Action Construction Equipment Limited (ACE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '20 results call of Action Construction Equipment Limited, hosted by Emkay Global Financial Services. We have with us today, Mr. Sorab Agarwal, Executive Director; and Mr. Rajan Luthra, CFO. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Anas Dadarkar of Emkay Global. Thank you, and over to you.

Good evening, everyone. I would like to welcome the management and thank them for giving us this opportunity. I would now hand over the call to the management for opening remarks. Over to you, sir.

Good evening, everybody. I am Sorab Agarwal, Executive Director, Action Construction Equipment Limited. The month of December brought some respite, surprisingly. And last quarter, that is quarter 3 FY '20, was slightly better on quarter-on-quarter basis, and we feel that the slump in economic activity bottomed out during the last quarter, especially somewhere in December. We experienced green shoots and order flow increase from December 2019 onwards after a dismal October and November, which led to slight increase in December quarter numbers. Similar positive trend in order flow and execution still continues during the current quarter, and we have been able to further better our January month sales by about 15% as compared to the month of December. Our revenue in quarter 3 FY '20 increased by about 8% on quarter-on-quarter basis, but declined by 20% on year-on-year basis. Despite 20% reduction in revenue, we have been able to better our EBITDA margins to 8.3%, was about 7.9% on year-on-year basis. On quarter-on-quarter basis, we have been able to improve our EBITDA and PBT by 9.5% and 7%. Looking at the improvement in demand trend, we would like to revise our revenue guidance for the whole year to negative 12% to 15% as compared to negative 15% to 20%, which was projected earlier. We are also hopeful of bettering our EBITDA margins of about -- of 8% achieved last year, and accordingly expect a slight betterment in our EPS by approximately 8% to 10%. The increase in EPS can also be attributed to successful completion of buyback of equity shares, which was completed in November '19, which was to the tune of 38 lakh shares at an average price of INR 86.70 per share. Our current outstanding shares are approximately 11.35 crores as compared to earlier figure of 11.73 crores equity shares. We feel we have overcome the short-term turbulence being faced by the company. And going forward, the revenue and bottom line of the company should normalize with further betterment of economic activity in the country. We remain optimistic about the medium to long-term prospects of the company. I think that's it as of now. We can start off with the question and answers.

[Operator Instructions] The first question is from the line of [ Saket Kapoor ] from Kapoor Company.

Sir, first you said -- the briefing which you were giving the investors, the positive outlook, if you could dwell more on it on a segmental basis, that would be very helpful, sir, to put forward further questions, sir.

See, until November, the scenario seemed very bad and the order inflow, and accordingly the execution seemed to be on the decline. As a matter, it was very difficult to -- it was a very difficult October and November. But some time in middle of December, I do not know what changed, and the government was trying to do a lot of things. And the order flow started increasing, whether it was the -- we primarily work with infrastructure, construction activity and even with the hard-core industry where we supply our cranes, which is about 70% of our business approximately. So the order flow increased in the month of December, and accordingly, a little execution improved by about, I would say, 15%, 18%. And the same trend has followed into January. So -- I mean it was not just a one-off fluke that -- that's what it seemed like in December. So generally, things have started to better a little post November, that is in December, as well as continuing well into January.

Okay. And sir, these inquiries are pertaining from which particular sector, sir, of the economy, whether cement, steel, if you could give further granular details?

See, right now, I would say most of the uptake or increase has been more from infra and construction site in the last 1 to 2 months. But yes, what had happened that -- because the manufacturing activity and industrial activity overall had also slowed down so much, especially our Material Handling segment, forklift was very bad. So that has also done some reasonable numbers in December, and especially in January. So we could easily say that it's not only infra. Yes, the more inflow is from there. But even hard-core -- or whether it is an auto ancillary or hard-core industry space available in the country, there, again, the buying has started.

And sir, this is all through routing from the stalled projects that we can say -- we can safely say that it is not the new projects, the greenfield projects, the stalled one that is getting funding from the government and in totality going for the buying of the equipment?

I think it is for both. There were hardly any stalled projects here. Some of them had stopped, like The Coastal Road project in Bombay because of some annuity order and similar, similar, so many things which had happened. So obviously, those things have also fallen on track. Yes, there's definitely been a fund release flow from the government side for the various projects, wherever the payments were stuck. I mean it's evident because as the cash flow for the construction company starts to improve, then only they can plan for other things. So I think, and like I mentioned, even the industrial sale -- industrial part has also increased. It looked like the slow cycle we had entered about 1.5 years back, rather, that had started to slow down a little from -- in Q1 FY '19 and then Q2 FY '19, and Q3 was a little more this thing because of IL&FS and everything in Q4, and it kept on sliding down. So I would say Q2 of this year and Q3, it appears to have bottomed out because it improved in December, it has improved again in January. And we already started February, and we have a reasonably healthy order book entering into February. So it looks like some sort of an improvement is definitely there.

And sir, if you could give the granular details for order book segment-wise, which is -- which segment has garnered so much attention, sir?

See, I would say the crane segment, the Construction Equipment segment, even the Material Handling segment. I would not -- I will not know the exact percentages as of now with respect to the increase segment-wise. But I can tell you that there is at least -- as compared to last quarter, there is at least a 15% to 20% increase in order booking.

Okay, sir. Sir, in the crane segment, which category of cranes are we particularly having a dominant market share? And these are catering to which industry, sir?

See, our biggest segment, we make a lot of types of cranes, whether Pick-n-Carry cranes or tower cranes or crawler cranes; and recently, we have gotten into self-propelled truck cranes, lorry loader cranes. But there is -- the biggest segment within Cranes is Pick-n-Carry cranes. And it caters all across. Anywhere there is any requirement of lifting and shifting, and like I said, whether it is infrastructure, construction or whether it is any industrial project, these cranes are required everywhere, all across.

Sir, we have found a lot of green -- a lot of not green shoot but exactly good sound bite from production companies like Coal India also, wherein they have recorded highest production for -- a 10% increase in the coal production for the month of January. And we find that Coal India also is one of your client, I think, so that falls in the material handling part. So any idea, sir, the type of expansion which Coal India is contemplating in the ramp-up in the volume? What kind of business -- incremental business can we expect from players like Coal India, Steel Authority? I am talking about the PSU market as a whole currently, sir.

See, it will be very difficult to -- because we -- our government share of business is only about, I would say, 1.5% to 2% of our revenue, or it's a long-drawn tender process. So it's very difficult to -- even if they did want to buy, they will take 6 months to 1 year to buy. That's how it works in most of the PSUs. But all I can tell you is that you were talking about little green shoots or some better information. Increase of steel price, I think, is the biggest indicator of demand/supply game. And yes, if the steel prices have hardened up by 10%, 12% over the last 2 months, so definitely, the demand is there and the supply is a little constrained or there is an opportunity to increase the prices, that's why it has happened.

Sir, what I found in the segmental reporting is that it is the Construction Equipment that is a big drag on the number. And now you are -- what you are guiding us is that there is a reversal that is expected -- that has -- that is evident on ground in the Construction Equipment category. That is what the message is.

No. I am slightly surprised that you asked this question. Construction Equipment has not been a drag. On year-on-year basis, we have done about 14% more. And on quarter-on-quarter basis, we've done about 27% more. Rather, last quarter, we have done 1.5%, 2% less in Cranes on a quarter-on-quarter basis and about a 6% lower in Material Handling.

Okay, okay. Sir, I missed that number for December '18 with September '19, that was the reason.

No. It's not a drag. As a matter of fact, going forward...

It's a better performance, yes. It is better because INR 1 crore loss from quarter-on-quarter is now reduced to INR 18 lakhs. You were telling something, sir, I just...

Yes. As a matter of fact, with respect to our Construction Equipment, we have been able to increase our revenue. As -- in the current year, Construction Equipment is the only segment where we will still manage to increase our revenue by around 15% on a whole year basis, at least 15%. All other segments, still we will be reducing revenue. And I'm sure, going forward, like we have contemplated in the past, about a 50%, 60% revenue increase year-on-year basis with respect to Construction Equipment, I see that happening now. I mean I feel that in FY '21 and FY '22, we should be able to realize what we have been thinking for the last 1 or 2 years, 2.5 years, and trying to do, and we should be able to increase our construction equipment market by at least 50% to 60% going forward.

And who are the major customers, sir, in this segment, sir, from where you will be going to get the business?

This is all infra and construction companies.

Okay, sir. Correct, sir. Sir, coming to your agri business...

And we work with all the big, small companies. All of them.

In the construction?

Yes, all of them. We work with most of everybody you can think of.

Correct, sir. Sir, in the agri business, if you could explain, sir, what is the focus currently right now? What we found that agri businesses have also seen a big bump up, if we take the revenue part from INR 29 crores to around INR 48 crores, INR 49 crores quarter-on-quarter.

Somehow first half of the current year was miserable for our agri business, but we have been able to sort of stabilize it in quarter 3. And I'm very hopeful that we will be able to maintain this trend of stabilization, and then going forward with increase in numbers maybe from next quarter onwards.

If we take the peer comparison for Agri Equipment, sir, in your category, the customers which you are handling, who are your nearest peer competitors?

See, we make agricultural tractors and we make harvesters. So in harvesters, we compete primarily with class and standard. And with -- in tractors, we compete with -- there are about 20, 25 small, big tractor manufacturing companies, we compete with all of them.

Okay. In tillers also, are we present, sir?

No, we don't make tillers.

The next question is from the line of [ Rajiv Maheshwari ] from Praj Investment.

Mr. Agarwal, first of all, I would like to congratulate you and your entire team for completing 25 years.

Thank you, Mr. Maheshwari. You figured out.

Yes, I figured out. I saw the program organized -- I had a glimpse in the YouTube, so saw a couple of stills of you on the stage. So it was a good thing to have. And hopefully, maybe this would bring turnaround in the fortunes of the company as well as the shareholders. Let's hope that going ahead.

We did try to put up a grand show, and we invited most of our leading customers from all over the country.

Okay. In fact, I think, Milkha Singh was also invited in that program, if I'm not wrong?

Yes, but we had to pay him.

So that should be more of a concern for the shareholders, not for you, but okay, it should be a good celebration, and it was a good achievement as such.

Yes. I think a good celebration, and we used this opportunity to showcase our company and also for strengthening our brand. And I'm sure synergy treatment will have its own benefits over the years.

No, no, it's fine. Branding and image building is also equally important going ahead for the future of any company. And anyways, ACE has been in the top 100 brands since last maybe 6, 7 years, sir.

Yes, yes.

Okay. So coming to the question, I just wanted to know, in the last con call, you had mentioned this -- that there was some export order of a big order of around INR 70 crores, which has come from some neighboring country government order. So how has that work gone because I think the delivery was supposed to start some time in December and January or maybe February. So how has that gone?

We were -- we are expecting to start delivery within this quarter. We are still expecting that because the commercial clearance and the required payment instrument has not been received by us. As a matter of fact, as we speak, our people are there in that country trying to organize why it is getting delayed. So we are hopeful we might start to execute in this quarter or, otherwise, positively in the next quarter.

So basically, it's a firm order, only the execution is taking some time?

Yes. We are waiting for the payment instrument, the letter of credit, to come because, otherwise, it will become unsecured.

Okay. I read in -- somewhere in one of the interviews that you are planning to maybe handle the slowdown in the Indian economy by going ahead and aggressively pursuing for more export orders as such. So has anything turned up in the last quarter or maybe last 3, 4 months, apart from this one?

Yes. Our -- generally, our share of export used to be about 2%. And about 1, 1.5 years when we started planning, we increased it to 5%, 6%, and this year, it will be increased to 7%, 8%. And I'm sure, by the end of next year, it should be somewhere around 10%, 12% at least. And we are targeting that, yes, over the next 2 years, 3 years, we should take it to 20%, 25%. So that it can give us a cover in case of slowdown in the Indian economy. So we are working very aggressively on it. And we are also trying to export our machines to CIS countries. We are already exporting to some African and South American countries. Now we expanding to CIS, more into Middle East and Southeast Asia. It's an ongoing process. And I'm sure that, yes, it will take some time. We will take this share of export in our revenue to about 18% to 20%, if not more.

20%, 25% sounds good, but just wanted to know how is the competition like in these countries because they must be have -- also having some local players or -- so how is it like if you consider the competition as such?

See, we have a lot of variety of machines, whether it is road making or Cranes or Material Handling, which includes forklifts and some warehousing, and also agriculture. So yes, there is some local competition. But we realize that we are still being able to be very price competitive as well as quality competitive in these countries. So I mean I'm sure that we will be able to do a reasonable job wherever we've entered. Yes, it -- obviously, it takes time to establish the brand locally and to increase the numbers. And it is already happening. We are actively exporting to about 20, 22 countries as of now.

That's good. That's good. The other part of the question is, like, you see the firming up of demand and the steel prices and all also have gone up. So how would -- it would impact the profitability of our company as such going ahead the -- impacting steel prices, the rise in steel prices and the effective increase in our raw material cost as such?

Yes. Steel price actually ate away into most of our profitability in FY '19, which was a very good year, otherwise. We did our peak numbers and our profitability was hit by at least 3%, 4% only on account of steel prices. But we have already taken preemptive effect. The steel prices started firming up a little end of November and December. So 1st January onwards, we've already pushed in a price increase of -- depending on models, anywhere between 3% to 5%.

Okay. So you have again taken a price hike on 1st January?

Yes. We have taken a price hike. I think 2% to 5% depending on models. We've already increased our prices in January.

Okay, that's great. And the final part of the question is, how -- maybe 3, 4 months back, you had mentioned about the new product, which will be a game changer in terms of taking care of the telehandler as well as a couple of other functions as such. So now the industry improving as a whole, how do you see things moving ahead in terms of the interest taken by the big players?

See, people are very much interested. As a matter of fact, we did some reasonable sales in the month of November and December. And going forward, with the economic cycle improving and the purchasing power improving, I'm sure that over the next 6 months, 1 year and -- but let's say -- let's talk of a 3- to 5-year horizon from now, that product would be commanding a lot of respect and a reasonable market share within the Cranes segment to the tune of maybe about 20% to 30%. And this has already started happening, yes.

And no risk of the same product coming through the competition or something like that as such?

Sir, full risk is there for all the 3 products. We have applied for all the necessary patents. They are under process. I also understand competition is trying to copy one of those products. So obviously, we'll go to court and stop them as soon as they copy ours.

The next question is from the line of [ Adil Khan ] from ICICI Direct.

Sir, this is Chirag. Sir, my question pertains, you already mentioned that your target is to grow 50%, 60-odd percent in the Construction Equipment segment. So -- and you already mentioned that you are looking at green shoots in the month of Jan and Feb. So what is your outlook in the Pick-n-Carry crane segment? So what is the kind of growth that you are looking in the next particular year, fiscal, per se?

See, if I talk of -- let's start with the current quarter. I'm sure that current quarter should be at least 15%, 20% better than the last quarter with respect to Cranes. That's what it looks like. And if the same trend continues, so I would say that a 15%, 20% increase looks evident if it does not stop to improve; and if things are further spruced up in the economy or -- because like in the budget, they mentioned release of INR 1,70,000 crores only for the highways within the current year, I mean, this coming year in the budget, like that happened; and with Jewar Airport and some 20, 22, whatever new airports coming up; and work which is slated to start on the high-speed rail project apart from so many other expressway projects, which are already under plan or under implementation; and the metro lines which are getting expanded, now in Delhi, Phase 4 has started and work has already been allotted to companies like KEC or Dilip Buildcon or YFC. So -- I mean if this continues, then it should be faster than 15%, 20%, much faster.

Okay. Sir, my next question is from a client side perspective, is liquidity abundant enough? Are they getting enough credit from NBFCs or banks for getting these equipments funded, the problem which arose maybe 3, 4 quarters back, is that thing getting receded?

See, I think I've already answered this in the past also, but just for repetition sake, I feel that for the -- for a credit-worthy end user or a buyer, equipment funding was never a problem. It is in the last 3, 4 quarters. It was just that, yes, because of the IL&FS thing, the NBFCs did get squeezed and became a little more diligent in their activity of disbursement, only to pure credit-worthy customers. So yes, 8%, 10%, 15% of the market would have definitely got affected. And their cost of borrowing would have increased because if ex-NBFC or bank would not have done it, the other bank would have done it at a maybe 1% or 2%, 2.5% higher cost. But I always felt that funds were available. It was more to do with the credit worthiness.

And sir, if you are seeing that you've already taken a price hike of 2% to 5% across product categories, so then what kind of margins are you looking to exit Q4? And what kind of margins are you envisaging over the next 2 years?

Yes, I think we should be able to improve our margins by at least 1% or 2% in Q4. And our target would be at least to do -- I mean if we talk of next year, to achieve at least about 10%, 11% EBITDA level, at least, if not more. That will actually translate into 7%, 8% PBT.

Right. And given such a growth -- robust growth outlook that you're mentioning for both of your heavy segments, that is Construction Equipment and Cranes segment, sir, then probably what kind of utilizations we -- would be next year? And when would we need a big CapEx program to fund our growth?

See, depending on different product -- our segments, we are working anywhere between 40% to 60% as of now. So to more than double up our business, we do not need any CapEx. So I don't think we will need any CapEx, at least for the next 1 to 2 years. But I do hope the need arises and we are able to grow faster than that, practically not possible maybe, but I don't think for the next 1 to 2 years or to at least double up or more than double up our 2.5x from here, we really don't need any significant CapEx.

Right. And sir, do any emission norms impact -- are there any emission norms for our equipments? And is there any emission norm that we have to comply by in the near future, which will lead to product changes and, hence, higher price realizations?

Yes. What is happening, currently, the construction equipment, the CMVR , Central Motor Vehicles Rules, for construction equipment, which is called CEV is at BS-III in -- from 1st of October, all the construction equipment vehicles, which have tires, which are on tires, so most of our cranes and backhoe loaders and rollers and even any machine which has tires, whether -- even a forklift, so they need to upgrade to BS-IV engine from BS-III. But for CEV, this is applicable for engines bigger than 50 horsepower. So I would say half the models of our cranes will need to be upgraded. We are -- and the process is continuously -- is currently happening. And we are planning to move on to BS-IV engines. The cost increase for the engines between 50 to 75 would be anywhere between INR 1 lakh, INR 1.5 lakhs per machine approximately. And the cost increase for machines which have an engine bigger than 75 horsepower would be anywhere between, again, depending on the engine horsepower, anywhere between, I would say, INR 1.5 lakhs to INR 3 lakhs, which is reasonably significant. So this will have to be -- this will be the new norm. So I'm sure, accordingly, the rental prices and everything will correct from October onwards.

Okay. So then in that case, sir, probably your June and September quarter should see a good amount of prebuying also from the vendors?

Ideally, it should. But this is what most of the commercial vehicles, CV segment, this is what they were imagining and dreaming for last 1.5 years, that sales will increase before March '20, especially in the last 6 months, but we have seen what has happened. So I can't say. So logically, there should be 10%, 20% prebuying in Q1 and Q2 as soon as the buyers realize, and our salespeople start telling them that from October, the same machine is going to cost INR 1 lakh, INR 2 lakhs or INR 3 lakhs more. If it's a INR 15 lakh machine, it's going to cost INR 2 lakhs more, that's a significant amount of money for anybody to prebuy it.

Exactly. So is your assumption of...

[Operator Instructions] The next question is from the line of Saket Kapoor from Kapoor Company.

Sir, I was talking about the debt level, sir, currently and the receivables also, sir. We have gone through a rough patch over the last 2 quarters that just changed last month only. So if you could give some understanding on the net receivables?