Sanghvi Movers

Company Report Engineering - Turnkey Services April 03, 2007 ICICIdirect Code: SANMOV Company

Profile

Registered Office Survey No 92, Tathawade, Taluka Mulshi, Pune - 411033, Maharashtra Website: www.sanghvicranes.com

Sanghvi Movers OUTPERFORMER

47.21

Institutional Investors

33.83

Other Investors

5.19

General Public

13.77

Stock Data Shares Outstanding (in crore)

523.3 0.82

52-week High (Rs)

913.0

52-week Low (Rs)

563.0

Avg. Volume

5,167

Absolute Return 3 mth (%)

-13.8

Absolute Return 12 mth (%)

-13.5

Sensex Return 3 mth (%)

-4.3

Sensex Return 12 mth (%)

18.5

Performance Chart

Time Frame 12 mths

‰

Thrust on infrastructure to spur demand for cranes Cranes are an essential component for infrastructure building. The government has unveiled several initiatives to boost infrastructure and investment amounting to Rs 1,400,000 crore have been planned over FY0712E. We believe this will create huge demand for cranes and Sanghvi Movers will be a major beneficiary.

‰

Dominant player in the crane-hiring business Sanghvi enjoys a leadership position in the domestic crane-hiring market with an almost 50% market share. It is India’s largest crane operator and among the top 5 largest crane hiring companies in Asia. It is ranked 15th globally by Cranes International, a UK based magazine tracking the global crane providers.

‰

Aggressive ramp up in crane capacity

%

Promoters

Market Cap (Rs crore)

Potential upside 31%

INVESTMENT RATIONALE

Shareholding Pattern as on 31/12/2006 Holders

Target Price Rs 837

Sanghvi Movers, India’s largest crane-hiring company, is a proxy on the industrial and infrastructure boom in the country. Its aggressive ramp- up in crane capacity has coincided with a severe shortage of cranes globally, which should lead to robust growth in revenue and profits over the next few years. We initiate coverage on the company with an OUTPERFORMER rating.

Chairman & MD : C P Sanghvi Business Group: Sanghvi

Major

Price Rs 640

To capitalise on the rising demand, the company has been adding capacities and ramping-up its fleet size. It has lined up capex of Rs 330 crore for FY07-08E, to further boost its fleet by another 60-65 cranes. Of this it has completed expansion of Rs 180 crore in FY07.

VALUATIONS At the current price of Rs 640, the stock is trading at a P/E multiple of 12.5x its FY07E EPS of Rs 50.9 and 10.7x its FY08E EPS of Rs 59.7. On an EV/EBIDTA basis, the stock is available at 6.3x FY07E earnings and 5.4x FY08E earnings. Given the company’s dominant position in the crane-hiring market and the capex boom in India, we believe that the stock is undervalued. We rate the stock an OUTPERFORMER with a 12-month price target of Rs 837, at 14x FY08E earnings, an upside potential of 31%. Exhibit 1: Key Financials Year to March 31

FY05

FY06

FY07E

FY08E

Net Profit (Rs crore)

13.70

32.18

41.66

52.48

EPS (Rs) % Growth Siddhartha Khemka [email protected]

ICICI Brokerage Services Limited, 2nd Floor, Stanrose House, Appasaheb Marathe Road, Prabhadevi, Mumbai - 400 025

P/E (x)

18.77

44.10

50.95

59.79

121.6%

134.9%

15.5%

17.3%

34.09

14.51

12.56

10.70

Price/Book (x)

8.23

5.78

2.52

1.93

EV/EBIDTA (x)

12.35

7.06

6.35

5.46

NPM (%)

18.06

21.51

23.65

24.17

RoNW (%)

24.13

39.85

20.08

18.00

RoCE (%)

15.35

19.99

18.13

18.65

Source: ICICIdirect Research

1 For private circulation only

COMPANY BACKGROUND Sanghvi Movers, flagship of the Sanghvi Group, is India’s largest crane operator and among the top 5 largest crane hiring companies in Asia. It is ranked 15th globally by Cranes International, a UK based leading magazine tracking the global crane providers. It has a fleet of around 250 medium to large-sized heavy duty hydraulic truck-mounted telescopic and lattice boom cranes and crawler cranes, with lifting capacity ranging from 20 tonnes to 800 tonnes. Sanghvi provides these cranes for heavy lifting, plant erection and maintenance services to various industries in infrastructure and core sector areas, which includes include power, refineries, steel and cement. It undertakes implementation of turnkey projects, which includes providing of wellmaintained equipments, expert technical services and skilled manpower. The company also has a fleet of 75 trailers, which it uses to transport cranes in parts to reduce its dependence on outside transport service. Sanghvi has also set up 8 depots at various locations across the country to save on cost and time required for mobilisation of cranes. The company’s major clients include Suzlon Energy, Reliance Industries, Enercon, BHEL, Grasim, Tata Steel, L&T (ECC group), etc. The company has diversified its business activities by venturing in power generation. It has wind mills of 5.05 MW installed in Rajasthan and Karnataka.

Exhibit 2: Sanghvi Movers cranes at work

A Liebherr LR 1400-2 crawler crane

A Krupp GMT 350 hydraulic truck mounted crane

Source: Company

2 For private circulation only

INVESTMENT RATIONALE I)

Thrust on infrastructure to spur demand for cranes Sanghvi’s fortunes are directly related to industrial and infrastructure growth. The government has unveiled several initiatives to boost infrastructure and facilitate investment into the sector. Cranes are an essential component for infrastructure building and with the massive investments lined up – both by the government and private sector – we expect the company to benefit from increased demand. The company mainly provides services to core sectors like construction, power, refineries, steel and cement. These sectors are witnessing phenomenal growth and have lined up huge capex.

Exhibit 3 : India Inc’s major capex projects Sector

Company

Project

Place

Capex

Refineries

Reliance Industries

29 million tonnes refinery, SEZ complex

Jamnagar, Gujarat

Indian Oil Corporation

15 million tonnes refinery cum petrochemicals complex

Paradip, Orissa.

25,000

Steel

Posco

Steel SEZ

Orissa

52,000

Mittal Steel

12 million tonnes steel plant

Jharkhand / Orissa

40,000

JSW Steel

Jharkhand Steel Project

Jharkhand

35,000

Tata Steel

Dubri (Kalinganagar) Steel Project

Orissa

15,000

NTPC

Hydel Power Project

Arunachal Pradesh

20,000

Reliance Energy

12,000 MW thermal power project

Hirma, Orissa

60,000

Suzlon Energy

Kachchha Wind Power Project

Gujarat

2,200

Grasim

3 projects

Orissa

3,600

UltraTech Cement

Expansion of units

Gujarat, Andhra Pradesh

2,700

(Rs crore)

Power

Cement

27,000

and Chhattisgarh Source: CMIE, ICICIdirect Research

The investment in creating and upgrading infrastructure over FY07-12E has been estimated at a whopping Rs 1,400,000 crore. Sanghvi Movers, the largest crane operator in the country will be the biggest beneficiary.

Beneficiary of rising crude prices Due to a sustained rise in crude prices over the last decade, investments in alternate technologies for energy like windmills have grown multi-fold. In the 11th Five-Year plan (2007-12), the government has proposed an installed capacity of 10,000 - 12,000 MW of renewable energy through wind power. The windmill segment currently accounts for over 60% of Sanghvi’s revenues, with Suzlon being its largest customer. Suzlon, which is expanding very rapidly, has entered into a long-term contract of 39 months with Sanghvi for supply of cranes. Reliance Industries, another large customer, is also expanding capacity. Reliance Petroleum, its subsidiary, is building a 29 million tonnes petroleum refinery-cum-SEZ complex in Jamnagar, Gujarat and has booked cranes from Sanghvi. The company also provides cranes for the annual maintenance shutdown of the plants, which are of short duration.

3 For private circulation only

II)

Dominant position in the crane-hiring business in India Sanghvi enjoys a leadership position in the domestic crane-hiring market with an almost 50% market share. It has a fleet of 250 cranes, which include medium to large sized heavy duty hydraulic truck-mounted telescopic and lattice boom cranes and crawler cranes, with lifting capacity ranging from 20 tons to 800 tons. Currently, more than 87% of the total gross block includes cranes with a lifting capacity above 100 tonnes. The margins get better with higher tonnage. The company’s strategy is to deploy most of its cranes for medium to long-term basis, which provides stability to earnings, besides increasing utilisation rates. Sanghvi boasts of a marquee clientele, which includes Suzlon Energy, Reliance Industries, Enercon, BHEL, Grasim, Tata Steel, L&T, etc.

Exhibit 4 : Marquee clientele Power

Oil & Refineries

Cement

Metal

Engineering

Others

Suzlon Enercon

Reliance

Grasim

Tata Steel

L&T- ECC

Tata Chemicals

ONGC

Ultra Tech

Vedanta Resources

Bechtel

Indogulf

Windia Power NTPC

MRPL

ACC

Ispat

Samsung Engineering

Indian Oil

Gujarat Ambuja

Indian Charge Chrome

Hyundai

BHEL

GAIL

Rolls Royce

Source: Company, ICICIdirect Research

Favourable global scenario Due to the industrial slowdown, which started in the late 1990s, Sanghvi’s fortunes took a downturn and sales plummeted from Rs 51.5 crore in FY99 to Rs 22.4 crore in FY02. Income as percentage of gross block, a key metric in this business, dropped from 46% in FY99 to 20% in FY01 and hovered around those levels till FY03. However, the revival in the Indian economy post 2003 saw a pick up in demand for cranes. At the same time, the rapid industrialisation in China and the oil-fed boom in the Middle East over the last few years resulted in strong demand for cranes from these regions. Consequently, crane manufacturers order books are now flooded and the lead-time for new cranes has shot up to 18 months. The second-hand cranes market is also booming and prices have increased to almost 80-85% of the prices of new cranes. This shortage has resulted in crane hiring companies enjoying twin benefits of higher utilisation as well as billing rates. Sanghvi has seen its sales and income/gross block surge to Rs 149.65 crore and 37% in FY06, which highlights the change in fortunes.

Exhibit 5: Sharp improvement in operations 160

46%

50%

Rs Crore

140 120 100

30%

29% 20%

80

19%

32%

37%

40% 30%

23%

60

20%

40 20

10%

0

0% FY99

FY00

FY01

FY02 Income

FY03

FY04

FY05

FY06

Income/GB (RHS)

Source: Company, ICICIdirect Research

4 For private circulation only

III) Aggressive ramp up in crane capacity From 1999-2003, the company’s gross block was stagnant reflecting the subdued economic scenario of the time. However, it was quick to anticipate the increase in demand for cranes when the Indian economy started reviving in 2003 and aggressively ramped up its capacity. Its gross block has since increased 3.5x from Rs 114.3 crore in FY03 to Rs 405.6 crore in FY06 with its fleet expanding to 200 cranes. Furthermore, Sanghvi has lined up a capex of Rs 330 crore for FY07-08E to increase its crane capacity by about 30%. It acquired 42 cranes in FY07 and will add another 18-22 cranes in FY08E.

Exhibit 6 : Capacity addition (number of cranes) Second-hand

Brand new

Total additions

FY07

28

14

42

FY08

08-10

10-12

18-22

Source: Company, ICICIdirect Research

Exhibit 7: Trend in gross block 850

737.6

750

Rs crore

650

586.6

550 405.6

450 350

236.6

250 150

112.4

120.7

117.8

115.4

114.3

FY99

FY00

FY01

FY02

FY03

155.7

50 FY04

FY05

FY06

FY07E

FY08E

Source: Company, ICICIdirect Research

The company is financing this expansion by a mixture of debt and equity so as not to increase leverage significantly. The promoters are contributing Rs 42 crore by subscribing to 600,000 convertible warrants at Rs 700 per share, of which they paid Rs 6 crore in May 2006 and the balance Rs. 36 crore shall be brought in FY08 for further capex. It further raised Rs 72.6 crore by issuing 880,000 equity shares to Goldpeak, a subsidiary of Aria Investment Partners III, in January 2007 at Rs 825 per share.

Setting up of depots to save time & cost Extensive amount of logistics services are required for mobilisation and demobilisation of its cranes. To save cost and time, Sanghvi has set up eight depots at strategic locations across India, for parking and overhaul of the cranes once they are demobilised. This helps in improving manoeuvrability and turnaround time for its fleet of heavy-duty cranes. The depots are further supplemented with 75 trailers owned by Sanghvi, which enable the transportation of cranes. These depots are located at strategic locations across the country near industrial activity centres. It has depots at Pune, Bharuch, Jamnagar (Gujarat), Chennai, Nagpur, Bangalore, Cuttack (Orissa) and Gaziabad (Delhi). We expect that this will help Sanghvi to increase the operational efficiency and effectively deploy the existing cranes, thus increasing the average utilisation of assets.

5 For private circulation only

KEY CONCERNS ¾

Any delay in delivery of new cranes ordered, as well as non-availability of second hand cranes, will impact the growth potential.

¾

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.

FINANCIALS Exhibit 8 : Key Assumptions Sales

FY07E

FY08E

83%

85%

2nd Hand Cranes

3.25%

3.25%

New Cranes

2.25%

2.25%

Average Utilisation Avg. Realisation per month (% of gross block)

Source: ICICIdirect Research

Income from operations and net profit to surge Efficient deployment, better price realization and shift towards higher tonnage cranes which have better margins will drive revenue and earnings going forward. Income is expected to grow at a CAGR of 20.6% from Rs 149 crore in FY06 to Rs 216.65 crore in FY08E. Net profit is expected to grow at a CAGR of 27.7% from Rs 32.18 crore in FY06 to Rs 52.48 crore in FY08E.

250.00

60.00

200.00

50.00 40.00

150.00

30.00 100.00

20.00

50.00

Rs Crore

Rs Crore

Exhibit 9: Projected revenues and net profit

10.00

0.00

0.00 FY04

FY05

FY06 Income

FY07E

FY08E

Net Profit (RHS)

Source: ICICIdirect Research

6 For private circulation only

Robust operating margins The huge capex lined-up by core sector industries coupled with the global shortage of cranes has helped Sanghvi improve realization on its cranes. Other initiatives like setting up depots across the country, supplemented with a set of 75 trailers have helped in reducing cost and improve margins. Operating profit margin, which was at 55%in FY04, is likely to expand to 70.8% by FY08E.

Exhibit 10: Improving operating margins 75% 69.5%

70%

70.8%

66.2% 65% 60.4% 60% 55.3% 55% 50% FY04

FY05

FY06

FY07E

FY08E

Source: ICICIdirect Research

VALUATIONS Exhibit 11: P/E Band 1200

22x

Share Price (Rs)

1000

18x

800

14x

600 10x 400 200 0 01-Apr-05

01-Aug-05

01-Dec-05

01-Apr-06

01-Aug-06

01-Dec-06

Source: ICICIdirect Research

The stock has been fluctuating in the P/E band of 14x – 18x one-year forward earnings for the last year. At the current price of Rs 640, the stock is trading at 12.5x its FY07E EPS of Rs 50.9 and 10.7x its FY08E EPS of Rs 59.7. On an EV/EBIDTA basis, the stock is available at 6.3x FY07E earnings and 5.4x FY08E earnings. Considering Sanghvi’s dominant position in the crane-hiring business, we believe that it is one of the best proxy plays on the infrastructure boom. We rate the stock an OUTPERFORMER with a price target of Rs 837, at 15x FY08E earnings, at the lower level of its historical trading band.

7 For private circulation only

FINANCIAL SUMMARY Profit and Loss Account Income to grow at CAGR of 21% over FY06-FY08E

Year to March 31

FY08E

(Rs Crore) FY07E

FY06

FY05

Income from Operations 216.65 175.01 149.05 75.38 ................................................................................................................................................. % Growth 23.80% 17.40% 97.70% 64.70% ................................................................................................................................................. Total Expenditure 63.31 53.43 50.44 29.86 ................................................................................................................................................. Operating Profit 153.34 121.58 98.61 45.53 ................................................................................................................................................. % Growth 26.10% 23.30% 116.60% 79.90% ................................................................................................................................................. Other Income 0.43 1.14 0.6 0.49 ................................................................................................................................................. EBIDTA 153.77 122.72 99.21 46.01 ................................................................................................................................................. EBIDTA margin (%) 70.84% 69.67% 66.30% 60.65% ................................................................................................................................................. Depreciation 47.35 35.4 35.64 21.28 ................................................................................................................................................. EBIT 106.42 87.32 63.57 24.73 ................................................................................................................................................. % Growth 21.90% 37.40% 157.10% 112.80% ................................................................................................................................................. Interest 29.32 25.48 13.72 4.67 .................................................................................................................................................

Net profit to grow at CAGR of 28% over FY06-FY08E

PBT 77.1 61.84 49.85 20.06 ................................................................................................................................................. % Growth 24.70% 24.00% 148.50% 108.10% ................................................................................................................................................. Taxation 24.63 20.18 17.67 6.36 ................................................................................................................................................. PAT 52.48 41.66 32.18 13.7 ................................................................................................................................................. % Change YoY 26.00% 29.50% 134.90% 121.60% ................................................................................................................................................. Extraordinary Items 0 17.12 0 0 ................................................................................................................................................. Shares O/S (crore) 0.88 0.82 0.73 0.73 ................................................................................................................................................. EPS (Rs) 59.79 50.95 44.1 18.77 .................................................................................................................................................

Balance Sheet (Rs Crore) Year to March 31 Capital infusion by promoters and private placement

FY08E

FY07E

FY06

FY05

Sources of funds ................................................................................................................................................. Equity Share Capital 8.78 8.18 7.3 7.3 ................................................................................................................................................. Share Warrants 0 6 0 0 ................................................................................................................................................. Reserves & Surplus 282.7 199.27 73.46 49.46 ................................................................................................................................................. Secured Loans 274.22 264.22 234.22 101.91 ................................................................................................................................................. Unsecured Loans 5 4 3.08 2.45 ................................................................................................................................................. Deferred Tax Liability 25.92 20.92 16.51 17.65 ................................................................................................................................................. Current Liabilities & Provisions 52.09 42.43 28.39 9.5 .................................................................................................................................................

Aggressive ramp-up in crane capacity

Total Liability 648.7 545.01 362.96 188.27 ................................................................................................................................................. Application of Funds ................................................................................................................................................. Net Block 560.84 457.19 285.77 152.34 ................................................................................................................................................. Capital WIP 0 0 12.41 1.81 ................................................................................................................................................. Investments 0 0 0 0.41 ................................................................................................................................................. Cash 1.2 12.57 3.78 3.27 ................................................................................................................................................. Trade Receivables 54.16 43.75 32.74 19.72 ................................................................................................................................................. Loans & Advances 32.5 31.5 28.24 10.73 ................................................................................................................................................. Miscellaneous Expenditure 0 0 0 0 ................................................................................................................................................. Total Asset 648.7 545.01 362.96 188.27

8 For private circulation only

Cash Flow Statement (Rs Crore) Year to March 31 FY08E FY07E FY06 FY05 ................................................................................................................................................. Opening Cash Balance 12.57 3.78 3.27 2.6 ................................................................................................................................................. Profit after Tax 52.48 58.79 32.18 13.7 ................................................................................................................................................. Misc Expenditure w/off 0 0 0 0.13 ................................................................................................................................................. Dividend Paid -5.05 -4.7 -8.18 -4.09 ................................................................................................................................................. Depreciation 47.35 35.4 35.64 21.28 ................................................................................................................................................. Provision for deffered tax 5 4.41 -1.14 2.16 ................................................................................................................................................. Cash Flow before WC Changes 99.78 93.89 58.5 33.18 ................................................................................................................................................. Net Increase in Current Liabilities 9.66 14.04 18.89 2.52 ................................................................................................................................................. Net Increase in Current Assets -11.4 -14.27 -30.54 -13.23 ................................................................................................................................................. Cash Flow after WC Changes 98.03 93.67 46.85 22.47 ................................................................................................................................................. Purchase of Fixed Assets -151 -194.4 -179.67 -84.5 ................................................................................................................................................. (Increase) / Decrease in Investment 0 0 0.4 -0.39 ................................................................................................................................................. Increase / (Decrease) in Loan Funds 11 30.92 132.94 63.08 ................................................................................................................................................. Increase / (Decrease) in Equity Capital 30.6 78.6 0 0 ................................................................................................................................................. Net Change in Cash -11.37 8.78 0.51 0.67 ................................................................................................................................................. Closing Cash Balance 1.2 12.57 3.78 3.27

Ratios Year to March 31

FY08E

FY07E

FY06

FY05

EPS (Rs.) 59.79 50.95 44.1 18.77 ................................................................................................................................................. Book Value (Rs. Crore) 332.08 253.69 110.67 77.78 ................................................................................................................................................. Enterprise Value (Rs. Crore) 839.75 778.99 700.53 568.11 ................................................................................................................................................. EV/Sales (x) 3.88 4.45 4.7 7.54 ................................................................................................................................................. EV/EBIDTA (x) 5.46 6.35 7.06 12.35 ................................................................................................................................................. Market Cap to sales (x) 2.59 2.99 3.13 6.2 ................................................................................................................................................. Operating margins to improve significantly

Price to Book Value (x) 1.93 2.52 5.78 8.23 ................................................................................................................................................. Operating Margin (%) 70.78 69.47 66.16 60.39 ................................................................................................................................................. Net Profit Margin (%) 24.17 23.65 21.51 18.06 ................................................................................................................................................. RONW (%) 18 20.08 39.85 24.13 .................................................................................................................................................

Reduction in D/E ratio despite of Rs 330 crore capex

ROCE (%) 18.65 18.13 19.99 15.35 ................................................................................................................................................. Debt/ Equity (x) 0.96 1.26 2.94 1.84 ................................................................................................................................................. Current Ratio 1.69 2.07 2.28 3.55 ................................................................................................................................................. Debtors Turnover Ratio 4 4 4.55 3.82 ................................................................................................................................................. Fixed Assets Turnover Ratio 0.39 0.38 0.5 0.49

9 For private circulation only

RATING RATIONALE ICICIdirect endeavours to provide objective opinions and ecommendations. ICICIdirect assigns ratings to its stocks according to their notional target price vs current market price and then categorises them as Outperformer, Performer, Hold, and Underperformer. The performance horizon is 2 years unless specified and the notional target price is defined as the analysts’ valuation for a stock. Outperformer: 20% or more; Performer: Between 10% and 20%; Hold: +10% return; Underperformer: -10% or more.

Harendra Kumar

Head - Research

[email protected]

ICICIdirect Research Desk ICICI Brokerage Services Limited, 2nd Floor, Stanrose House, Appasaheb Marathe Road, Prabhadevi, Mumbai - 400 025 [email protected] The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Brokerage Services Limited (IBSL). The author of the report does not hold any investment in any of the companies mentioned in this report. IBSL may be holding a small number of shares/position in the above-referred companies as on date of release of this report. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This information may not be taken in substitution for the exercise of independent judgement by any recipient. The recipient should independently evaluate the investment risks. IBSL and affiliates will not accept any liabilities for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Actual results may differ materially from those set forth in projections. IBSL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject IBSL and its affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

10 For private circulation only

PH/28/07

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