Stock Fundamentals

Greaves Cotton: Hold

Updated on: Sep 29, 2012
BL30ACE1

BL30ACE1

30greaves.eps

30greaves.eps

Good prospects for light commercial vehicles and the downtrend in interest rates, may drive the company’s prospects.

Catering to segments such as auto, power and construction equipment, the ongoing slowdown in the economy has impacted growth for Greaves Cotton in recent times.

The company manufactures products such as petrol/diesel engines for automotive, farming and industrial applications, gensets, farm equipment such as power tillers and reapers and construction equipment, including transit mixers, road compactors and pavers.

But good prospects for light commercial vehicles and the downtrend in interest rates, may boost the company’s prospects. Hence, existing investors can continue to hold the Greaves Cotton stock. The company’s strong R&D and low gearing are added positives. At the current market price of Rs 78, the stock trades at 12 times its estimated earnings for the year ended March 2013. This is at a discount to bigger peers such as Cummins, which trades at about 22 times.

Tough times for 3-wheelers

Unlike peers such as Cummins or Kirloskar Oil Engines, Greaves derives about 55 per cent of its revenues from the supply of engines to the auto segment. Piaggio, an auto maker with a majority share in the three-wheeler cargo segment, is the company’s major client. Greaves also supplies to other three-wheeler makers such as Atul Auto, Mahindra and Mahindra and Scooters India.

For more than a year now, the auto industry has been going through a moderation in volume growth and three-wheelers are no exception.

As against 10 per cent growth in 2009-10 and 2010-11, three-wheeler (goods carriers) volumes grew only by 6 per cent in 2011-12. Off takes in the first five months of this year were lower by 13 per cent when compared to the same period last year.

A second reason for the poor show by three-wheelers is the increasing competition from similar sized, but four-wheeled, cargo carriers (sub one tonne).

Small LCVs to drive growth

Thanks to advantages such as greater cabin comfort, higher mileage/fuel-efficiency and low maintenance costs, these mini-trucks are increasingly being preferred over three-wheelers. Greaves Cotton has tuned into this shifting market preference. It is already supplying to Piaggio’s four-wheeled truck, Ape, as part of an eight-year contract.

Greaves has also won a ten-year contract for the supply of engines to Tata Motors’ new half-tonne truck, the Ace Zip in 2011.

From a structural perspective, a shift to the hub and spoke model of logistics will favour the company too. Under this model, large heavy trucks are used to ply goods across cities and smaller trucks for last mile connectivity. While for this reason, the company expects the three-wheeler segment to keep growing in single-digits, a majority of the push in growth for the company will come from sale of engines for the four-wheeled small trucks.

Greaves engines’ market share in the four-wheeled segment grew to 9 per cent in FY12 from 3 per cent in FY11.

With M&M also manufacturing small LCVs such as the Gio and Maxximo, given its existing relationship for supply of three-wheeler engines, it could only be a matter of time before Greaves wins a similar contract from them. It targets to become the second-largest supplier of engines to this segment in five years’ time.

Pick-up likely in other segments

The growth of gensets (15 per cent of revenues) is linked with the economy, in general, and real estate, infrastructure and manufacturing sectors, in particular. Likely softening of interest rate, pickup in infrastructural investment will help in reviving demand.

The company is a player in the 300-500 KVA segment with about 10 per cent market share.

Considering that demand for gensets at the lower end remain fairly strong, the company is working on improving its offering in this range as it will help volume growth during a slowdown.

Besides, the pick-up seen in the roads segment in the June 2012 quarter bodes well for the company. Greaves sells equipment such as road compactors and pavers in its construction equipments division (10 per cent of the revenues).

In the farm equipment segment (15 per cent of revenues) too, the need to mechanise as a result of higher labour costs and unavailability of labour will drive the demand for equipment such as power tillers.

Financials

For the quarter ended June 2012, net sales grew by 2 per cent over the June 2011to Rs 409 crore while net profits declined by about 10 per cent to Rs 31.5 crore.

EBITDA margins stood at 12.8 per cent, down from 14.3 per cent a year ago.

Published on March 12, 2018

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