Focusing on core strength… • Greaves Cotton’s (GCL) :: ICICI Securities,

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Focusing on core strength…
• Greaves Cotton’s (GCL) revenues declined 1.5% YoY to | 441 crore
(above our estimate of | 420 crore). The engine segment reported
2% YoY growth as the auto engine segment witnessed 11% volume
growth. The overall decline was on the back of discontinuance of
operations in the infrastructure segment
• Reported margins at 12.7% were below expectations of 13%, given
negative operating leverage arising out of the discontinuance of the
infrastructure segment. PAT stood at | 28 crore for Q2FY15
• Volume in the 3W auto engine space stood at 94000 units in Q2FY15,
implying growth of 16 YoY whereas volumes in the 4W SCV space
stood at 11000 units, down 21% YoY. GCL was able to maintain its
market share across all product verticals
Steady play on “last mile transportation story”
GCL derives ~55-60% of revenues (engine supply to OEM + spares
sales) from the automotive segment (3W vehicles + 4W SCVs). Going
ahead, with the urban population set to grow at a CAGR of 4.9% over
FY14-20E, we believe the want of last mile transportation is set to
increase at least in line with GDP growth of 6-6.5% over the next couple
of years. This, we believe, will provide steady but dominating visibility to
GCL as it commands 80%, 35% share in 3W goods segment, 3W
passenger segments, respectively, coupled with recent foray in
supplying engine to Tata Motor SCVs (Magic and Iris models). Hence, we
believe in the next three to five years, auto engine business can grow at
5% CAGR and, hence, form over 50% of GCL’s consolidated revenues.
Quadricycles: Potential but quantum of opportunity still not fathomable
Quadricycles can be an emerging segment for passenger transportation
where players like Bajaj Auto are striving hard to launch the first product
in the Indian market. We believe successful launch of the same (post
regulatory clearances) can open up a new segment for GCL as we
believe competing OEMs of Bajaj, outsource engines from GCL for their
3W and 4W vehicles. In this aspect, GCL has already developed a 265 cc
engine to cater to the needs of OEMs but the timing/quantum of demand
is still not fathomable owing to market acceptance.
Exits infrastructure segment operations - big positive for GCL
In Q2FY15, the management has taken a conscious decision of exiting
the loss making infrastructure division. Given higher competitive
intensity, this business was eating away into the cash flows of the engine
business. The share of this business had fallen from 12% in FY09 to 7%
in FY14. At the same time, the losses (EBIT level) in the segment had
climbed to | 27 crore in FY14, thereby impacting overall margins of GCL.
Post continuance of this business, minor losses are expected to be
reported over the next six months till the business is completely exited.
Laggard business exit to positively impact financials; maintain BUY
A recovery in the engines business and complete exit from the
infrastructure business may drive PAT CAGR at 18% over FY14-17E.
Even with the improvement in GDP, we expect sales to witness 14%
CAGR over the same period. The uptick in financial performance is
expected to drive RoE to 19-20% and will improve the cash flow
generation ability of the business. We expect GCL’s FCF to be at | 144
crore and | 273 crore in FY16E and FY17E, respectively. Given 18%
CAGR in PAT, we value GCL on 1x PEG to arrive at a target P/E multiple
of 18x on FY17E EPS. We have a target price of | 175 with a BUY rating.

LINK
http://content.icicidirect.com/mailimages/IDirect_GreavesCotton_Q2FY15.pdf