Buy Greaves Cotton-Successfully Fights Base Effect; Emkay

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Greaves Cotton

Successfully Fights Base Effect; Reiterate BUY

BUY

CMP: Rs 91                                       Target Price: Rs 111

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n     Strong performance – (1) Revenues up 22% yoy to Rs4.2 bn (2) Stable EBITDA margins at 17% (despite high base) (3) Net profits up 36% yoy to Rs444 mn

n     All-round performance – Engines (revenues +19% and EBIT +16% yoy), Infrastructure (revenues +36% yoy with EBIT of Rs3 mn – after 8 quarters of EBIT loss)

n     Greaves Cotton (GCL) signs 10-year supply contract with Tata Motors for the new ½ ton truck – Ace Zip

n     Upgrade earnings by 5% and 9% for FY11E and FY12E  - Reiterate BUY with revised target price of Rs111/Share

Strong performance continues – Revenue up 22%, APAT up 36%, EBITDA

margins held at 17%

Greaves Cotton (GCL) posted yet another quarter of strong performance with net profit

growth at 36% yoy – ahead of estimates. Revenues grew by 22% yoy to Rs4.2 bn – in

line with estimates. It was all-round performance – Engines was up 19% yoy to Rs3.5

bn while Infrastructure was up 36% yoy to Rs483 mn. EBITDA margins remained stable

at 17.0%, defying unfavorable base (expected a 100 bps yoy decline). Consequently,

EBITDA grew by 22% yoy to Rs713 mn. Led by strong operational performance, net

profits grew by 36% yoy to Rs444 mn - ahead of estimates.

Engines division grew by 19%, Infrastructure posts EBIT of Rs3 mn

At the segmental level, both Engines and Infrastructure division delivered strong

performance (1) Revenue from Engines grew by 19% yoy to Rs3504 mn with PBIT of

712 mn (+16% yoy) –EBIT margins declines mere 50 bps – Engines recorded healthy

volume growth and capacity remain fully utilized (2) Infrastructure division grew by a

robust 36% yoy to Rs483 mn and posted EBIT of Rs3 mn – after 8 successive quarters

of EBIT loss (3) Others (largely tillers) posted healthy performance – revenues at Rs168

mn (up 10% yoy) and PBIT of Rs55 mn (up 93% yoy) – ahead estimates.

Company signs diesel supply engines with Tata Motors – significant

development in the quarter

GCL signs 10-year engines supply contract with Tata Motors for the new ½ tonne truck

– Ace Zip. It’s a 600 CC engines combustible on diesel and CNG. Company has already

initiated capacity expansion program- planning to add capacity of 80,000 Units in two

phases. First phase of 80,000 Units is expected to commence production in April 2011.

Meanwhile, delivery to Tata Motors has begun from existing facilities.

Upgrade earnings by 5% for FY11E and 9% for FY12E

We are aligning our estimates to factor (1) stronger traction and stable margins in

engines business and (2) break-even in Infrastructure business. Consequently, we have

upgraded earnings by 5% and 9% for FY11E and FY12E respectively. Earnings revised

from Rs6.1/Share to Rs6.4/Share in FY11E and Rs7.2/Share to Rs7.9/Share for FY12E.

We remain positive on GCL and maintain BUY rating with revised target price of

Rs111/Share versus Rs101/Share (Valuing at 14X FY12E Earnings).