Good For The Long Haul - Greaves Cotton

Recent downturn in the stock market has brought down prices of some counters lower than their intrinsic worth. And the time seems to be right for the investors to go on for shopping for companies which are available at prices investors could never think of. Now based on the similar line, our low price scrip for this fortnight is Greaves Cotton (GCL) which is trading at its book value. It is said that in uncertain markets dividends act as a soothing factor. Hence along with consistent dividend payment history and dividend yield of more than 7 per cent GCL seems to be comfortably placed.

The scrip also seems to be placed better on the valuation front where the CMP of Rs 72 discounts its trailing 12 months earning by just 3.50x. In addition, market cap to sales ratio of just 0.28x and EV/EBITDA of 1.75x makes the scrip further more lucrative. What adds to the confidence is low debt/ equity ratio of just 0.13x. We also feel that the expected reduction in the diesel prices, infrastructure stimulus packages announced by government, declining financing cost and reduction in raw material prices make GCL a good buy at current levels.  GCL manufactures diesel engines for the three-wheeler segment (51 per cent of the revenues), Infrastructure equipments (25 per cent), agricultural equipments (11 per cent) and industrial diesel engines for power generation (12 per cent).

There are several reasons why we are recommending GCL. But here one should note that GCL is mostly dependent on the automobile sector where no immediate recovery is expected. Hence the reasons we are providing are of longer term nature and the impact can not be seen in the short term. First is, GCL is mainly into diesel engines and government’s move to cut the diesel prices is expected to be a positive one. In addition company's dependency on the three-wheeler segment as earlier an issue. But now GCL has de-risked itself by entering into the four-wheeler (Sub One Tonne) segment. We feel it is expected to mitigate some of the negative growth witnessed in the three-wheeler segment.  Even the launch of twin cylinder diesel engine plant and G11 series of diesel engines is expected to help the company show better volumes.  Company is also expected to be benefited on account of lowering financing cost.

Now, the important factor is that along with increased volumes margins growth is also expected in both the segments as key raw material prices (Ferrous metals) have declined considerably. Another important factor is due to lean fixed cost structure even a modest rise in volumes is expected to help in improvement of margins.

On the financial front, after posting a flat topline growth and decline in bottomline for FY08 (June ending), Q1FY09 (September 2008) results have not been encouraging. Now, as stated earlier, the impact of all above factors will come in long term and hence the December quarter results may not be encouraging. But one should not judge the company by the performance of just one quarter. GCL has got all the ingredients to perform in long term and hence we recommend the investors to buy the scrip at current levels with a target price of Rs 98 in next one year.