Sanghvi Movers

Stock Opportunities
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Arun,
With that approach, RoCE will improve even if management did nothing but maintain status quo (same sales figures, no capex) in the next FY. Your ratio would have improved when the business has remained the same, purely because of accounting :).

Also, I’d use EBIT only if I wanted to compare it with other businesses without being impacted by interest and tax structure - to compare operations numbers purely. But to know my returns, I would consider both interest and tax (as long as there are no deviations there) as they are both inherent part of doing business. Hence I’d use PAT instead of EBIT (and make adjustments wherever I deem necessary, like depreciation in this case like I mentioned earlier).

That’s just my approach and you needn’t agree with me though :).

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Dear Prashant,

Yes, I agree with you that valuations are cheap. Most asset rental companies over the world (United Rentals, Sunbelt, etc) are valued at something like 5x to 8x EV/EBITDA and even by that measure, Sanghvi is at the lower end of the band. What I really meant was - as and when the valuation gap closes, further gains can come from only increase in intrinsic value and that is going to be average.

Also, lets see where we can see improvements in the business. The 3 areas with scope for improvement are yield, utilisation rates and operating margins. I think yield is capped at 3.2% (management comment from concall), utilisation rates >85% are hard to hit unless demand spikes. Personally, I think they are doing a decent job already and further improvements are small incremental improvements only.

As far cashflow is concerned, an asset rental business is a -ve cashflow business in good times and +ve cashflow in bad times. Yes, they will payback debts when demand is low, but they will also take loans again when demand picks up. It’s just a cycle and I wouldn’t read too much into +ve or -ve cashflow, but I’d pay a lot of attention to what that incremental capex is earning for the business whenever that happens.

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Dear Prem,

If you take PAT instead of EBIT, then one should use ROE as the measure as that PAT number is after all debt obligations and left for the equity owners. The number that you using is the Return on Assets.

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Hi Prem,
I think you had good grasp of the things without even doing much analysis. I have used 10 year data to see what you are talking about. I think you are spot on about ROCE ~12%
What I see from 10 year data is that the cumulative PAT is much lower than cumulative CFO. How can that be the case? Over the last 10 years the capex is 1671 cr where as the CFO is 1767 Cr and the PAT being only 668 Cr makes me think, there is a lot of disconnect. Though the OPM is impressive ROCE is nothing. The reason being it is capex intensive?
I feel any growth estimates here is the domain of speculation. Any small mistake in assumptions, will cause severe loss in this. I already see it down from 350s to 230s in this 9 months.
I am still a beginner, so I may be completely wrong in my analysis

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AGM Notes

  • Many shareholders present and asked lot of questions. Some questions were earlier asked on Concalls. So I wouldn’t provide those details. Some new information as below

  • Maximum utilization possible would be 87-88%

  • GST can help improve utilization by 2-3% by improved movement of cranes between states.

  • Sanghvi has around 75% market share in cranes required for wind power market.

  • Company is now thinking of giving BKC office (newly purchased) on rent.

  • Sales Tax demand of around 120 Crores for 2008-09 was made up of 40 Cr demand, 40 Cr interest and 40 crore penalty. Company has paid service tax from 2008 onwards. Many court decisions favoring company’s claims that you can not charge service tax as well as sales tax on the same service. Supreme court asked sales tax department to complete assessment. Most other crane company have also received similar notices. Company is confident that they would not need to pay anything. But matter may not get resolved in next 1 year.

  • Lots of shareholder pushed for share buyback as company is generating good amount of cash and stock is cheap right now. Company did not commit anything as of now.

  • Company is not in favor of using chinese cranes considering maintenance and resale value.

  • Expecting year end Debt Equity ratio between .75-0.8 to 1. Target ROE between 12-18%.

Overall Impression - Came back feeling management is conservative is giving guidance but aggressive in Capex (last year 500 Crore, this year 212 Cr). Promoters are focused (no diversification), consistent, ethical and transparent. Board members from reputed related companies like Bharat Forge, L&T, ThyssenKrupp , Sudarshan Chemicals (not related but reputed for good governance ) etc Attractive stock price (company with gross block of 2000+ Cr, sales of 500 Cr+, CFO of 250 Cr is going at market cap of 1000+Cr).

Disc- invested

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2.65 Millions shares traded today with 64% deliverables! Stock is up by 10%. Normal daily volume for this stock is around 10,000-20,000. Looks like some big investor or Mutual Fund has entered this counter.

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DSP BLACKROCK MUTUAL FUND bought huge quantity (~1.5 million)

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HDFC Securties came out with research report on Sanghvi recommending target price of 325

http://www.moneycontrol.com/news/recommendations/buy-sanghvi-movers-targetrs-325-hdfc-securities_8539101.html"?port_flg=yes&utm_source=MC_INMAIL_NEWS"

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@ankitkhemka7

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A FEW POINTS ON SANGHVI MOVERS

It has a roce of 20 and roe @16%.

The ebidta margin is around 66%.According to mngt it can go to a maximum of 70% only…

The capacity utilization of the cranes is around 83%…maximum utilization will not exceed 89% due to the nature of business…

57% of the turnover is coming from installation of wind turbines…this can even go up to 63-65%…the rest is from power, steel, cement etc No single client has exposure of more than 10% of the topline…

Debtor days in bad days if 2012 /2013 were around 240 days…now it has come down to 84 days…the company gives a 30 day credit…plus it takes another 30-35 days for payment to be released… hence it takes a minimum of 65-70 days…

The capacity expansion of 360 crores was completed in Q3…and the remaining 160 crores will be completed by Q4…all the cranes imported have gone directly from port to clients sites…all the capex is fully deployed… There is a huge demand from wind turbine makers for above 400tons category of cranes… they are scrambling to book the cranes for next year too…demand is also there from power and oil refineries.

Company now has a debt equity of around 0.75…it does not want to go up beyond 1…it has already repaid this year`s debt…and started paying back next years debt too…

The capacity expansion will lead to a good jump in topline in fy 2018…

Sanghvi has 75% of the market share in above 400tons capacity cranes…it has more cranes than all the competitors combined capacity…

There is still unmet demand from wind turbines but they wont go for next round of capacity expansion in a hurry…they need to see back to back booking for the next round of capex. And now the HDFC securities reports anther 300 crores of expansion planned for FY 2018 too…seems like the huge demand is pushing the company towards second expansion.

I am going into details of sanghvi movers…because it appears to a safe stock… with low downside risk…and quite high upside potential…there is also very good top line and eps growth visibility for next one year… It is trading at a low p/e…hence there can be both a growth of eps and also p/e multiple…making the stock a potential two or three bagger in the next 12-18 months…

Its a good stock to park a big portion of portfolio…but its a slow mover…may go up in a slow and steady manner… don’t expect fireworks here…its ideal only for proponents of slow and focussed investing only

Disclosure: Not invested…but watching it with considerable interest.

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Hi Mehnazfatima,

Looks good… As far as I know, DSP Blackrock has entered the stock near 250
in October… Will add further myself

Rgds
Ankit

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Good pointers @Mehnazfatima !

Any estimates on what could be the topline boost one can expect due to this 400 cr capex? How many new cranes have they purchased? And with further 300 cr (HDFC report)?
This is sort of clear that av. realization per crane will be more or less constant from here (as utilization and op. margin don;t have much upside). Growth is going to come from expansion (crane count).

Someone in one of the posts above very aptly pointed that this is a business where we will have positiver cash flows in bad times and vice versa! :slight_smile: So in good times they have to expand, and in bad times, they will go for repayments and BS strengthening.

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The mngt has said that the nature of business is such that the capacity utilization will not go above 90%…(due to time taken for shifting of cranes from one site to another)…the capacity utilization is already around 84%, so there is not much scope for it going up drastically…

The mngt has already said that they do not favour reckless expansion and would prefer to keep the debt equity ratio below 1…they said that they would buy more cranes on seeing sustained demand (i.e demand beyond a few quarters).

_t takes them about 7 years to recover the cost of a new crane and around 5 years to recover the cost of a used crane.

Yes, it is correct that the topline can grow only through buying more cranes…and as of now, the pickup in demand indicates that the sector is in a cyclical uptrend. Demand is there from wind turbines, power and oil sectors…and as of now it appears to be sustained demand growth.

The mngt is repaying debt aggressively as can be seen from the repayment of the present year debt and also commencement of payment of next year debt.

For investors, the most important thing to note is the cyclical uptrend in this sector…the cycle may peakout in the next 2-4 years…till then it will pay to ride this stock to good gains…this stock is a proxy for wind energy sector power sector and infra growth…

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Hi Mehnaz,

Please help share the link to the Q3 Concall audio or transcript. I tried looking up on researchbyte and some other sources but, didn’t find it. Also, if you could provide the link to the HDFC report that you have mentioned in your post.

Regards,
Yogansh Jeswani

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If ROCE is so attractive then why dont new players enter the market? Importing cranes does not seem to be too difficult to do? Can anyone tell me what the real competitive advantage is here… High tonnage rationale doesnt seem like an advantage IMHO

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You can find HDFC report on Moneycontrol…i too am not able to locate the Q3 concall transcript…

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I track this and have a position - doing further research to see what can go wrong - a real advantage is a distribution network - such cranes are expensive to move and time consuming as a process - so someone who has a nationwide network will have a disproportionate advantage - ala cement industry. if you are small and have high cost of funds, you cant buy a crane and keep it idle within a limited geography.

Sanghvi has a wide network across all the key wind mill sites in the country - that IMHO is a moat.

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I agree the business model seems simple i.e. buy a crane (which has demand in the market) -> find a customer who needs it -> fix a rent for your offering and finally deliver the service -> make money.

But, actually its not that simple. There are several operational challenges that you need to counter day-in day-out. To be specific, and to answer your question, Sanghvi’s crane service not just involves giving cranes on rent, it also provides technical help in-terms of operating the crane (inclusive of- crane operators, supporting cranes & parts, maintenance, delivery of crane at the site with clearances from state and several similar issues).

Listing Few strengths of Sanghvi below:

  1. Fleet of high tonnage cranes, where they are the market leaders (as mentioned by @Mehnazfatima in above post too).
  2. Widespread Depot network, for providing timely & cost efficient delivery of cranes at client’s site.
  3. Strong back end team (crane operators, maintenance team etc)

Also, the reason they are a market leader in High tonnage is that- When you offer a high tonnage crane to a client you also need to provide the client with supporting cranes of lower tonnage. Now, this feature alone of the business makes it difficult for the small and organized player to enter the higher tonnage category (Read: capital intensive, complex operation, feasibility).

PS- Sanghvi is 6th largest player globally in terms of fleet and tonnage, you can have a look at it from here. Also, you can go through past concall to get a better sense of it :slight_smile:.

Regards,
Yogansh Jeswani
Disclosure: Invested

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As per HDFC report, utilization is going to reduce going forward (2017-2019) to 77% owing to wind segment capped at 4 GW. Topline as per them will grow, although very slowly (at 5 odd percent) going forward due to the same reason. Interest and depreciation will also rise going forward resulting in stress on bottomline. They do have moat in their distribution network and pan India presence, but despite regular capex, demand growth will grow very slowly. Question is - will one want to be with a company which is resource intensive, a slow mover, and with high debt (which will rise going forward) with incremental capex going forward. Two third of the demand is coming from the wind segment (which is capped anyways) and execution is slow, aren’t there better opportunities in the market?

What is going to result in p/e rerating? It is already at 10-11 trailing p/e, and i don’t think such resource intensive cyclical businesses can command more than 12. Is the gross block yield going to improve?

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A quick look at P/E since 2007 shows that it is currently trading well in line with its historic multiples and one should not expect much re rating from here onwards and hence any gain would come out of increase in earnings. Current installed capacity in wind is around 30 GW and it is expected to reach 60 GW by 2022 PROVIDED the government meets its targets. Based on HDFCs estimate of 27 EPS in 2019 the upside seems to be limited.