Buy Action Construction Equipment; target of Rs 65: ICICI Direct

ICICI Direct's research report on Action Construction Equipment

Action Construction Equipment (ACE) reported a sturdy Q4FY20 performance clocking 2% YoY revenue growth. Margins expanded YoY on account of a reduction in input costs. Revenue for the quarter was at Rs 305.5 crore, up 2% YoY. Crane segment revenue, which contributes ~70% to topline, was at Rs 217.4 crore, down 2.5% YoY. Total crane volumes were at ~1319 units vs. ~1464 units in Q4FY19. Gross margins expanded ~285 bps YoY due to lower input costs. Consequently, EBIDTA margins were at 9%, expanding ~100 bps YoY. ACE registered absolute EBIDTA of Rs 27.4 crore, up 15% YoY. On the expenses side, employee expenses increased 15% YoY to Rs 23.3 crore while other expenses increased 20% YoY to Rs 20.2 crore. Thus, due to increased expenses, the benefit of higher gross margins to the bottomline was partially negated. PAT came in at Rs 13.8 crore, up 12.6% YoY. Tax rate during the quarter came in at 24.6%.

Outlook

Given the recent events, ACE is likely to face headwinds in the short to medium term on account of sluggish demand and low capacity utilisation. At present, ACE is trading at 6.5x FY22E EV/EVITDA, with most of the near term uncertainty priced in the stock. Going ahead, market leadership in the ‘pick & carry’ cranes (>60% market share) with a healthy balance sheet, foreseeable improvement in working capital, growing agri and construction equipment segment is expected to augur well for the company in the long term. However, short & medium term pain is expected to weigh on profitability in FY21E. In light of all the above, we value the stock at 8x FY22E EV/EBIDTA to arrive at a target price of Rs 65 per share with a BUY rating.

Action Construction Equipment 18062020

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