Sanghvi Movers

Company Profile  

Sanghvi Movers Ltd. (SML), a flagship company of the Sanghvi Group,operating since 1989, is the largest crane hiring company in India, 3rd  largest in Asia and 9th  largest in the world . It has a fleet of 370 medium to large sized heavy duty hydraulic and crawler cranes with capacity ranging from 20 tons to 800 tons. The crane hiring business is the main business line for the company contributing around 99% of the  turnover . The company also provides basic engineering and lift planning services along, as it helps in determining the time, labor, type of equipment required and flow of work.These cranes are used in the power, refineries, steel, cement and construction sectors, for purposes such as plant erection, heavy lifting and maintenance services.Lets take a closer look at the company to determine whether its worthy of an investment.

Balance Sheet Quality

Sanghvi operates in a capital intensive industry and hence generally sports a high Debt/Equity ratio. The D/E is currently about 1.01 and Debt has grown 10 times in 10 years from 44 crs to the present 470Crs as the company has also grown. The company borrows heavily when the economy is doing well & remains conservative during slower times. Between 2000 - 2004 the D/E was well below 1 , but from 2005 to the present it has remained more than 1 but steadily reducing after peaking to about 3 in 2006. 

The current ratio has remained well above 1 for most years. The Cash Conversion Cycle is a huge negative value as the company has no inventory due to the nature of the business & the large Days Payable Outstanding. I am not sure how useful this metric is for Sanghvi as ideally its should have been a positive value for a capital intensive business. Accounts receivables have grown at 39.7% CAGR which is a worrying sign although Payables have also grown at 41% CAGR.

Profitability

Sanghvi has over the years shifted focus to Higher Tonnage Cranes(>100MT) where competition is lesser and enjoys a dominant market share which enables it to earn good profit margins. The operating profit margins have been in the range of 66-75% in the past 5 years as there are very little expense by the way of maintainence of cranes, transportation & labor charges. The company has also consistently improved its Net profit margin from 13.4% in 2004 to 26.4% in 2010. This has mainly been on account of focus on higher Tonne(100MT+) cranes which have better margins. Asset turns have been on the lower side ranging between 0.47-0.35 in last 5 years touching 0.35 in 2010. This depends on the utilization rates(and lower idle time)of the cranes. The Return on Capital Employed(ROCE) has ranged between 15% - 24% in the last 6 years and has gotten better with improving margins. 

Cash Flow

A look at the trend of Cash Flow from operations (CFO) w.r.t Earnings before Interest,Depreciation & Amortization (EBIDA) between 2000 - 2010 shows that SML has manged strong cash flows  with good working capital management(Further the company has no Inventory due to the nature of the business) & control over Payables & Receivables. 

The Cash Return on Capital Employed(CROCE) has been close to the ROCE in most years ranging between 15 - 22% in the past 7 years. Coming to the important metric Free Cash Flow(FCF), SML has had consistent -ve FCF(except 2010) despite strong Cash Flow from Operations mainly due to the Capital Intensive nature of the business. The chart below shows the FCF ,Net Profit & CFO trend over the last 6 years.

Beginning in 2004 upto 2009, Sanghvi undertook aggressive CAPEX plans by purchasing a lot of High Tonnage cranes to capitalize on the Infrastructure boom during the period. Going forward, one can expect similar Capex plans to buy more cranes which will need to be funded by both Internal cash flows & debt. This will need to be watched carefully as the company will need to balance Growth & Balance sheet strength going forward.

 

Performance

SML has managed to grow its sales at 25.7% CAGR over the 10 years 2000 - 2010 and Net profits at 36.5% CAGR during the same period. Much of this growth has come between 2004 - 2009 as can be seen from the chart below. 

The CAGR growth rates over the last 5 & 3 years  in Sales have been 34.5% & 22.9% and in Profits 45.8% & 24.2% respectively.There was Sales & profit De-growth in 2010 mainly due to slowdown in infrastructure activity. The company had a good 2009 despite the Recession mainly as it gets 40%+ of its revenues from the Power Sector which was relatively unaffected. Going forward, with the kind of thrust on Infrastructure growth in India, Sanghvi has good growth visibility to maintain its good performance .

Valuation

At the Current Market Price of Rs 184 , Sanghvi Movers's Market Cap is 798 Crs & Enterprise Value is 1266 Crs. The table below shows the various important valuation metrics for TTM & 3,5,10 Year averages .

                                    TTM           3Yr AVG     5yr AVG    10yrs Avg
          P/E                   8.82               9.06                   11.61              21.88
          P/CF                4.67                6.04                     7.72             18.32

          EV/EBIT      6.84                7.04                    8.77              16.27

          P/BV               1.7              Div Yld         1.63% 

SML appears Cheap on most counts even considering the 3 & 5 Year Averages for a company growing at 25% and with good Margins & ROCE . The only Comparable & Listed competitor is ABG Infralogistics(Caters Specifically to Port Sector) which Trades at a P/E of 26 despite being smaller & inferior to Sanghvi on most counts. 

Strengths
Some of the Positives of Sanghvi Movers that come to my mind are :

1. Near monopoly in higher capacity cranes : SML focuses on the higher capacity cranes market, since the below 100 MT capacity segment has many players operating in it. SML has approximately 65% market share in the above 100-150 MT crane segment and approximately 80% market share in the above 250 MT crane segment.The margins get better with higher tonnage. The company’s strategy is to deploy a majority of its cranes on a medium to long-term basis. This provides stability to earnings besides increasing utilization rates.
2. Pan India Presence : SML has a network of 10 depots, which are strategically located to enable it to have a pan India presence. These depots not only reduce costs but also save time spent in transporting cranes from the depot to the site. For transporting Cranes, the company has a fleet of in-house trailers constituting 45 Volvos (100MT) and 35 trailers of 25 MT- 35 MT to reduce dependence on outside transport services. This has enabled  the company  to  reduce costs and save  time  involved  in moving cranes from one location to another.
3. Thrust on infrastructure to spur demand for cranes : Cranes are an essential component for infrastructure building. With massive investments lined up both by the government and the private sector we can expect the company to benefit from the increased demand. Around 0.5-0.7% of infrastructure spending translates to crane hiring charges.Power, Refineries, Steel, cement and construction sectors are witnessing good growth and have lined up huge capex. This augurs well for the company.
4. Strong Client base  & Sourcing : SML’s clients are major players in their respective industries. Major clientele of the company under various industry segments include Suzlon,BHEL,Enercon,Reliance etc. SML sources cranes  from major  international  players  like Liebherr  (Germany), Terex Demag (Germany), Manitowoc (USA), American crane & Hoist (USA), Kobelco (Japan), and Kato (Japan). The company has established relations with crane vendors around the world.
5. Aggressive ramp up in crane capacity : After having aggressively added to its capacity over the last couple of years (total capex of Rs. 896 cr over the last 5 years), SML had, in keeping with the slowing economy, cut down on its capex plans.However, with an improvement in the market, the company is expected to resume its aggressive Capex plans.

Risks 

The Main Risks that Sanghvi Movers faces can be summarized as below:

1. Customer Concentration : About 40% of the company's revenue comes from the Power Sector & the top 5 clients account for a major chunk of the revenue. Although SML has been able to reduce this dependence by diversifying into Refineries, Cement & Construction, a loss of few main customers can hurt it.
2. Debt & interest Rates :  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. Increase in  interest rates could impact the net profit margins of SML. The company has done well to bring down the D/E from 2.9 in 2006 to about 1 in 2010.
3. Slowdown in economy  : If the economy slows down , it may lead to curtailment in the capex plans of client companies or in execution which may may lead to a reduction in the utilization rate.In such a situation,one can expect Sanghvi Movers to take a considerable hit on its topline and bottomline. However the company does have some insularity to this due to its major customers being in the power sector as we saw in 2009. 
4. Competition & Manpower :  Crane renting industry is an unorganized industry with a large number of players. The  less  than 100 MT  capacity  segment  is highly  competitive  and there  are  large number of players. However, in the above 100 MT capacity segment, there are very few players. This is because cranes in this segment are expensive and need highly skilled manpower to operate and maintain.The company's operations may get affected on account of increase in competition in Crane Hiring Business, shortage of trained operators, mechanics and engineers.
5. FII Shareholding : SML has foreign shareholding of about 34%, which comprises of different institutional investors. These shareholders have been invested in the company for a considerable length of time, which reflects their confidence in SML’s business. However, on the downside, there could be selling pressure when there is a sustained rise in price increasing the stock’s volatility.

Conclusion

Sanghvi Movers in my view is a proxy for the Infrastructure story that is to play out in our country.In the preceding boom in Infrastructure between 2003-2009 ,SML did well to grow its Topline ,Bottomline & improve margins. It would need to repeat that in the coming years while making sure it doesn't take on too much Debt. With history on its side and a reasonable Valuation i believe Sanghvi Movers makes a good long term bet.

Disclosure : Long Sanghvi Movers. Please read the Disclaimer