Rationale

The reaffirmation of ratings continues to take into consideration Action Construction Equipment's (ACE) well-established market position in the construction equipment sector, especially in the crane and forklift segments and its strong financial profile characterised by comfortable liquidity position and healthy credit metrics. ACE's strong business profile is supported by a well-diversified portfolio spanning applications in infrastructure, industrial and agriculture sectors. The company's presence in the infrastructure sector is especially strong and it is a market leader in the mobile and fixed tower crane segment. In this segment, the company has approximately 60% market share, which is supported by the well-established ACE brand, wide product offerings, frequent product innovations and cost competitive products. Besides its market leading position in the cranes segment, the company is the third largest player in the material handling segment. The rating factors in its strong financial profile backed by healthy credit indicators and surplus liquidity. In FY2019, the company's interest coverage indicator improved to 8.5x from 7.0x in FY2018, whereas its DSCR improved to 3.4x from 2.4x in FY2018. The gearing ratio remained strong at 0.1x and its TOL to TNW ratio remained flat at 1.0x. Although the credit indicators are expected to weaken in FY2020 because of lower earnings on the back of demand contraction and higher inventory levels leading to higher dependence on working capital borrowings, ICRA expects an improvement over the medium term aided by scaling up of the company's operations and higher profitability. The financial profile is supported by liquid investments of Rs. 14.4 crore (as on September 30, 2019) and moderate working capital utilisation. Moreover, the company's capital expenditure requirements remain moderate due to adequate capacity in place. These strengths are, however, partially offset by ACE's exposure to cyclicality in the construction equipment (CE) industry, the ongoing slowdown in the CE and tractor industries at present and stiff competition from established foreign and domestic players. In line with subdued economic activity in infrastructure and industrial sectors, ACE's revenues declined by 17.5% in H1 FY2020 on a YoY basis. However, its profitability margins improved marginally to 7.5% in H1 FY2020 (7.3% in FY2019), despite a decline of 17.5% in the revenues. This was aided by price hikes taken by the company across its portfolio in Q4 FY2019, softening of the steel prices as well as the launch of its new NX series multi-activity crane, which is a higher margin product. Nevertheless, ACE's profit margins lag some of its peers because some of its products like backhoe loaders and tractors are priced at a discount compared to the market leader in the respective segments. The Stable outlook on the long-term rating reflects ICRA's opinion that ACE will continue to maintain its strong financial profile over the near term, despite the slowdown in the industry, supported by its modest debt repayment obligations and capex requirements. Moreover, ICRA believes the company will continue to maintain its strong market share in the cranes and forklift segments, aided by its well-established brand and frequent product innovations.