>ACTION CONSTRUCTION EQUIPMENT: Poised for growth

■ Strong volume growth: Action Construction Equipment (ACE) reported sales of Rs1.3bn, a 60% YoY (in line with our expectation Rs1.3bn). Revenue increase was on the back of both, a lower base in Q1FY10 and increased volumes. The company saw significant increase in volume across all product ranges. ACE maintained that it could have done higher volumes for the quarter if it was not for loss of productivity on account of Oracle implementation. We expect the strong volume growth to continue, given the robust demand from infrastructure and alleged activities. There was an increase in EBITDA margins by 170bps YoY to 8.4%, primarily due to lower other costs. We expect EBITDA margins to improve in 10-10.5% range for FY11 as volume growth will help better capacity utilization.

■ PAT increased by 136% YoY to Rs80m from Rs34m in Q1FY11. This was on the back of higher EBITDA margins and lower (decrease of 37% YoY) interest cost of Rs4.9m.

■ New product offerings: ACE has started selling ‘Motor graders’ from the current quarter. It will also introduce a new product, ‘Mobile telehandlers’ by December in current year.The current market size of this product in India is bout 70-80 units per annum. However, if approved by defence for their specific requirement, the market could be ~1000 units per annum from defence itself.

■ Attractive Valuation: On the back of a substantial improvement in liquidity situation, both with NBFCs and Banks, 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 Rs56, the stock trades at 10.6x FY11E and 7.9x FY12E earnings, respectively. We maintain ‘BUY’ on the
stock.

To read the full report: ACE