Sanghvi Movers Ltd

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Our key objective is to pick stocks which can compound sustainably at a healthy rate for the next 3-5 years and create wealth. We like to select companies with strong competitive advantages and are quoting at a discount to their intrinsic value.

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Sanghvi Movers Ltd- Lifting Indian Infrastructure’s CAPEX

Content Index

• Sanghvi Movers– Investment Snapshot :- Slide #5

• Industry Opportunity – An Overview:- Slide #7

• Sanghvi Movers– Business Overview :- Slide #11

• Investment Rationale :- Slide #17Investment Rationale :- Slide #17

• Sanghvi Movers – Financials:- Slide #22

• Concerns & Reasoning :- Slide #24

• Conclusion :- Slide #25

“ Specialists in discovering Multibagger stocks “

Californian Gold Rush Storyline :

In 1848, gold was discovered in California. Soon, news about that spread around and led to a gold rush. People from all around the United States and abroad came to California to dig for gold, hoping to strike it rich. With too many gold diggers competing with each other, very few of them actually attained great wealth. However, there is a class of people who became rich—the ones who sell shovels and other equipment to the gold diggers.

Pick and Shovel Play :

A strategy where investments are made in companies that are providers of necessary equipment for an industry, rather than in the industry's end product.

Indian Infrastructure story :

Indian Infrastructure is similar to Californian Gold rush in the fact that everyone accepts that it is a huge opportunity, but very few investors have been able to benefit from the opportunity. Returns of Infrastructure asset owners and Contracting companies depend on a large number of variables which they don’t control and hence few are consistently profitable. In such a scenario, Sanghvi Movers which provide crane rental services is a perfect “Pick and Shovel” play.


Sanghvi Movers – Investment Snapshot (as on March 27, 2012)

Recommendation :- BUYAccumulation Range :- 100-120Target Range :- 240-300Investment Period :- 18 to 24 months

Current Market Price – Rs. 109.7

Bloomberg / Reuters Code – SGM IN/ SNGM.BO

BSE / NSE Code – 530073 / SANGHVIMOV

Sanghvi Movers established in the year 1989 by visionary entrepreneur Mr. Chandrakanth Sanghvi has evolved to become the largest crane hiring company in India.

Sanghvi Movers is also 7th largest Crane servicing company in the world. It dominates the Indian market with over 45% market share. In the above 100 tonnage segment, Sanghvi Movers has a near monopolistic 60% share.

With an expected trillion dollars of spending in the Indianinfrastructure sector in the next 5 years, Sanghvi movers

Mkt Cap (INR BN / USD Mn) – 4.74 / 94.04[1 USD – Rs. 49.50]

Total Equity Shares [Mn]– 43.2

Face Value – Rs. 2

52 Week High / Low – Rs. 137 / Rs. 83.5

Promoter’s Holding – 45.45 %

Institutional Holding – 32.33 %

infrastructure sector in the next 5 years, Sanghvi moverswill be the biggest beneficiary of the increasingopportunities in the sector.

Sanghvi Movers has been aggressive in buying cranes overthe past few years. Hence, any pick up in the CAPEX cyclewill result in substantial gains for the stock. During theprevious cycle, its share price multiplied by over 100X.

Sanghvi Movers in spite of being a small cap stock, hassignificant Institutional presence. Investors like CLSAensure that the company follows good Corporategovernance practices.


Key Investment Highlights

Best Placed company to take advantage of Infrastructure Boom – Sanghvi Movers has a wide range fleet ofover 400 cranes with varying utility and also complementary trailers. With a strong mix of old and newcranes, it has a unparalleled asset base in Indian market. In the last three years, Sanghvi Movers has investeda total of 679 Cr Rs in procuring cranes and building depots.

Strong Business Model – Sanghvi’s simple but efficient business model of building a robust fleet of leveragedassets and renting them out with a utilization rate of 85% and monthly yield of 2.9% is a good business.More importantly, this is a business where the incumbent market leader keeps on improving his competitiveadvantage or moat which makes it stronger and difficult for new players to compete profitably.

Healthy Balance Sheet – Sanghvi Movers doesn’t have a over leveraged balance sheet as in the case of other infrastructure stocks. With a Debt of around 700 Cr Rs, it is comfortable as the company generates over 180 Cr Rs of cash from operational activities. Working capital intensity of the company has increased since the Cr Rs of cash from operational activities. Working capital intensity of the company has increased since the downturn of 2008, but it should stabilize or possibly decrease from these levels.

Operational Excellence – Sanghvi Movers has a robust clientele most of whom are repeat customers whichunderlines the operational excellence of the company in spite of the entry of several new players. SanghviMovers also has strong human resources in the form of well trained crane operators, mechanics etc whichhelps it in performing better than its peers.

Hugely Attractive Valuations – The biggest reason to buy Sanghvi Movers is the cheap valuations at which itsquoting currently. Sanghvi Movers at a Market Cap of under 500 Cr Rs is juicy for investors who are willing towait for the next 2-3 years. At the current price of Rs. 110/Share, it is quoting at a P/E multiple of under 5and just over 2X its operating cash flows.


Industry Opportunity & Potential- An Overview- An Overview


Indian Infrastructure Opportunity• Total Envisaged Infrastructure Opportunity in 12th plan (2012-17) = 41 Lakh Crore

• Indian Infrastructure Spending as % of GDP is 6-7% which is lower than most other similar countries which on an average spend around 10-12% of GDP.

• Indian CAPEX spend which has been lower in the past few years will need to pick up to sustain the growth

• There is no one doubting about the growth of Indian Infrastructure industry and people are only concerned about the uncertainties involved. Also leveraged balance sheets, lack of transparency, increasing interest costs and unsustainable valuations have hit infrastructure stocks badly in the past 4 years.

• The current size of equipment rental in India is approximately $2.3 billion. As per a McKinsey study theearthmoving and construction equipment industry has the potential to grow fivefold from its current size of $2.3 billion to approximately $12-13 billion by 2015, growing at a 24 per cent compound annual growth rateconsidering upcoming power projects, refineries, cement units, metros and windmill erection. In the US, therental market is 65% of the total construction equipment market.


pick up to sustain the growth momentum.

Crane Rental Business

Advantages of Renting a Crane over Buying it :

• Equipment rental is advantageous because the responsibility of operation, maintenance, transportation and other administrative formalities like RTO registration and insurance lies with the supplier.

• The crane operation requires skilled operators, technicians and engineers for execution as well as crane

Crane Rental Spending as % of total Project Cost = 1%(Ex: A 1000 MW power plant with overall costs of 4,000 Cr spends around 25-30 Cr Rs on Crane Rentals with a time frame of 3-5 Years)

For Wind Power projects, it is a little higher at around 1.5%

• The crane operation requires skilled operators, technicians and engineers for execution as well as cranemaintenance. This burden can be passed on to the crane renting company.

• The most important thing is that capital is not blocked if a crane is rented instead of outright purchase.

• By renting equipment there is optimal utilization of equipment against idle time when there is no work in case of outright purchase. It is difficult to rent cranes with a small fleet.

• The requirement of cranes differs from project to project. This can be avoided if a crane is rented from a rental company where they (crane rental company) undertake the responsibility of providing suitable crane as per client's requirements.


Industry Characteristics• The under 100 Ton segment is largely fragmented with a large number of unorganized players in the market. It is only in the higher end of the market, there is consolidation and fewer players.

• When crane rentals cost around 0.75% of total project cost, customers generally don’t change rental companies for cost savings. A crane breakdown will hamper the progress of the project and a delay will lead to huge losses. Though customers ask for lower rates depending on the supply in the market, the vendor churn is usually very low if the service quality is good.

• Project Companies do not want to take the risk of managing these complexities and instead prefer to outsource to a professional player like Sanghvi Movers which helps them both financially and operationally.

• For example - a company like Suzlon which has continuous deployments for erection of its wind turbines, is • For example - a company like Suzlon which has continuous deployments for erection of its wind turbines, is still not buying its own cranes because of the complexities involved. Whereas Reliance, has its own cranes for building up refineries which it also rents out when they don’t have any need.

• Whenever there is a strong CAPEX cycle, demand for equipments go up and the rental companies which are able to scale up benefit hugely. Since it is a cyclical industry, companies which leverage during the uptick will find it difficult to survive during the tough times. Sanghvi Movers having been in the industry for over two decades, manages this cycles effectively.

• Indian CAPEX cycle will revive soon as the utilization ratios inch up, regulatory clearances get faster, lowering of interest rates and better sentiments. Sanghvi Movers having a large fleet of cranes will be a major beneficiary if the cycle restarts.


Sanghvi Movers– Business Overview


Key Highlights

Sanghvi Movers has strong advantages over its competitors in costs,

infrastructure, technical knowledge, operational history, clients, scale of

operations etc which makes it stronger.

Strong Moats

Sanghvi Movers in spite of high growth has not diluted equity and

managed its balance sheet well. Management is also conservative in accounting and in taking risks.

It depreciates a 25 Yr life time

Rational ManagementSanghvi Movers has an excellent

track record both in terms of business performance and shareholders perspective.

Sanghvi’s profits have multiplied

Excellent Track Record

Sanghvi Movers It depreciates a 25 Yr life time

crane in 8 years.

Sanghvi’s operational parameters are very strong with over 85% fleet

utilization and blended monthly yields of over 2.8%.

It has also containing its costs well and uses a optimum mix of old +

new cranes for operations.

Efficient Operations

Company’s ROCE is at a healthy 16%. Whenever CAPEX cycle starts

reversing, ROE can inch to over 22%.

Sanghvi Movers will be able to improve its Debt: Equity in the next

few years.

Healthy Return Ratios

Sanghvi’s profits have multiplied from 6 Cr in 2004 to 100 Cr in this

financial year.Movers


Robust Fleet of Cranes


• As on December 31, 2011, the company has a fleet of 398 cranes aggregating to Rs. 1507 Cr Rs out of it 226 cranes are 100 tonnes and above which constitutes nearly 90% of the gross block of the company.

• Sanghvi Movers has a good mix of old and new cranes which are effectively used based on the needs of the client and thus improving the blended yields.

• Sanghvi Movers has cranes across various types like Crawler cranes, Telescopic cranes etc and also supporting equipments like Counter Weights, Multi axle trailers etc.

Strong Track record

• Sanghvi Movers has a good operational track record which can be seen from the large number of repeat customers it has and also from the quality of its customer base. Company has also scaled up very well in the past few years with an aggressive CAPEX to serve its customers better.

• Its strong record for investors can be seen from the fact that the Total dividend received by shareholders adjusted to 2002 Face value is 80 Rs. The stock has been one of the top-20 wealth creators of the last decade. Dividend over the years has been pretty consistent.


Adjusted Share Price of Sanghvi Movers in 2002 = 1.35 Rs

Adjusted Dividend/ Share in Fy-11 = 15 Rs

Competitive Scenario

• With huge construction slow down in the Middle East, many foreign players have entered the Indian market over the past few years.

• Since, most of their cranes were idle and have been fully paid for, they have been pricing irrationally leading to price cuts in order to acquire market share.

• Sanghvi Movers being the 3rd largest player in

Rank Company No: of Depots

Areas of Operation

1 Mammoet 68 Worldwide

2 Lampson 6 Worldwide

3 Sarens 54 Worldwide

4 Maxim Crane 32 National

5 All Erection & Crane 30 Continental

6 Al Jaber 5 Worldwide

Sanghvi Movers is the 9th largest Crane Rental company in the world and 3rd largest in Asia

• Sanghvi Movers being the 3rd largest player in Asia has been dominating the Indian market and is expected to continue it.

• Indian players other than Sanghvi Movers are mostly a part of a bigger group which leads to lack of focus on this business. But they also have an advantage in a strong captive client base.

• But, none of the Indian operators have been able to scale up as successfully as Sanghvi Movers over the years.


6 Al Jaber 5 Worldwide

7 TAT Hong 35 Worldwide

8 Essex Crane 8 Worldwide

9 Sanghvi Movers 25 National

10 Am Quip 13 National

Indian Competitors :

1. Quippo.2. All Cargo Logistics.3. Foreign Players from Middle East.

Sectoral Break-Up


• Sanghvi Movers operates across sectors with its wide range of cranes. This helps in de-risking itself from slowdown in any one sector.

• Management aims that the contribution from power, refineries and wind power will continue to contribute over 80% of its revenues.

• Company’s margins has been relatively stable over the past few quarters and this is expected to continue.

Investment Rationale


Competitive Strengths• Given the Capital intensity on cranes above 100 Tons, it is virtually impossible for unorganized players to compete in this space which in itself limits competition to a select few.

• Given a large fleet of over 400 Cranes, Sanghvi Movers has a strong negotiating power with the crane suppliers enabling it to buy them cheaper than others. Also it provides economies of scale, helping it to utilize the accessories better for various sectors.

• Strong Knowledge, Experience and In-depth understanding of the business helps it to navigate tough environments by using scarce resources optimally.

• Experienced crane operators are very difficult to hire and hence Sanghvi Movers has set up its own training institute (India’s only). Trainees are initially used for smaller cranes and with 4-6 years experience,


training institute (India’s only). Trainees are initially used for smaller cranes and with 4-6 years experience, are allowed to operate higher end cranes. This gives Sanghvi Movers a huge advantage in scaling up trained operators compared to its peers. It also helps in maintaining the quality of workforce and re-tool them for new model of cranes.

• India being a vast country, transportation of huge cranes consumes a lot of time. Sanghvi Movers with the help of its 15 depots, is able to save on time and costs. Presence of depots helps it to serve customers better and maintain inventory better. Customers also rent cranes locally to reduce transit time.

• Sanghvi Movers experience in the industry helps it to buy and sell second hand cranes better and achieve better blended yields. Also repairing and maintaining old cranes is important and Sanghvi Movers with its strong team is able to do that better than others.

Expanding Moats (Cost Structure + Business Operations )

• Crane prices have increased substantially over 2007. Before the financial crisis of 2008, rental companies


• Crane prices have increased substantially over 2007. Before the financial crisis of 2008, rental companies were expecting a yield of about 4%/month. Today yields have come down substantially and only composite yields of around 2.5% is sustainable.

• On an average, a brand new German crane which is of higher quality and costlier gives a yield of about 1.2%/ month while Chinese cranes yield around 1.5%/ month. For a new player, with these yields it is difficult to invest higher amounts and compete against established players and gain market share.

• On an investment of 100 Cr Rs, new players will be able to earn revenues of 18 Cr Rs and an EBIDTA of around 12-13 Cr Rs. Add to it the interest charges and depreciation costs, it becomes unsustainable for new players to compete against depreciated cranes of older players. An efficient crane operator like Sanghvi movers, thus has huge moats which keeps on expanding over time leading to above industry growth for it.

Management Outlook

• Management is hopeful of maintaining the Utilization ratios at around 85% and Yields at 2.8%.

• Company wants to spend only 25 Cr Rs of CAPEX in Fy-13 which is essentially balancing CAPEX in the form of Axles, Trailers, Accessories etc.

Chandrakanth.P.Sanghvi (Chairman & MD), has been one of the pioneers in the crane hiring industry. With an engineering degree and MS from US, he has maintained the company to be a professionally managed organization with high focus on Corporate Governance and strong Board Processes.

• Management wants to see confidence improving on the ground level before committing huge CAPEX.

• They have clearly indicated their intentions of not getting into a price war or debt trap by overleveraging and chasing all the opportunities available.

• Company wants to become debt free in the next 3-4 years by using its cash flow to reduce the debt burden. If growth takes place, it would be happy to spend on CAPEX and increase its capacity.

• Sanghvi sees the intensity of irrational competition decreasing with tough environments. Though it is unlikely to abate in the next 2-3 quarters, it would be definitely much better by next year.


Highly Tempting ValuationsFinancial Snapshot :Gross Debt = 750 Cr Rs.Interest Payments = ~ 80 Cr Rs.Sanghvi Movers Cash Generation/ Year = 200 Cr Rs.EBIDTA/ Quarter = ~ 80 Cr Rs.

Cash Utilization : (Next Year)Next Year CAPEX = 25 Cr RsDebt Repayment = 150-200 Cr RsPossible Savings on Interest Payments = 20-30 Cr Rs

Three Years Hence : (If Management executes its plan)

Gross Debt = ~ 0Total Net Profits = > 150 Cr Rs

Sanghvi Movers, Current Market Cap = 475 Cr Rs. Current Enterprise Valuation = 1225 Cr Rs

If environment changes for better, company will add more cranes leading to improved Topline and Bottom-line performance than projected.


Total Net Profits = > 150 Cr Rs Gross Block = > 1500 Cr Rs.

• Sanghvi Movers is undervalued in the market and quoting at a deep discount to its intrinsic value. It can’t remain undervalued for a long time. Management will be giving either higher dividends or be forced to buyback its shares which will improve valuations in the coming years. ( Hoping that the management would be rational and not unnecessarily diversify or spend cash recklessly )

• Even with a conservative P/E band of 6-7, Sanghvi Movers should be quoting at double the current prices in 3 years which implies a 24% CAGR. But if the situation turns for better, stock will be quoting at its average P/E band of 10 (High-17 & Low-5), then the stock should be quoting at 3X current prices by FY-15.

and Bottom-line performance than projected.

Financials


Earnings Projection Income Statement (INR Cr) FY 10 FY 11 FY 12E FY 13E

Operating Income 331.5 261.2 440 464

Operating Expenses 78.9 105.4 128.8 137.4

EBIDTA 252.7 255.8 310 326

Other Income 11.2 12.3 20.9 10.7

Depreciation 78.7 92.9 109 117.6

Interest 47.5 49.2 71.5 61.5

Taxes 47.2 39.7 48.5 48.0

• Over the last 5-6 years, the taxes paid by the company has increased 10 fold, signifying the growth achieved and clear accounting practices.

• Sanghvi Movers book value has been growing steadily and this would over a period of time get reflected in the share price.

Taxes 47.2 39.7 48.5 48.0

PAT 90.4 86.3 103 109.5

Diluted EPS 20.9 19.9 23.4 23.8

Dividend Yield 2.7 % 2.7 % 2.8 % 2.8 %

ROE % 20.9 % 17.1 % 17.5 % 16.4 %

Book Value 108.5 124.9 143.7 163.6

• Sanghvi Movers will start adding more assets once the market recovers and this would help in improving the topline.

• Company’s depreciation accounting practice makes sure that it front loads the costs resulting in subdued EPS while the operating cash flows improves continuously.

Specialists in discovering Multibagger stocks “

Concerns & Reasoning1.) Muted Topline Growth in the next 2 years :

Though the topline growth may be muted, there will be significant improvements in the bottom line which would lead to better valuations for the business. Whenever the company feels that the demand is improving, it can invest in buying cranes which will improve topline.

2.) Increasing competition from foreign players + Irrational pricing leading to decreasing market share :

Management has indicated that the competitive pressures is decreasing and rationality has set into the system. It is only expected to improve as they understand the pressures of local dynamics and once the global economy starts recovering. In spite of this, Sanghvi has performed well and maintained market share.

3.) Increasing Working Capital Intensity + Bad Debts :


3.) Increasing Working Capital Intensity + Bad Debts :

Infrastructure players have faced several headwinds, which has led to delaying payments and certain defaults. Management has taken steps to improve the situation in the coming quarters.

4.) Extended CAPEX downturn resulting in lower returns :

This is a real threat but if India is to grow, it needs to improve its investments in infrastructure and a delayed CAPEX cycle will only lead to a more ferocious cycle resulting in better yields for Sanghvi movers.

5.) Dependence on Windmills sector (esp. Suzlon – 29% of total revenues) :

Management has been repeating that Suzlon has been prompt in payments, but this is a serious concern.

Conclusion


Price chart

• Sanghvi Movers has correctly sharply in the past year like most other infrastructure related stocks because

Share Holding %

Dec 2011

Sept 2011

June 2011

Mar 2011

Promoters 45.45 45.45 45.52 45.52

FII 28.66 20.77 20.77 21.27

DII 3.67 3.67 3.54 4.42

• Sanghvi Movers has correctly sharply in the past year like most other infrastructure related stocks because of negative investor sentiment in the sector.

• Institutional and Promoter share holding has been stable throughout. Unlike other Infra companies none of the promoters shares are pledged.

• We feel the stock is available at good levels for the 1st phase of buying and even if it corrects another 10-15 %, investors are advised to average down considering the strong fundamentals.

• Sanghvi Movers stock was one of the stars of the previous bull run with the share recording gains of around 300X between 2003-07. Though this kind of returns is difficult on a higher base, Sanghvi Movers is definitely expected to outperform the broader markets by a wide margin.


Conclusion

We are looking at a company which is expected to generate around 200 Cr Rs of Net cash over the next 3years, quoting at just under 500 Cr of Market Capitalization. More importantly, EV of the company is around1200 Cr and with the company’s plans to become debt free in the next 3 years, Share price could effectivelytreble (3X) even without a significant valuation re-rating.

Sanghvi Movers has faced lots of headwinds in the last few years like irrational competition from foreigncompanies, CAPEX slowdown, Financial Crisis, High Interest Rates, Slow Project Implementation due toregulatory hurdles, Project Cancellations, Payment Delays etc. In spite of all these, Sanghvi’s earnings havebeen solid and less volatile. More importantly, core performance metrics like Utilization Ratio’s and Yieldshave been maintained well.

A company with 70% EBIDTA margins, 22% Net margins, dividend yield of 3%, ROE’s in high teens isavailable at a price less than its Book value and P/E of less than 5. For a company with crane assets worth1500 Cr + 85 acres of depot across the country + Strong technical knowledge + Market Leadership, shareprice is quoting at a significant discount to its intrinsic value.

Infrastructure opportunity in India is very high, but few companies have competitive advantage orrational management to produce consistent returns. Sanghvi Movers is a perfect proxy play on the growthof Indian Infrastructure. Company has several possible triggers going forward like revival of CAPEX cycle,lowering of interest rates, Earnings growth, P/E expansion, Sentiment Improvement etc which combinesto make the stock a strong multibagger and generate superior risk adjusted returns.


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Sanghvi Movers Ltd

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