Greaves Cotton: Gaining speed

Investors with a one to two-year perspective can buy the shares of Greaves Cotton (GCL). The company is mainly in the business of manufacturing diesel engines for auto rickshaws, three-wheeled goods trucks and four-wheeled mini trucks such as the Ace, Ape, Maxximo and some of their variants. This segment accounts for 55-60 per cent of its revenues. Verticals, such as farm equipment, gensets and after-market sales bring in the rest.

The pick up in three-wheeler/mini truck sales in recent months makes the stock an attractive proposition. The improved outlook for the farm equipment division, thanks to the good monsoon, and the company’s initiatives to boost sales in the higher margin after-market segment also lend support to its prospects.

The stock now trades at about 17 times its trailing 12-month earnings. This is at a discount to bigger peers such as Kirloskar Oil Engines (26 times) and Cummins India (35 times).

The sale of light trucks have begun gathering steam in the last few months after the earlier slowdown. Light truck volumes have grown by 11.2 per cent in April-August 2016. Sales volumes of three-wheeled trucks have grown by 17 per cent. Auto rickshaw sales have also come back to double-digit growth this fiscal.

Going forward, auto rickshaw sales may depend on the opening up of permits by the government. But the cyclical upturn in the three-wheeled truck and four-wheeled mini truck segment should continue to benefit GCL. With both the rural and urban consumption showing signs of revival, these small trucks — used in last mile connectivity for delivery of goods in the neighbourhood or doorstep of the consumers — will be in demand. GCL’s clientele includes Piaggio, Mahindra and Mahindra, Atul Auto, Tata Motors and TVS.

The company also added Eicher-Polaris to its client list last year, supplying engines for their small truck, Multix. GCL has developed engines compliant with BS IV standards for these vehicles. It has also come out with a 1.5 litre, three-cylinder diesel engine which can be used in light trucks of higher payloads and is in talks with vehicle manufacturers for the same.

GCL is also betting on the good monsoon to push up sales in its farm equipment division. It has about 40 per cent market share in pump sets and is among the top three players in power tillers. In the three months ended June 2016, pump volumes showed a 10 per cent growth over the quarter ended June 2015, while tiller volume growth for the same period moved more briskly up to around 60 per cent. With growing farm mechanisation, prospects for farm equipment sales remain sunny.

For the quarter ended June 2016, net sales grew by 5.7 per cent to ₹399.5 crore, while adjusted net profits grew by 9 per cent to ₹42. 4 crore. Adjustments to the profits in both quarters include exceptional items due to the closing down of its loss-making construction/infrastructure equipment division in late 2014. Operating margin came in at 13.5 per cent, about 100 basis points lower than in the year-ago period. This was predominantly due to product mix issues, with the lower margin farm equipment segment showing higher volume growth than auto engines. GCL’s recent entry into the multi-brand spares business in the after markets (where pricing power is higher) should help margin expansion.

COMMENT NOW