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Permanent upcycle in play…

Action Construction (ACE) hosted an analyst meet (virtual) wherein the management brought us up to speed on the recent business updates and also provided us an outlook on the sector. The infrastructure industry is witnessing robust traction with upcoming capex in metro, rail, manufacturing, road and real estate sector. Hence, demand for cranes and construction equipment is expected to see a significant improvement. The management remained assertive on the fact that ACE would become a counter cyclical company powered by 50-60% growth in CE & 25-30% growth in crane, agri equipment & material handling segments.

Operating leverage to curtail commodity impact…

We believe the recent price hikes in November and January coupled with positive operating leverage should aid margins. In addition, the growth highlighted by the management will be achieved with an increase of less than 10% in fixed cost. However, being conservative, we pencil in 11% and 11.9% EBIDTA margins for FY22E and FY23E, respectively

Exports, CE segment to help become counter cyclical

The current share of exports in the topline is at 6-7%. It is expected to grow to the 10-11% range in the next three years. A higher mix of export in revenue would assist ACE in beating the domestic cyclicality. Furthermore, we expect backhoe loader to play a pivotal role in achieving the targeted growth in CE segment. It is important to note how the competition in the backhoe loader reacts to ACE’s aggressive stance.

Better profitability to entail superior CFO

PAT is estimated to grow 56% & 37.3% to | 110 crore & | 150 crore, respectively. We expect this to generate CFO to the tune of | 76 crore, | 127 crore, respectively. Going ahead, we do not see any major capex apart from the paint shop that would need ~ | 25 crore and maintenance capex of | 10- 15 crore per year. The company is operating at ~50% utilisation. Hence, there is headroom for growth without any major investment. With CFO flowing through, we expect debt to be pared completely by FY23E.

Valuation & Outlook

Till now, ACE was largely reliant on the crane segment. The key catalyst for the company from here on is how CE and agri equipment perform. With the current outlook and recent quarter numbers, we believe ACE is set to fire on all cylinders. Taking cognisance, we revise our FY22E & FY23E estimates upwards and expect ACE to post revenue, EBIDTA & PAT CAGR of 25.3%, 37.1% & 46.3% respectively. At this juncture, ACE is trading at 8.6x FY23E EV/EBIDTA against an historical up-cycle range of 15-20x. Hence, this calls for a multiple upgrade given the company is on the cusp of posting historically high growth rate. We value ACE at 11x FY23E EV/EBIDTA and maintain BUY rating with a revised target price of | 215 (earlier | 160).

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