Buy This Construction Stock That Can Generate Solid 30% Returns

Broking firm, Emkay Global has recommended buying the stock of Action Construction Equipment for a solid 30% returns. The broking firm has set a target price of Rs 285 as against the current market price of Rs 219.

Action Construction Equipment

Action Construction Equipment reported 9% yoy sales growth in Q3FY22, led by the robust performance of the construction equipment and material handling segments. The growth of crane and agri segments remained muted at 4% and 6%, respectively. Management said the construction equipment industry saw a 20%+ decline in the quarter.

Management commentary

According to Emkay Global, the management indicated that higher commodity costs and the transition to BSIV led to price increases for the end product in the range of 8-10%.

"Given that large rental companies purchase more than half of all construction equipment, their cost of ownership has risen.

In the quarter, the construction equipment industry declined by 23% yoy, while Action Construction Equipment managed to see positive growth. Although this looks like a significant achievement, higher growth was anticipated for the company, for which it had positioned itself through higher inventory too. is expected to grow by 15-20% FY23, and if raw material prices do not increase, operating leverage should lead to some margin improvement.

Valuation and estimates

According to Emkay Global, the medium-term outlook remains bullish for the construction equipment sector. We have cut our FY24 EPS estimates by 5%.

"Our Mar'23E target price of Rs 285 is based on a 20x 1-year forward PE (10% premium to the last five-year avg.), as we assume 16% RoE for FY22-FY24E vs. 13.5% RoE in the last five years. Action Construction is evaluating two small acquisition proposals. If they go through, the QIP proceeds will be utilized. Maintain Buy on the stock with a price target of Rs 285," the brokerage has said.

The stock of Action Construction Equipment was last trading at Rs 219 on the NSE.