:

  • Cranes
  • Construction
  • Material Handling Equipment
  • Agri Equipment

Investment Rationale:

  • Market leader in cranes, especially in pick-and-carry cranes, with expected higher market share growth
  • Strategic focus on global expansion, leveraging joint ventures and inorganic opportunities
  • Strong financial performance, supported by high revenue growth and healthy cash flow

History of the Company:

 Source: Investor Presentation

Business Segments:

Cranes

Cranes is the segment where the company generates most of its revenue around 70 to 73%. Most of its products under these segments are market leaders and have gained major market share in the country.

Construction Equipment

This segment provides construction equipment around 14-15% of the total revenue, this segment is the fastest growing segment, growing at the rate of 50-70% annually, and is expected to contribute significantly to the topline in the coming years.

Agriculture Equipment

In this segment, the company sells agriculture equipment such as tractors, Harvester Combines and Tractor Rotary Tillers, which contributes 10 to 12% of the total revenue, this segment is slow growing.

Material Handling

In this segment, the company sells forklift and warehouse equipment where this segment contributes around 6-7% of the total revenue, and is expected to grow in the coming years with the growing demand in the pharma, manufacturing sectors.

Geographical Classification

Majority of the Income comes from India which contributes 92-93% of the total revenue in FY24, Exports Contributes 8-9% of the overall revenue in FY24.

Management

  • The company’s management is led by Mr. Vijay Agarwal (MD) who has nearly 50 years in the industry.
  • Mrs. Mona Agarwal, Whole Time Director of the company, where she has been associated with the company since its inception and is actively involved in the administrative and Human resource development, strategic transformations, business management and employee engagement process.
  • The promoter currently has 65.41% stake in the business, which is reasonable for the size of the business
  • The company’s board comprises experienced members with backgrounds in the automotive industry, government service, and the medical profession. This diversity brings together a blend of seasoned professionals, enhancing the board’s overall expertise and perspective.

Deep-Dive on the Investment Rationale

Market leader in cranes, especially in pick-and-carry cranes, with expected higher market share growth

The company is a market leader in cranes, holding a market share of over 63% in pick-and-carry cranes, with expected growth driven by increased demand from diversified industries such as real estate, infrastructure, and construction. With its affordability, high-quality production, and competitive advantages, the company is well-positioned for incremental growth. The launch of the PM Gati Shakti Plan, a ₹100 lakh crore national infrastructure master plan, is seen as a potential game-changer, boosting earnings potential which would be a strong potential proxy in growth in infrastructure investments . Additionally, the company’s strong dealer network, with over 100 locations across India and globally, and patented technology in EV Cranes further enhances its growth prospects.

Strategic focus on global expansion, leveraging joint ventures and inorganic opportunities

The company currently holds investments of around ₹600 crores and reserves of approximately ₹1,200 crores. It is planning a 50:50 joint venture with Kato Works Co. Ltd. to leverage and increase exports, which currently contribute 8-9% of total revenue. The goal is to raise export revenue to 15-20% of the total revenue. The company expects to reach ₹1,000 crores in revenue by FY29, which would drive incremental earnings growth. Additionally, the company aims to acquire small businesses and position itself as a major OEM supplier, further fueling its growth trajectory.

Strong financial performance, supported by high revenue growth and healthy cash flow

The company achieved revenue growth of 35% and a profitable growth of 77% year-on-year. It has a strong cash flow conversion of 70-75%, with expected growth driven by factory expansion and significant investments, maintaining an average reinvestment rate of 55%. With a current Return on Capital Employed (ROCE) of 41% and anticipated growth in private capital expenditure, the company is well-positioned as a key driver of potential growth and a proxy for the infrastructure, construction, and real estate sectors.

Risk/Threats

Raw Material Price Volatility:
Raw material prices play a pivotal role in the company’s operating margins, with material costs accounting for 70-80% of its total direct costs. Steel, being the main raw material, poses a significant risk—any major price fluctuations are difficult to fully pass on to end customers. As reflected in the company’s quarterly earnings, operating margins have fluctuated between 8% and 14%, largely due to volatility in raw material prices.

Competitive Intensity: The company faces stiff competition from both established foreign and domestic players in the road equipment and tractor industries. In the road equipment segment, it competes intensely with JCB in the backhoe loader segment, and with Escorts, Volvo, and Hitachi in the soil compactor segment. Additionally, it faces competition from Caterpillar and Leeboy in the motor grader segment. In the tractor segment, the market is dominated by incumbents such as Mahindra & Mahindra (M&M), Tractor & Farm Equipment Limited (TAFE), and Sonalika, posing significant competition for the company.

Higher Operating Leverage: The company has a high operating leverage, with a ratio of 2x. This means that if revenue grows by 10%, profits are expected to grow by 20%. Conversely, if revenue declines by 10%, profits could decrease by 20%. This creates a significant risk for the company, as any slowdown in revenue growth could have a substantial negative impact on profitability. Managing this risk is crucial for the company’s financial stability.

Exposed to Cyclicality in End-User Industries: ACE is exposed to the inherent cyclicality of its end-user industries, primarily the Material Handling and Construction Equipment (MCE) sector, where growth is closely tied to infrastructure investments and domestic economic performance. While the Government’s focus on increasing infrastructure spending is expected to drive sustained growth in construction activity in the coming quarters, any slowdown in capital expenditure (capex) in end-user industries such as infrastructure, real estate, and construction could significantly impact the company’s earnings growth.

Financial Analysis & Valuation

If we look at the company’s Return on Equity (ROE), it has steadily grown from 12% in FY20 to 27% in FY24. This improvement is primarily driven by an increase in net profit margins, which have risen from 7% to 11%, and a higher fixed asset turnover ratio, which has increased from 2.8x in FY20 to 5x in FY24. These metrics are expected to improve further in the coming years, supported by patented EV cranes, material handling equipment, and incremental sales growth, particularly from the growing proportion of export sales and the crane and material equipment segment.

Additionally, the company has significantly reduced its working capital requirements from around ₹100 crores in FY20 to ₹20 crores in FY24. Its working capital days have improved from 24 days in FY20 to -4 days in FY24. This is a clear indicator of the company’s competitive advantage, as it has successfully reduced debtor days from 50 days in FY20 to 21 days in FY24. This trend is expected to continue, driven by strong operating cash flows and increasing demand for cranes and material handling equipment.

Valuation

As of September 20th, the company’s market capitalization stands at ₹16,653 crores, with a trailing twelve-month (TTM) P/E ratio of 48.3. Earlier in January 2024, the company reached a peak valuation with a P/E ratio of 69. The subsequent drop is mainly due to a sequential decline in sales and earnings growth. However, the company’s Q1 FY25 results were strong, showing a 14% YoY sales growth and a 25% YoY earnings growth, marking one of its highest revenue and earnings growth periods.

Management remains optimistic about the next 3 to 5 years, anticipating growth driven by increased innovation, particularly in fully electric mobile cranes and 180-ton crawler cranes. The company is also expanding into the defense sector, which currently contributes 2.5% of total revenue, with expectations of significant growth by FY25. The company’s export sales are also expected to rise.

The PEG ratio currently stands at 1.13, which appears reasonable given the expected sales growth of 30-35% and earnings growth of 40-45%. However, investors should remain cautious about competition in the industry, as well as growth trends in the infrastructure and real estate sectors.

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