Buy Greaves Cotton - Play on the light engine demand - IIFL

Better economics and the need for last-mile connectivity are driving volume growth for low-capacity SCVs and 3W vehicles — the key focus areas for Greaves Cotton (Greaves). Long-term supply agreements with key large OEMs provide growth visibility. Expanding farm equipment offerings through focus on R&D and better distribution would further aid revenue growth for Greaves. We estimate 16% EPS Cagr over FY12-15 and continued free cash generation despite large capex on R&D. We initiate coverage with BUY and a target price of Rs92.

Levered to the fast-growing, small commercial vehicle market: Proliferation of the hub-and-spoke logistic model drives faster growth for low-capacity SCVs. With 58% market share in three-wheeler (3W) engines and ~9% share in four-wheeler (4W) SCV engines, Greaves is strongly levered to this market. Although the shift from 3W to 4W SCVs is slightly unfavourable, ramp-up in engine volumes for 0.5 tonne 4W SCV of Tata Motors under long-term supply ensures volume growth. Further, plans to expand into higher-capacity engines will unlock more medium-term growth opportunities.

Diversifying end use to expand market: Greaves has credibly diversified its end use markets for engines by adding farm equipment, industrial engines/equipment, and construction equipment to its offerings. These segments contributed ~45% of revenue in FY12. Investments in R&D to enhance product offerings and expansion of distribution will support growth in farm equipment segment for Greaves. For industrial/construction equipment reversal in the investment cycle is the key to improvement in demand.

16% PAT Cagr; healthy balance sheet and return ratios: We estimate net profit Cagr of 16% over FY12-15ii, driven by 12% revenue Cagr and slight improvement in margins. Engines segment will drive the entire revenue growth. A strong balance sheet with net D/E of -0.2x and a track record of robust free cash flow would support planned capex and provide a buffer against any worsening in the operating cycle. We initiate with BUY and 12m TP of Rs92 based on 12x average FY14-15ii PER.

Source : Equity Bulls

Keywords