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

Ladies and gentlemen, good day, and welcome to the Action Construction Equipment Limited Q1 FY '22 Earnings Conference Call, hosted by Motilal Oswal Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nilesh Bhaiya from Motilal Oswal.

Thank you, and over to you, sir. Thank you, Inba. Welcome to the first quarter FY '22 Earnings Conference Call of Action Construction Equipment Limited, representing the management we have Mr. Sorab Agrawal, the Executive Director; Mr. Rajan Luthra, the CFO of the company; and Mr. Vyom Agarwal, the Head IR May I request the management for the opening remarks on the latest quarter financials, post which we will open the forum for question and answers. Over to you, sir.

Yes. Good afternoon. I am Sorab Agarwal, and welcome, everyone, to this earnings conference call for discussing the results for this quarter ended 30th June, '21. I do hope that you and your loved ones are keeping safe and getting vaccinated. We at ACE have facilitated vaccination of all our employees and dealer personnel to ensure safety against the pandemic. On behalf of ACE, I would like to express our gratitude to all the frontline workers who have stood up against adversities to help keep others safe. I would also like to thank every member of the ACE family for their relentless commitment and dedication in these difficult and trying times. Along with me in today's earnings con call, we have our CFO, Mr. Rajan Luthra; and our Head of Investor Relations, Mr. Vyom Agarwal. I hope that all of you have had the opportunity to look at the company's financial statements and the earnings presentation, which has been circulated and uploaded at the stock exchanges. We started the financial year on the back of a strong momentum generated in the second half of last year. Consumer sentiment were improving and the economy was on path to recovery. However, in April '21, COVID struck again with a more virulent and deadlier form in the second wave. The spread of infections was much faster this time with significantly higher fatalities recorded. The pace of transmission puts pressure on health care system across the country. Unlike the national lockdown announced last year, this time around, we witnessed regional local lockdowns in order to curtail the rising infections. And as you are aware, historically, the first quarter is seasonally slower for our sector. And on top of that, it was further impacted due to COVID-19. So accordingly sales in April started slowing down considerably and the month of May was severally impacted, both for sales as well as from supply chain point of view since a large part of the country was under localized lockdowns. This time, the virus spread into the rural hinterlands. Notwithstanding this, rural continues to remain resilient with a decent start to the monsoon. Urban markets that showed signs of recovery in the last year also impacted severely, but as the restrictions lifted progressively in the month of June, the demand scenario started to bounce back again. Recovery in the month of June led us to post a decent set of numbers even in adversity. Our numbers are not only better than Q1 of last year, but also reasonably better than second quarter, that is September 2020 in terms of both top line and bottom line. To brief you on the first quarter of FY '22, the operational revenues grew by 213% on a year-on-year basis to INR 324 crores, with an EBITDA margin of 10.1%. The EBITDA during the quarter increased to INR 32.6 crores in comparison to INR 2.4 crores on a yearly basis. The PBT and net profit grew to INR 26.4 crores in INR 19.31 crores against a small loss of INR 4.3 crores and INR 4.22 crores during the same period last year. Our current PBT and PAT margins stand at 8.2% and 6%, respectively. It is important to note that despite the headwinds, the company achieved its highest ever EBITDA and PAT margin, both in absolute and percentage terms for the first quarter ever due to sustained focus on cost efficiencies and better product mix. On the operational side, export sales witnessed a growth of 47% quarter-on-quarter and 260% on a year-on-year basis, contributing to 9% of our overall revenue for the quarter. In the crane segment, we reiterated our dominant market leadership position with a year-on-year revenue growth of 346% to INR 223 crores with a margin of 11.2%. In Construction Equipment segment, we clocked sales of INR 37 crores, registering a year-on-year growth of 104%. In material handling segment, there has been a 330% growth in revenue on a year-on-year basis. to INR 33 crores, while maintaining an EBIT margin of 11.6%. In the agri segment, too, the company recorded a revenue of INR 30 crores, which is close to 16% growth on a year-on-year basis. In the quarter gone by, we upgraded our cranes and construction equipment to BS IV CEV norms, thereby, increasing the fuel efficiencies and environmental friendliness of our machines. This shift towards CEV Stage IV regime will further help us in opening additional international markets over the years to come. Second wave of COVID has brought into focus the unpredictable times we live in. It tested the resilience of our business, flexibility of our operations and depth of our financial strength. Our 3 growth fundamentals, right product, right price and right aftersales and service support have helped us remain close to our customers. Our customer-oriented approach and deep penetration helped us to navigate the crisis well and come out stronger. Today, our supply chain has become more agile and resilient we have debottlenecked our production lines, made them more flexible to quickly adapt to the changing requirements should there be a surge in demand. Steel, which is our biggest input material, remained volatile and at elevated levels with further increase in prices during the last quarter. And we continue to look for all levers like savings, judicious and calibrated pricing whilst maintaining right growth equation to protect our business model. Our focus remains on driving volume-led competitive growth, with right balance on pricing. We will continue to dynamically manage our EBITDA margins broadly in the existing range, owing to the carnage caused by steel prices and the inflationary pressures. The macro picture suggests that India has taken the second COVID wave in its stride. Looking at the resilience and the state of our country, the economic activity has returned by mid-July. We feel that business should start to normalize in the second quarter, and we are looking forward to at least a 15% to 20% growth in business revenue in the current year, which is a slight upgrade from 10% to 15% we had conveyed earlier, with sustained EBITDA margins. We are very hopeful that the cranes and steel market will further bounce back meaningfully post August '21 on account of receding monsoons and are reasonably sure that the short-term turbulence is already behind us. We are confident about the medium- to long-term prospects of the company. We are expecting a growth of 15% in the crane segment for the current year and a 25% growth across our other 3 business segments, that is construction equipment, metal handling and agri. We hope that we are in a position to revise these projections by end of second quarter, which will predominantly depend upon the progress of current and future COVID waves across the country. With this, I would like to open the call for question-and-answer session. Thank you.

[Operator Instructions] Our first question is from the line of Raj Mehta from Raj Mehta and Associates.

Sir, congratulations for the very good set of numbers. Sir, in last quarter, if you remember as the question with respect to your export. Last year, export was around 6%, and now it went up to 9% in this quarter. You gave us the target to reach 8% for the entire year. And internally, you are also aiming to get at 15% to 20%. So what was the trigger that allowed you to grow your export order? Was it the new product which you launched a few months back, especially for export market picked up?

So I think it was a combination of 2 things. Definitely, the new products have now been floated in the market and sales have started happening. And apart from that, there was an order -- a special order we received from Bangladesh for export of a certain type of crane, which immediately caused get up -- But we are very confident that on a whole year basis, we should be able to attain our 7%, 8% or maybe a little more than that with respect to export contributing to our revenue.

Okay. Sir, but a follow-up on that is that you tend your margins tend to be higher on export compared to domestic. And you mentioned in your presentation that you achieved highest ever Q1 EBITDA and PAT margin. So when I compare your segment results, you achieve around 11% to 11.5% in the your cranes and handling segment? And on steel, it was roughly around 5% and on agri roughly around 7%. And overall, you did a margin of 10%. So then how is that highest ever? Is it -- what I'm missing here is that it is for the quarter 1 or because your last quarter was around 12.32%. It got degrew by -- it came back to 10%. So what is that I'm missing? You said that it is the highest ever EBITDA margin.

Highest ever EBITDA margin for quarter 1 results. So in terms of percentage, our EBITDA margin above 10% and our PBT margin of around 8%, 8.2% is the highest ever margins we have done for quarter 1 results in terms of percentage and also in terms of the quantum. So we have never ever before done INR 32.6 crores in EBITDA profitability ever and similarly in PBT. So this is our best ever.

So you're giving a guidance of maintaining this 12%, which was there last year to be maintained in current year also or on an overall basis?

We are trying our level best. And I think it can be anywhere between 11% to 12% because steel prices and commodity and inflationary pressures are playing havoc. We are definitely trying to neutralize them wherever possible even by price increases. Even in the end of June, we have done a substantial price increase. So the first came in October, then it came in January, then in April because of steel and especially because of BS IV transition. And again, we have done a price increase in June. So we are trying to set it off, but steel prices are unabated and they are still at about INR 65 a kg with respect to HR. So let's hope. If the steel prices sustain at current levels, then definitely doing between, let's say, 11% to 12% should be possible. Yes, if this continue to increase further because we have really increased our prices for products in the last 6 to 8 months. We are already on top. I mean ...

Yes, last quarter also, you told that you increase you were just not increasing because the consumer sentiment was not good at that time, so you increased at the end of the June.

Yes, the prices have come to such a level that we did face resistance in the month of July from the customers because they have significantly increased. We have had 3, 4 meaningful price increases in the last 8, 9 months. So I think We are on track to do 11%, 11.5% for sure. And yes, if steel prices do not play spoil sport, we can be touching 12 or more than that. That time will tell.

Okay. And sir, I would like to appreciate the guidance you gave in last con call, where you said you will do by 40% to 50%, and you exactly deliver on that. So my second question is with respect to your thinking to raise equity of INR 175 crores. So can you mention the reason for the same, because you have been talking to various investors like Malabar fund. So is that they want to invest into companies and they don't want to buy from open market and they are requesting you to do QIP?

No, it is not with respect to any particular fund. See our -- depending -- our intention for raising funds from the market is very clear that we want to cut down on the process of filing time whatever is required to days point and be ready to hit the market anytime over the next 6 months, 1 year because we keep on getting opportunities for inorganic growth and also to safeguard ourselves a little against the volatility, which comes because of COVID and raise some funds for general corporate purposes. So keeping that in mind, we have -- because our AGM was due to be held in early September so we have gone for these approvals. And we shall be exercising this over the next -- at an opportune time over the next 1 year. Whenever we feel that the price and the opportunity to use the -- use the money for growth is right, so accordingly -- and it's not dependent on any particular fund that's why we are doing at QIP.

Sir, 1 small recommendation. Since you have always very good on corporate governance. So I would always request you that whatever meetings would do with various investors, which you often publish in BSC and NSC, if you can possibly can record those meetings or a phone call and provide the link into it so that retail investor like me can understand your business more deeply. So because you do not publish unsensitive information to them. So it will be much more transparent way with your minority shareholders also. So if you can take that as a recommendation.

Yes, I'm sure Luthra Sahab is taking notes of what your input is -- And Luthra Sahab, if the guidelines are that the regulations allow us, we can do it.

And sir, last question, if I can squeeze in. Sir, your current capacity utilization, if you can provide in all the 4 things?

Obviously, we have been grossly underutilized in the last quarter. So currently, with respect to cranes, we are working -- I mean, in the last quarter, especially in the month of June, we are working only 45%, 50%. Construction equipment about 30%, material Handling, 70%, 75% and agriculture about 35% to 40% utilization.

Sir, the same utilization is in Q4 also in material handling and equipment. So you have not -- because you gave a guidance in Q4 that you might degrow almost by 50% of your capacity also, but you are almost doing the same in materials and agri. So what is that change in the outlook like?

Material handling and equipment is primarily forklifts and warehousing equipment. And for some good reason, we did not see a dip there because I would say the broader economy or the logistics part was still continuing to work in the country. And rather, if there is a shortage of labor, so mechanization increases. So I think that's the reason we were able -- we really did not degrow in our material handling business.

Excuse me, Mr. Mehta, may we request you to return to the queue, please. There are several participants waiting for their turn. [Operator Instructions] We'll take a next question from the line of Sanjay Satpathy from Ana.

Congratulations on second -- for a good set of Q1, because after quarter 4 results we felt that you pretty attentive about the outlook. So what I want to know is that compared to the kind of guidance that we had given at the end of Q4. Are you in a position to increase guidance now? And the second thing is that you are obviously present in several segments and I clearly see you're doing much better in the material handling segment. Is there any particular reason which you can ask right there?

To answer the first part of your question, earlier we were giving a guidance of about 10% to 15% growth in revenue and maintaining EBITDA margins close to -- in between 11% to 12%. Yes, I can say that still, it is a little too early because we are in the middle of monsoons and unfortunately, half of the country is flooded. Credit when I say there is this excess water and especially all the infra site and construction and this part of the activity nearly comes to a standstill. But still, we feel that we should be able to grow 15% to 20% within this year. It can be faster than that, but the exact guidance, I think, middle/end of September would be the right thing on August end when the monsoons have receded and then we can get a much clearer picture. So I would say, currently, it would stand at 15% to 20% growth for the current year and EBITDA margin varying between 11% to 12%. And if you talk about segment-wise, I think we should be looking at a 15% growth in cranes followed by a 25% growth in all 3 other segments, whether it is material handling, construction equipment or your agriculture segment of ours. With respect to MHE -- Material Handling, I think the business, over the years, last 12, 13 years has matured enough that now it has become self-sustaining. And our philosophy of right product, right price, and right service, which is what a customer wants, has played out very well. And I feel that it shall continue to grow with all our efforts and the maturity that has been built up in the business in the last 10, 12 years ever since inception of this line for us. So that is the thing why it is growing and will continue to grow. Rather, we are continuing to increase our market share here and there and bits and pieces in this business.

If I can just ask last question. I mean you have announced this fundraising of INR 175 crores, and it's still not clear exactly what will be the utilization. And also couple of months back, promoters sold some sales to certain funds. So basically -- I mean we've not been able to kind of understand where really -- what really is the driving factor for this decision?

Like I said, and I will be very frank with you, we are very clear of the utilization. It's just that it has not been conveyed in that fashion. Primarily, these funds are going to be used for some inorganic growth opportunities, which we are already seeing. And obviously, we'll raise funds depending on that opportunity, how it fortifies in the future. And maybe some INR 40 crores, INR 50 crores here or there for general corporate purposes or to retire the debt, that is our aim.

[Operator Instructions] Our next question is from the line of Naga Raja Rao from Sun Corporate Financial.

I'd like to congratulate you on another good quarter. These days, wherever we go in India, we see newer equipment and especially cranes and construction equipment. Of course, material handling and agri are interior so we cannot see them. I just want to understand now you are in not only construction but you are into material handling and agri equipment. Is there any plan to change the name of the company to reflect overall business of the company than construction alone? #1. #2, at the moment, you are only in Haryana, any plans to go -- I know you told that we have enough capacity at the present location, but still any other plans to go pan-India and to say South up from there.

Yes. See, with respect to name change to be very frank with you, we have really not thought about it. Yes, we are called Action Construction Equipment, so that more reflects on print construction equipment. And to some extent, I would say MHE can be included in it. But yes, construction equipment is not synonymous with agriculture. But in any case, as a company, we have principally decided that we will subsidize our agri business, take it into a subsidiary. Already, we are starting to think on that to bring in more focus in that business and to capture onto the growth potential of that business. With respect to expanding in our manufacturing or set up to other parts, we already have capacities in place. And for whatever revenue we've been doing, nearly double of that we can attain from the capacities. So as of now, there is no such plan in the mind. But I'm sure that when further capacity expansion needs to happen, we would definitely be looking at Central India or South India to save on the logistics costs.

We'll take a next question from the line of Nilesh Bhaiya from Motilal Oswal.

Sir, I had a couple of questions. The first question is about the gross margins. I think you mentioned in your opening remarks or 1 of the answers to 1 of the participants that steel prices and all these commodity prices are moving here and there. So they are -- you have not... So I just wanted to understand that discussing with your clients, what is the response from the clients that are you able to pass on the input cost pressure to them? Or they are also reluctant to take equipment as of now? How are you looking at the ground level situation as of now?

See, obviously, whenever there is a price increase, there is reluctance. So even when we buy steel and whether it is Essar Steel, which is now, I think, ArcelorMittal or Tata Steel or Steel Authority of India, we also offer a lot of resistance when they increase prices abruptly. And because steel is one of our main input material and more or less most of the commodities and similar things have gone up in costing. So customers -- our customers also do show a lot of resistance with price increase. And like I mentioned earlier, in October, November, we increased in January than April, and again, in the end of June, we had to increase. So -- and the price increase has been substantial, anywhere between 20% to 30% now, depending on models, also putting in the BS IV factor, which is substantial. So after the last price increase, yes, we have seen a lot of resistance. And luckily for the customers, I would say that because July comparatively is a leaner month due to excessive monsoons than in most of the years. So they also get a breathing time. We also get a breathing time with respect to price to settle in. Because we've asked for a price increase. And obviously, they also know that their requirement is actually going to be there more or less in August or September. So the resistance and the negotiation in July were very hectic. Customers are not liking it, but all of them understand that it is because of steel. And so they understand it, but they are not willing to accept it, but eventually, they accept it. So I'm very sure -- it has already started happening in July -- in the second half of July and in August, it will be pushed in.

Okay. So taking out the seasonality factor out of the business, do you need to take more price hikes to offset the commodity price inflation? Or we have mostly taken the pricing as of now?

With the last price hike, which was close to up to about 8%, 9%, which we did in the end of June, I think we have taken care of most of everything with steel at the current prices. So with respect to the commodity or inflationary pressure, I don't think we need to take any more price increases, price hikes. I just need to push this 1 in smoothly, which has already started happening, and I'm sure within August, it will happen.

Sure. And sir, 1 from a business perspective, I mean, I just don't want near-term answer, but from a 3- to 5-year perspective, I think construction equipment, is there supposed to be the next big story for us where we can see a significant market share gain. That has been my understanding. So can you shed some light how you're reading the compatible intensity there? And are we on track to gain market share in the construction equipment business? And if you want to give a number how big that business can be, say 3 years down the right?

In the last 2 years, 2 to 3 years, rather, we have done all the right things in the construction equipment business and we are projecting growth of around 25% for that segment in the current year for us. But I'm sure it will be faster than that. Construction equipment, rather, I see would be the fastest out of all the segments. We have positioned our product well. The market acceptance is okay. We are now increasing our penetration and even our network with respect to these machines. So everything seems to be on place. I see that we should be looking at a 40% to 50% CAGR for this over the next 3 to 5 years with respect to construction equipment. So last year, we were in INR 133 crores. This year, we should be somewhere around INR 180 crores, INR 200 crores, then maybe say something close to INR 280 crores, INR 300 crores. So hopefully, maybe around, in 3 to 5 years, I would say, anywhere between INR 400 crores to INR 500 crores from INR 133 crores is what we are looking at for this business. It can be faster than this, but I think this will happen what I'm conveying to you. INR 400 crores to INR 500 crores, anywhere between 3 to 5, it can happen in 3 years. But definitely, in 5 years, it will happen. It can be bigger than that.

Okay. And I'm assuming that there's a lot of cross-selling, right, or your existing customers to whom you sell cranes are the same set of customers that you can market your construction business right?

There will be a reasonable amount of cross-selling between the sales teams as well as customers Yes. So that is the advantage we will get.

Sure. And then just 1 last question, if I may squeeze in. So I just wanted to understand from a cost structure perspective, if you can throw some light on how the employee cost is supposed to move in. So I'm assuming that if the -- there's a lot of operating leverage is there in the business, which if the top line grows, your -- I mean, there can be a lot of operating effect. So if you can throw some light, if you want to build on employee cost, et cetera, is that a -- is that an investment that you would need to do in your business? Or is it an operating manager?

Not really. See, most of our costs, and obviously, employee cost being one of the significant ones have already in place. So any increase in revenue, which is already in result in the current year and going forward at a much faster pace. This is only going to help us in providing us operating leverage and increasing our margins. Eventually, I think we will settle somewhere between 4.5%, 5% with respect to our employee costs. And if you talk about crane business, we are generally hovering around 3% to 4%. As a company, I think we are close to about 7%, 8%, if I'm not wrong. So going forward in the next 1, 1.5 years, this is only going to come down to around 5%, 6% and add to the operating devises because we are already more or less -- all the key positions, locations are taken care of, and we really need not be increasing employee cost on any part.

[Operator Instructions] We'll take a next question from the line of Sidhart Venkatesh, an individual investor.

Hello. I my name is Sidhart Venkatesh, I'm an individual investor. I have 3 or 4 questions for you. My first question is sales of agri equipment are declining every quarter. We are losing market share even in June 2021, our tractors sales were down 25% in volume compared to June 2020 sales. Every other tractor maker showed an increase. We were the only 1 with a decline -- Why are we performing so poorly in agri equipment? Will we met the guidance of 25% growth in FY '22 for agri equipment?

Sir, if you look at the numbers compared to last year, there is not a degrowth. There is a 16% growth. And I'm sure by end of this year, as conveyed about 25% growth we should be seeing. This also happened last year, and it will happen this year also because, again, all the loss links are in place. Yes, we did lose a little bit of sales in the last quarter, but that was primarily because you -- as compared to other bigger players, our network is smaller with respect to our dealers and locations. And because of COVID, unfortunately, a lot of our network got affected the selling network in the rural side. But yes, everything is back in place, and then you'll see the results in this quarter. I mean, this quarter onwards, like it happened last year as well.

Okay. Even for the other tractor makers, COVID was there, but all of them show an increase in the sale of the number of tractors. We are the only ones with a decline. Why does that happen?

Sir, I have explained to you my position. And I really do not know about other companies because we are working for our all is also -- let me finish. All I know is we did let me just answer that question for you. I mean if you want to jump on, it is very difficult for me to answer, right? And I want to answer if you want to listen. Do you want to listen?

Targeting sales of INR 2,000 crores in 2 to 3 years. It is possible... why should anyone buy our backhaul order. Are you targeting the lower end of the backhaul order market? Have you priced our backhaul orders to target the lower end of the market.

I'm sorry, Mr. Sidhart, I have muted your line. As sir as asking you something. We would request you to just limit your questions and once sir responds, maybe you can move out of the question queue.

And the name is Mr. Sidhart, right?

Yes, sir.

Sidhart, sir, if you want to make allegations, we are totally open to it. You can definitely call you on my landline separately, and we can have a long chat. But we are running our company. We have been running it successfully, and we'll continue to run it successfully, and we will grow our businesses. which is evident in the last year and the year before that. So with respect to agri, like I said, we'll grow by about 25% and construction equipment be faster than that. And we are catering to the entire sector, even the higher end, lower end everywhere. Thank you.

We'll take a next question from the line of Sri Dara from Paladin Capital.

Really amazed by your strong guidance I just wanted to clarify, you mentioned you upped your guidance from 10% to 15% to 15% to 20%, is that volume guidance or overall revenue guidance?

See, I would put it together. It keeps it considered it as a volume guidance or, let's say, revenue guidance. Yes, the prices have increased, so it will pitch in. So it can definitely be in terms of revenue being more than what I'm saying, but it will play out through the year. But as of now, I would say that you should consider it to be the revenue guidance.

Right. Because I think you mentioned you've taken several price increases and maybe in the last quarter or maybe these levels sustain. But given the price increases already versus the last year, the base is much higher. So if you're seeing 20% volume growth, then, of course, revenue growth will be much higher than that.

Yes, it's possible. definitely possible, and that's a safety fallback, which you have exposed.

And the second question I had was that you're planning this fund raise. And if I recall, you mentioned in the past that your utilization levels are still quite low, maybe 50%, 60%. So you certainly don't need this money to expand your capacity, and therefore, inorganic is the primary use for this sort of cash. So is that -- are you already in the process? Is something already on the table? How imminent is the transaction?

We have a couple of opportunities. And to be very frank, some keep on cropping of air and there, and we just let them go by. So that let us do this activity. Let us take the approvals, put them in place as it was happening. And as we see any of these things rectifying or coming close to it, we will just go ahead and raise money for that. I feel that the things should happen in this year, something should happen.

Okay. And sorry, could you just tell me how much debt do you have on the books at the moment?

Of as of now, we are utilizing about INR 124 crores of short-term borrowings.

That's right, sir.

It was around INR 31 crores end of March, so we are utilizing about INR 100 crores more than what we were utilizing 3 months back, primarily again because of some working capital requirements, which are out. Because we've -- our creditors have gone down by INR 100 crores, and our inventories have gone up by INR 30 or INR 40 crores. Primarily, we didn't want to be starved we learned from the last COVID that there's no point trying to control inventory at this juncture because the sale bounce is back. It was a conscious call, and that's why creditors have gone down and our inventory levels are slightly more than what they were because we have a little overstocked, which we wanted to be...

What I was going at is that -- So I'm just trying to understand because you're taking the pros of INR 100 crores, INR 175 crores of equity raise, but you could fund this acquisition using debt if you wanted to. So I was just wondering what the logic is?

Okay. We don't like that. That is the logic.

Fair enough.

We don't like that.