SANGHVI MOVERS LTD : MOVING AHEAD !!!

Scrip Code: 530073 / SANGHVIMOV

CMP:  Rs. 220.70; Market Cap: Rs. 955.63 Cr; 52 Week High/Low: Rs. 376.00 / Rs. 197.00. Total Shares: 4,32,88,000 shares; Promoters : 2,02,95,129 shares –46.88 %; Total Public holding : 2,29,92,871 shares – 53.12 %; Book Value: Rs. 173.22; Face Value: Rs. 2.00; EPS: Rs. 23.98; Dividend: 150.00 % ; P/E: 9.20 times; Ind. P/E: 24.76; EV/EBITDA: 4.29 times. Total Debt: Rs. 607.02 Cr; Enterprise Value: Rs. 1,548. 18 Cr.

SANGHVI MOVERS LTD: The Company was founded on November 3, 1989 and is based in Pune, India. Sanghvi Movers Limited operates as a crane rental services company. It’s a major player in Equipment rental & leasing sector in India and other parts of Asia. It provides heavy lift, plant erection and maintenance services for various large scale projects. The company gave last split in the face value of its shares from Rs. 10 to Rs. 2 on 29 May 2007 and has not announced any bonus so far. The company also offers over dimensional, heavy, and bulk cargo transportation services. It operates a fleet of 400 medium to large size hydraulic truck mounted telescopic and lattice boom cranes and crawler cranes with lifting capacity ranging from 20 MT to 800 MT; and 132 hydraulic multi axle modular trailers. In addition, the company also engages in the generation of power from windmills. It primarily serves power, cement, steel, refinery, metros, windmill, and metal sectors. The Company operates in two business segments: Operations of Cranes and Power Generation. It earns regular revenue from the business of power generation from windmills commissioned in Jaisalmer, Rajasthan and Chitradurga, Karnataka. The Company's clients include ACC Ltd, BGR Energy Systems Ltd, Birla Corporation Ltd, Electrosteels Ltd, Furnace Fabrica (India) Ltd, Jindal Steel & Power Ltd, Leitner Shriram Mfg Ltd, Neelachal ISPAT Nigam Ltd, Suzlon, Aditya Birla Group, TOYO, BHEL, Reliance, Vedanta Group, Siemens, Tata Steel, Enron power, Samsung and Gujarat Ambuja. Sanghvi Movers ltd is locally compared with Crown lifters, Sancia Global infrastructure Ltd, globally compared with Nippon Pallet Pool Company Ltd of Japan, Han Kook Capital Company Ltd of South Korea and with Nippan Rental Company Ltd of Japan.

Investment Rationale:

Sanghvi Movers is the 3rd largest crane services company in Asia and ranked seventh largest in the world. The company has a robust fleet of over 400 cranes, majority of which are above the 100 tonne category. Sanghvi Movers has an overall market share of about 45 % and more than 80 % market share in the 100 tonnes and above category. The company undertakes the implementation of turnkey projects and caters to 75 % of the traditional power sector and 65 % of the windmill sector’s crane requirement. The company has Crawler and truck mounted cranes and also has Hydraulic Multi Axle Modular Trailer. The company claims to have 98 % guaranteed machine availability with a timely deployment. The company has its owned state of the art Sanghvi Training Academy which provides high skills crane training programmes and produces highly skilled crane operators. Sanghvi Movers has 12 depots across the country to ensure timely deployment of cranes. The performance of the Sanghvi is dependent on the Indian Economy, more particularly investments in infrastructure and core sector of the economy both by private as well as public sector undertakings. According to the provisional estimates released by the Ministry of Statistics, the Annual growth rate for financial year 2014-15 of Gross Domestic Product (GDP) was seen to improve to 7.3 % as against 4.9 % in the previous year. It is projected to reach 8 % growth rate in the next fiscal year (2015-16), soon it is also expected that the India's growth rate will outpace that of China, Japan and Germany combined as projected by International Monetary Fund (IMF). Control on price rise continued and remarkable downfall in inflation was noted, with wholesale price index (WPI) falling at five year low of 0.11 in December 2014 in contrast to 6.40 in December 2013. The Central Government's emphasis on the renewable energy more particularly on wind power generation and solar energy will bound to increase the demand for the crane rental business. In view of the increased investments in the renewable energy sector and upcoming projects in refinery and gas, cement, power and steel sector, the company expects increase in demand and rental for the cranes. Sanghvi Movers Limited has been providing heavy lift, plant erection and maintenance services to various large scale projects. The Company has maintained a good track record in terms of effective deployment of cranes at competitive rates with due regard to time schedule as well as safety and efficiency in operations. The growth of crane rental business is constrained due to higher capital cost may result in availability of suitable cranes as per market demand. There is a concern for safety of cranes at work sites. The introduction of GST may result into simplified tax regime. The Company's operations may get affected on account of increase in competition in crane hiring business, delay in receivables. The Company has concentrated its fleet of cranes more on heavy duty cranes i.e. cranes above 100 Tons. At present more than 90 % of gross block of cranes is in 100 MT & above. Obviously, more than 90 % of the Company's turnover is contributed by higher tonnage cranes. The current order book position for the company stands at Rs. 250 Cr and the company is expecting that the fleet utilization would be around 80-82 % during H2FY17E. It has planned for capex to the tune of Rs. 189.2 Cr during FY17E and has placed a purchase order for import of 5 Nos. New Terex Cranes with Capacity of 650 MT, some Derrick attachments and boom inserts for cranes. These cranes have been bought under trade in agreement with Terex Global GmbH which will buy 5 Nos. used Terex Demag CC 2400-1 Cranes from the company at an aggregate value of Rs. 53.33 Cr. Hence, the net capex for Cranes and allied attachments would be around Rs. 136 Cr. In addition to this, the company has already bought office premises in BKC, Mumbai for a sum of Rs. 17 Cr. Hence, the total capex for FY17E would be Rs. 153 Cr. Company’s 2QFY17 financial performance was impacted by the seasonal spillover caused on account of the de-hiring of cranes getting pushed to 2QFY17. While this impacted the utilisation rates at 66 % in 2QFY17 vs. 79 % in 1QFY17, the gross block yields remained stable at 2.77 % vs. 2.80 % for 1QFY17. With a residual order book position of Rs. 2.5 bn for the next 6 months and already receiving work orders for its new +650MT, it is expected that Sanghvi mover’s fleet utilisation rates will improve to 82 % to 83 % in 2HFY17, with its gross block yields remaining healthy at 2.75 % 2.80 %. Despite the 1HFY17 disappointment, the management continues to see good traction in the wind power space and expects a conservative 3,500-4,000MW of wind asset creation over FY17-19E. Additionally, it is also optimistic about pick-up in ordering activity from the thermal power space. Despite the tepid financial performance it is expected that Sanghvi movers to report FCF of Rs. 2.2bn in FY19E. With no major capex plans, company plans to utilise the cash generated from operations to retire its debt, which would consequently lead to interest cost saving. Company will repay Rs. 3.3 bn of debt over FY17-19E. Incrementally, company could also reward its shareholders in the form of higher dividends or share buybacks.

Outlook and Valuation:

Sanghvi Movers has a near monopolistic position in the high tonnage crane rental market in India. Company is a great proxy play to the improvement in Indian Infrastructure industry. Sanghvi Movers Limited is the Largest Crane Hiring Company in India and 6^th Largest in the World, as per rankings from Cranes International. The company is led by a strong entrepreneur C. Sanghvi and his professional team, company has been able to maintain its competitive advantages. Company has its Economic Moat (A competitive advantage that one company has over the other companies in the same industry – by Warren Buffett) expanding moats which is a very strong sign of a future Multi-bagger stock. Logistics is responsible for all the movement that takes place within the organization whether it is inbound logistics of incoming, raw materials or movement within the company or the physical distribution of finished goods, logistics encompasses all of these. A typical logistics framework mainly consists of physical supply, internal operations and physical distribution of goods and services. To put it more simple manner, the material supply logistics starts from the base level of “generation of the demand”, through the “process of purchase” and “supply of material from the vendor” right through to “final acceptance” and “payments to the supplier” and “issue to the indenter” and has to be considered as a “one whole activity” with each stage having an impact on price/cost of material supply. Logistics is, in itself, a system; it is a network of related activities with the purpose of managing the orderly flow of material and personnel within the logistics channel. On financial side, Sanghvi reported revenue growth of 7.5 % registering Rs. 249.7 Cr during H1FY17 compared to H1FY16 of Rs. 232.2 Cr. Wind Mill continued to be the major revenue contributor and stood at 63 % followed by power at 15 %, refinery & gas at 11 %, Steel & metal at 4 %, Cement at 2 % & Others at 5 %. EBITDA stood at Rs. 153.2 Cr in H1FY17 compared to Rs. 151.4 Cr in H1FY16, with EBITDA margins at 61.4 % in H1FY17 a drop of -3.84 % when compared to 65.2 % in H1FY16. The drop in EBITDA margins was mainly on account of increased freight & carrier charges during H1FY17. Increase in other income for H1FY17 includes gain of Rs. 1.5 Cr on investment in equity shares of Suzlon Energy Limited. It also includes a sum of Rs. 1.9 Cr towards the interest received on GJ RTO Tax refund and a sum of Rs. 70 lakhs towards profit on 3 cranes sold during the six months. PAT for H1FY17 stood at Rs. 37.8 Cr compared to Rs. 45.00 Cr in H1FY16 witnessing a drop in the PAT margins from 15.1 % in H1FY17 by 4.26 % compared to 19.4 % in H1FY16. With a capped capex cycle, mostly in the wind power space, which would drive SGM’s tepid revenue CAGR of around 6.6 % over FY16-19E, Utilisation rates and average yields on gross block to remain between 75 % to 78 % and 2.75 % to 2.85 % over FY17-19E, Improving Net Working Capital cycle from 265 days in FY14 to 108 in FY18E, Strong FCF generation of Rs. 2.2bn in FY19E, which will largely be utilised towards debt repayment and FCF yield of 19.3 % in FY19E Sanghvi movers can gain premium in valuation. Also with increasing focus on optimum utilsation, strong working capital management and ace promoter acumen, Sanghvi Movers is well positioned to withstand any cyclical slowdown in the crane hiring business. At the current market price of Rs. 220.70, the stock is trading at a PE of 7.11 x FY17E and 6.14 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 31.00 in FY17E and Rs. 35.90 in FY18E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.  

KEY FINANCIALS	FY15	FY16	FY17E	FY18E
SALES (₹ Crs)	308.20	531.50	628.00	676.60
NET PROFIT (₹ Cr)	8.10	116.90	134.10	155.20
EPS (₹)	1.90	27.00	31.00	35.90
PE (x)	146.50	10.60	7.10	6.10
P/BV (x)	1.80	1.60	1.10	0.90
EV/EBITDA (x)	8.30	5.20	3.60	3.20
ROE (%)	1.20	16.70	16.60	16.50
ROCE (%)	2.20	12.90	12.60	12.90

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