Ambit Report on Greaves Cotton Limited

Recommendation: BUY
Target price: Rs. 178
CMP: Rs. 122

Below are a few excerpts from the report:

Auto volume growth to recover; new OEM signup likely

Greaves Cotton is guiding for higher volume growth in the auto business in FY16 (vs 2% in FY15). The company expects strong growth in cargos (40% of FY15 volumes) due to: (a) softening interest rates; and (b) reduction in foreclosure inventory of LCVs with bankers. The management remains confident of adding at least one large 4W OEM in 1HFY16; Greaves is also aggressively looking at multiple sign-ups in the LCV segment, given the recent product portfolio expansion from 0.7 tonnage up to 3.5 tonnage. The management expects NIL losses in the infra business in FY16, due to manufacturing shutdown and adequate provisions. Thus, it is guiding towards EBITDA margin of 15% in FY16 vs 11.7% in FY15. The company reiterated its guidance of doubling genset revenue in FY15-17. We reiterate our high conviction BUY. We factor in 23% adjusted EBITDA CAGR in FY15-17. At CMP, the auto business' low valuations (FY17E P/E of 11.7x, a 46% discount to peers) ignore the 21% margin and 30% RoE generated by this business.

Key takeaways from the conference call

FY16 to be a better year for auto engines led by higher growth in the commercial vehicle portfolio: Greaves Cotton's management is guiding for a pickup in the auto engine portfolio. Higher growth in the cargo vehicle segment (40% of total auto engines sold in FY15) would be driven by the recent softening of interest rates (YTD CY15 rate cut has been 75bps). Almost 80% of cargo vehicles are purchased on loans and hence any reduction in EMIs (fall-out of a rate cut) leads to replacement of old vehicles (replacement market is ~30% of the total market).

Shares of GREAVES COTTON LTD. was last trading in BSE at Rs.121.4 as compared to the previous close of Rs. 123.15. The total number of shares traded during the day was 4040 in over 117 trades.

The stock hit an intraday high of Rs. 123.1 and intraday low of 120.25. The net turnover during the day was Rs. 491930.

Source : Equity Bulls

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