With the new government according top priority to the infrastructure sector, we believe the infrastructure sector is on the cusp of a turn-around. The government has already taken many steps (making funding easier for infrastructure sector, expediting approval process, debottlenecking the system, simplifying bureaucratic complexities, restoring confidence of the investors, etc) which will show visible improvement over next few quarters. Action Construction Equipment (ACE), being in the derived demand space, is ideally poised to benefit from the revival of the infrastructure sector.
We initiate coverage on Action Construction Equipment with a BUY recommendation and a Price Objective of `42 implying a potential upside of ~51%. We value the company on EV/Sales multiple as the company is in a turn-around phase and
EV/Sales methodology captures its valuation more appropriately than any other methodology. We assign EV/Sales multiple of 0.55x to its FY16 estimated sales, which is lower as compared to its historical average of 0.6x. We expect revenue and profits to post a CAGR of ~23% and ~128%, respectively, through FY14-16E. At the CMP of `28, the stock is trading at EV/Sales of 0.6x and 0.4x for FY15E and FY16E, respectively.