Sanghvi Movers: Buy
Increasing focus on the power sector may help the company keep its growth momentum intact.
High-capacity cranes, used to build and erect nuclear plants and power stations are likely to enjoy high utilisation.
Investors with a two-three year perspective can consider taking exposure to the stock of Sanghvi Movers, an established player in the business of renting out cranes.
Our optimism stems from the company's well-diversified user industry base, established clientele and its large equipment bank, which give it an edge over competition. At the current market price of Rs 204, the stock trades at a reasonable valuation of over 11 times its likely FY-09 per share earnings. Investors can, however, consider purchasing the stock in lots given the present market conditions.Large fleet size
Engaged in the business of renting out cranes to sectors such as steel, windmill, cement and power, Sanghvi Movers has over the years built for itself a large inventory of cranes. It now enjoys a fleet size of over 284 cranes (out of which 152 are above 100 tonnes) with a network spread out over nine depots across the country.
This is significant because in the above-100-tonne crane category, the company enjoys a market share of over 60-65 per cent; the share goes to over 80 per cent in the 250-tonne category. It further plans to add to its fleet and has committed itself to a capex of Rs 250 crore for buying 51 cranes ( 21 second hand), out of which 34 will be over the 100-tonne capacity.focus on power
Further, Sanghvi plans to increase focus on the power sector and, thereby, minimise its reliance on the windmill sector. This was of concern as the company was deriving as much as 73 per cent of its revenues from the windmill segment in 2006-07. This issue has been addressed as Sanghvi has managed to bring that down to 48 per cent last fiscal. It further plans to reduce it to 35 per cent this year by improving focus on the power sector.
This appears an achievable target, considering that Sanghvi's cranes have found application in almost every single power project involving the installation of over 250 MW power plants in recent times. Further, Sanghvi has placed orders for the purchase of two high capacity cranes 750 tonnes and 1400 tonnes which are expected to be delivered by mid-2009. These high-capacity cranes are used to build and erect nuclear plants, refineries and power stations and, thus, are likely to enjoy high utilisation.
The barriers to entry are also high in the high-capacity crane segment since most of the international equipment manufacturers are running full capacities and have delivery schedules booked for the next couple of years.
This will give Sanghvi a significant leeway in establishing market presence. And since the demand-supply gap in this category of cranes will be in favour of Sanghvi, procuring attractive rentals would be the least of its worries.Results scorecard
For the financial year ended March 2008, Sanghvi reported 42 per cent growth in revenues and 13 per cent increase in profits. The operating profit margins expanded marginally to about 73.2 per cent. There was, however, a 550 basis points dip in operating margins sequentially, due to high employee cost in the quarter. The relatively subdued growth in profits, despite a high utilisation, can be explained by the high interest cost and depreciation during the year.
In a high-interest rate scenario, the company's reliance on debt to fund its capacity additions is of concern, but may not be worrisome, given its high operating margin.
Higher margins should be able to cushion the impact of any significant increase in financing and capital costs. That said, any slowdown in capex by user industries, however, remains a primary risk to its earnings.