Joint Venture With KATO WORKS Will Improve Technology And Broaden Product Portfolio

Key Takeaways

• Increased infrastructure spending in India and strategic expansion efforts are expected to drive revenue growth and sustain long-term business expansion.
  
• Competitive advantages from anti-dumping duties, international sales boosts, and a joint venture with KATO WORKS could enhance market position and improve margins.
  
• Geopolitical tensions and trade wars, coupled with flat Agri segment growth and pending anti-dumping duties, threaten revenue stability and market share in India.

Catalysts

Manufactures and sells material handling and construction equipment primarily in India.

• The government of India's continued focus and increased allocation on infrastructure spending, as outlined in the recent union budget, is expected to drive demand for the company’s products, potentially increasing revenue.
  
• The company's plan to increase its manufacturing capacity to approximately ₹5,000 crores by the end of the current fiscal year and further expand this capacity could enable sustained revenue growth in the medium to long term.
  
• The expected introduction of anti-dumping duties on Chinese cranes could provide a competitive advantage and enhance revenue for the company by reducing price competition in the Indian market.
  
• Transitioning to CEV 5 emission norms and exploring export opportunities in mainland Europe and North America could boost international sales and possibly improve the margin profiles, contributing to increased earnings.
  
• The strategic joint venture with KATO WORKS is anticipated to enhance technology and broaden the product portfolio, which could lead to increased sales and improved net margins when products from this venture enter the market.

Action Construction Equipment Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Action Construction Equipment's revenue will grow by 18.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.2% today to 10.4% in 3 years time.
• Analysts expect earnings to reach ₹5.5 billion (and earnings per share of ₹46.18) by about February 2028, up from ₹3.9 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 50.9x on those 2028 earnings, up from 38.1x today. This future PE is greater than the current PE for the IN Machinery industry at 29.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.07%, as per the Simply Wall St company report.

Action Construction Equipment Future Earnings Per Share Growth

Risks

• There is a risk associated with the geopolitical tensions and trade wars, which could affect the company's export prospects and result in volatility in revenue targets.
  
• The company anticipates sticking to current EBITDA margins despite the potential for cost increases due to shifts to CEV 5 norms, which could pressure net margins.
  
• The current CapEx expenditure by the government has been reduced, which may slow down infrastructure projects that are critical to the company's demand and revenue growth forecasts.
  
• The company's revenue from the Agri segment might remain flat, which suggests limited growth potential and risks potential impacts on the overall revenue mix.
  
• The anticipated introduction of anti-dumping duties on Chinese imports is still pending, which creates uncertainty in the competitive landscape, consequently affecting profitability and market share stability in India.

Valuation

• The analysts have a consensus price target of ₹1582.5 for Action Construction Equipment based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹52.9 billion, earnings will come to ₹5.5 billion, and it would be trading on a PE ratio of 50.9x, assuming you use a discount rate of 14.1%.
  
• Given the current share price of ₹1247.25, the analyst price target of ₹1582.5 is 21.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.