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GREAVES COTTON
RECOMMENDATION: BUY
TARGET PRICE: RS.110
FY12E P/E: 12.5X
GCL has reported strong set of numbers, which are ahead of expectations
due to higher than expected revenue growth and expansion in EBITDA
margins.
The management is positive on the growth outlook of the company and
expects a good year ahead. Supplies to Tata Motors LCV in 0.5 ton range has
started but volumes are thin. The company plans to expand capacity
significantly in FY11 by adding 80000 units pa Greenfield plant near
Aurangabad.
We maintain BUY with a DCF based target price to Rs 110.
Strong revenue growth driven by engines and infrastructure
equipments
For the quarter, net revenue grew 24% yoy driven mainly by all-round strong performance
of engines, infrastructure and agriculture segment.
The company is the sole supplier of light diesel engines to OEMs like Piaggio, M&M
and Atul Auto. Piaggio is the prime client.
The company is thus a play on the 3W segment (passenger and cargo) which in turn
is driven by rising urbanization and usage of light cargo vehicles for intra-city transportation.
3W volumes during the quarter for GCL's customers were up 24% yoy. The company
is positive on the demand outlook for the 3W segment and its plants are running
at full capacity to service the strong demand.
In the infrastructure equipment segment, the company makes concrete mixers and
pavers. This segment is driven by the construction and road building activity and has
been on a cyclical revival. However, current level of revenue is far below the peak
levels seen in FY08.
EBITDA margins remains strong. Infrastructure segment reports
marginal loss
For the quarter, EBITDA margins expanded 20 bps yoy due to higher productivity in
engines business and reduction in loss in the infrastructure equipment business.
Infrastructure segment is nearing a turnaround as reflected by marginal loss in the
quarter. This segment bore the brunt of credit crisis as demand fell off the cliff. Since
then while recovery has been taking shape, the segment is still well below the peak
revenue clocked in FY08. At improved volume levels, this segment can clock
EBITDA margins in low teens (10-12%). We expect the segment to turnaround in
FY11 with some marginal profits and should contribute meaningfully to the profits in
FY12.
Capital engagement within control
Capital employed across engines as well as infrastructure segment has registered a
modest expansion despite the robust increase in revenues indicating that working
capital cycle has remained under control. We expect robust cash generation to continue
in FY11. Interest cost has been on a secular decline for the year as the company
has turned debt free in FY10.
Supplies to Tata Motors started. Significant increase in capex in
FY11 indicates the management's bullish outlook
Greaves currently has more than 80% market share in the single-cylinder diesel engine
segment in India. The company has developed engine specifically for Tata
Motors' Penguin project - 4W in the 0.5 ton range (both cargo and passenger). The
company has this sole-supply contract for a period of 10 years. Supplies to the auto
major have already started on a small scale and all-india launch is expected by Mar
2011. The volumes from this product could be large on complete ramp-up. In anticipation
of this, the company is stepping up capacity expansion in FY11.
The company is investing Rs 600 mn in phase I specifically to cater to Tata Motors
LCV in 0.5 ton category. The first phase will have a capacity of 80000 units and
should be ready by Mar 2011. Post completion of the first phase, the company will
monitor the market response to the LCV model and decide on the launch of the
second phase at the same location.
However, the management is quite optimistic of the success of the LCV and expects
to launch and complete the second phase in FY12 itself. Together, the expansion
will increase the company's auto engines capacity from 360000 to 520000 units pa.
Growth outlook remains positive
The company expects the momentum in automotive segment to continue in the
current year given the rising urbanization trend, economic activity in rural as well as
urban India, offtake by new OEMs (Tatas for Penguin project) and infrastructure
spends.
Increasing in-house assembly of DG sets
Among its various initiatives, the company now plans to increase indigenization of
assembly of DG sets from 60% currently to 100%. The company had observed that
in the past its diesel engines were assembled by various DG set OEMs. Since GCL
did not have any control on these OEMs, the DG set would often have quality issues
which impacted the reputation of GCL in the engines market. To correct the situation,
the company has begun in-house assembly of DG sets. This way it can control
the final product quality as well as retain margins.
Target to expand non-auto engines business.
Bulk of engine revenues for GCL is accounted by the automotive division which caters
to the light transport segment (3W passenger and cargo). The growth in this
segment is dependent on the market expansion of 3W auto industry, which in turn
has grown at 8-12% CAGR in the past few years. The non-automotive engine segment
has higher growth potential driven by stand-by power, agricultural applications,
and marine and infrastructure applications.
GCL plans to strengthen its presence in marine engines segment where the company
was an established player in the 1990s. However, due to lack of focus, the
company lost market share and virtually vacated the space. GCL plans to regain its
lost position in the segment.
Valuation
GCL has changed its accounting year from June to March thus FY11 will be a truncated
fiscal with 9M numbers. We have accordingly presented annual numbers as
per revised format.
GCL is currently trading at 12.5x FY12 earnings (Since FY11 has only 9M and is not
comparable). The stock is trading at 7.2x FY12 EV/EBITDA basis.
The stock has been one of the top performers within our engineering universe. In
view of the strong set of numbers and adequate upside of 20% from current levels,
we maintain BUY on the stock with an unchanged DCF based price target of Rs
110.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
GREAVES COTTON
RECOMMENDATION: BUY
TARGET PRICE: RS.110
FY12E P/E: 12.5X
GCL has reported strong set of numbers, which are ahead of expectations
due to higher than expected revenue growth and expansion in EBITDA
margins.
The management is positive on the growth outlook of the company and
expects a good year ahead. Supplies to Tata Motors LCV in 0.5 ton range has
started but volumes are thin. The company plans to expand capacity
significantly in FY11 by adding 80000 units pa Greenfield plant near
Aurangabad.
We maintain BUY with a DCF based target price to Rs 110.
Strong revenue growth driven by engines and infrastructure
equipments
For the quarter, net revenue grew 24% yoy driven mainly by all-round strong performance
of engines, infrastructure and agriculture segment.
The company is the sole supplier of light diesel engines to OEMs like Piaggio, M&M
and Atul Auto. Piaggio is the prime client.
The company is thus a play on the 3W segment (passenger and cargo) which in turn
is driven by rising urbanization and usage of light cargo vehicles for intra-city transportation.
3W volumes during the quarter for GCL's customers were up 24% yoy. The company
is positive on the demand outlook for the 3W segment and its plants are running
at full capacity to service the strong demand.
In the infrastructure equipment segment, the company makes concrete mixers and
pavers. This segment is driven by the construction and road building activity and has
been on a cyclical revival. However, current level of revenue is far below the peak
levels seen in FY08.
EBITDA margins remains strong. Infrastructure segment reports
marginal loss
For the quarter, EBITDA margins expanded 20 bps yoy due to higher productivity in
engines business and reduction in loss in the infrastructure equipment business.
Infrastructure segment is nearing a turnaround as reflected by marginal loss in the
quarter. This segment bore the brunt of credit crisis as demand fell off the cliff. Since
then while recovery has been taking shape, the segment is still well below the peak
revenue clocked in FY08. At improved volume levels, this segment can clock
EBITDA margins in low teens (10-12%). We expect the segment to turnaround in
FY11 with some marginal profits and should contribute meaningfully to the profits in
FY12.
Capital engagement within control
Capital employed across engines as well as infrastructure segment has registered a
modest expansion despite the robust increase in revenues indicating that working
capital cycle has remained under control. We expect robust cash generation to continue
in FY11. Interest cost has been on a secular decline for the year as the company
has turned debt free in FY10.
Supplies to Tata Motors started. Significant increase in capex in
FY11 indicates the management's bullish outlook
Greaves currently has more than 80% market share in the single-cylinder diesel engine
segment in India. The company has developed engine specifically for Tata
Motors' Penguin project - 4W in the 0.5 ton range (both cargo and passenger). The
company has this sole-supply contract for a period of 10 years. Supplies to the auto
major have already started on a small scale and all-india launch is expected by Mar
2011. The volumes from this product could be large on complete ramp-up. In anticipation
of this, the company is stepping up capacity expansion in FY11.
The company is investing Rs 600 mn in phase I specifically to cater to Tata Motors
LCV in 0.5 ton category. The first phase will have a capacity of 80000 units and
should be ready by Mar 2011. Post completion of the first phase, the company will
monitor the market response to the LCV model and decide on the launch of the
second phase at the same location.
However, the management is quite optimistic of the success of the LCV and expects
to launch and complete the second phase in FY12 itself. Together, the expansion
will increase the company's auto engines capacity from 360000 to 520000 units pa.
Growth outlook remains positive
The company expects the momentum in automotive segment to continue in the
current year given the rising urbanization trend, economic activity in rural as well as
urban India, offtake by new OEMs (Tatas for Penguin project) and infrastructure
spends.
Increasing in-house assembly of DG sets
Among its various initiatives, the company now plans to increase indigenization of
assembly of DG sets from 60% currently to 100%. The company had observed that
in the past its diesel engines were assembled by various DG set OEMs. Since GCL
did not have any control on these OEMs, the DG set would often have quality issues
which impacted the reputation of GCL in the engines market. To correct the situation,
the company has begun in-house assembly of DG sets. This way it can control
the final product quality as well as retain margins.
Target to expand non-auto engines business.
Bulk of engine revenues for GCL is accounted by the automotive division which caters
to the light transport segment (3W passenger and cargo). The growth in this
segment is dependent on the market expansion of 3W auto industry, which in turn
has grown at 8-12% CAGR in the past few years. The non-automotive engine segment
has higher growth potential driven by stand-by power, agricultural applications,
and marine and infrastructure applications.
GCL plans to strengthen its presence in marine engines segment where the company
was an established player in the 1990s. However, due to lack of focus, the
company lost market share and virtually vacated the space. GCL plans to regain its
lost position in the segment.
Valuation
GCL has changed its accounting year from June to March thus FY11 will be a truncated
fiscal with 9M numbers. We have accordingly presented annual numbers as
per revised format.
GCL is currently trading at 12.5x FY12 earnings (Since FY11 has only 9M and is not
comparable). The stock is trading at 7.2x FY12 EV/EBITDA basis.
The stock has been one of the top performers within our engineering universe. In
view of the strong set of numbers and adequate upside of 20% from current levels,
we maintain BUY on the stock with an unchanged DCF based price target of Rs
110.
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