IIFL recommends BUY for Greaves Cotton with a TP of Rs. 190

Growth engine cranked

Strong growth expected in the automotive engines segment

Supply of engines to three-wheelers and LCVs contribute 55% of the revenues for Greaves Cotton. We see a revival in these segments and Greaves Cotton being a dominant engine supplier should benefit from this opportunity. The three-wheeler demand in India will see a steady growth considering rapid urbanization and lack of public transport system even in the existing tier-I and tier-II cities. Also, export of three-wheelers from India is increasing at a fast pace. SCV demand should revive with expected revival in industrial activity, implementation of GST and improved finance availability.

Low farm mechanization to drive farm equipment business

Farm mechanization in India has grown substantially over the past three decades due to expensive labour and better availability of organized finance. However, India continues to lag behind many emerging and developed economies leaving substantial headroom for growth in farm mechanization. Greaves Cotton being an established name in the rural areas through its pumpset and other equipments, will see large benefits accruing from this opportunity. Farm equipments contribute about 15-18% of the revenues.

Financials to gain strength on multiple grounds

Through value engineering, Greaves Cotton has been able to improve its gross margins consistently since FY12. Meanwhile, the company has also exited its loss-making infrastructure equipment business. With utilization levels below 70%, we see benefits of operating leverage coming in. These factors will drive 540bps expansion in OPM during FY15-18E. This coupled with revenue CAGR of 10% will result in PAT CAGR of 47%.

Valuation gap to narrow down when compared with the leader

Greaves Cotton currently trades at FY17E P/E multiple of 16.1x v/s 25.7x for Cummins India, the market leader. With strong earnings growth trajectory, exit from the infrastructure equipment business and renewed management focus on core business of engine manufacturing and allied operations, we see this gap narrowing. Recommend BUY with a 1-year price target of Rs190.

Shares of GREAVES COTTON LTD. was last trading in BSE at Rs.139.15 as compared to the previous close of Rs. 138.75. The total number of shares traded during the day was 31075 in over 247 trades.

The stock hit an intraday high of Rs. 141.5 and intraday low of 138.25. The net turnover during the day was Rs. 4332072.

Source : Equity Bulls

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