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ACTION CONSTRUCTION EQUIPMENT LIMITED

Rating Instrument Commercial Paper Issue* *Carved out of sanctioned working-capital limits Rating Rationale The rating continues to take into account ACEs leading position in the pick and carry crane segment, its pan-India presence through strong dealership network and wide product portfolio. The rating also draws strength from favourable capital structure and healthy liquidity scenario backed by comfortable cash balances. The rating also considers ACEs moderate profitability margins coupled with significant dependence on the prospects of infrastructure sector and cyclicality inherent in the construction industry. Going forward, ability of the company to maintain low debt level while controlling its operating cycle shall be the key rating sensitivities. Background Action Construction Equipment Ltd (ACE), promoted by Mr Vijay Agarwal and his wife Mrs Mona Agarwal, was incorporated on January 13, 1995 as a Private Limited Company. It was converted into a Public Limited Company on October 04, 2005. During 2006, the company raised Rs.60 cr through its Initial Public Offering (IPO) and got itself listed on NSE and BSE. The company is engaged in the manufacturing of cranes, material handling/construction equipments and tractors. Its four manufacturing facilities are located at Ballabhgarh (Faridabad), Dudholla (Faridabad), Uddham Singh Nagar (Uttarakhand) and Kashipur (Uttarakhand). Presently, the company has an installed capacity of 7,500 units p.a. of cranes (57% utilization during FY11 (refers to the period April 1 to March 31)), 1,300 units p.a. of material handling and other construction equipment machinery (62% utilization) and 6,000 units p.a. of tractors (58% utilization). The company has recently completed two expansion projects; one each in Kashipur (Uttaranchal) and Palwal (Haryana) in May 2011 and March 2011 respectively. The total cost for the expansion projects was Rs.36.00cr which was funded by an ECB of USD 4.5mn (Rs 20.28 cr) and balance by internal accruals. Credit Risk Assessment Experienced promoters and established track record of operations The key promoter, Mr Vijay Agarwal is an MBA from FMS, Delhi and has got over 38 years experience in the material handling and heavy engineering industry to his credit. He is looking after the overall management. Mr Vijay Agarwal started his career with Bhartiya Cuttler Hammer Ltd., where he worked for ten years. Thereafter, he joined Escorts Ltd, in the Industrial Equipment Division as Senior Divisional Manager and worked there for eight years in different departments and looked after purchase, production and after sales service functions. After Escorts he started ACE in 1995. He is well-supported by Mr Sorab Agarwal, 33, BE (Mechanical), responsible for business development, marketing and positioning of the companys brand. Leading position in pick and carry cranes ACE is an established player in construction equipment business. The company is into this line of business since the last 16 years, which is largely dominated by ACE and Escorts Construction Equipment Limited and has attained significant market position in pick and carry cranes segment. During the last three years, the company has strengthened its position in the cranes segment by taking its installed capacity for the segment from 5,100 units p.a. in FY09 to 7,500 units p.a. in FY11. For the same period, number of unit sold has increased from 2,826 to 4,267. Over the last 5 years, the company has expanded into material handling equipments/ construction equipment/ road construction equipments (viz forklifts, backhoe loaders, compactors etc) and tractors which diversifies the revenue profile of the company. Amount (Rs. cr) 30 Rating 1 CARE A1+ [A One Plus] Remarks Reaffirmed

Complete definitions of the ratings assigned are available at www.careratings.com and in other CARE publications.

Strong dealership network The company has a marketing headquarter based at New Delhi and a dedicated product support division located at Faridabad, Haryana. The company has all India network of 96 sales and service dealer outlets and offices, which provide pre-sales and after sale service for cranes, construction equipment and material handling equipments. These outlets are supported by 13 area offices and five regional offices based at Delhi, Mumbai, Chennai, Kolkata and Vishakapatnam. The company has also set up dealerships in Middle East Asia, Bangladesh, Nepal and South Africa. In the tractor business, ACEs distribution network is limited to primarily five states of Uttar Pradesh, Rajasthan, Haryana, Punjab and Madhya Pradesh. Wide product portfolio ACEs products can be broadly classified into three segments viz cranes, material handling/construction equipment/ road construction and tractors. Cranes segment of the company has been the best performing segment with products like hydraulic mobile cranes, crawler cranes and mobile/fixed tower cranes. The cranes segment has contributed 71% of the turnover and 84% of PBDIT in FY11. ACE has also introduced tractors (35-45 hp) into its product portfolio in FY09. The company is presently selling tractors to five northern states. Comfortable overall gearing coupled with healthy liquidity The companys capital structure is comfortable with overall gearing of 0.35 times as on March 31, 2011. The operating cycle of the company has improved from 43 days in FY10 to 37 days in FY11. The improvement was supported by better collection period which has come down to 34 days in FY11 as against 42 days in FY10. The liquidity position of the company is also comfortable with free cash and bank balances of the company at Rs.20.23cr as on March 31, 2011. Further the average utilization of fund-based working-capital limits for the trailing 12 months ending October 2011 was 52% which indicates healthy operational cash generation. The interest coverage ratio is also comfortable at 13.13 times in FY11. Moderate profitability margins During FY11, the company has posted an increase in total operating income to Rs.699.39cr as against Rs.433.94cr in FY10 (y-oy increase of 61.17%). However, there was marginal moderation in PBDILT margin during FY11 attributable to higher raw material cost (particularly steel prices) which coupled with competitive pressure has resulted in subdued profitability. In the recent years ACE has entered into competitive backhoe loaders and tractors business (both the segments have established players) wherein the company had sold the products competitively to garner market share. Furthermore, as per the provisional results for the half year ended September 30, 2011, the firm has reported the net sales of Rs.432.49crore with operating profit of Rs.33.23cr. Industry risk The demand for material handling equipment and construction equipment is correlated with the growth of segments like infrastructure, construction, ports, pipelines, roads, steel, cement, power projects, hydel projects, engineering, mining etc as such equipment find primary use in these sectors. Emergence of India as a manufacturing hub and the investment scenario in the infrastructure sector continuing to be strong with investment requirement of US$1 tn over the 12th five year plan will strengthen the demand for cranes and construction and material handling equipments. Furthermore, the ease of availability of finance for mobile cranes and construction equipment which is now being provided by more or less all major NBFCs/ Financial Institutions and Banks etc. has further helped the cause of increasing mechanization, as even small contractors and the companies are now able to buy their own machines. Demand for tractors is derived from agriculture sector. Increasing farm mechanization coupled with easy availability of equipment finance is likely to bode well for the companies like ACE. Financial Performance For the period ended / as at Mar.31, Working Results Net Sales Total Operating income PBILDT 2009 (12m, A) 446.28 446.28 39.28 2010 (12m, A) 433.94 433.94 41.62 (Rs. Cr) 2011 (12m, A) 699.39 699.39 65.19

For the period ended / as at Mar.31, Interest Depreciation PBT PAT (after deferred tax) Gross Cash Accruals Financial Position Equity Share Capital Net worth Total capital employed Key Ratios Growth Growth in Total income (%) Growth in PAT (after D.Tax) (%) Profitability PBILDT/Total Op. income (%) PAT (after deferred tax)/ Total income (%) ROCE (%) Solvency Long Term Debt Equity ratio (times) Overall gearing ratio(times) Interest coverage(times) Total debt/Gross cash accruals(years) Liquidity Current ratio(times) Quick ratio(times) Turnover Average collection period (days) Average creditors (days) Average inventory (days) Operating cycle (days)

2009 (12m, A) 4.30 5.74 30.17 22.73 28.25 17.98 155.91 195.42

2010 (12m, A) 3.65 5.25 32.77 24.44 29.67 17.98 169.53 200.39

2011 (12m, A) 4.96 6.89 54.32 40.59 47.81 18.58 207.15 281.64

8.38 -37.34 8.80 5.09 19.43 0.00 0.25 9.14 1.39 1.70 1.29 41 41 38 39

-2.77 7.50 9.59 5.63 18.40 0.00 0.18 11.40 1.02 1.61 1.24 42 50 51 43

61.17 66.10 9.32 5.80 24.60 0.00 0.35 13.13 1.50 1.23 0.78 34 49 52 37

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