Building the Future: ACE's Role in India's Infrastructure Boom

We met with the management of Action Construction Equipment. Here are the key takeaways:

• ACE operates primarily in 4 categories: Cranes (68%), Construction equipment (15%), Material handling (7%), and Agri equipment (7%).
• ACE holds a 63% market share in mobile and tower cranes, followed by Escorts.
• The company aims to increase its current export share from 10% to 15% in the medium term.

Transition from BS3, BS4 to BS5:

• The US and Europe have timelines to shift to BS5 engines by January 2025. Currently, all engines below 50 HP are BS3, necessitating the shift of BS3 and BS4 production to BS5.
• From a cost perspective, transitioning from BS4 to BS5 involves minimal cost change, but transitioning from BS3 to BS5 incurs a cost differential of 10% to 12%.
• ACE has positioned itself to capitalize on this transition opportunity with improved aesthetics and performance.

Industry and Company Growth:

• It is unlikely that the government will curtail infrastructure growth, thus the current industry growth trajectory is expected to continue.
• ACE anticipates outpacing industry growth, achieving mid-teen margins primarily due to: 1) product innovations (where competitors are less focused), 2) better raw material sourcing and management, and 3) increased operating leverage.

Capex, Expansion Plans, and Visibility:

• Recently, the company completed a ₹100 crore capex, potentially enabling a ₹4,000 crore topline.
• The company has 15 acres of land bank remaining beside the existing plant, which will be utilized once current capacity is exhausted (expected in < 2 years). The new plant on this 15-acre land will be fully automated.
• Additionally, ACE has acquired 82 acres of land near the existing plant for future growth.

Defense:

• ACE has supplied specialized cranes for defense applications, where contracts were bid by Tata and Ashok Leyland for chassis, with ACE providing the crane structure. These cranes are used for handling missiles and operate via remote control.
• The defense sector also includes customized cranes, skid steer loaders, forklifts, and backhoes.

Other Highlights:

• Every ₹1,000 crore increase in revenue results in approximately 75 basis points of margin expansion. The use of this incremental delta will depend solely on market conditions, whether to retain it or pursue cost competitiveness.
• The crawler crane market in India is valued at ₹600 crore, with an average ticket size of ₹1 crore to ₹1.2 crore. China is the main competitor in this segment.
• Production of cranes commences only after receiving advances from customers (with exceptions like L&T and Tata).

Revenue and Margins:

• Forecast for FY24: ₹3,000 crore. FY25 projects a 20% growth rate to ₹3,600 crore, and FY26 anticipates another 20% growth to ₹4,300 crore, maintaining mid-double-digit margins (currently at 15% over 9 months).

Our View:

‍ While the company has conservatively guided for 20% growth due to impending general elections, we strongly believe growth will exceed expectations over the next 3 years.We remain bullish on the industry and prefer Sanghvi over ACE purely due to valuation differences.