Promoted by Vijay Agarwal and his wife and son, Action Construction Equipment (ACE) manufactures mobile tower cranes, tower cranes and material handling equipment. The company has sold its equipment to most leading private and government sector companies in India such as Reliance Industries, Punj Lloyd, Gammon India, Nagarjuna Construction, Simplex Concrete, NTPC and Bhel.
ACE is setting up an assembly unit in Uttaranchal, which is funded by internal accruals. This assembly unit will be eligible for various tax incentives. The company is planning to set up a new plant (through the IPO proceeds) to manufacture loaders, higher capacity tower cranes and other material handling equipment at Faridabad.
Strength
- Infrastructure and construction industries are witnessing substantial investments. On an average, construction equipment forms 12-15% of the project cost. Thus, significant fresh demand is likely to arise in future. The useful life of construction equipment varies from 7-15 years. At present, replacement demand constitutes only 5-7% of the total demand. However, four-five years from now, about 30-40% of the total demand may be replacement demand along with demand for spares as the volume for construction equipment has grown significantly in the last four-five years.
Weakness
- ACE is operating in a raw material intensive industry. The main raw material used by the company is MS steel, which constitutes around 60% of its overall cost. Unexpected rise in and volatility in steel prices can adversely affect profit margin.
Valuation
The post-IPO EPS based on FY 2006 earning works out to Rs 7.2. At the offer price band of Rs 110-130, the PE range is 15.2 to 18. The TTM PE of Engineering - Heavy - Material Handling is around 16.6. Annualised EPS based on first quarter earning works out to Rs 8.8. About 45% turnover is derived in the first and second quarters and 55% from the third and fourth quarters.