Buy Action Construction; target of Rs 47: PLilladher

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Buy Action Construction; target of Rs 47: PLilladher

Prabhudas Lilladher is bullish on Action Construction Equipment and has recommended buy rating on the stock with a target of Rs 47 in its November 15, 2011 research report.

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Prabhudas Lilladher is bullish on Action Construction Equipment and has recommended buy rating on the stock with a target of Rs 47 in its November 15, 2011 research report.

"Action Construction Equipments (ACE) reported sales growth 42% YoY at Rs2.1bn, ahead of our estimate of Rs1.99bn. The company highlighted that the sales could have been higher but for the extended monsoon affecting sales of products like tractors and mobile tower cranes. EBITDA margins came in at 6.4%, down 170bps YoY, mainly on account of significant increase in purchase of traded goods (up 118% YoY). Interest cost was 82% YoY due to increased debt to fund increased capital requirement. PAT was up 17% YoY to Rs105m."

"ACE has cut the guidance for top-line to 25-30% growth for FY12 from 40-45% growth due to a weak outlook on account of difficult macros. However, the company expects the margins to improve in H2FY12 as it has taken price hike of ~2-3% and reduced raw material cost by ~2%. It has guided for PAT margin of ~7.5%. The board has approved merger of ACE Steel Fab (wholly-owned promoter company) with itself. It will issue 6m shares, leading to dilution of ~6.4%. The company had sales of Rs900m and PBT of Rs450m in FY11. It is also looking at acquiring a company in India and China. The Indian company is in a different product range from ACE with common customer base. The company has sales of Rs800m and PBT margin of ~15% in FY11. ACE is looking to pay ~Rs600m for the same. The Chinese company is in similar product range as ACE and had sales of Rs600m and PBT margin of ~9% in FY11. ACE is likely to acquire the company for a consideration of Rs350m. Both these companies are debtfree. ACE will use mix of debt, equity and internal accruals to fund the same."

"The stock is trading at 6.4x FY12E earnings. We believe the wide user base and product profile will help cushion the impact of a slowdown. We maintain 'BUY' rating on the stock," says Prabhudas Lilladher research report.  

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