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

Ladies and gentlemen, good day, and welcome to Q1 FY '21 Earnings Conference Call of Action Construction Equipment Limited, hosted by Emkay Global Financial Services Limited. 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 now hand the conference over to Mr. Anas Dadarkar of Emkay Global. Thank you, and over to you, sir.

Good evening, everyone. I would like to welcome the management and thank them for giving us this opportunity to post first quarter FY '21 results earnings call. I would now hand over the call to the management for their opening remarks. Over to you, sir.

Good evening, everybody. I'm Sorab Agarwal this side. All of us are currently dealing with the ill effects of COVID which have caused a lot of pain and disruptions here and there within businesses. Our top line for quarter 1 has been adversely affected due to the lockdowns and slump in the market conditions. But the overall sentiment and business quantum has started improving since July 2020, which is good news. And we are definitely looking at a better quarter 2 as compared to quarter 1 of FY '21. During the last quarter, we have taken all possible liquidity conservation and cost control measures to minimize the effects of reduced revenues, which we have already faced in the last quarter. And this quarter, again, there will be some loss -- reduction in revenue. But unfortunately, despite our best efforts, we did suffer a loss in the last quarter, being the first ever in the history of our company. We witnessed a 67% degrowth in our revenues on a quarter-on-quarter basis, and about a 65% degrowth on a year-on-year basis. Even in this tough situation of 67% revenue degrowth, we were able to remain EBITDA positive at the rate of 2.4% as compared to 8.5% on quarter-on-quarter basis. We did suffer loss at PBT levels to the tune of around INR 4,31,00,000 versus a profit of around INR 18,27,00,000 in quarter 4 of financial year '20. As mentioned earlier, business has definitely started gaining some traction from the month of July onwards, and we are hopeful of reaching 65% to 70% revenue levels as compared to last year's sales within quarter 2 of the current year. We have been able to successfully lower down our breakeven levels, which will ensure that the company remains profitable even at reduced revenue levels. The economy we feel is still in uncharted territory. But going forward, we should be able to attain at least a 78% of last year's average revenues from quarter 3 onwards owing to the increase in infra activity with ending of monsoons and availability of migrant labors. As conveyed earlier, we have undertaken all possible measures to remain in the black on full year basis and still continue to work on the same. That's it from the opening comments here.

[Operator Instructions] The first question is from the line of Anas Dadarkar.

Mr. Luthra, can you give us the number of units for this quarter as compared to the last quarter? The way you give it for every quarter?

Yes, I can give. The Pick-n-Carry cranes is 280, mobile tower crane is 2, fixed tower crane 8, 1 crawler crane, 382 tractors, 41 backhoe loaders, 83 [ graders ], 1 compactor, 3 truck mounted cranes, 22 harvesters, 266 rotavators and 3 piling rigs. So before current quarter, just for everybody's sake the quarter numbers are not comparable compared to corresponding quarter or last quarter, keeping in view the COVID-19 and so apples and apples are not same, similar in this quarter. So these are the numbers. And we had our first month of -- April was totally locked down. So we did not have one way in the minds it has started picking June onwards only.

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

I joined the call late. Is Mr. Agarwal also there or he's not there in the call?

Yes, I am very much there.

Okay. You are there, sorry. Because the first question was directly to Mr. Luthra, so I thought maybe you are not there. Just wanted a quick -- couple of quick questions. In terms of -- I saw the numbers. The agri equipment and the road construction figures are looking fine, but what the dip I think sure was more visible in the crane, the Pick-n-Carry crane segment. So just wanted because that's the bread and butter of the entire sales. So just wanted to know any analysis you guys have done where the sale has fallen to around INR 50 crores for the quarter? And another question is actually going ahead, what the percentage of normality which we have already reached in the current month of July and the half of August?

See with respect to yes, we definitely did miserably in cranes and were down about close to 76%, 77% in the first quarter. Construction equipment and tractor segment of ours, in both these segments, our market share is quite miniscule as compared to the overall market size. So even though, for example, construction equipment, the market size was squeezed, but still, we were able to manage some basic numbers in the month of May and June. April was practically nil because everything was in lockdown. Tractor market really did not take a hit. On the contrary, last 1 or 2 months have been good. So that's how we were able to take. We still have some hit in the tractor segment, but it is reduced. Now for the second part of your question, it seems that cranes are also falling in sync with other equipment lines of ours, our other segments. And July was not bad, looking at the circumstances, the way things were in the month of May and even in June. So -- and that's why we feel that in this quarter, doing a 65% to 70% revenue level as compared to our last year's average sale, it should be possible easily. It can only go up from 65% to 70%.

So as of now, for the -- maybe the 45 days, we are already pretty 65% to 70% of the average sales, that what we did in last quarter, the last -- okay...

So that's because monsoon is in full effect. So as soon as the monsoon starts to die down end of August, it will start to improve further.

Yes. So there, I think it's a relatively good figure because what you had mentioned that we would be reaching around 50%, 55% in the last con call. So 65%, 70%.

Yes, that was in the month of June and everything seemed to be sinking.

Yes, lots of uncertainties were also there at that time.

As a matter of fact, so many mini lockdowns and city lockdowns have happened even in the last 1.5 months, which definitely has hampered. To be very frank with you, Bombay and Puna is one of the big markets, even Bangalore and Chennai. So they have been continuously in and out of lockdown and mainly in the lockdowns. So activities are still not restored to anywhere near 50%, 60% also in these cities with respect to our business. So as things start to further improve and people start to get -- already getting adjusted to this period of COVID. So going forward when some of the other major locations and markets, which contribute to our revenue, start to wake up, things will definitely look even better from here.

So these locations of Puna and Mumbai, are they also impacting the raw material supply to the plant? Or it's only for the finished goods sales, which impacted you?

Bombay, Puna have definitely hurt us for some supplies, which we get from Bombay region as well and this Puna, Aurangabad, this side also. So we have remained hand to mouth for quite some items from this region. And it still continues to be like that. But luckily, they open and they close, they open and they close. So in bits and pieces, things are happening and we are trying to manage as of now.

Okay. That's good. Just a quick question that how has import -- exports picked up in this COVID times and after the open up of the activities?

See, it is -- if you put it at the ratio of revenue, it is quite similar to what it was happening. So that means, obviously, it is also slow by about 65%, 70%. But on a whole year basis, we feel that whatever revenue we're able to do in this year, which we still anticipate that can -- there can be a degrowth of anywhere between 30% to 35%. So I think, as of now, it seems that export will also fall in the same sync of degrowth. We might be able to a little better, maybe increase our 6% revenue share of export to 7%, 8%, maybe slightly higher. But it is too early to say anything on that.

Okay. And the final part is the impact on the hike of steel price because a couple of companies have taken the hike in the last 2 months. So how would you get effect on our workings as such?

Last time, we were discussing that the steel prices will -- have moderated a little. And now they are nearly at pre-COVID slightly higher than that. So I'm sure some impact will come. It comes generally to us with a lag of 1 or 2 months. So during this quarter, as of now, we are still maintaining it. Whatever steel we buy directly, yes, there is already some impact, which will be utilized with whatever inventories we are carrying. So yes, if at all there is any price impact due to COVID is with respect to our consumption. But we will -- happening sometime end of September or October onwards.

Yes. But from the economy perspective, I believe it's a good thing that the prices are firming up, then maybe demand is also picking up. And when the steel prices are hiking, you guys produce more, what is told in the last call. So one way I think it's a sign of green shoots and improvement also?

Yes. It is definitely a sign. But here, I would say that also that had all the stockyards of the steel companies and most of the traders, during COVID time and after that, everybody, I think, was also working on inventory control and inventory reduction. That is also a reason which has definitely caused some scarcity of especially slightly higher grade steel than normal sizes, which is also adding a little fuel to the fire. So it is a mix of, yes, definitely something -- see, because we have not reached pre-COVID levels. So there is no reason for the steel prices to be firming up.

Yes, even I was surprised to find how come in these scenarios see steel companies are raising their prices. Maybe the China factor things not getting...

I think more to do with the inventories, which have been cleared off in May and June, at the destination locations here and there. And coupled with -- but eventually, if we go in detail, steel prices need to remain around the current prices for the steel companies to remain profitable. If it goes down by 10%, 15%, then it's a bigger mess. So it's okay that they're increasing a little. But I just hope, unlike 2018, where steel prices just rocketed, it does not happen like that. And it goes to 48, 50 without the demand going up that high.

That was a one-off case, which impacted all the companies. And just a quick question in terms of what I saw the reports of exports and Mahindra and all, the tractor part is booming for these companies. So what the strategy which we guys are taking up in terms of pushing our sector in the market? Because it's, again, a high-margin line, service line. So what's the take on that?

There are 2 aspects to this. I'm sure that we will definitely increase our revenue from our agri segment in this year, maybe to the tune of at least 10%, 15%, if not more. Apart from that, if you look at even the quarter's results, which was definitely on a much smaller number. And you would see that our profitability there is only improved even with lower numbers. So we are doing a lot of work as of now to ensure that EBITDA or EBIT levels, we do 8%, 10%, 12% and then start focusing on including the numbers because for the last so many years, we've been trying to increase the numbers. And the counter of that was that we were not making any profit in tractor business. So right now, our focus is to make profit and then increase numbers. But even in this scenario, I'm hopeful like that at about 10% increase should happen this year, but definitely with profitability in place. So next year, again, we will try and take some lead and jump and see if we can increase our numbers drastically or not. So -- but as of now the focus is to work on the profitability part.

I think it should happen. Seeing the rural demand and the rural things and on picking up. I think maybe we push something more on the rural side on the tractor than making let's hope it goes.

I agree. As a matter fact, Tier 2, Tier 3 cities and rural is, again, where construction equipment is happening. Tier 1 has been more or less dead to be very frankly speaking.

Mr. Agarwal, thank you so much for clearing the queries and let's hope with you, least a sale of around INR 200 crores and come back into profit.

I'm sure we'll do more than that.

The next question is from the line of Sanjay Dam from Old Bridge Capital.

Sir, I just thought -- just 1 question I had. At the end of FY '19, yes, that was a good year. So at the end of FY '19, the addressable space that we have in cranes and construction equipment, how large were those 2 segments, sir? The cutters are the...

If we talk of the numbers, I think cranes was close to about 9,000 to 10,000 units. They might be a little here and there. The cranes was close to about 9,000 to 10,000 units. And for construction equipment, it was close to about 40,000 units.

So if we convert it to the value that they would they would be what...

For cranes, it was a good year for us. And like I said, we did, I think, 62%, 63% market share in that year. So we would have done close to about 6,300 machines. So each multiplied by about INR 13 lakhs, INR 14 lakhs. So that is the size of crane. So crane market is about INR 1,300 crores to INR 1,400 crores, which was in 2019. And for the other side, you can multiply it by 17 or 18. So 18 x 4 is about INR 7,000 crores, INR 7,000 crores, INR 8,000 crores.

So INR 7,000 crores, INR 8,000 crores of construction equipment and INR 1,300 crores of cranes?

Yes, addressable because construction equipment market -- don't do excavators and all addressable, I mean where we are, what we are doing.

So roughly around INR 9,000 crores, INR 9,500 crores.

Yes. But in cranes I've forgotten 1 thing. You also need to put in place some crawler cranes, tower cranes and truck cranes and maybe this would be an additional INR 300 crore, INR 400 crores, INR 300 crores at least. So the crane segment, all types of cranes put together will go to maybe INR 1,600 crores, INR 1,700 crores, a little plus/minus, addressable.

Yes, addressable. So roughly, around say, all put together, cranes and construction equipment, about INR 10,000 crores.

Yes, INR 9,500 crores to INR 10,000 crores. Sorry, INR 9,000 crores to INR 9,500 crores, around INR 9,000 crores, yes.

Right. And the way we are positioned now, and I suppose we go back to -- I mean, we will go back to normalization at some point in time. So you keep on talking about launching new product lines and some new stuff. Would that expand the addressable space meaningfully or no?

Currently, what we are looking at whatever products we have brought in and what is in the pipeline, is to further improve, upgrade or add to the existing market, let's say, the addressable size and the revenue we were talking about. But yes, we are about to bring in maybe over the next 6, 7 months a different type of machine, which nobody manufactures in India. But there, I would say the addressable space is, as of now, put together old and new machines is about it's a INR 250 crores to INR 300 crores, which is currently being dealt by only by imports, I would say, 40%, 50% is new machines and balance would be about the used machines, which are coming into the country. So we are about to enter into that space, if everything goes well, within this financial year.

Next question is from the line of Arvind Joshi from Bateleur Advisors.

I had a few questions on some broad topics. I wanted to understand your reading on the Chinese impact on our portfolio. Currently, I think only our piling machines were coming from China, other than that, I think most of our portfolio is largely in-house, right?

Yes. Most of everything we do is done in India about 8, 10 months back, about a year back, whenever we had tied up with this -- 1 of the leading companies there to sell India because they are not manufactured in India. And apart from that, we don't do anything from China. We do have some imports here and there from China, but in the last 1.5, 2 months, we have already started working on alternates within India and some other countries.

Okay. So you see our product mix changing a little bit, considering the change opportunity in the landscape that now is so much wider with some import restrictions coming on Chinese products probably Sany and Liugong also coming under some pressure. Do you feel additional opportunities in the market? What's your call on the development?

Yes, definitely. See what China had done, for example, Sany or XCMG or Zoomlion, but especially Sany. So they were restructuring market. They had practically squeezed Tractors India Limited by bringing these truck trains at lower prices and offering 1 or 2-year credit, which obviously, Tractor India Limited in India cannot do. Because 1 year credit would mean 8% to 10%. So they have definitely started bringing and they have also entered into the big space structure in the last 1, 2 years. So I do see that there is definitely a negative sentiment in the market with respect to the Chinese products. And I cannot say with certainly that most of us will stick to that, but at least a 30%, 40%, 50% will not want to buy Chinese, even if they are restricted or not restricted, which is a sentiment I can already see, that's about 40%, 50%. So this will definitely add some benefit to our truck train sales where we are in the inception stage, we just come out with the entire self-propelled range only about last year as CIL will benefit because of this. And see, Liugong has practically not been causing any harm to us if you talk as such. As they do sell some motor graders, and obviously, that will definitely go down. So obviously some benefit will come to us, some will go to Caterpillar or wherever. But yes, for the loader segment where Liugong did start to sell some numbers. I'm sure Tata and L&T equipment divisions will definitely gain on account of this.

Okay. Okay. Okay. And also, there has been talk of manufacturing capacities migrating to other locations like India where some Chinese people might want to come to in the European or Americans might want to get it manufactured in Asia, considering learning now that we have gone through and also the large capacities that we now have. Are there any likelihood chances of that materializing into some serious tie-ups for us to manufacture for the world?

I'm sure opportunities like this will crop up, and there already are 1 or 2 in the pipeline here and there, which time will only tell. But rather than complete equipment, which I feel because see already most of the multinationals of the world in construction equipment segment, whether it is Komatsu, whether it is Kobelco, whether it is Hitachi, these are all in India, or whether it is Caterpillar. Most of them are already in India. But 1 thing is for sure that definitely for higher-end machines and excavators and lot of other things, a lot of components were still being imported from China, because of the cost parity. And to be very frank with you, in the last 1.5, 2 months when we have started relooking at the component that we import, which started 5, 10 years back, looking at the cost or, let's say, the quality advantage or whatever that was there, we're very surprised that now they are not as competitive as they were versus 7, 8 years back. And then will continue past from Malaysia and even from Europe, they're ready to manage the cost.

And what about our domestic capabilities, matching costs and matching quality?

Domestic capability is even better. We've actually found some of them to be cheaper and better quality in India which we are not looking out for the last 3, 4 years.

Okay. Okay. Okay. And my other question was on the Swadeshi or Atmanirbhar Bharat and all that we've been talking. So in that context, how does our defense footprint place us? We had some ancillary work to do for defense. So any chances of setting or extending the footprint on that?

Yes. In the last 5, 6 years, we have been trying and doing a lot of things and also spending a lot of money into R&D and developing machine here and there for the army. But fortunately, unfortunately, the system and the procurement processes and way litigations are in our country, it was a very slow process. And somebody would get in with some litigation at the last year when you're getting the order or something. But I'm sure things will improve quite a lot. And only in the last one, 1.5 months, we've seen under -- I'm forgetting what the army call us, emergency procurement type of provision they have. I am forgetting the technical word for that, under which they want to buy cranes, all of a sudden and types of cranes, which are they never buying earlier because now they realize that they need equipment to be there at site and not just planning for it for 10 years and then not buy it. So yes, definitely, things have started moving. Let's hope, it also translates into actual business as soon as possible.

Okay. And my last question was, you have almost all the top contractors as your customers. How do you see the change in the mood over the last 2, 3 months, especially with government being a little easy in giving the payment, NHAI being very liberal in the payments, the income tax refunds are started coming. Do you see a slightly more upbeat mood for them to add to their equipment banks or the machinery banks or general upbeat attitude improving a little bit? Or do you feel concern about the overall ambience?

We work with everybody. So I would say, there are 2 types, healthy and unhealthy. Healthy have always been bullish and were quite okay. Unhealthy are the way they were. Unhealthy are slow ones. But what I see is definitely leading out hardcore road construction companies, which are still continuing to do a reasonable amount of work. And I'm sure you will not see quite a dip in their revenues. But all other EPC companies or infra company, they are still working at 40% to 60% levels. Because of labor -- this migrant labor problem and this monsoon, which was obviously going to start July onwards. They have more or less delayed and postponed some or most of their sites till post monsoon.

No, labor issues apart, there was a major issue that payments were not coming. So do you get a feel that the payment cycle has started improving in their favor because the...

I think it has started to normalize and NHAI, especially in roads and all that, taking a lot of pain to make sure that the payments are released. Yes, that has definitely started improving.

So that should provide some kind of a tailwind to us also?

Yes, it will definitely. And I think that post September or within September, things will also start to improve further. As a lot of sites which are currently on hold will start to function, either because of labor or because of monsoon. So what they've done is they've clubbed it. Labor was less and the monsoon, in any case, the work is slow. So they have just forgotten those sites for 3, 4 months, which will now start again in September and October, mainly in December.

[Operator Instructions] Next question is from the line of Pradeep Shetty from Axis Bank Capital Limited.

My question is regarding your dependency on China. So we are quite dependent on China as of now. So looking to the current situation, are we having some alternative for that?

See, we are not quite dependent on China. I do not know from where you get that conception. We do import certain components and certain things from China, which -- for which definitely throughout the world and even in India, there are alternates. We are already working on it. And hopefully, by October, November, whatever small, big components maybe to the tune of 4%, 5%, 6% of the thing, which we might be getting from there. And so 70, 80% of them will be delivered from our list to get from China. So we -- the work is already in process. We are not dependent on China. I mean that's a misconception.

[Operator Instructions] The next question is from the line of Sandesh Shetty from Phillip Capital.

Sir, in the earlier -- 1 of the earlier quarters, you have said about multi-activity crane. So looking at the improved sentiment, do you foresee any improvement in demand for this multi-activity crane in the coming time, say, 6 to 12 months?

Yes pre COVID in the 2 quarters, definitely traction was there on the multi-activity crane. This still continues to be. But obviously, everything is slow. So that is also a little slow. They are game-changing cranes, they will change the way we use cranes and work with cranes in India eventually. So I'm sure going forward, as things start to normalize, which we have seen that already in this current quarter will be definitely better than last quarter than quarter 3 should be at least 70%, 80%, if not more. So things will start to improve. Even for those cranes, for everything rather.

The next question is from the line of [ Yash Tanna ], an individual investor.

We spoke about consolidation in the crane segment once, where we said that only 4 to 5 unorganized players now? So where are we on that? And are we gaining more market share there?

See, there are basically 2 big players. We do about 60% to 63% market share. And be very frank with you, we have taken it up to 65%, 66% in the last 4 months. And there are 2 to 3 small unorganized players, they hardly do anything. So I'm sure 1 or 2 of them will get knocked out. They did not check during this slow time because they're actually doing very little numbers and with that smaller business, very difficult to survive. So I mean, all put together will be 2%, 3% of the market. So I think that's not a pain at all.

[Operator Instructions] As there are no further questions, I now hand the conference over to the management for closing comments.

Yes. Like we said that this quarter definitely seems to be -- we seem to be getting some grip on the things, and we're looking at a 65%, 70% revenue as compared to our earlier quarters. And it can only better from here, the way we see it. And definitely, in time construction activity is going to gain more traction once the monsoons are done. And hopefully, quarter 3 will be even better as compared to quarter 2. And we are trying to do all our best to ensure that the company remains in black. Last quarter, it was practically impossible, we did whatever best we could to avoid it, but the revenue was so less and on the market was so less coming at, we could not do anything. And that's it. And on a whole year basis, we will be in black to be able to do a 6%, 7% at EBITDA level also, that's what we foresee. And that's it, I think. Let's hope the country gets well, the economy gets well as soon as possible and all of us have happy faces. That's it. Thank you. Thanks a lot.

Thank you, everybody.

Thank you. Ladies and gentlemen, on behalf of Emkay Global Financial Services, that concludes this conference. Thank you all for joining us and you may now disconnect your lines.