Investment in the initial public offer of Action Construction Equipment (Ace) can be considered at the cut-off price. In the price band of Rs 110-130, the offer is priced at 12-14 times its expected March 2007 per share earnings on post-offer equity. The offer is attractively priced compared to its peers such as TIL and BEML. Expanding product portfolio, marketing alliances with international players and solid fundamentals lend support to our recommendation.
Ace is one of the prominent players in the construction equipment space and a leading player in the hydraulic tower and mobile cranes segment. Much of the proceeds will be used to expand manufacturing facilities and set up units for new products.
Expanding product portfolio
Ace holds 50 per cent market share of the mobile and tower cranes segment. Escorts Construction is the primary competitor in this segment. Ace's broader product offering in terms of capacity and better margins give it an edge over its competitors.
The company plans to launch higher capacity tower cranes that could give it a better share in the construction equipment market.
The company also plans to foray into forklift trucks where Godrej and Boyce is the leader. It has already entered the Backhoe loader segment, where several players such as BEML, L&T and JCB operate. Ace's product offering in this segment is now restricted to lower end capacities.
Ace has forged marketing alliances with international companies such as Maber, Tigieffe and Autoguru of Italy for products such as aerial access platform and mast climbing platforms, which are used extensively in the construction of high-rise buildings.
These products are not manufactured in the country and, hence, imported. As clients prefer a one-stop shop, a broad product offering enhances the chances of cross-selling different products to the same client.
Given the scale of infrastructure investments planned in the country, there is immense scope for growth of the construction machinery sector.
Construction machinery accounts for 20-24 per cent of the total construction costs in high growth areas such as power, roads and bridges.
Availability of easy finance too has encouraged construction companies to own equipment. Ace's tie-up with financiers such as Citicorp and Srei Finance for infrastructure finance could help it improve volumes.
Ace is one of the fastest growing companies in the construction segment with a compounded annual sales growth of 96 per cent over the last five years. Even in 2005, when most equipment manufacturers suffered a slow down in sales due to delay in awarding road contracts, Ace managed decent growth.
Strong fundamentals indicated by the low debt-to-equity, high interest coverage and return on net worth in excess of 30 per cent lend support to our view.
We feel the offer is attractively priced, considering the immense growth opportunities in the sector, Ace's positioning in the construction machinery space and its strong fundamentals.
The offer that closes on September 7 is lead-managed by Karvy Investor Services.