Spreading Its Wings - Greaves Cotton

Greaves Cotton (GCL) is one of the largest makers of light diesel engines in the world. Over the years, the company’s focus on research and development has resulted in an efficient product which has been gaining acceptance with original equipment manufacturers (OEM).

In a recent development, GCL has been made the sole supplier of engines to Tata Motors’ four-wheeler (4W) LCV ‘Penguin’, which is in the launch phase. It is also expected that the company’s infrastructure equipment division will achieve a turnaround in FY11. To celebrate the company’s 150 years it announced a one-time special dividend of Rs 7.50 per share. Thus, the total dividend for the year was Rs 15 per share, translating into a dividend yield of 4 per cent. To enhance liquidity, GCL undertook a stock split of 5:1 par value reduction from Rs 10 per share to Rs 2 per share.

Earlier GCL was heavily dependent on Piaggio for its engine segment business. But now the company has diversified its client base and has been making inroads into other OEMs, including Tata Motors and M&M. In addition to this, Piaggio is also sourcing engines from GCL for its 4W ‘Ape Truk Plus’ which was selectively launched in September 2009. It is expected that going forward the LCV cargo market will expand due to the availability of superior models. The infrastructure equipment segment bore the brunt of the credit crisis in 2008 and posted a sharp decline of 59 per cent in revenues in FY09. The segment margins turned negative due to lower volumes and higher material costs.

However, due to the expansion in infrastructure sector and renewed thrust on road building, it is quite likely that the demand will respond positively. The infrastructure equipment division may therefore witness a turnaround in FY11E and may contribute significantly from FY12E. On the financial front, the company witnessed a growth of 45 per cent in its topline at Rs 347 crore as against Rs 239 crore on a YoY basis. The bottomline too witnessed a growth of 109 per cent and was Rs 27 crore as against Rs 13 crore on a YoY basis. However, on a QoQ basis both the topline and bottomline witnessed de-growth of 3 per cent and 17 per cent and were Rs 358 crore and 33 crore respectively.

The decrease on a QoQ basis is mainly due to the increase in the employee expenditure which was Rs 30 crore - a jump of 31 per cent. The margins however witnessed growth at both the operating and net profit levels on a YoY basis which increased by 249 basis points and 243 basis points respectively. GCL reported expansion in EBITDA margins on the back of higher volumes coupled with softer material prices.

At the current share price the stock trades at a P/E of 16.38x on an EPS of Rs 24.05. Another important aspect is that the company is almost debt-free with a debt to equity ratio of 0.16. Our suggestion is that investors should enter the stock at the current levels with a price target of Rs 460, thus providing an upside of 17 per cent on a one-year time horizon.