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

So I'm saying is the EBITDA level or, let's say, EBIT in the construction equipment business should start to reach 7%, 8%, 9%.

Okay. That's encouraging, again. Okay. Sir, that's it on my side. I would just request you to give the machinery sales numbers?

Yes, Mr. Luthra will do that. Luthra, sir.

Yes. The numbers are for this quarter cranes is -- our Pick-n-Carry crane 891; mobile tower crane 6, fixed tower cranes 42; crawler cranes 4 numbers, tractors, I've already told, 589; backhoe loader 104; forklift 266, 11 compactors; 3 graders; 7 truck-mounted cranes; 66 harvesters; 308 rotavators; and 4 piling rigs.

The next question is from the line of Rajiv Maheshwari from Praj Investments.

Congratulations on a good set of numbers, considering the environment which we were in the last quarter.

Thanks a lot. As I said, we could have done 10%, 15% or even more than that. We just could not do it because everything was running on low inventory.

Yes, yes. I understand. In fact, in the last call, based on the percentage, I had asked you, whether we'll be able to cross INR 200 crores. So you had told me, it will be more than that. In fact, even I didn't expect it to reach INR 260 crores, considering what went on in the March and April and May. So good to see...

We have started thinking we can cross INR 300 crores, but we were not able to...

Yes. In fact, as you told, there were some supply chain concerns. So I think -- and the number which you have given that we make as the last year sale. So I did a calculation, sir. It's coming in the range of INR 325 crores to INR 350 crores, fingers crossed.

So for -- you're talking quarter 3?

I'm talking for quarter 3 and quarter 4, both.

Quarter 3, it definitely seems we will definitely exceed -- Luthra, sir, what is our last quarter 3 number last year?

Last year, in quarter 3, we did INR 289 crores.

I think, if everything goes well, we will exceed it by 20%, 25%.

And it's good to see you are sounding much more bullish this time after a long, long time, maybe 2, 3, 4 quarters. So it's really good...

Post-COVID, we just didn't know what will happen...

It was quite uncertain. Nobody was clear [Foreign Language]. But it's really a good effort from your side. The only concern is like you told that because of the supply chain concern, we had an impact. So what was the impact on sales? And did we carry forward those sales? Or we lost on it? Or how was it like?

See, we lost at least 10% to 15% revenue in the last quarter on account of supply chain. So this revenue could easily, we have been looking like INR 300 crores. And there were 2, 3 main big suppliers from where we got trouble. One of them was a [ Sundaram Group ] company and other was a big hydraulic suppliers, our cylinder supplier in [indiscernible]. And another was an engine. So we have not totally overcome the problem. Still a supply chain problem and disruption, with these 3, 4 main components was happening within October also. But yes, it is coming into control, and it is on an improvement trend. So we are very confident by end of November, middle of December, it will be solved, and we will be able to achieve the revenue, which I've forecasted.

So basically, going forward, we don't expect a fall in sales because had we got this 10%, 15%, result would have been much, much more better than what it's right now? So hopefully, yes...

And as a policy in our company, we only get stuck once. We don't get stuck in the same problem again and again. So we'll definitely come out of it.

Okay. Right. So that's a good part. And where do you see this momentum coming from right now, suddenly the increase in the sales in the other 3 sections, like the metal handling and tractors and all? So what exactly has changed suddenly that things are picking up in these areas? Because in some areas, we have shown maybe a 30%, 40%, 50% increase compared to last year.

See, basically, the segments we work in, primarily, it is the construction sector. And then definitely, the heavy engineering and the industrial sector, which uses a lot of cranes and metal handling. And then because of our tractors and harvesters, the agri sector. The construction sector definitely was, like I had mentioned in my last call also, that because of heavy monsoons and longer monsoons, and the migrant labor problem or the labor shortage, a lot of these projects were sort of just turned out for 2, 3 months. And what to be restarted in September, October, once the rains finish and the labor might start to return. That was the anticipation. And that is what has happened. So most of the construction projects of the companies, which were on a slow mode or practically shut off for 2, 3 months, let's say, June, July, August or for some companies, even May, June, July, August, so those came onboard and the construction activity has sort of normalized and regained. Industrial activity, very surprisingly, has really, even I was caught unaware the way it bounced back in the last 2, 3 months. And the basic reason behind that, I really [ cannot ] answer because the industrial activity has increased more or less all across.

We, even in the steel companies have raised their prices, suddenly the car sales have picked up. So suddenly, it's -- as if nothing had happened in last quarter. It's looking like that.

The industrial activity has generally picked up and a lot of cranes are required right from handling of steel in every cycle, whether it is the iron ore mine or whether it is the plants or further the rolling mills or the stock yards or transportation. So it has helped. Cars and automotive and scooters, I think, has more to do with -- obviously people will prefer more personal mobility than being on public transportation. But it has helped everything all around it, yes.

Yes, it has helped the entire industry, of course. The one final part is in the last call, there was some discussion in terms of the small player in the Pick-n-Carry cranes would be literally left with nothing. So are the only 2 dominant players, ourselves, ACE, and other competitors, are they [indiscernible] 2 players? Or still, we see the smaller players eating into the shares? Or how is it like, the market scenario?

I would say 95%, 96%, 97% of the market is between [indiscernible] and ACE. Obviously, we are a dominant player. And there are 2, 3, 4 others. Sometimes there are 2, sometimes there are 3, 4. They just keep on waking up and sleeping. There are 2, 3 players who have been a little active with the 2%, 3%, 4% market share. Obviously, they are still existing. So they have not been knocked out as of now. Let us [indiscernible]. It's very difficult for me to answer that question. But they remain to continue -- they continue to remain where they were.

Okay. Right. And the one final question. How is the export scenario after the COVID in terms of the exports to the African countries or the South Asian countries?

I think it has resumed already. And last year, we did close to about a 6% revenue from exports, and we are hoping to take it to 8%, 10% and then finally to 15%, 20% going forward in the year. So I think we are on track to take our revenue to 7%, 8% within this year. It appears to me like that.

Next question is from the line of Naresh Katariya from MoneyCurves Investment.

Congratulations. I wanted to ask on margins. I heard that you are looking at potentially much better margins, close to double digit. What are the levers which will come into play? Is it just volume growth? Or are you seeing better pricing? What exactly -- how do we read this very, very positive statement on margins?

Yes. See, it is a combination of a lot of factors. I think primarily the margins depend on the selling price and the raw material cost. Because the steel prices have gone up, and accordingly, we have increased our selling prices to some extent in the month from November 1 onwards, and going forward from January, we'll further increase our prices to set up the material cost aspect. So that takes care of that. And on the contrary, we are very hopeful that our operating leverage with our numbers going up, that will definitely contribute to our margin expansion. Apart from -- because of COVID, the various cost control measures that have been put in place and whatever we've been able to do and whatever we see we can do further. I'm sure that 1.5% to 2% expansion in margins on account of cost control, which we have been able to do, which might be a little more going forward. That is definitely in place, and operating leverage will further bring in margin expansion. So that actually gives us a lot of confidence that we should be -- I'm as sure as I can that quarter 3, quarter 4 would be double-digit margins at EBITDA level. And we just might be able to do it on a whole year basis also.

Very good, sir. That's nice to know. And my last question is on dividend distribution. I see that we've been distributing 10%, 11%. So with better times, could we look at -- and our debt levels are also quite comfortable. Would we be looking at slightly better distribution?

I'm sure. I'm sure. And as a matter of fact, we've been distributing with the policy of distributing at least 30%, 40% of the money that we can every year. So I'm sure with the profit margin increasing and the availability of cash of [ R&D ] company, and yes, our reducing debt levels. Unfortunately, March seemed to be a little higher just because our working capital was put in a mess. Definitely, with time, our dividend yield or dividend will ultimately be going up.

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

Sir, 2 questions. One is, in the last call, you were kind enough to explain how big the crane market is, the addressable space for us and what was the construction machinery market. And I recall you saying that the crane market was about INR 1,700 crores, INR 1,800 crores and then the construction market was kind of about INR 8,500 crores, INR 9,000 crores types. So going by the addressable space, do you think that we'll catch up with, at least, we'll address the larger space in the construction equipment? Revenue will kind of do justice to the -- our revenues will do justice to the opportunity size?

I am as sure as I can be now. And I will answer your question again in 2 parts; a, with respect to cranes; and b, with respect to construction equipment. In cranes, we are already in a majority market share, and I'm sure we'll continue to work hard to increase it. But with reference to a lot of virtual meetings and discussions, which I have had with some of the key players with respect to construction in friendly countries, the impression that some of them have really senior people who are also well connected in the circuit with respect to what is happening, what is not happening. That -- one of them told me that you just might see one of your best years next year. So that gives me confidence that the crane market will further expand. It has to with growth, with infrastructure, with activity, with economic activity, with mechanization happening. The only problem with our country has been that I do not know what happens every 1 or 2 or 3 years, something happens and then the thing goes down and then catches up, then it goes down, then it catches up. So -- and this time, when revival has started happening, December onwards, unfortunately Corona caught up. This is the statement which I got from one of the leading players that -- not from one, 2,3 of them that next year could be one of your best years so far because of the amount of traction they are seeing in the construction activity and the crane market size accordingly will have to expand. This is the first part. Second part, with respect to construction equipment, we have been struggling and toiling for so many years. And that too, I can very confidently tell you that, for the first time, even in my own heart, I have got the confidence that we can go anywhere, not just somewhere. We can go anywhere. We have already started heading in the right direction. And God willing, that -- I used to say that there is a potential to grow 70%, 80% every year on a CAGR basis, next 5, 7 years with respect to our construction equipment business. And for the first time, I'm fully confident that we are on the right track, and it just might happen. Whether it happens or does not happen, obviously, you'll know, I know. But we will do justice to the construction equipment space, the size and the quantum available with respect to our company. I'm very confident.

Yes, because, sir, you've got -- I mean, in the INR 1,700 crores space, you've got a 60% share or thereabouts, right? So unless we do kind of in INR 10,000 crores -- INR 7,000 crores, INR 8,000 crores, INR 9,000 crores...

[Foreign Language]

So just putting back, I mean, I'll just extend what you just said, that this INR 9,000 crores become INR 12,000 crores. And we could do INR 2,000 crores, INR 2,500 crores out of that.

Over the next 3 to 5 years, yes.

3 to 5 year, whatever. I mean I'm just saying that year-after-year, we are kind of seeing our dominant share in cranes being there, but we've kind of not been reaching anywhere in the construction space. So [Foreign Language] so would you be kind enough to kind of break this up into the opportunities which are there? And what are the things that we could address?

[Foreign Language] that was primarily with respect to our addressable market space, which was backhoe loaders.

That would be how big, sir?

And soil compactors. So which with the market size is about INR 8,000 crores, INR 9,000 crores, which eventually, with time, will go to INR 10,000 crores and INR 12,000 crores. That's what it looks like. So [Foreign Language] I would say, the majority of the portion is backhoe loader. And yes, there are motor graders maybe worth about INR 400 crores, INR 500 crores, INR 600 crores and soil compactors maybe worth about another INR 800 crores, INR 1,000 crores. So [Foreign Language] And the balance is backhoe loaders. So I think we will be going into both of these spaces and taking a 10%, 20% market share in both of these places. So I mean it looks doable. It will not happen in, like I said, in this year or the next year. But over the next 3 to 5 years, it will happen. We have already been able to position ourselves, get acceptability, come over the obstacles, improve the machines, do whatever that needed to be done, and we are already at some level and acceptance. And from here on, I'm sure it will continue to increase.

Next question is from the line of Aadil Khan from ICICI Direct.

Congratulations on a stellar set of numbers. Sir, I had just 2 questions. The first one being that the last quarter, we talked about the launch of new product. So that product had a market size of around INR 300 crores to INR 400 crores. So what is the outlook in the second half of the year for that, sir?

We wanted to come out with that product within this year. And as of now, we are on track. So if everything goes well, we should be bringing it around sometime in February, March. So the actual effect of some sales and revenue and profitability increasing would be coming in next year only because February, March, sometimes we're able to bring around that product. So we are on track, and we'll bring it this year. So I mean, yes, the addition to our bottom line, top line will start happening only next year.

Sure. And sir, what will be your outlook on debt position for FY '21, sir?

See our position before COVID was very simple that we need to go debt-free as soon as possible. And if you look at the trend for the last 4 or 5 years, we've been able to steadily reduce our debt, which has primarily been our working capital short term. And end of March, we were left at INR 81 crores. So if everything goes well, I think we should be able to get INR 50 crores, INR 60 crores by end of this year or even better. Because of this disruption and our working capital getting disrupted for nearly 3, 4 months, so we might not be able to bring it down more than that, but I think we should be down to INR 50 crores, INR 60 crores level. Am I right, Luthra, sir?

That's right, sir.

That's what we're planning. Right.

[Operator Instructions] The next question is from the line of Bharat Parekh from CLSA.

Hello? Can you hear me?

Yes, I can hear you, loud and clear.

Sir, congratulations, I must say, that you are one of the few managements in the construction stock equipment space which has given such a positive commentary. So I must say, so congratulations on that. But sorry to dig deeper, but having seen this space for a decade, what I observed right now on the ground, sir, is that except for one [indiscernible] based construction company, average order backlog of all the construction companies, including the largest company in India, is actually running negative right now. While we appreciate that things will bounce back from a low base, but until order backlog starts to grow because they already have a construction equipment right now, so which is that subsegment, sir, which you see is sort of in a bullish? Because we talk to all the industrial companies, while volumes are back, but CapEx is on freeze as far as FY '21 is concerned. It's not cut by 20%, 30%. So sorry, I don't want to make you negative. I'm just trying to understand, sir, better in terms of real feel from the ground, which you get better than us, in terms of where do you see this positive delta coming from, as a sectoral perspective? And secondly, if you can give us a perspective that was your base low last year that we are having such a robust growth right now in October? But first question will be really helpful to get your perspective, sir?

Yes. See, what is happening that if you talk about the construction sector, it is broken up into a lot many things, whether it's roads, metro, bullet train, urban infra, ports, xyz. If you look at the recent changes in the tendering norm, which has been done by the road ministry, wherein they are allowing even smaller players with a slightly lower revenue base. And I'm sure you would have read that article.

Yes.

So see, the market, with respect to infra development and construction, even the government doesn't want, should be controlled by 4, 5, 6, 10 fewer people, rather, smaller companies, who has the potential to become bigger, should also be able to play in the infra story should also get work. Otherwise, it is limited to 5, 10, 15 players bidding or getting a tender, and creating a backlog or increasing their size or because the size has grown too big because of the inefficiency delaying the project? Or do you understand what I'm saying?

Yes.

So maybe the order book of the bigger companies might not increase. But you also have to understand that a lot of middle-sized companies are companies which are on the verge of being called bigger construction infra companies are on the verge of getting more orders now and in future. So that is the first commission, I would say, with respect to what you just said. Apart from that, if you look at the construction activity with respect to metro, it is practically starting in every big city. It has already started or happening. And once it starts, it's only going to increase, increase and increase because just putting 1 or 2 lines or 1 or 2 phases, metro network can really work or be completed. And projects like your bullet train which is now merely under award and the actual need of urban or civic infra in the very cities where all of us stay, I really don't know whether you're from Bombay or from Chennai or Bangalore, or let's say, Tier 2, Tier 3. So the scope has been immense. A lot of things have been happening in the last 10, 12 years. Fortunately, unfortunately, the speed at which they were happening and the speed at which they were required to be developed to cater to the actual requirement, there was a lag. The requirement was increasing faster than what the creation was. In any case, the base of the creation of the infra was already lagging, yes. The biggest question mark, which is going to come is from where all this will be funded. So that is one question, I think, don't have an answer to. If that question, the government is able to answer whether it is -- whether the private play coming in, whether getting money at lower cost of, for example, that like the bullet train project, getting funding from or the dedicated freight corridor, getting in funding from countries with lower or very less interest cost. So that is one question I really can't answer. But yes, with respect to the potential, I think, is enormous. That is all I can tell you. But another thing which I just said, our country is basically unpredictable. And if things seem to be coming back -- coming on track, then they get derailed. This time, the derailment was more to do with COVID. After even though IL&FS debacle and 1, 1.5 years of slowness or where things were getting back on track, December, January onwards and then COVID happened. Again, they seem to be coming back on track. So that is something which is definitely much beyond our control, influence. We just have to bear with it. And if you talk of -- yes, definitely, last year was a little slowing year for most of the equipment manufacturers and same was for others. And we did degrow a little in the last year post IL&FS and then the market slowing down and then the elections and whatever, whatever. So yes, the base was definitely a little smaller last year. So that's why you will see that we did INR 268 crores same quarter last year, same quarter this year. So that is also reason that you might see some growth, but I really don't know how quickly, how fast, how bigger the infra, construction or the industrial landscape will grow in our country. Another thing with respect to our company, especially, there are about 60% of our revenue -- I'm talking about infra and -- sorry, infra industrial breakup. 60% of -- let's say our crane business comes from the infra side and balance comes from the industrial or heavy engineering or general manufacturing at large. So right now, we are seeing traction on both the ends. And good monsoons and everything, and India is primarily an agriculture-based economy with respect to the size or the contribution agriculture has in our economy and our population. So we are in all the 3 segments. And if the country grows, we grow. So yes, if somebody believes that the country will not grow and then we'll start to languish sometime or will just taper off, then obviously, we will also taper off. I'm very frank. But yes, if somebody can bet on India, then I'm sure we are more or less in most of the hardcore plays.

So great. So that's really helpful. Sir, secondly, wanted your perspective that there is a big narrative on currently making India and [Foreign Language] and a lot of focus on that. Can you help us understand was the imported equipment, especially from China was a threat at all in your business? And you'll see some action on the ground in terms of government tenders coming out with making India as a sort of prerequisite and stuff like that? How do you see? Is it still a narrative? Or you see reality on the ground?

See, unfortunately, while answering my last question, I think I should have covered this as well. But if you asked it. With respect to supply chain, China, with respect to small, big components and even fully finished machines, not only construction equipment, but most of everything was taken to the world and even to the biggest of the companies globally. One thing is for sure, which I'm seeing, feeling and let's say, a couple of our vendors and our -- my friends rather who are in the automotive space or, let's say, component space, they -- because most of the people globally are looking for an alternate supply chain to at least a 30% to 50% extent, which needs to move away from China. So that's a fantastic opportunity for India. And like I said, talking to some people who are really big in these spaces and who also supply a little to us and some of them are friends, they are already seeing this, hearing this. And they are on the verge of deciding whether to expand more or not with respect to CapEx or capacities. So that is one thing for sure, which is happening. So coming to the second part of your question, Chinese equipment companies did establish a decent amount of presence in India, especially in the bigger segment of machines like the bigger crawler cranes or the bigger tower cranes or the bigger truck cranes. And they -- unfortunately, Indian companies are at a slight disadvantage because the cost of money they get through Hong Kong. So they've been able to offer 1- or 2-year credit period for these bigger machines, and there was really no player in the country. But yes, in the past, in the last 1, 1.5 years, we've developed a series of cranes to compete with the bigger truck cranes. We have now tower cranes which are even bigger competing with the Chinese. So wherein we are selling more than the Chinese now in our cranes. In the smaller tower crane business, Chinese used to exist from 2004, 2003 onwards. We sort of overtook them by 2010, '11. And today, we have about a 65%, 70% market share in tower cranes. And the Chinese for the smaller models are nearly out. But they continue to exist in the bigger models where the quantities were less in our country, and they were being imported. So we have also become reasonably dominant there as well with our bigger range of tower cranes. So yes, China has been there -- is there. And for how long and -- now let's say for bigger crawler cranes, so we are about to make a bigger machine, which will be around 160 tonne. But yes, there is requirement of 250 tonnes and 600 tonnes, there's nobody doing in India. And obviously, the Chinese are much more cost-effective as compared to the Japanese or the Europeans. So that space will still be open to them. In bits and pieces, spaces will be open to them, which are not being catered by anybody in the country. But as soon as somebody starts to cater that space in the country with reasonable quality and a good price, things start to roll back, which we have seen in the past and I'm sure will happen again.

Great. And really, so nice of you to answer this candidly, and wish you best of luck. And hopefully, your optimism sustains, and we'll see even better numbers from you, and I wish you best of luck.

Thanks a lot. I hope my optimism remains [ interesting ].

As there are no further questions, I now hand the conference over to the management for closing remarks. Over to you.

Yes. Like we discussed, we have been lucky enough to do a similar revenue as compared to last year, which was slightly beyond our expectation. And the economic activity and the momentum, it seems, is nearly at the same level where we left it pre COVID where the situation appeared to be a growth situation. So our order booking, our order flow, everything seems to be well on track. I just hope and pray this momentum continues and countries able to fight off COVID as soon as possible and maybe the vaccine might be out in January, February, that's what I hear. So let's hope and pray that all of us are able to fight off COVID and come back to economic normalcy and then grow from thereon. And definitely, we are looking at maybe touching our last year's revenue, even though the first quarter was a total washout. So I feel in a way that is growth happening in the company. And let's see where we are able to go from there. Thank you.

Thank you, everybody.

Thank you very much. Ladies and gentlemen, on behalf of Emkay Global Financial Services Limited, that concludes today's conference call. Thank you all for joining us, and you may now disconnect your lines.