Greaves Cotton - A Sequel, Reiterate BUY : Emkay

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Greaves Cotton

A Sequel, Reiterate BUY

BUY

CMP: Rs 92                                       Target Price: Rs 111

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n     Greaves Cotton enters into a 5-year supply agreement with M&M for supply of single cylinder engines for latter’s 3-wheeled vehicles

n     Shifting of engine sourcing from other suppliers to Greaves Cotton creates room for 2-3% upgrade in FY11E and FY12E earnings

n     M&M’s 4-Wheeler’s continues to remain out of ambit – but case strengthens in favour of Greaves Cotton

n     Currently, maintain earnings estimates of Rs6.4/Share and Rs7.9/Share for FY11E and FY12E, Reiterate BUY rating

Signs long-term supply agreement with M&M – Sequel to Tata Motors

Greaves Cotton has entered into a long-term supply agreement with M&M for supply of

single cylinder engines for 3-wheel vehicles. The agreement comes into force with

immediate effect and is for period of 5 years. Pursuant to this agreement, Greaves will

be single-source supplier of engines for latter’s 3-wheel vehicles. This agreement is

sequel to agreement signed with Tata Motors for Ace Zip.

YTD 3-wheeler sales for M&M is 50,648 Nos, up 39% - Greaves Cotton

locks these volumes Nos

YTD performance for M&M 3-wheelers has been extremely good. M&M has logged 39%

growth with sales volume of 50,648 Nos. Greaves Cotton is already a large supplier of

single-cylinder engines to M&M – but the current agreement locks both the parties.

Hence, shifting of engine sourcing from other suppliers to Greaves Cotton would drive

2-3% upgrade in FY11E and FY12E volume assumptions and earnings estimates.

M&M 4-Wheeler’s continues to remain out of ambit – but case

strengthens in favour of Greaves Cotton

Greaves Cotton is not supplier of engines to M&M’s 4-Wheeled pick-up trucks -

Mahindra ‘Geo’ and Mahindra ‘Maximmo’. It stays out of Greaves Cotton’s ambit. But,

recent long-term supply agreement for single-cylinder 3-wheeler engines strengthens

case for engine sourcing or supply agreements for 4-wheeler engines at latter stage.

Room for 2-3% upgrade in near-term earnings, but strengthens case for

robust far-term earnings

We believe that, transfer of volumes from other suppliers to Greaves Cotton would drive

2-3% upgrade in FY11E and FY12E volume assumptions and earnings estimates. It

also strengthens case for engine sourcing or supply arrangements for 4-wheelers at

latter stage, which could drive far-term earnings. Currently, we maintain our earnings

estimates of Rs6.4/Share and Rs7.9/Share for FY11E and FY12E – changes would be

factored at latter date.