Sanghvi Movers: Buy

Investments with a two-three year perspective can be considered in the stock of Sanghvi Movers, a company that hires cranes. Buoyant demand , combined with Sanghvi’s established presence, suggest good prospects for growth. Sanghvi’s strong earnings growth, planned expansion in capacities and its conscious move to reduce dependence on the windmill sector are also positives.

At the current market price of Rs 185, the stock trades at about 11 times its likely FY09 per share earnings on a fully diluted basis. Investors, however, can accumulate the stock in lots, given the volatility in broad markets.
Business

Sanghvi, which enjoys a near monopoly in the organised crane hiring business with over 50 per cent market share, offers a proxy to the ongoing infrastructure boom in the country. The increasing capital expenditure across user industries such as power and refineries is likely to present a huge growth opportunity for the company.

Our optimism also stems from the company’s strategic position in the crane hiring segment. One, a fleet size of 260 cranes backed by a well-dispersed presence (through depots) across the country, poses a high entry barrier to other players. Notably, Sanghvi has also set up depots in Jamnagar and Cuttack to leverage on the increased business from Reliance and power projects of BHEL in the northeast respectively.

Two, Sanghvi’s continuous investment in capacity over the years has helped it meet the rising demand for cranes. This strategy has resulted in a higher dependence on debt, but has helped the company take advantage of rising demand, without significant capacity constraints. The company has consistently enjoyed high operating profit margins in recent times, which have more than made up for the financing and capital costs.

In anticipation of a further firming up of demand, Sanghvi has outlined a capital expenditure of about Rs 200 crore each for FY08 and FY09.

The company plans to fund these through a mixture of debt, internal accruals, conversion of warrants allotted to promoters and money raised from preferential allotment. While increased reliance on debt could expand the overall financing costs, we expect the strong growth in volumes to more than offset this.

Another factor that reflects the strengthening of Sanghvi’s business is the reduced dependence on the windmills sector, which currently accounts for over half the revenues. An enhanced focus on sectors such as power and steel may help broad-base the company’s client base and reduce its vulnerability to a slowdown in the windmills sector. This could also help it benefit from the increased capex in other sectors.
Earnings scorecard

Sanghvi’s second quarter earnings reflect the growing demand for its business. It recorded a 21 per cent growth in revenues and a 28 per cent rise in earnings over last year. Helped by improving pricing, the operating profit margin expanded by about 2.4 percentage points to 74.9 per cent, while net profit margin expanded by 1.6 percentage points to 29.3 per cent.

Given the buoyancy in demand, realisations could see further improvement. While Sanghvi had managed a 90 per cent occupancy rate for its cranes during the last fiscal year, with an increasing fleet size, its ability to manage the overall utilisation levels of its cranes could be tested. Additionally, slowdown in capex by user industries also poses a downside risk.