Sanghvi Movers


(Siddharth Shukla) #1

I recently analyzed Sanghvi Movers at my Blog : http://thriftyinvestor.blogspot.com/2010/12/sanghvi-movers.html .

It appears to me to be Reasonably priced with good growth prospects. I invite views .

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Company Profile**

Sanghvi Movers Ltd. (SML), a flagship company of the Sanghvi Group,operating since 1989, is the largest crane hiring company in India, 3rd largest in Asia and 9th largest in the world . It has a fleet of 370 medium to large sized heavy duty hydraulic and crawler cranes with capacity ranging from 20 tons to 800 tons. The crane hiring business is the main business line for the company contributing around 99% of the turnover . The company also provides basic engineering and lift planning services along, as it helps in determining the time, labor, type of equipment required and flow of work.These cranes are used in the power, refineries, steel, cement and construction sectors, for purposes such as plant erection, heavy lifting and maintenance services.Lets take a closer look at the company to determine whether its worthy of an investment.

Strengths
Some of the Positives of Sanghvi Movers that come to my mind are :

  1. _Near monopoly in higher capacity cranes

___: SML focuses on the higher capacity cranes market, since the below 100 MT capacity segment has many players operating in it. SML has approximately 65% market share in the above 100-150 MT crane segment and approximately 80% market share in the above 250 MT crane segment.The margins get better with higher tonnage. The companyâs strategy is to deploy a majority of its cranes on a medium to long-term basis. This provides stability to earnings besides increasing utilization rates.
2. Pan India Presence : SML has a network of 10 depots, which are strategically located to enable it to have a pan India presence. These depots not only reduce costs but also save time spent in transporting cranes from the depot to the site. For transporting Cranes, the company has a fleet of in-house trailers constituting 45 Volvos (100MT) and 35 trailers of 25 MT- 35 MT to reduce dependence on outside transport services. This has enabled the company to reduce costs and save time involved in moving cranes from one location to another.
3. _Thrust on infrastructure to spur demand for cranes _: Cranes are an essential component for infrastructure building. With massive investments lined up both by the government and the private sector we can expect the company to benefit from the increased demand. Around 0.5-0.7% of infrastructure spending translates to crane hiring charges.Power, Refineries, Steel, cement and construction sectors are witnessing good growth and have lined up huge capex. This augurs well for the company.
4. Strong Client base & Sourcing : SMLâs clients are major players in their respective industries. Major clientele of the company under various industry segments include Suzlon,BHEL,Enercon,Reliance etc. SML sources cranes from major international players like Liebherr (Germany), Terex Demag (Germany), Manitowoc (USA), American crane & Hoist (USA), Kobelco (Japan), and Kato (Japan). The company has established relations with crane vendors around the world.
5. Aggressive ramp up in crane capacity : After having aggressively added to its capacity over the last couple of years (total capex of Rs. 896 cr over the last 5 years), SML had, in keeping with the slowing economy, cut down on its capex plans.However, with an improvement in the market, the company is expected to resume its aggressive Capex plans.** **

Risks

The Main Risks that Sanghvi Movers faces can be summarized as below:

  1. Customer Concentration : About 40% of the company’s revenue comes from the Power Sector & the top 5 clients account for a major chunk of the revenue. Although SML has been able to reduce this dependence by diversifying into Refineries, Cement & Construction, a loss of few main customers can hurt it.
  2. Debt & interest Rates : Being a capital-intensive industry, the company has funded a major part of its capex via the debt route and a significant hike in interest rates would have an adverse impact on its profitability. Increase in interest rates could impact the net profit margins of SML. The company has done well to bring down the D/E from 2.9 in 2006 to about 1 in 2010.
  3. Slowdown in economy : If the economy slows down , it may lead to curtailment in the capex plans of client companies or in execution which may may lead to a reduction in the utilization rate.In such a situation,one can expect Sanghvi Movers to take a considerable hit on its topline and bottomline. However the company does have some insularity to this due to its major customers being in the power sector as we saw in 2009.
  4. _Competition & Manpower _: Crane renting industry is an unorganized industry with a large number of players. The less than 100 MT capacity segment is highly competitive and there are large number of players. However, in the above 100 MT capacity segment, there are very few players. This is because cranes in this segment are expensive and need highly skilled manpower to operate and maintain.The company’s operations may get affected on account of increase in competition in Crane Hiring Business, shortage of trained operators, mechanics and engineers.
  5. FII Shareholding : SML has foreign shareholding of about 34%, which comprises of different institutional investors. These shareholders have been invested in the company for a considerable length of time, which reflects their confidence in SMLâs business. However, on the downside, there could be selling pressure when there is a sustained rise in price increasing the stockâs volatility.

Conclusion

Sanghvi Movers in my view is a proxy for the Infrastructure story that is to play out in our country.In the preceding boom in Infrastructure between 2003-2009 ,SML did well to grow its Topline ,Bottomline & improve margins. It would need to repeat that in the coming years while making sure it doesn’t take on too much Debt. With history on its side and a reasonable Valuation i believe Sanghvi Movers makes a good long term bet.

More Detailed Analysis at http://thriftyinvestor.blogspot.com/2010/12/sanghvi-movers.html


(Kiran) #2

Fantastic analysis.

Any which way I look at it, I think valuations appear reasonably cheap. I mean, forget ABL, I compared it with all other Engineering Turn Key service providers (Hindustan Dorr-Oliver and the lot) and yet this turns out to have the best operating margins, RoE and RoCE, along with other competitive advantages in the crane sector (especially high tonnage)

The question I have is, is it a value trap?

Yes, there is the Infrastructure story. Yes, Sanghvi movers has grown with the Infrastructure story. But if future growth is intrinsically tied to costs (typically, I would state it as the growth in revenue would almost equal the cost of growth) and Sanghvi needs to continually refurbish and buy new equipment, don’t you think the trigger is missing? Where will the value come from? How do you expand margins from here, if all they do is buy more cranes and supply to more locations?


(Kiran) #3

I meant, ABG Infralogistics instead of ABL*


(Siddharth Shukla) #4

Thanks a lot Kiran for the nice words .

I am glad someone agrees with me that there is value here, however i wouldn’t call it a value trap. It is not an outright cheap stock like say a cranes s/w or Koutons, i think those kind of situations qualify as value traps. With Sanghvi, what i really like is per se even though the business has low entry barriers(lower tonnage cranes) they have managed to carve a niche for themselves and build a competitive advantage and have grown very well with the economy. The concern here IMO is how they are going to balance leverage & growth in the future.

I don’t believe growth in revenue is equal to cost of growth,as u can see it has quite an impressive ROCE & its WACC is definitely lower than that. This is more of a growth at reduced price stock than a pure value play , so i believe growth it self is the trigger. You are right , SML continuously needs to buy cranes to grow and i guess thats part and parcel of a capital intensive business. However what separates them from other cash burning capital intensive businesses is the superior ROCE & margins arising out of competitive advantage. Sanghvi has excellent margins IMO & i don’t think there is need for much expansion. What they can definitely improve on is efficiency or utilization levels. India needs a lot of investment in Infrastructure in coming years & that will without doubt require a lot of cranes and i believe SML is well equipped to cash in on that.


(Kiran) #5

Thanks Siddharth. I think I understand your argument now, and I am tilting towards it.

I have one question though - what prevents the lower tonnage players to buy up higher tonnage cranes? (I mean, given the capital, of course). Why is this a moat? (Are higher tonnage cranes difficult to buy? Else, capacity build up is pretty easy, ain’t it, given the capital?)


(Siddharth Shukla) #6

Hi Kiran,

Sorry for the delay in replying. That is a good question, as per my understanding there are two difficulties in acquiring Higher Tonnage cranes:

1). The capital required is more and tough for the smaller players . However one may ask why don’t the big guns like Reliance get into it(there was actually a slight fear last year that they may get in but it didn’t materialize) (Reliance maintains its own fleet if cranes too) . The reason is, the crane cost constitutes less than 1% of total cost of infrastructure projects and hence it would be too less for them to play for.

2). The delivery time for such crane sis close to 2 years, so the entrant has to be ahead of the curve to really threaten sanghvi. Also unlike in lower tonnage cranes 2nd hand cranes are almost 85-90% of cost of the new cranes further deterring new entrants.

Other than this Sanghvi also has an advantage in terms of having about 10 depots around the country and its own fleet of volvo trailers for transportation. The transportation of these higher tonnage cranes is a big deal and new entrants may need to set up the needed infrastructure to threaten sanghvi.


(Hitesh Patel) #7

Just looking at the results posted by the company.

Company has shown good topline growth but bottomline has shown pressure. Still the company managed to clock EPS of around 20 per share.

In q4 fy 11 also company has clocked good growth but margins seem to be under pressure. Operating expenses have gone up from 10 to around 24 crores on sales of 85 vs 104 crores. I dont get what operating expense entail.

Does it include fuel expenses, transportation charges etc? And has the company got any pass through clauses for higher expenses?

I think the punishment meted out to the stock is out of proportion to the fall in margins and investment at cmp of 120 and on subsequent declines might give good returns.

Views invited.


(Siddharth Shukla) #8

HI Hitesh,

I haven’t been able to devote much time to investing in recent times, so i can’t say about the Q4 results(i shall look into it & let u know). I totally agree that the stock has been punished unfairly. The whole Infra sector has been out of favor. I think Sanghvi makes a good bet to tap into the Infra story over the long term. However in an Interest rate rising scenario, due to the debt load, the bottom line can take a hit. We have to see how the next few Qs & FYs pan out. I am confident the company will do well in the long run.


#9

Hi Sidharth,

I was looking over your report on Sangavi Movers and find to be framed very nicely.But the thing i was looking is the growthprospectswhich look to be quite slow the main concerns which looks to me are:

1.The debt level of the company which is Quite high at some 500 Cr level,good % of profit is eaten as a interest cost.

In recent interview by management they are planning to decrease this debt level, Now i have one doubt like how they will decrease the debt level either by fundor through internalaccruals in both the cases the Annual profitability will be bitten.

2). Can you point some point on theutilizationcapacity of the company.

3). Recently they have expanded cans capacity by deploying some 50 Cr , why they haven’t use this money to reduce the debt level?

Please help me little to understand this stock.

Regards,

Vishal


(Hitesh Patel) #10

Good results in difficult times by sanghvi movers.

Q4 results

120 crores sales for q4 fy 12 vs 104 cr for q4 fy 11.

net profit 24.66 cr for q4 fy 12 vs 21.72 cr for q4 fy 12.

for full yr, sales at 448 crores for fy 12 vs 359 cr for fy 11

and net profits at 101 crores vs 86 cr.

EPS at 23.51 crores.

Total debt at around 350 crores as on March 12. With enterprise value at around 820 crores, this company generates cash flow from operations of around 140 crores avg in last three years.

Book value of 146 and here it is important bcos assets are in the form of cranes.

Seems very attractive at cmp of around 108-110. views invited.

I think the stock suffers from the general apathy towards infra sector.


(Ayush Mittal) #11

Yes, I agree. This has been a high quality stock and seems cheap at these levels. We should dig more into it


(Dhwanil Desai) #12

I was tracking Sanghvi movers till 2011, however i sold it off at marginal loss due to Very agressive expansion ( buying new cranes) in increasingly competitive environment from ABG infra, Reliance Port (they have lots of cranes lying idle post refinery expansion) and local players which significantly reduced yields for SML. Moreover, this higher expansion was funded through leveraging balance sheet significantly. SML’s capacity utilization was constantly declining from 90% to 80% due to slow down in the economy and increased competition.I thought, management was over optimistic for the kind of capex they had done. SML has strong moat as operating large cranes successfully requires considerable skill, experience and engineering expertise. It is very difficult to replicate the know-how gained by SML through years of experience.

I would like to see management turning more realisticby reducing its capex and develeraging its balance sheet through FCF. SML would be a very good buy if management gets its act together.


(Hitesh Patel) #13

dhwanil,

already management seems to have taken ur advice to heart. there are reports of capex for next two years of only 25 crores and plans to reduce debt and even in one concall they mentioned about making the company debt free in the future.

lets see how this one plays out.

it remains in my buy list.


(OMPRAKASH) #14

Hi Hitesh,

I agree with you that stock is very attractive in terms of valuations.Could you recheck the debt figures.Although in statement they shown 350 cr as debt i think we have to check liabilities (360 cr) also. As on fy 2011 total debt is 639 cr.So i think it might be around 700 cr debt as on fy 12.Also they paid 77 cr as interest.

12).


(Hitesh Patel) #15

If u consider the liabilities of 360 crores, then total debt does come out to 700 crores. In Sep 2011 the statement of accounts mentions total debt as 704 crores.

In March 12 they have disclosed long term debt as 310 crores, short term debt as 42.64 crores and other current liabilities as 360 crores. (can trade receivables of 204 crores be adjusted against these?) Accounting guys please clarify.

Sanghvi Movers in its fy 11 results footnotes mentions that it completed expansion of 299 crores during fy 11. I guess they can do with reduced capex spend now for next 1-2 yrs.

I am not too worried about debt of Sanghvi Movers bcos of two reasons:

1). Debt has been taken for acquiring cranes which dont lose value overnight and which are productive assets.

2). Sanghvi has excellent operating cash flows and once they reduce capex, they can reduce debt pretty fast.

My gamble here is that if they reduce debt then reduction of interest payment itself should prop up EPS several notches.

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(Pradeep Vaswani) #16

This is a cyclical business…although last 4-5 years have been very good…with high fixed costs…when going is good - you can make lot of money - every incremental revenue flows directly to profits.

But, when going gets tough, these high fixed costs will cause profitability to crash. An idle crane instead of earning money - will eat away from profits - (debt, maintenance)

If future capex is only 25 cr- where is the growth coming from - it also showcases mgmt expectations.

I would be cautious and not invest based on mathematical rear view number crunching.

Pradeep


(Dhwanil Desai) #17

**

dhwanil,

already

** future.lets **

** out.it **

list.

Hi Hitesh,

Yes, your are right. Management has indicated in its concall that they will develerage balance sheet and limit capex to 25 cr/year for next two years. However, in my view, the return ratios of deleveraged business will be mediocre and if one considers ROE/ROCE as key factor in making long term investment decision (though short term value proposition may be very good), I would assume SML would not be on the top of the list.

Following is my logic. Historically, SML’s NPM is in the range of 25-30% (current NPM is 23% and NPM is expected to stay around 24% due to higher competitive intensity)while its asset turnover is typically 0.4 (currently 0.31), if we consider zero debt company, equity multiplier (Asset/equity) will be 1. So without leverage, company will generate ROE of 10-12%. Which I consider fairly mediocre. Am I missing something? I invite yours and fellow boarder’s views on the same.

Best Regards

Dhwanil Desai

http://www.valueinvestinginpractice.blogspot.in/ Link: http://www.valueinvestinginpractice.blogspot.in/

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(Ayush Mittal) #18

Hi Hitesh,

I think we will have to include Other currentliabilitiesto compare the total debt as in earlier years it was being included. Though we should try to understand the reason for re-classification.

This company does has value and seems cheap but the talk of deleveraging has been going on for more than 1-2 yrs now (based on my interaction with friends who are tracking this co) but nothing has happened.

Second risk is that the debtor days are increasingcontinuouslyover the last 2-3 yrs. It also risks therecover abilityof some of the dues.

Ayush


(Hitesh Patel) #19

thanks ayush.

dhwanil,

sanghvi movers is not a classical long term bet. Its what donald loves to call a mispriced bet. the ROEs are going to remain low and probably thats why other players are not going to enter the fray due to lower returns in the business. Thats probably the paradox with this company that lower returns provide a moat to this company.

My guess is that there could be upto 40-50% upside here if the sentiments for infra segment improves somewhat.

debtor days as ayush said is a matter of concern but in a concall when this question was raised they mentioned that they faced almost nil bad debt.


(Dhwanil Desai) #20

Hi Hitesh,

I think we are on the same page. As you very rightly put, it is a mispriced bet and hence one shall buy it with clear idea of selling it off as mispricing is taken care of by the market.