Greaves Cotton - Prepping for The Leap; Result Update Q3FY15 ::Edelweiss, report

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Greaves Cotton’s (GCL) Q3FY15 PAT (adjusted for write offs in construction business and tax provision) of INR360mn was below our INR410mn estimate. Three wheeler (3W) auto engines volumes surged 2% versus industry’s 7% growth. The company continues to focus on value engineering and material cost reduction, evident in the 50bps gross margin expansion during the quarter. It has also been able to improve working capital by INR1bn on better supply chain and reduction in debtor days. We believe GCL is in a sweet spot to benefit from recovery in the small commercial vehicle (SCV) cycle by virtue of its cost-based leadership in the low-ticket vehicle segment. We introduce and roll forward our valuations on FY17E EPS with a revised target price of INR183 assigning 17x.

3W auto engines traction weak; EBIDTA margin steady

GCL’s 3W engine volumes surged 2.0% (at 100K) versus industry’s 7.0% growth (high as Bajaj Auto (not GCL’s OEM) grew 26%). While genset volumes slipped 13% (in line with industry), agri pump business catapulted 50%. Led by cost saving measures and value engineering initiatives, gross margin expanded 50bps to 32.3% and EBITDA margin surged 70bps. Management indicated that the gross margin expansion is sustainable. The ~50bps margin dip in the engine segment was primarily due to write offs in gensets inventory due to implementation of CPCBII norms.

New OEM addition, product development key growth drivers

The company’s primary focus remains on customer, product and channel development, besides exploring new geographies. GCL is in talks with the Eicher Polaris JV for manufacturing a 600CC SCV diesel engine. Though it is yet to enter into a formal contract, the company is confident of adding new OEMs in the auto segment in FY16, which can comfortably boost revenue growth to ~15-20%.

LINK
https://www.edelweiss.in/research/Greaves-Cotton--Prepping-for-The-Leap;-Result-Update-Q3FY15/28265.html