Midcap mania: Action construction equipment expects to improve margin on the basis of increase in price

From the highs of February 2018, the stock has halved owing to various headwinds such as the company's inclusion in the additional surveillance measures (ASM) framework in mid-2018, feared slowdown in Infra space and a disappointing Q2FY19 on the margin front.

The company has exited the ASM list recently and a closer look at the results say that the margin miss is due to a couple of provisions in the profit and loss account as well as higher input costs.

The management is expecting a strong H2FY19 as the margins will move to 9-10 percent in FY19 because of the price hike coming into effect. It also increased the production capacity of cranes by 50 percent to approximately 11,000 to 12,000 units. It also expected to end the year with debt of around Rs 40 crore from the current Rs 100 crore.

The financials have also been steadily improving. Although on a trailing basis the stock is trading at more than 24x. However, looking at the strong growth in H1FY19 and a good showing in H2FY19 will help ACE to end the FY19 with a net profit of Rs 70 crore. Hence, the stock will trade at approximately 18x its forward earnings.

The visibility for FY19 is fairly good but the company may face a host of challenges in FY20 as it has a high dependence on the infrastructure space.  The infrastructure space is likely to slow down due to the crisis in nonbanking financial space. The general election may also affect ACE's growth prospects.

If the negatives do not play out then FY20e PAT (profit after tax) could come in at Rs 90 crore which makes the stock attractive but risks do exists and need to be taken note of.