We initiated building position in Sanghvi Movers back in 2018 and averaged down opportunistically to bring down our average cost to Rs 125 a share. Today’s price of Rs 673 is 5.3x higher implying this has been a volatile but extremely rewarding journey for us.

At the time of entry, SML was going through a down cycle while posting losses. The debt in the balance sheet created an additional burden but we had conviction in the strength of the business model as well as its management which used all the cash flows to completely deleverage the balance sheet.

Compared to the previous upcycle of 2017, the monthly rental yields fell from highs of 3.5% to as low as 1.5% at the bottom.

This down cycle has been the worst in the company’s history, so much so that last few years, even the promoter guided that forget 3.5%, the yields would not be able to go back above 2% even in good times.

We had a different thought process and our understanding of this industry’s dynamics and demand-supply led us to believe that yields can surprise on the upside once core user industries are back in action, which is why we continued to hold last few quarters even though the key lever of utilization had played out (at 80-85%).

In Q1FY24, the company posted a blended yield of 2.2%, despite most of the revenue coming from contracts done at yields of 2% or lower. This implies the spot yield has been extremely buoyant due to high demand from the wind as well as other infra sectors. Despite the low contribution of the spot, the overall yields came in at 2.2%.

We believe this positive cycle may last for a while and the yields have the potential to sustain at current levels or even inch up higher. The market too seems to be believing this as reflected in stock price and the current market cap which is at a lifetime high of Rs 2,900 Cr. This is at 1.3x the gross block of Rs 2,200 Cr.

Like always, the trick question at this juncture of any successful investment is to assess whether all the good news is already baked in the price and whether incremental risk-reward is worth holding on?

We already stated the positive (rewards) above, the risk part increases on account of two new factors 1). The company has started doing large capex which is funded via debt - so the balance sheet leveraging has begun again, 2). The new segment of EPC can surely bring quick revenues, but it is also a gruesome business with much inferior economics to the crane rental business in terms of margins as well as risks via warranties, cost overruns, etc. with back-ended risks.

Keeping in mind the risk-reward at this stage, we think taking the money off the table makes sense. Accordingly, we are exiting Sanghvi Movers at the current price. Whether we are early in exiting SML like Mrs. Bectors or it's a well-timed exit like Dhanuka Agritech, only time will tell.