Action Construction Equipment- A Proxy to the Capex and Infrastructure cycle?

Summary

Action construction equipment(ACE), incorporated in 1995, is the leading manufacturer of mobile cranes (63% market share) and tower cranes (60%) in India. It has four segments: Cranes (66% of revenue), Material handling equipment (10% of revenue) & construction equipment (11% of revenue) and agriculture equipment (13 % of revenue).

Action Construction Equipment

Investment Rationale-

·      Market Leadership in Cranes- ACE has above 60% + market share across the crane industry such as tower cranes and pick and carry cranes.

·      Proxy to growth in Manufacturing and Infrastructure- 55% to 60% of its Crane revenue overall comes from the Infra /Construction sector and about balance comes from Manufacturing /Industrial sector for its products.

As shown in the image below, various spending initiatives outlined over the next 3-4 years could help increase growth momentum in the end user industries to which ACE supplies to.

Business Segments-

 1.              Cranes – (72% Of Revenue)

Crane Industry size is of close to– 1700 crs market (95% market share by ACE and Escorts. ACE has around 63% mkt share in Pick & Carry Cranes and 60%in Fixed Tower Cranes with market leadership in India, while ACE Truck cranes have the number 3 position in India. About 50% to 60% sales is to rental companies and 40% to 45% of sales is to end users. Replacement Cycle of Cranes is generally between 7 -12 years.

Average Selling price of Cranes in INR-

·      Mobile Tower cranes-16 lakhs

·      Pick & Carry Cranes- 15.5 Lakhs

·      Fixed Tower Cranes- 55 lakhs

Clients: include major Indian as well as International players such as Reliance, L&T, BHEL, Coal India, Indian Railways, KEC International, Airport Authority of India, Ministry of Defence, NTPC, ABB, etc.

Innovation-The company is the first one to introduce new age products like Nextgen Pick & Carry Cranes and 360 degree slew with Pick N Carry Cranes to capitalise and maintain its market leadership position in these segments. It estimates that over the next two to three years 15% to 20% of the mobile crane market will migrate to these game changing multi activity NX series cranes.

2. Construction Equipment (11% of Revenue) - Construction Equipment products are used for digging, moving, grading, compacting 
and loading earth and other loose aggregates, also find application in industrial and mining activity. This construction equipment industry has a market size of 7000-8000 crores and is forecasted to grow to 10000-12000 crores in next 3-5years. The Indian construction and mining equipment industry continues to be highly dependent on backhoe loader demand which is 40% of the overall CE volumes.

Backhoe loaders is one of the key focus products for ACE due to their significantly large addressable market size of INR 8000 crores (75% Market share by JCB) and Motor Graders is also in focus since it is a higher margin product. Along with this it also sells Soil compactors and Tandem compactors. ACE’s profit margins lag some of its peers because some of its products such as backhoe loaders and tractors are priced at a discount, compared to the market.

3.Material Handling (10% of Revenue) -the company has 18% Market share in the forklift space and is the 3^rd largest player. (Godrej & Voltas/Kion largest 2 players in this segment) .It boasts a wide clientele for forklifts from Indian Army, to Airport Authority of India, and also FMCG companies like PepsiCo. With the warehousing push in the country, this division too has a high growth prospects.

4.Agriculture Equipment (13% Of Revenue)

ACE is an emerging farm equipment manufacturer as well where it produces & sells tractors (in the 32-50 HP range) harvesters (Number 2 player in the country) ,rice planters, balers & rotavators. The states of Punjab, Haryana and Uttar Pradesh account for a majority of ACE’s tractor sales which constitutes majority of the revenues in this division followed by harvestors.

Agricultural Equipment market size is 50,000 to 60,000 crores. ACE is selling 4,000 tractors annually in Agri out of a total capacity of 7200 tractors and volume size of entire market is  8 lakh - 9 lakh tractors.

For its agri business it has around 200 dealers for tractor across India and captured Already captured more than 10% market share for tractors in Assam. Current Focus is to increase presence and brand awareness in West and South India.

Defence - In the last quarter the company further expanded its business in the defence. It was declared an L1 supplier for the supply of 482 multipurpose tractors with special attachments from the Indian Army. In addition, it has developed an indigenous Special Low-Silhouette Knuckle Boom Crane for DRDO used in missile launcher. It has also received a LoI from Tata Advanced Systems Limited for manufacturing and supplying such cranes for integrating with TATA HMV 8X8 chassis. It targets a 100-150 crore revenue from defence by FY23

Export Revenue Target- Currently 5.5%- 6% of export revenue in our total revenue to be increase to 12-15% over 3 years. Has Nepal as one of its key markets for exports. Targeting Africa, South American Middle East and South East Asia for exports

Overall defence and exports could contribut 25% of sales over the next few years and reduce element of cyclicality in the overall business profile.

inancials ( Amt in Inr Million ) – Source Company Investor Presentations

The company has a target to achieve 2500 crore revenue with 12-13 % EBITDA margins by FY24. ACE aims to achieve a revenue of 500 crores in agri equipment and between 400 and 500 crore in the CE segment in the next two to three years. The company is currently operating at 45- 50% capacity utilization in the crane segment and has a land bank of around 40 acres available for future expansion. In the near term there is no large capex required and the company could double revenues with existing capacities in place. An upside to growth could also be derived from operating leverage since the company has ample room to increase production in case of a demand upcycle since capacity utilizations across business segments remain not high.

Following below is a financial forecast (Source- Emkay Research) that attempts to show the possible growth that ACE could achieve till FY24 with breakdown of revenue growth across business segments.

 Risks-

·      Input cost inflation- The operating margins have come down from 12% EBITDA levels and we are struggling at about 10%. This might get further compressed given increase in steel (25-30% of total raw material cost). However, ACE has already taken 12-15% hikes in the last 15 months and the management says majority of price hikes will get passed on to customers with a lag of 2-3 months.

·      Ability to achieve aggressive growth targets in Agri and Construction equipment division- ACE has aggressive target of achieving 500 crores in revenues from each of these 2 divisions in the next 2-3 years. Given, they have currently low market share in these segments, it will be interesting to see whether they could capture the same from larger players in these segments

·      Cyclical to demand from end user industries- Sectors such as Manufacturing, infrastructure etc are more cyclical to changes in economic growth, credit availability etc. Any downside in growth in these industries could influence demand for ACE products as well.