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Stable margin a positive

* ACE reported sales growth of 12% yoy in Q4FY22, led by growth of 17%/13% in construction equipment (CE)/cranes segments. The company reported its highest-ever quarterly revenue in Q4. Despite a lower gross margin, EBITDAM improved to 9.4% from 9% in Q3FY22 on account of operational efficiency.

* For FY22, ACE reported 33%/28% YoY growth in sales/EBITDA, outperforming the construction equipment industry. It is evaluating backward integration or acquisition of smaller companies.

* ACE expects to grow its revenue by 15% given the present demand scenario. Lower steel prices could in the future help to improve the gross margin. We cut our FY23E/FY24E EPS by ~2.5%/5.6% and introduce FY25E EPS of Rs14.4. We build in sales/EBITDA/ PAT CAGRs of 13%/15%/17% during FY22E-FY25E. We roll forward our valuation to Jun’23 and lower the TP to Rs240 from Rs270. Maintain Buy.

Decent quarter:

For Q4FY22, ACE reported sales growth of 17%/13%/3% in the Crane/CE/MH segments, leading to overall 12% growth for the firm. Agri sales declined by 14% YoY. The gross margin has been affected by higher commodity prices (mainly steel) for the last few quarters. Q4 gross margin fell to 17.8% from 20.2% QoQ. Despite this hit, EBITDAM rose to 9.4% from 9% in Q3FY22 on account of operational efficiency. For the year, sales grew by 33% YoY, with the crane segment growing by 40%.

CE industry performance:

ACE’s CE segment grew by 39% YoY vs. 27% growth for Escort’s CE segment. EBIT margin stood at 10.8% for ACE in FY22 (FY21:10.2%) vs. 2.4% for Escorts (FY21: 3.6%). Overall, the industry reported 2% growth in crane volume, while ACE reported 17% YoY growth. The backhoe industry posted a 28% fall in volume, while ACE’s CE segment witnessed a 9% YoY drop in volume. ACE outperformed the industry in both these segments, and seems to have fared well on the margin side.

Valuation, outlook and risks:

We believe that we are in the initial stage of a larger infrastructure and industrial capex cycle. Hence, the medium-term outlook remains bullish for the CE sector. We cut our FY2E/FY24E EPS by 2.5%/5.6%. With expectations of lower steel prices, the margin is likely to improve (also from better CE sales) in the second half of FY23. We build in EBITDAM of 9.3%/9.9% for FY23E/FY24E vs. 9.3% in FY22. We roll forward our valuation to Jun’23 and revise the TP to Rs240 (earlier Rs270), based on 18x one-year forward PE (from 20x to factor higher business risk and cost of equity). Risks include any delay/deferment of capex and higher steel prices.

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