The management of Action Construction Equipmentbelieve that margin stability in H2 holds the key to growth.
Action Construction Equipment reportedsales/EBITDA growth of 35 per cent/44 per cent Y-o-Y in Q2FY22, aided by growthacross most of its business segments. For H1FY22, revenue grew 85 per cen. Cranes,Construction Equipment, and Material Handling Equipment businesses continued todeliver healthy performance on account of market share gains and price hikes.
The management has stated that persistentcommodity inflation continues to hamper margins, especially in the steelsegment. ACE has taken a 10-12 per cent price hike in H2FY21 and a further 8-10per cent in H1FY22. It may undertake an incremental 5-6 per cent hike in thenear term, considering the inflation environment and the need to maintainmargins in the range of 10.5-11 per cent.
Capacityutilization was still below adequate levels
The management has reiterated that capacityutilisation has been below adequate levels – at ~30 per cent for Construction Equipment,and 45-50 per cent for Cranes. Management believes that operating leverage willbe key to driving any margin upside.
Customers across the board have recently become uncomfortablewith price hikes and management is cognizant of this fact and wishes tomaintain the market share right now.
Management expects the Construction Equipmentsegment to grow faster than the Cranes segment as it has very high upsidepotential going ahead. Construction Equipment is expected to grow by at least25-30 per cent in a year and has prospects of 40-50 per cent growth.
Management has maintained its conservativerevenue growth guidance of 15-20 per cent. Exports accounted for 7.0 per cent ofthe overall business in H1FY22. The company expects better momentum in H2 vs.H1, considering business seasonality and visibility in infrastructure activity.
In response to increased business visibility,management deployed more working capital in inventory, which was impacted by alonger monsoon season. Additionally, delayed payments from financed equipmentand exports led to higher receivables.
Working Capital should normalize from 70-75 daysin H1 to the usual 40-45 days in the medium term, the management has stated.
Management will initially cater to Eastern EUand Russia markets as new opportunities open on account of emission upgrades.It has also pitched other products, including Backhoe Loader, to the IndianArmy, all of which are under trials and ACE expects results soon. Existingdefence orders to the tune of Rs1bn should support revenue in FY22.
The Forma tractor brand has done well in theexport market, although high freight costs have deterred such purchases aswell.
The company is closely looking at inorganicopportunities to deploy its recent QIP proceeds. It is exploring bothcomponent-level and whole machinery-level players to strengthen itsbottom-line. One of the possibilities includes a small-market Cranemanufacturer, in order to improve pricing power and consolidate market share.
Speaking about the Semiconductor shortage, themanagement has said that the issues have hampered availability of 130hp+engines (sourced from Ashok Leyland). The management is hopeful the issueshould subside in the next 1-2 months. A majority of the business is lessdependent on semiconductors, so the issue is limited.