This Smallcap is All Set to Ride the Infra Wave 

Interesting events have unfolded over the last few days.

Fitch has downgraded US credit rating.

Morgan Stanley recently upgraded India's outlook to overweight, suggesting we are entering a long growth phase.

The world is acknowledging that the elephant can dance, and that the dragon's fire is losing heat.

And guess gave India's growth story the thumbs up?

Well, it's none other than China.

China's top State-run bank and biggest lender has joined India dedicated investment fund, citing that India offers the best opportunity for a double-digit growth.

While China itself is slowing down after a spectacular growth phase triggered by manufacturing, capex and infra revolution lasting decades, it seems to be India's turn now.

In this video, I'm going to talk about a smallcap company that is all set to ride the infra wave.

Well, the stock in question is Sanghvi Movers. Headquartered in Pune, Sanghvi Movers is the largest crane hiring company in India and Asia, with 55% market share. It is also the sixth largest in the world. It has a fleet of over 400 medium to large sized cranes ranging from 20 to 1000 MT over 130 operational job sites in India. Sanghvi Movers is present pan India with its Depot network spread in more than 10 states.

Now, cranes are critical for infrastructure theme to play out across industries such as wind energy, power sector, refineries, fertilizers, oil n gas, steel, metal, cement, metro, and EPC projects. Sanghvi caters to all of these, with revenue from wind sector accounting for the biggest share of 48%.

As green capex is one of the identified pillars in the Budget presentation this year, if these theme indeed takesoff, stocks like GHCL and Sanghvi Movers deserve to be a part of your solar and wind energy stock watchlist respectively.

By the way, do check out of video for GHCL's role as an enabler in solar energy revolution in case you missed it.

Coming back to Sanghvi Movers...

As highlighted in one of its concall, wind industry added 2.3 GW of capacity in FY23. In FY24, the management expects country to add 4 GW more. The company has around 65 to 70 pc market share in wind energy market.

The order book as on 1^st Aug 2023 to be executed in FY24 is Rs 4.5 bn, up 40.6% YoY. This is the highest order book in last five years.

Now that the infra cycle is on an upswing, the company is in a good place to make the most of it with its lean balance sheet, and surplus cash to capitalize on growth opportunities. The company has a gross block worth Rs 25 bn of cranes. Its guidance for FY24 capex is Rs 3 bn, of which Rs 2.4 bn was done in first quarter of FY24. 70 pc of capex is debt funded. This is higher than the combined capex in past five years and will reflect in the topline growth, with most of it going to cranes.

The capex is backed by multiyear project orders from core sectors such as refinery, petchem, power, renewable, construction sector. The management expects utilisation levels despite such high capex to be over 80 pc due to the multiple cylinders firing. The max utilisation that company expects on its cranes is 90 pc.

In the previous upcycles, the blended yields had been more than 2.7 pc. This is the indication of average monthly rental income that the company earns on its crane's investments. The yields in that range were on account of some benefits and overtime and use of old equipments in those years. Given the fast project execution, realistic yields this time are expected to be just a little more than 2 pc this time. The yield for June 2023 quarter has improved to 2.21%, as compared to 1.97 pc for FY23, and 1.71 pc for June 2022 quarter.

Rental yields are flat across sectors, as such the cranes added would be fungible across sectors.

Coming to financials and valuations...

Sanghvi's debt to equity ratio is 0.34 times which is well within the comfort zone. The receivable days are expected at 90 to 110 days.

The debt to equity is at 0.34 times and return on capital employed for FY23 was at 15.2%. The ratio of cash flow from operations to net profit is 2.3 times, suggesting strong earnings quality.

The stock is trading at a PE of 20 times, and at a PEG (or price earnings to growth ratio) of 0.7 times.

Now, one thing you need to keep in mind is that Sanghvi Movers is a cyclical play.

Prior to infra pickup last year, the stock had been in a downcycle .

However, there are some ways in which the company has made the business more resilient to such downcycles.

First, its exposure to wind sector alone has come down from upto 75% in FY16 And FY17, to just 48% now.

In the earlier cycles, it resorted to huge debt funded capex of upto Rs 7 to Rs 8 bn in FY16-FY17, to mainly to cater to the investments in the wind sector. And then the downturn in the economy, especially in wind sector on account of regulatory changes from bidding tariff to reverse auctions led to a cut down in wind installation.

With that policy scrapped now, wind installation has picked momentum. More importantly, the company has diversified its business exposure significantly beyond wind sector.

In this cycle, due to the above factors and healthy liquidity and low debt on the balance sheet, the company is better placed to play infra cycle which is still young. For checks and balances, the management has threshold in mind which it won't exceed.

All in all, I believe Sanghvi Movers is a great enabler of the investments unleashing in the Indian economy and makes the cut for watchlist of smallcaps that could ride the capex wave.

Do note that this is not a recommendation on the stock.

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Thank you for watching. Goodbye.