GREAVES COTTON LTD
Greaves Cotton Ltd. (GCL) is a leading manufacturer of diesel and petrol engines (~75% market share in 3W diesel engines), gensets and farm equipment’s in India. Customers are positive on the company as better business prospects due to new launches and revival in overall economy would lead to revenue growth. Further, improvement in rural economy is expected to lift farm equipment revenue. The stock trades at a P/E of 13.4x on FY19E earnings. The company deserves higher valuation on back of improving sales and operating performance, healthy balance sheet and average FCF yield of 5%.
The company derived majority of its revenue from automotive segment (~51%) followed by after-market (~19%), farm equipment (~14%), gensets (~12%) and others (~3%) in FY17.
Replacement demand is expected to drive volumes in the automotive segment with the implementation of BS-IV norms across India. A successful commercial roll out of its BS-VI compliant ‘leap engine’ will spur automotive’s long term growth. Apart from better monsoon, government’s thrust to double farm income over next five years augurs well for its farm equipment business. In addition, average decline in farm holding size, increasing mechanization are demand drivers. It also plans to grow its high-margin (20%) aftermarket business (19% of sales) by leveraging on its brand, extensive service and dealer network of over 3,000. We expect total sales and earnings CAGR of 14.5% and 18% respectively over FY17-19E, while EBITDA margin will expand by 140 bps to 16.3% by FY19E.