Riding on the infrastructure boom

PENNY WISE

Sanghvi Movers is well prepared to cash in on the opportunities of growing Indian economy, though valuations are slightly on higher side.

The government focus on infrastructure development has facilitated huge investments in infrastructural and core industries like steel, cement, oil and gas, construction, power projects etc in order to fuel the growth rate.

However even these industries need infrastructural support for their own operations. Here is where the role of the companies like Sanghvi Movers (SML) comes into picture. This 16 year old Pune based crane hiring company is a one stop shop for all the requirements of companies in the infrastructure segment.

Leading player in cranes

Sanghvi is the largest crane hiring company in India and the fourth largest in Asia. It was recently ranked twenty-Fourth in the world by Cranes International, an international crane magazine.

Besides, it also provides an entire range of services like movement of materials, erection of equipment, assistance in fabrication apart from engineering services.

SML owns a fleet of about 200 medium to large size Hydraulic and Crawler Cranes with lifting capacity ranging from 20 Tons to 800 Tons. It is planning to add some more cranes worth Rs 160 crore by FY06. In fact its has already spent about Rs 80 crores in H1FY06 by adding about 45-50 cranes.

The company imports second hand machines from OEM manufacturers like Liebhrr of Germany and Demarg in Europe.

Analyst Sachin Abhyankar of Motilal Oswal Securities says "The reduction of import duty to 35 per cent currently from 70 per cent a few years back has benefitted the company". According to him, there is a shortage of cranes worldwide which could a lesser number of cranes for the company, especially with China buying in large numbers".

In order to cater to the needs of its clients, save cost and time involved in mobilisation of its crane and facilitate quicker maintenance, SML has set up its own depots and workshops at various locations like Bharuch, Gujarat, Nagpur, Chennai and Pune. It further proposes to set up about 10 - 15 different depots across the country. Wide range of customers.

Currently wind mills contribute about 35-40 per cent of total revenues from cranes with Suzlon being the biggest contributor. The company also caters to other industry behemoths like ONGC, Gail, Jindal, Bhel, L&T (ECC group), Reliance Industries, Gujarat Ambuja, Aban Lloyd etc.

Higher contribution of wind mills in crane hiring augurs well for the company as India is supposed to be the fastest growing market for wind power.

Rising energy costs, greater environmental regulation and thrust on renewable energy is driving investment of wind power in India. Also wider clientele base in various industries is expected to benefit the company as it is well protected from any downturn of any particular industry.

Analysts are optimistic about the growth prospects of the company's business considering the buoyant trends and massive investments plans of the core sector.

For example setting up of steel plants by world's leading steel companies like POSCO and Mittal steel in Orissa is expected to drive demand for cranes. Though large companies like L&T, Reliance, BHEL also own some cranes, their future growth plans and the worldwide shortage of cranes has made the demand for the SML's services imperative.

However analysts caution about the risks associated with the company's business. Most importantly, the company's revenues are highly dependent on the economic development and the timely commencement of capital expansion programmes of its customers.

This means that as long as the economy is booming and capital expenditure plans are here to stay, there is demand for the company's services. If the projects announced by the company's customers are delayed, it is expected to lead to slower-than-expected revenue growth.

Impressive financials

The company's sales and net profits recorded a CAGR of 34 per cent and 508 per cent in FY01-FY05 respectively. By the first half of FY06 itself, the company has achieved 82 per cent of net sales achieved in FY05 and net profit has even surpassed the profit achieved in the whole of FY05.

According to Abhyankar, the company is expected to report sales growth of about 50 per cent each in next two years looking at the current capex boom and company's scale of operations. 
 

FINANCIALS
In Rs crore	Q2FY06	Q2FY05	%change	H1FY06
Net sales	34.53	15.76	119.10	62.25
Operating profit	22.53	9.82	129.40	39.79
OPM (%)	65.20	62.30		63.90
Net profit	6.89	2.95	133.60	11.15
NPM (%)	19.95	18.72		17.90
Trailing P/E		14.40	-	-

The company funds most of its cranes through debt due to capital intensive nature of the business led by low assets turnover. Thus its debt-equity ratio is over one as on March 2005.

Reasonable valuations

At Rs 415, the stock trades at a trailing price earnings multiple of about 17 times. At the current market price, it trades at a P/BV of about 5 times FY05. Its closest competitor ABG Heavy industries trades at a trailing price to earnings multiple of 18 times and price to book value of 1.9 times as on FY05.

However, if the earnings growth rate as expected by analysts is anything to go by and the margins remain at the same level of Q2FY06, the stock is expected to trade at forward price earnings multiple of 14.1 times and 9.4 times in FY06E and FY07E respectively.

Analysts feel that the company's valuations are slightly on the higher side and expect a modest appreciation from current market price.