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GREAVES COTTON LTD
PRICE: RS.89 RECOMMENDATION: BUY
TARGET PRICE: RS.105 FY12E P/E: 12.3X
q Firming interest rates coupled with slowdown in economic activity has
begun to reflect on the 3W volumes, which have decelerated in the July
and August.
q The deceleration appears to be relatively marked for GCL's main client
Piaggio.
q Stock has been resilient in the current market meltdown and outperformed
the sector by a large margin. We maintain BUY with a revised
DCF based target price to Rs 105 (Rs 110 earlier).
q The annual report highlights rising interest rates as the key risk for the
company's products.
Highlights
n The company is the sole supplier of light diesel engines to OEMs like Piaggio,
M&M and Atul Auto. Piaggio is the prime client accounting for the bulk of automotive
engines revenue. 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.
n The Indian 3W sales volumes during the Apr-Aug 2011 stood at 366313 units vs
310745 units, a growth of 18% yoy. During the Q1FY12, the demand was strong
but it has started to moderate in recent months. Industry volumes in July-Aug
2011 period has grown at 11% yoy.
n Volumes of GCL's main client segment grew 9.4% yoy in Apr-Aug 2011 period
but have slowed down further in July-Aug period to 8% yoy. Piaggio's 3W sales
in Jul-Aug are down marginally. However, the impact has been cushioned by
strong volumes from M&M and Atul Auto during the same period.
n We estimate 3W's to account for roughly 70-80% of auto revenues and around
50-55% of total revenue for the company and hence is an important variable to
monitor. We expect the impact of moderation in the 3W volumes to be felt in
the 2Q FY12 numbers.
n The automotive division is setting up a Greenfield plant with a capacity of 80000
units to make diesel engines for Tata Motors LCV (Ace zip and Magic Iris) in the
0.6 ton range. The commissioning of this plant was expected in July 2011 but
has been delayed. We expect strong marketing push for Magic Iris around the
festive season of Diwali.
n The 4W LCV segment has continued to defy the economic slowdown and has
been posting strong volumes. LCV volumes in Apr-Aug period have grown 32%
yoy to 147287 units. Tata Motors continues to lead this segment with a market
share of 59%.
n The company plans to spend Rs 1.0 bn towards capacity expansion at its various
locations including Aurangabad (Rs 200 mn), Ranipet (Rs 400 mn) and other locations.
The expansion at Ranipet (80000 units) and Aurangabad (80000 units)
should lead to a overall engine capacity of 600000 units pa by end of FY12.
n The company continues to maintain strong focus on R&D and is striving to engineer
new generation of engines that are more efficient on cost and emission
front. The entire range of automotive engines is now compliant with the BS-III
emission norms well ahead of the stipulated date.
n The company's medium term objective is to move up into higher capacity engines
and tap greater share of OEM business.
n Although the company is not actively looking at acquisitions, but a reasonably
priced facility for manufacturing high precision engine components could be considered.
GCL makes single and twin cylinder engines currently. For graduating
into three cylinder engines, the company may look at acquiring technology.
n 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, thus indicating the significant room for upside.
n In FY11, the company launched motor graders in the Indian markets, which were
well received. The company booked revenues of Rs 180 mn in FY11. The strategy
is to widen its product offerings in the road building segment.
Financials
n In view of the moderation in 3W volumes in July-Aug, we have made minor
changes to our FY12 revenue estimates.
n The company incurred capex of Rs 427 mn in FY11 majorly towards the
Greenfield plant at Aurangabad. The total cost of this plant is expected to be Rs
600 mn. The company plans to meet the balance capex needs from internal
accruals.
n The company generated free cash of Rs 677 mn during year. We project it to
generate free cash of Rs 1.3 bn in FY12.
n The company's subsidiary Greaves Farymann Diesel GmbH reported improved
performance in FY11 with a total income of Euro 4.8 mn and a marginal loss of
Euro 0.04 mn. The company has initiated strategic moves to improve the profitability.
The engines manufactured by Greaves Farymann are highly reliable and
hence preferred by several armies across the world.
Valuation
GCL is currently trading at 12.3x FY12 earnings. We maintain BUY on the stock with
a revised DCF based price target of Rs 105 (Rs 110 earlier)
Risks and Concerns
The Annual Report highlights the demand sensitivity of the company's products to
the interest rates and liquidity. In addition to this, commodity prices could play a
spoilsport.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GREAVES COTTON LTD
PRICE: RS.89 RECOMMENDATION: BUY
TARGET PRICE: RS.105 FY12E P/E: 12.3X
q Firming interest rates coupled with slowdown in economic activity has
begun to reflect on the 3W volumes, which have decelerated in the July
and August.
q The deceleration appears to be relatively marked for GCL's main client
Piaggio.
q Stock has been resilient in the current market meltdown and outperformed
the sector by a large margin. We maintain BUY with a revised
DCF based target price to Rs 105 (Rs 110 earlier).
q The annual report highlights rising interest rates as the key risk for the
company's products.
Highlights
n The company is the sole supplier of light diesel engines to OEMs like Piaggio,
M&M and Atul Auto. Piaggio is the prime client accounting for the bulk of automotive
engines revenue. 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.
n The Indian 3W sales volumes during the Apr-Aug 2011 stood at 366313 units vs
310745 units, a growth of 18% yoy. During the Q1FY12, the demand was strong
but it has started to moderate in recent months. Industry volumes in July-Aug
2011 period has grown at 11% yoy.
n Volumes of GCL's main client segment grew 9.4% yoy in Apr-Aug 2011 period
but have slowed down further in July-Aug period to 8% yoy. Piaggio's 3W sales
in Jul-Aug are down marginally. However, the impact has been cushioned by
strong volumes from M&M and Atul Auto during the same period.
n We estimate 3W's to account for roughly 70-80% of auto revenues and around
50-55% of total revenue for the company and hence is an important variable to
monitor. We expect the impact of moderation in the 3W volumes to be felt in
the 2Q FY12 numbers.
n The automotive division is setting up a Greenfield plant with a capacity of 80000
units to make diesel engines for Tata Motors LCV (Ace zip and Magic Iris) in the
0.6 ton range. The commissioning of this plant was expected in July 2011 but
has been delayed. We expect strong marketing push for Magic Iris around the
festive season of Diwali.
n The 4W LCV segment has continued to defy the economic slowdown and has
been posting strong volumes. LCV volumes in Apr-Aug period have grown 32%
yoy to 147287 units. Tata Motors continues to lead this segment with a market
share of 59%.
n The company plans to spend Rs 1.0 bn towards capacity expansion at its various
locations including Aurangabad (Rs 200 mn), Ranipet (Rs 400 mn) and other locations.
The expansion at Ranipet (80000 units) and Aurangabad (80000 units)
should lead to a overall engine capacity of 600000 units pa by end of FY12.
n The company continues to maintain strong focus on R&D and is striving to engineer
new generation of engines that are more efficient on cost and emission
front. The entire range of automotive engines is now compliant with the BS-III
emission norms well ahead of the stipulated date.
n The company's medium term objective is to move up into higher capacity engines
and tap greater share of OEM business.
n Although the company is not actively looking at acquisitions, but a reasonably
priced facility for manufacturing high precision engine components could be considered.
GCL makes single and twin cylinder engines currently. For graduating
into three cylinder engines, the company may look at acquiring technology.
n 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, thus indicating the significant room for upside.
n In FY11, the company launched motor graders in the Indian markets, which were
well received. The company booked revenues of Rs 180 mn in FY11. The strategy
is to widen its product offerings in the road building segment.
Financials
n In view of the moderation in 3W volumes in July-Aug, we have made minor
changes to our FY12 revenue estimates.
n The company incurred capex of Rs 427 mn in FY11 majorly towards the
Greenfield plant at Aurangabad. The total cost of this plant is expected to be Rs
600 mn. The company plans to meet the balance capex needs from internal
accruals.
n The company generated free cash of Rs 677 mn during year. We project it to
generate free cash of Rs 1.3 bn in FY12.
n The company's subsidiary Greaves Farymann Diesel GmbH reported improved
performance in FY11 with a total income of Euro 4.8 mn and a marginal loss of
Euro 0.04 mn. The company has initiated strategic moves to improve the profitability.
The engines manufactured by Greaves Farymann are highly reliable and
hence preferred by several armies across the world.
Valuation
GCL is currently trading at 12.3x FY12 earnings. We maintain BUY on the stock with
a revised DCF based price target of Rs 105 (Rs 110 earlier)
Risks and Concerns
The Annual Report highlights the demand sensitivity of the company's products to
the interest rates and liquidity. In addition to this, commodity prices could play a
spoilsport.
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