Greaves Cotton - Engine-ered for Growth...!!! - Nirmal Bang

Greaves Cotton (GC), established in 1859 is one of India's leading and welldiversified engineering companies. The company manufactures wide range of products such as Diesel / Petrol Engines for Automotive and Industrial applications, Gensets, Pump sets, Farming Equipment and Construction Equipment at 12 manufacturing facilities.

Greaves Cotton enjoys dominant position in 3W engine market and is tapping the opportunity of accelerated growth in 4-wheeled SCV engines. Long-term supply agreements with large OEMs provide growth visibility. GC has nearly 53 OEMs as its customers which reduces the risk of dependence (earlier was highly dependent on Piaggio) for the company. GC is also targeting to add OEMs in its client list and the existing clients are launching new products which will also be supplied by Greaves Cotton. Apart from the automotive engine business where GC is comfortably placed, the company is also focusing on improving its market share in non automotive business.

For the same the company is focusing on R&D and distribution network along with product launches expected to happen in FY14E. The company's construction equipment business is currently facing loss resulting from the turmoil happening in the overall industry. With break even expected in this segment towards the end of FY14E the company's overall performance is expected to witness improvement. We expect sales to report CAGR of 14% over FY13-FY15E and net profit to witness CAGR of 22% over the same period. Greaves Cotton has been focusing on reducing the overall cost through various efforts like vendor rationalization, change in product mix, rebuilding distribution network, focus on increasing spare parts business etc which we believe will help in improving the margins of the company.

In addition the strong balance sheet position of the company with almost negligible D/E ratio, healthy free cash flow and attractive return on equity further adds to our confidence in the stock. GC has consistently been paying impressive dividend to its shareholders and has also rewarded with special dividend. Looking ahead the outlook looks encouraging and therefore we recommend investors to BUY the stock at current levels as it is available at attractive levels compared to its underlying earnings potential. Any positive change in the overall demand environment, will lead to a significant appreciation in the stock price.

In Q4FY13, GC witnessed decline in EBITDA margins which was due to higher employee costs and unfavorable product mix. However, we believe that the recent price correction factors in all the major concerns. At CMP the stock is trading at 9.29x FY14E and 7.88x FY15E earnings respectively. Based on a target P/E multiple of 12x (as the stock was trading at multiple above 12 during April 10-April 12) and FY14E EPS of Rs 7.63, we arrive at target price of Rs92 indicating an upside of 29% from current levels. Thus, we recommend investors to BUY the stock at current levels from a long term perspective.

Source : Equity Bulls

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