Focusing on profitable growth… • Greaves Cotton :: ICICI Securities, report

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Focusing on profitable growth… • Greaves Cotton’s revenues grew 1.8% YoY to | 431 crore (above our estimate: | 420 crore). While auto engine segment saw muted volume growth of 2% YoY, genset volumes saw a decline of 13% YoY. Pumpset volumes, however, saw staggering 50% YoY growth • Reported margins at 11.9% were below expectation of 13.2%, mainly on account of higher other operating cost. PAT was at | 1.8 crore • Volume in the 3W auto engine space stood at 90,000 units in Q2FY15, implying 6% YoY growth whereas volumes in the 4W SCV space stood at 11,000 units, down 25% YoY. However, 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 urban population poised to grow at 4.9% CAGR in 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 segment, respectively, coupled with recent foray in supplying engine to Tata Motor SCVs (Magic and Iris models). Hence, we estimate that in the next three to five years, the auto engine business can grow at 5% CAGR and, hence, form over 50% of consolidated revenues of GCL. 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 a 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 still is not fathomable owing to market acceptance. GCL to exit loss making infrastructure segment – big positive In Q2FY15, the management took a conscious decision to exit 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, losses (EBIT level) in the segment had climbed to | 27 crore in FY14, thereby impacting overall margins of GCL. The management indicated that most losses have been written off. Going ahead, only minor losses from the segment could be reported over the next couple of quarters. GCL also indicated that, going ahead, it could resort to contract manufacturing for the infrastructure segment if there is some recovery in construction equipment demand. Exit from loss making business to be earnings accretive; maintain BUY With the exit from the loss making infrastructure division and recovery in the engines segment, GCL is expected to report 25.8% earnings CAGR in FY14-17E. Even with an improvement in GDP, we expect sales to exhibit 8.5% CAGR in FY14-17E (12.6% CAGR in FY15-17E). The uptick in financial performance may drive RoE to 20-21% range and improve the cash flow generation ability of the business. We expect GCL’s FCF at | 147 crore and | 273 crore in FY16E and FY17E, respectively. Given 26% PAT CAGR, we value GCL on 0.7x PEG to arrive at a target P/E multiple of 18x on FY17E EPS. We maintain our TP of | 175 with a BUY rating

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