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AN investment may be considered in the stock of Greaves Cotton, as growth prospects appear bright. Buy with a one-to-two year perspective.

The effects of restructuring of its businesses and debt, launch of new variants in engines/gensets, collaboration with foreign players for infrastructure equipment, and the thrust on infrastructure and agriculture at the macro level, may get fully reflected in earnings over such a period. The stock trades at a price earnings multiple of 10 times its likely per share earnings for FY 06. We have a buy recommendation outstanding on the stock made when it was trading at Rs 45 last April.

Greaves Cotton manufactures diesel engines, gensets and equipment for the infrastructure sector. Its engines find application in gensets, agriculture, low-end transportation vehicles and industrial operations. Given the buoyant trend in the economy, there is scope for higher demand growth from each of these end-user segments. The company has launched a couple of new variants for gensets, which could also enable it expand its market share. The defence (it is already one of the major suppliers of gensets) and mobile sector could provide an impetus to scale up revenues from this product segment.

With the boom in the construction sector, the increasing usage of ready-mix concrete and the thrust on infrastructure at the macro level, the prospects for its infrastructure equipment business appears bright. In the first half of FY 04, revenues of this business have risen by about 40 per cent. There could be considerable room for scaling up revenues as the company still operates on a small base. Its focus on after-sales services and branding initiatives are also likely to drive growth.

Its business restructuring that has been under way for three years continues. Following its exit from the industrial equipment business last year, it has now decided to sell the oil & drilling business for Rs 16.5 crore. This coupled with healthy cash flows from operations could lead to a further reduction in debt.

The company has cut its debt by about 60 per cent over the past three years to a level that is on par with shareholder funds. It has also replaced high-cost debt with funds sourced at lower rates. This has led to a sizeable reduction in interest burden. Over the next couple of years, it may be well placed to lower its debt burden further.

Higher input prices that are not passed on entirely to consumers could impact profitability and represent the principal risk to our recommendation.

S. Vaidya Nathan

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