India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GREAVES COTTON LTD
RECOMMENDATION: BUY
TARGET PRICE: RS.110
FY12E P/E: 13.3X
q In the annual report, 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 are expected to start meaningfully in the current
fiscal.
q The company had earlier indicated its medium-term target to double revenues
in three years timeframe.
q We maintain BUY with an unchanged DCF based target price to Rs 110.
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 Jul-March 2011 stood at 622117 units vs
495273 units, a growth of 26% yoy. During the year, the demand was strong
and GCL operated at full load to meet customer's requirements.
n The automotive division is setting up a Greenfield plant with a capacity of 80000
units to make diesel engines for Tata Motors LCV in the 0.5 ton range. This plant
is expected to be ready by July 2011.
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 The agriculture equipments (power tillers and engine driven pump-sets) added
few more products to its offering and made further inroads into the market. The
company launched new products to cater to the planting, plant protection and
harvesting needs of farmers. The main demand drivers in the agriculture segment
are increasing scarcity of labour besides higher cost of labour itself, improved
rural incomes and subsidized rate of interest for the agricultural sector.
The company continues to maintain a positive outlook on the sector.
n The Auxiliary Power Division manufactures diesel and gas gensets in the range of
15-500 KVA. 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. Given the massive infrastructure opportunity in the country, the
company foresees strong growth outlook in the current year.
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.
n During the year, the company also commenced sale of earth-moving equipments.
The products in this segment are currently imported and sold in the domestic
market under the Greaves brand without much value-addition. Going
ahead, the company's plans are that as volumes reach a critical mass, it can
then start indigenizing process for these products.
Financials
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 1.5 bn and Rs 1.4 bn in FY12 and FY13 respectively.
The company continues to remain net cash surplus of Rs 600 mn.
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.
Medium-term target is to double revenues in three years
The company has earlier articulated its medium plan of doubling revenues in three
years timeframe.
Valuation - Introducing FY13 estimates.
GCL is currently trading at 13.3x and 11.4x FY12 and FY13 earnings respectively. 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.
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.
No comments:
Post a Comment