>ACTION CONSTRUCTION EQUIPMENT (PRABHUDAS LILLADHER)

■ Ease of NBFC funding and Infra-led demand to improve volumes: Demand for equipments related to infrastructure is expected to see a considerable pick-up on the back of NBFC funding being available now and the on-going infra-related spending. Products like Mobile cranes, Backhoe loaders, Crawler cranes and Tandem rollers are expected to see increased volumes. But at the same time demand from the real estate sector (for fixed tower cranes, mobile cranes) might have bottomed out but still hasn’t gathered any momentum. Even on conservative volume estimates (15-25% lower than management guidance) for FY11 and FY12, we expect the company’s revenue to grow at a CAGR of close to 30%.

GATHERING MOMENTUM

■ Tractor foray to gain pace: Action Construction equipment (ACE) sells its tractors in the Northern states of Haryana, Rajasthan and Uttar Pradesh. The company is currently selling these tractors through its dealer network of over 200 dealers. The company has a capacity of 400-500 tractors per month which will be sufficient for the next year. Capex of Rs150-200m is expected to be undertaken in FY11 in order to increase this capacity to more than 700- 800 per month.

■ Margin improvement: Overall volumes are expected to improve considerably in both H2FY10 and FY11. ACE, currently, has a capacity to generate revenue of close to Rs6-6.5bn. Hence, with increased volumes, we expect margins to improve incrementally, with FY10 and FY11 margins expected to be 8-8.3% and more than 10%, respectively.

■ Valuation: With the ease of funding availability from NBFC, to both regular and first equipment buyers, coupled with an improving demand scenario, ACE is well placed at this point in time to take advantage of this increasingly positive scenario. At the CMP of Rs42, the stock trades at 9.9x FY11E and 7.6x FY12E earnings of Rs4.3 and Rs5.5, respectively. We maintain ‘Accumulate’ on the stock.

To read the full report: ACTION CONSTRUCTION EQUIPMENT