September 06, 2006

ACE Constructions - Go on

ACE-Action Construction Equipment Limited

It is quite interesting to note that the company has changed its name thrice in the past ten years. Though most of it have been more of a regulatory requirement than merely to change it for namesake. The last time it changed, I could not reason the need to change to singular (equipements to equipment)

Moving to the most important part,

  • This issue is for 50-59 crores depending on the cut-off price of the offer
  • The company is issuing 25% of its capital to the public. Post this issue the promoters control on the company is expected to reduce from 87% to 65%.
  • Lead runners for the issue is Karvy and they are back after a long time

Reasons for the IPO
  • Setting up a new unit
  • ACE is plannning to use a part of this IPO in a joint venture with Tigieffe SRL, Italy, though nothing has materialized in-terms of confirmation of the venture. The prospectus says that Rs. 6.6 crores earmarked for this. Considering the nature of the amount, this looks like it is in the final stages.
  • Acquisition/Investments which is unclear
  • Working capital requirements
  • Brand building
  • Building a corporate office
The total cost for all the above is about 78 crores and will be funded with this offer by about 50-59 crores and the rest with internal accruals and debt.

Negatives for the Company

  1. The company looks to have taken a few loans with severe restrictions for the shareholder. The covenants on its loan, though is normal, looks severe on the management to take decisions on undertaking new businesses or expand its set-up using debt.
  2. Sales of the company has increased by approximately CAGR 95% however the expenditure has tagged along pretty well. Margins for the company was extremely thin except for the last two years, where the company had the ability to price it higher.
  3. The company has increased its balance sheet size by about 13 times in the past two years,wheras the business has increased only by about 100% annually in the same time. The company has given 25% of its balance sheet in the form of loans and advances. This loan is largely unclear.
  4. The company has declared dividend last year and it was the first in the last five years.

Interesting Issues

The company's promoters are extremely clear on their allotment of capital. They have constantly issued shares at face value barring the last few issues. The company conveniently capitalised its reserves into bonus shares in the year 2005. It is quite interesting for the company to have done it, as this will give the promoters access to the premium money it charged to outside shareholders from its previous arrangements. The effect was that the company pocketed a 25% CAGR return on their investment on that day. However, it was not the company's profits only that was capitalised but premium money. One of their promoters is Benett, Coleman & Co. They have bought the shares at 100 and it looks like there is a wait for this investor to encash his investment. The company is lenient to the directors, friends, relatives as to have given it at a lower price than the outsiders. The company has been extremely lenient with insiders and quite harsh on its outsiders.

The company's EPS is approximately 11.08. At 110, this has a P/E of about 10, which is on the lower side. The company's networth is 43 crores and the current IPO is for 50-59 crores.The book value of the share is Rs. 29 and this works at 3 times at current issue price.

The company has made strong cash from operations. The cash EPS from operations was approximately Rs. 15.

I like the company for the industry which is in and I would go for it if I had surplus funds. The investment will be needed for the long term. However, if there is any downturn in the industry, this should be the first stock to sell as it does not pricing power.

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