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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: 12.0X
We recently met the management of GCL. 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 have started but all India
launch has been slightly delayed to March 2011. To cater to the 0.5 ton LCV
demand, the company has initiated capacity expansion in FY11 by adding
80000 units pa Greenfield plant near Aurangabad.
Owing to strong balance sheet, attractive valuations and a 25% upside from
current levels, we maintain BUY with a DCF based target price to Rs.110.
Key Highlights from our management meeting
Slight delay in launch of 0.5 ton LCV by Tata Motors
The management indicated that launch of 0.5 ton LCV "Magic" by Tata Motors has
been slightly delayed to March 2011 as against January 2011 expected launch. Tata
Motors aims to tap the rural demand for small vehicles and pick-ups with this upcoming
model. This vehicle will be apt for the smaller village roads. The vehicle will
compete with M&M's "Gio" in the 0.5 ton range. The current market for trucks with
0.5 tonne pay load is estimated to be around 2,000 vehicles a month. The price of
0.5 tonne truck from Tatas is expected to be in the range of Rs 1.6-2 lakh. Tata
Motors aims to capture a portion of the three-wheeler passenger carrier market with
the introduction of Iris.
GCL indicated that on full ramp-up of production of "Magic" should take place by
Sept 2011 by which time the production should reach 300 engines/day.
Significant increase in capex in FY11 indicates the
management's bullish outlook
GCL is currently seeing no let-up in demand for 3W diesel engines and is operating
on three-shift basis. In anticipation of strong volumes from "Magic", the company is
investing Rs 600 mn towards setting up a Greenfield plant in Aurangabad. 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.
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.
In this segment, the company competes with KOEL and M&M. Typically, the product
portfolio is inclined towards low to mid KVA engines. However, the company is not
a major supplier to telecom sector (like M&M) and hence has been spared the impact
of downswing in demand.
Management believes that material cost inflation is manageable.
The price of pig iron, which is the main input in engines has increased 22% in Jan
2011. GCL has long-term supply arrangements with OEMs and accordingly it makes
necessary price adjustement in response to material prices. With Piaggio, the company
has annual price adjustment. For Tata Motors, the company has understanding
to review product prices on a regular interval. For most major OEMs, the company
has some degree of pass-through arrangement in place. Thus, the company is confident
of preserving margins without major erosion.
Other Highlights
The company indicated that Auxiliary Power (DG set) and Agriculture segment
(mainly engine-driven pumps and power tillers) are also doing well and demand is
firm. The Agri segment is driven by farm mechanization as labour availability and
wages have gone up due to NREGA. State subsidy also plays a strong motivator for
investing in power tillers.
The company is also focusing on spares (18-20% of revenues) and revenue from this
segment has climbed steadily in recent years as vehicle population has increased.
The company has also started providing channel financing for distributors.
On the infrastructure equipment side, the company indicated that concrete mixers
have recovered but the road building equipment is still soft. The break-even level of
revenues in the infrastructure segment is Rs 450-500 mn (the company posted Rs
550 mn revenues in Q2 FY11 in this segment). We expect this segment to improve
on profitability on a sequential basis.
The company has recently launched a range of world class, state of the art technology
products. The range includes: Milling Machines, Paver, Loader, Twin Shaft
Batching Plant. The company has a tie-up with Bomag, Germany for construction
equipments.
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 12.0x FY12 earnings (Since FY11 has only 9M and is not
comparable). The stock is trading at 7.0x 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 25% 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: 12.0X
We recently met the management of GCL. 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 have started but all India
launch has been slightly delayed to March 2011. To cater to the 0.5 ton LCV
demand, the company has initiated capacity expansion in FY11 by adding
80000 units pa Greenfield plant near Aurangabad.
Owing to strong balance sheet, attractive valuations and a 25% upside from
current levels, we maintain BUY with a DCF based target price to Rs.110.
Key Highlights from our management meeting
Slight delay in launch of 0.5 ton LCV by Tata Motors
The management indicated that launch of 0.5 ton LCV "Magic" by Tata Motors has
been slightly delayed to March 2011 as against January 2011 expected launch. Tata
Motors aims to tap the rural demand for small vehicles and pick-ups with this upcoming
model. This vehicle will be apt for the smaller village roads. The vehicle will
compete with M&M's "Gio" in the 0.5 ton range. The current market for trucks with
0.5 tonne pay load is estimated to be around 2,000 vehicles a month. The price of
0.5 tonne truck from Tatas is expected to be in the range of Rs 1.6-2 lakh. Tata
Motors aims to capture a portion of the three-wheeler passenger carrier market with
the introduction of Iris.
GCL indicated that on full ramp-up of production of "Magic" should take place by
Sept 2011 by which time the production should reach 300 engines/day.
Significant increase in capex in FY11 indicates the
management's bullish outlook
GCL is currently seeing no let-up in demand for 3W diesel engines and is operating
on three-shift basis. In anticipation of strong volumes from "Magic", the company is
investing Rs 600 mn towards setting up a Greenfield plant in Aurangabad. 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.
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.
In this segment, the company competes with KOEL and M&M. Typically, the product
portfolio is inclined towards low to mid KVA engines. However, the company is not
a major supplier to telecom sector (like M&M) and hence has been spared the impact
of downswing in demand.
Management believes that material cost inflation is manageable.
The price of pig iron, which is the main input in engines has increased 22% in Jan
2011. GCL has long-term supply arrangements with OEMs and accordingly it makes
necessary price adjustement in response to material prices. With Piaggio, the company
has annual price adjustment. For Tata Motors, the company has understanding
to review product prices on a regular interval. For most major OEMs, the company
has some degree of pass-through arrangement in place. Thus, the company is confident
of preserving margins without major erosion.
Other Highlights
The company indicated that Auxiliary Power (DG set) and Agriculture segment
(mainly engine-driven pumps and power tillers) are also doing well and demand is
firm. The Agri segment is driven by farm mechanization as labour availability and
wages have gone up due to NREGA. State subsidy also plays a strong motivator for
investing in power tillers.
The company is also focusing on spares (18-20% of revenues) and revenue from this
segment has climbed steadily in recent years as vehicle population has increased.
The company has also started providing channel financing for distributors.
On the infrastructure equipment side, the company indicated that concrete mixers
have recovered but the road building equipment is still soft. The break-even level of
revenues in the infrastructure segment is Rs 450-500 mn (the company posted Rs
550 mn revenues in Q2 FY11 in this segment). We expect this segment to improve
on profitability on a sequential basis.
The company has recently launched a range of world class, state of the art technology
products. The range includes: Milling Machines, Paver, Loader, Twin Shaft
Batching Plant. The company has a tie-up with Bomag, Germany for construction
equipments.
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 12.0x FY12 earnings (Since FY11 has only 9M and is not
comparable). The stock is trading at 7.0x 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 25% from current levels,
we maintain BUY on the stock with an unchanged DCF based price target of
Rs.110.
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