Rationale

 The upgrade in the long-term rating of Action Construction Equipment Ltd. (ACE) takes into consideration sustained improvement in its financial risk profile, aided by healthy cash accruals, infusion of ~Rs. 136 crore via a Qualified Institutional Placement (QIP), low capital expenditure, and pre-payment of long-term debt; the coverage indicators remain strong with the company having an interest coverage indicator of 11x (from 9.7x in FY2021) in 9M FY2022. ACE's financial profile is further supported by surplus cash and liquid investments (~Rs. 178.5 crore as of December 31, 2021) and buffer in the working capital facilities, against which it has nil long-term debt repayments and limited capex requirements. Going forward, ICRA expects the company's coverage metrics to continue to remain strong, aided by scale up of operations, comfortable profitability indicators and limited capex requirements. Even though the company's performance was impacted by the second wave of the Covid-19 and lockdown restrictions in April– May 2021, the demand rebounded subsequently, and the company has reported a healthy revenue growth of 45% to Rs. 1,119 crore in 9M FY2022. Further, its operating profit margin (OPM) remained comfortable at 9.3% in 9M FY2022 despite the increase in raw material prices, aided by better product mix, cost control measures and price hikes taken by the company during the year. While the company's earnings are expected to remain under pressure during Q4 FY2022 and Q1 FY2023 due to raw material price hardening and expected moderation in demand due to price hikes necessitated by the transition to CEV BS 4 norms, it is expected to continue to remain comfortable.