Greaves Cotton: Stock Analysis

Greaves Cotton Ltd,
established in 1859, is one of India’s leading and well-diversified engineering companies. It manufactures a wide range of industrial products to meet the requirement of core sectors in India and abroad. The company’s core competencies are in manufacturing of diesel/petrol engines, gensets and pumpsets.  Even as the company is still heavily dependent on  on  demand for its petrol/diesel engines from automotive sector it has successfully ventured into related as well as new areas. The stock quoted at Rs. 139.85 on 03/02/2017. With a projected 10% growth in 3W (three wheeler)  auto engine segment in this year vis a vis a downfall last year, Greaves Cotton is attempting to further its hold in automotive engine segment and venture into other areas as well. Will the agricultural focus of the budget bring cheers to the company ?

Major Products
  • Automotive Engines: Greaves Cotton manufactures Diesel / gasoline engines  for Automotive Engines applications like 3-wheelers and small 4-wheeled commercial vehicles. Greaves light diesel engines are manufactured at ISO 9001 certified Units in Aurangabad and Ranipet. This is the largest contributor to company’s topline. 
  • Agri Business: Engines for portable agricultural pumpsets, power sprayers, power reapers etc. Also complete Power Tillers for agricultural needs. 
  • Auxiliary power business – Gensets 5 kVA to 500 kVA s. Greaves manufactures diesel generating sets in a wide range from 2.5KVA to 500KVA. The products are manufactured at its Chakan plant
  • After Market Business: The company ventured into independent aftermarket few quarters back for three wheeler and commercial vehicles. Under this Greaves Cotton provides multi brand spares vy  sourcing the components from suppliers and selling to the end user across categories viz engine, transmission, electrical, rubber parts and lubricants. Greaves has tied up with several  vendors for supply of spares and will initially focus on the fast moving engine spares. Greaves has a network of over 3,000 outlets spread across the country and plans to  leverage them to boost revenues  and plans to extend it for two wheeler spares as well.
.Quarterly Results
Quarter Results           Rs. Crore
  Sep-16 Jun-16 Mar-16 Dec-15 Sep-15 Jun-15
Gross Sales 488.55 443.64 403.83 404.64 471.07 422.00
Excise Duty 50.13 44.09 0 0 48.13 44.02
Sales 438.42 399.55 403.83 404.64 422.94 377.98
Total Income 452.33 414.7 418.07 444.57 437.83 397.31
Expenses 369.66 349.14 348.6 338.49 351.59 319.51
PBIDT 82.67 65.56 69.47 106.08 86.24 77.8
Interest 0.17 0.06 0.48 0.15 0.2 0.18
PBDT 82.5 65.5 68.99 105.93 86.04 77.62
Depreciation 11.51 10.91 11.09 11.56 11.5 11.23
PBIDT 70.99 54.59 57.9 94.37 74.54 66.39
Tax 19.74 16.05 19.59 31.48 19.64 22.58
Profit After Tax 51.25 38.54 38.31 62.89 54.9 43.81
Equity 48.84 48.84 48.84 48.84 48.84 48.84
Face Value 2 2 2 2 2 2
EPS (not annualized) 2.1 1.58 1.57 2.58 2.25 1.79
EPS (TTM) 7.83          
Price 140          
PE (TTM) 17.88          
Qtrly Sales yoy 4%          
Qtrly NP yoy -7%          
Qtrly Sales qoq 10%          
Qtrly  NP qoq 33%          

Income from operations for the company for Q2Dy17 was Rs. 489 crore as against Rs. 473 crore in the same period last year thus recording a growth of 3.4%. The growth is wth of 9.8% on a qoq basis. . EBITDA for Q2Fy17 is Rs. 70 crore as against Rs. 76 crore for the same period last year. This reduction in the EBITDA is due to one-time expenditure and provisions . The profit after-tax for quarter two is Rs. 51 crore as against Rs. 55 crore for the corresponding period last year and was affected by on account of one-off provisioning to the tune of INR 80mn relating to bad debts written off in the farm business. EBITDA margins continue to remain healthywere around 16% though a few point below on yoy basis.

Price Movement:

There are no comparable peers buts  the nearest  ones are Kirloskar Oil engines, Cummins India with overlap in few business segments only. Kirloskar Oil Engines and Cummins India both trade at PE of 33-35.5 . Greaves Cotton trades at a PE slightly below 20. 

Observations and Assessment
  • Over the years, Greaves Cotton has been able to garner a good share of overall 3 wheeler  auto segment engine business. It is 2nd  only to Bajaj Auto which manufactures its own engines.. In the three wheeler goods segment (sub 1-ton category), Greaves Cotton commands a market share of  80-90% share as it supplies its engines to Piaggio who is the leader in three wheeler goods carrier. Piaggio is also the single largest client of Greaves Cotton.
  • The auto segment constitutes 50-60% of the overall revenues of Greaves Cotton and some of its prestigious  clients in auto sector include the likes of  Tata motors, Piaggio, Atul auto, Mahindra & Mahindra , TVS, Eicher etc. 
  • Overall Diesel engines based 3 Wheelers account for 50% share of total 3 wheeler market & Greaves Cotton has a 75% share of the same.
  • The company’s existing supply agreements with Tata Motors (Magic and Iris models) and has made a  recent agreement with Eicher. 
  • The Multix (Made by Eicher Polaris) is powered by one of the smallest diesel engines in India, a 511cc motor manufactured by Greaves Cotton
  • Greaves Cotton is ready for upcoming  for BS-IV norm and its  teams are working with  customers towards BS-VI  for the future. 
  • It has also come out with a 1.5 litre, three-cylinder diesel engine which can be used in light trucks of higher payloads and is in talks with vehicle manufacturers for the same.
  • Greaves Cotton engines besides automotive needs are used extensively for portable agricultural pump sets, gensets, small boats, construction equipment and host of other applications
  • The engines are most popular for agriculture applications like power sprayer, pump sets and power reapers. Greaves is the trusted name across rural India for lightweight, portable pump sets. Greaves has increased its portfolio for the agricultural sector  with the launch of Greaves Power Tiller. The Power tiller is manufactured by a leading Chinese company and has been customized to suit Indian conditions.
  • Expecting a  revival in the agriculture sector, Greaves Cotton sector has  lined up a range of products that we will be launching over the course of time
  • Greaves Cotton has seen good traction  in sales of its generating sets which are branded as “Greaves Power”.
  • After Market Business which has been identified as a key area by the company on last few quarters seems to have launched well. Greaves Cotton started offering range of parts that meet the requirement of the major brand for three wheeler, commercial and passenger vehicles.Leveraging on its  strengths in both sourcing and distribution across the country, it aims to continue to roll out additional products.  aftermarket business it is a key growth area under the Greaves brand and has grown at a close to 10%.
  • Reliance MF on Jan 31, 2017  added more shares of the company and its stake stands at  5.07%. Tata Mutual Funds also holds a stake in the company.
  • Greaves Cotton announced that a Meeting of the Board of Directors of the Company will be held on 14 February 2017, inter alia, to consider and approve the Unaudited Financial Results of the Company for the third quarter and nine months ended 31 December 2016 and declaration of an Interim Dividend for the financial year 2016-17. These results will set the tone for the stock movement in near future.
  • Q2Fy17 resuults indicate that revenue growth was driven by strong momentum in the farm equipment and auxiliary power business. Volumes in pump sets and power gensets business saw healthy growth of 19% YoY and 70% YoY, respectively while business in Auto, LCV segment declined 27% yoy to 8000 units. Power tillers volume was at 1000 units (flat YoY). Auxiliary segment witnessed 70% YoY growth in volumes at 850 units as the company witnessed strong demand across 5KVA-500 KVA range. The services business also grew in high single digits in Q2FY17. 
  • Going ahead, management has turned it focus on growing the agri segment portfolio via introducing newer products relating to farm mechanization segment and also manufacturing products like tillers. We believe this move will further help Greaves Cotton diversify its business, which as of now is mostly dependent on the auto engine segment. 
  • Consistent growth in top line reassures us that growth will gradually pick up from here as LCV segment also starts contributing to top-line. 
  • Greaves Cotton is a cash rich company with cash to the tune of 450 crores & hence may pursue a liberal dividend policy. Last years its dividend was 275% amounting to  Rs. 5.5.
  • Demand for three Wheeler in the country which saw a negative trend in FY2016 grew 13% in H1FY17 and as per CARE Report is expected to grow 10% in 2017.
  • Focus of Union Budget 2017-18 on rural areas bodes well for the company and increased demand for this and new area should offset lack of growth in automotive  engine segment.
  • Overall Greaves Cotton seems to be stock with seasoned management, long track record, a degree of innovation and can be a reasonable performer.

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