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All round performance, sustenance key…

Action Construction Equipment (ACE) reported highest ever quarterly numbers led by a revival in infra & construction activities coupled with spillover from Q2. Revenue for the quarter came in at | 400.4 crore, up 38.4% YoY. Segment revenue for crane, CE, material handling & agri equipment were | 257.3 crore, | 38.8 crore, | 31.3 crore, | 73 crore respectively. Gross margins contracted ~96 bps YoY on account of higher input costs. However, price hike in November is expected to have curtailed contraction. Further down the line, positive operating leverage and a decline of 8% YoY in employee cost aided operating performance. Consequently, EBIDTA increased 101.7% YoY to | 45.2 crore with an expansion of ~ 354 bps in EBIDTA margins, which came in at 11.3%. Subsequently, ACE reported a net profit of | 30.9 crore, up 145.3% YoY.

Aiming to achieve | 2500 crore topline in next three years…

The management is quite confident about achieving a revenue target of | 2500 crore within the next three years and expects to grow at about 25- 30% CAGR. A larger pie of the growth is expected to come from CE & agri equipment segments where the potential is enormous. ACE aims to achieve a revenue of ~ | 500 crore in agri equipment and between ~ | 400 and | 500 crore in the CE segment in the next two to three years. ACE has a total capacity of 12000 CE’s & 9000 tractors annually with current capacity utilisation being 35-40% in CE & 55% in agri equipment

No major capex, strong FCF generation to aid in deleveraging

Maintenance capex of | 20 crore and at best another | 30 crore capex in a modern paint shop coupled with FY22E CFO generation of | 128 crore should aid ACE to become a debt free company by FY22. This would be another positive for the stock along with the growing topline

Time to beat the cycle…

ACE has always been at the mercy of infrastructure & construction activity given a major portion of revenue is contributed by the crane segment. However, recent realignment in business fundamentals and more focus on agri & CE segments is expected to usher 25-30% growth in the respective segments thereby contributing a significant portion in topline making ACE a counter cyclical company in the process.

Valuation & Outlook

Taking cognisance of Q3FY21 numbers, the management commentary on growth, sustained margins & overall industry scenario, we expect ACE to post revenue, EBIDTA & PAT CAGR of 23%, 32.6% & 41%, respectively, as we roll over and introduce FY23E numbers. Better outlook, improving financials and a healthy balance sheet call for a target price upgrade. Hence, we value ACE at 9x FY23 EV/EBIDTA to arrive at a target price of | 160 (earlier | 100). We maintain our BUY rating on the stock.

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