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Strong earnings trajectory

* ACE reported 36%/30%/55% YoY growth in Sales/EBITDA/PAT for the quarter, on the back of strong growth in the Cranes and Construction-Equipment (CE) segments. Sales growth in the Cranes/CE segments stood at 48%/36%, respectively. Cranes saw 28% volume growth.

* Management has revised its revenue guidance to >25% for the year which requires a growth of ~5% for H2. ACE saw ~10% YoY growth in H2FY22; hence, the base is not low. We assume 28% YoY revenue growth for FY23. ACE expects gross-margin expansion in coming quarters due to softening commodity prices. We estimate EBITDAM at 9.7-10.1% over the next 2 years vs 9.3% currently.

* Given the current sales run-rate, expectation of improvement in gross margin, uptick in buying activity and enquiry conversions, we revise FY23E/24E EPS by 16%/15%, respectively, on the back of similar revenue growth. We roll forward our valuation to Dec23 and arrive at TP of Rs345/share (Rs240 earlier), based on 21x PER. Our increase in TP factors-in the EPS increase (~15%), roll over and the PER upgrade. Our PE of 21x is a 10% premium to 5-year average P/E of ~19x, owing to FY23E-25E RoE of ~16% vs ~13.5% in the past 5 years.

* Considerably strong revenue growth in the last 2 quarters; buying activity picks up: The past 2 quarters saw ACE clock strong revenue growth across Cranes (53% YoY for 1HFY23) and CE (40%), despite heavy rains, which typically have a negative impact on purchase. Mgmt indicated uptick in buying activity and higher conversion of enquiries.

* Easing commodity prices to result in gross-margin expansion: While EBITDAM has been flattish, Management expects improvement in margin due to easing commodity prices. Steel forms 60% of ACE’s raw material. While Management believes a 100-150bps improvement is possible, we conservatively factor-in only 80bps over the next 2 years.

* Further expansion via a higher-tonnage Cranes-facility: ACE is putting up a facility for higher-tonnage Cranes which will have revenue potential of Rs3-5bn, with capex of Rs350mn.

* Negotiations on acquisition and backward integration ongoing: ACE had raised Rs1.35bn last year which it intends to deploy through acquisition(s); it is also exploring products that will lead to better backward integration. Negotiations are ongoing from the valuations perspective.

* Valuation, outlook and risk: We roll forward our valuation to Dec-23 and arrive at our new TP of Rs345/share, based on 21xPER. Average P/E for the FY18-22 period stands at ~19x. Our 10% premium factors-in a higher RoE. Risks include any slowdown in infrastructure and manufacturing activity in the country.

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