Saturday, June 6, 2015

Result Update: Action Construction Equipments Ltd

Action Construction Equipment (ACE) reported lower than expected revenues for4QFY2015, mainly owing to lower than expected revenue from the Cranessegment. Reported revenues were down 3.2% yoy, but were up 13.4% sequentially to164cr. Despite revenue is appointment, ACE impressed us by reporting a good set of EBITDA and PAT margins. The EBITDA margin expanded from 3.5% in 4QFY2014 to 4.5% in 4QFY2015, reflecting (1) 4.6% decline in raw material expenses (to136cr), and (2) 5.0% decline in employee expenses (to12cr). The PAT margin improved 21bp yoy to 1.2% for the quarter. This is despite 57.9% yoy decline in other income (to1cr), and sharp increase in effective tax rate to 40.1% (vs 14.0% in 4QFY2014). Key Positives: Turnaround in the Material Handling & Construction Equip (MH-CE) segment, Margin expansion ahead of our estimates. 
Key Negatives: Miss on the Cranes segment sales.
Outlook and Valuation: At the current market price of 39/share, ACE is trading at FY2016E and FY2017E P/E multiple of 37.7x and 10.1x, respectively. We are optimistic that ACE would be able to maintain its numero uno position in the domestic Pick and Carry cranes business. This, when coupled with a wide range of product offerings, wide pan-India distribution network, along with their recent cost cutting initiatives, comforts us. We estimate ACE to report an 18.4% and
138.1% top-line and bottom-line CAGR, respectively, during FY2015-17E.
Accordingly, we expect the RoE to improve from 1.3% in FY2014 to 11.3% in FY2017E. At the backdrop of sharp growth in profitability and RoE expansion, we assign 14.0x P/E multiple to our FY2017E EPS estimate of 3.9/share to arrive at a price target of 54.Given the 38.4%  upside in the stock from the current levels,we recommend a Buy rating on the stock. 

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