Action Construction Equipment Ltd - Buy

Background:
Incorporated in 1995 by Mr. Vijay Agrawal and his wife Mrs. Mona Agrawal as a private Ltd. company, Action Construction Equipment (ACE) Ltd. came out with a public issue in Sept’06.The company is involved in manufacturing and assembling of material handling equipments like hydraulic mobile cranes, mobile tower cranes and earth moving equipments like backhoe loaders to cater to the needs of clients across various sectors throughout the country. The company has been awarded ISO: 9001by CVI (Conformity Verification International) and its products are registered with the Automotive Research Association of India (ARAI) for roadworthiness. In May 06, the company has been awarded with CNBC TV18 Emerging India Award in the Infrastructure category. As per recent CONSTRUCT WORLD-NICAR survey, ACE has emerged as ‘First” amongst the fastest growing construction equipment companies in India.

CMP: Rs. 460 Target price: Rs.557 Industry: Engineering – Heavy – Material Handling

Stock Info
Market Capital Rs.813 cr Equity Capital Rs. 17.9 cr Avg Trading Vol. 98427 (Qtly)

52 WK High/Low 495/162 Face Value Rs. 10 BSE Group B1
BSE Code 532762 NSE Symbol ACE Bloomberg ACCE IN

Reuters ACEL.BO BSE Sensex 19840 NSE Nifty 5900
Shareholding Pattern (As on 31th Dec, 2007)
Promoters 65.2% Domestic Institutions 15.6%
Foreign Institutions 5.8% Corporate 6.6% Public & Others 6.9%

Action Construction Equipment’s (ACE) results for the Q308 and 9M08 were in line with our expectations. Companyreported strong numbers due to buoyant demand for products profile from the user Industries. We expect the revenues to grow at a CAGR of 46.1% and PAT to grow at 53.2% CAGR for FY07-FY10E.

Value drivers:

Foray into tractors: ACE started assembling and selling tractors on trial basis from its Dudhaula plant and sold around 5-10 tractors during Q308. If the venture kicks off, the company plans to enter in this segment in a big way by setting up new capacities. As compared to its peers, the 35 hp tractor manufactured by the company boasts of features like 4 cylinder engine, extra life and better fuel efficiency. We have assumed revenues of Rs.4.8 crore, Rs.16.0 crore and Rs.48.0 crore for FY08E, FY09E and FY10E respectively.

New products to provide traction: To capitalize on the ongoing infrastructure boom, ACE has added new products like Crawler Cranes, Piling Rigs and Trailer Mounted Concrete pumps to its portfolio. These products will be sold through the existing dealership network enabling faster penetration and at a lower price as compared to the competitors.
We believe the future traction will be provided by these products and expect the revenues from this segment to grow at a CAGR of 160% for FY08-FY10E. ACE has in pipeline other products which include batching plant, truck mounted concrete pumps and road rollers which it plans to introduce through a JV sometime in FY09 or FY10.

Potential of margin improvement: Introduction of the above new products in the domestic market and commencement of business through the Romanian acquisition will help to expand margins going forward. We have assumed nominal revenues projections from Romania in absence of commencement of operations.

Valuation and View
At CMP, ACE is trading at 21.9xFY08E earnings, 15.5 xFY09E earnings and 11.5xFY10E earnings of Rs. 21, Rs.30 and Rs.40 respectively and EV/EBITDA of 16.5xFY08E, 11.2xFY09E and 7.8xFY10E. ACE being a dominant player in the construction equipment sector, is bound to benefit from huge investment planned in the construction, industrial and infrastructure sector. Introduction of new products and Romanian acquisition will drive the future growth and help to
diversify risk. We maintain the earlier price target at Rs.557. At this price ACE is available at 14xFY10E earnings and EV/EBIDTA of 9.7xFY10E.We maintain a BUY call.