ValuePickr Forum

Greaves Cotton - Is this up to investors?

I’m incapable of doing a deep-dive analysis and that has kept me shy of posting new ideas. Nevertheless breaking that rule and posting my first idea:

Greaves Cotton: (mkt cap - 2067 crs)

Co is into manufacturing automotive engines, farm and construction equipments.

It caught my eye in last few wks/months back when I started seeing half/full page ads in newspapers. And now while re-reading Atul Auto thread recollected that it has a long-term supply agreement to supply engines to it and if I remember correctly reading some news similar LT pacts with Tata Motors and other auto cos too. So order book stability is more or less assured.

From there I took a quick screener look:

1/3/5/10 yr RoE hovering at ~30 - not bad.

Div yield ~2.5%,

PE 11.5

Virtually debt free. (& nothing on Cons side :slight_smile:

Then I loaded up chart. And as per my basic TA knowledge it tells me it’s forming a 1-year long cup-handle formation on both daily/weekly charts (attached). Am I reading it correct?

Stk has recently ran up from 75 to 85 which is its prevs resistance levels. Can this be called a double-top?And last week 100 EMA has crossed over 200 EMA.

So this is looking v.appealing both funda/TA front. Is my analysis correct?If so, the stk may be in for a long run chart is showing a lot of built up steam.

Please contribute your views on it and correct where I might be astray.


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Here’s the weekly chart. (How to attach two files in one post?)


kamikaze,

yes - like you, the bullishness around atul auto made me look this up too. It does look promising as it has long term supply agreements with the main 3W manufacturers and Tata Motors.

Here is a public link to a recent Emkay update - http://emkayglobal.com/Uploads/EmkayResearch/Greaves%20Cotton%20Q2FY13%20Result%20Update.pdf

Conference Call by Capital Market
on 31stJuly'13 and was addressed by Mr. Sunil Pahilajani, MD & CEO

Key highlights

  • Q1 FY'14 was a very challenging quarter for Greaves cotton. As per the management, the sudden slowdown in automobile sector was surprising.
  • Although the automotive sector was down sharply, the company was not that badly affected due to multiple products and multiple vendors.
  • Overall, engine segment volume was down by about 1% for the company in Q1 FY'14. 3W engine volume stood at 66000 during Q1 FY'14, down by 3% while other engines, which relates to marine and industrial engines, de grew from 8500 in Q1 FY'13 to about 5000 for Q1 FY'14.
  • Sale of engine to Tata Motors, however saw pick up during the quarter. Total engine sold grew by bout 25% y.o.y to 15000 engines during June'13 quarter.
  • Engines for Farm equipment sector did very well due to monsoon. Sale of Power tillers; power weeders and mini tractors were at record highs, although on low base.
  • Power gensets and Industrials remained flat during the quarter. However, the company has some good order book to follow in next couple of quarters.
  • Infrastructure sector was disappointing as the delay in execution and ordering together with RBI policy action, resulted in things remaining standstill it the sector. New products were introduced in this sector and some exports were also done. New office in Tanzania was inaugurated for export opportunities for this sector, during the quarter.
  • During the quarter, the company added new engine line for TVS and other smaller OEMs. Currently the company is working with more than 53 OEM's.
  • As per the management, there are no updates on the new emission norms and now looks difficult that the same gets implemented in FY'14.
  • The company was successful in bringing down the raw material costs through lot of initiatives of product mix and automation. However, the benefit of which was lost, due to lower volumes and loss in infra segment.
  • As per the management the endeavor is to improve the margins in the coming quarters, but all depends upon the recovery in automobile sector, which they expect it to happen from Q3 FY'14 onwards.
Represented by Sunil Pahilajani, MD & CEO and Narayan P, CFO of the company.

Key takeaways of conference call by Capital Mkt;

Revenue for the quarter ended Dec 2013 were Rs 423.40 crore, a fall of 18%. But with 290 bps contraction in EBITDA margin to 11.2%, the EBITDA was lower by 34% to Rs 47.35 crore. PBT (before EO) was lower by 39% to Rs 42.08 crore. After accounting for EO expenses of Rs 1.34 crore pertaining to VRS (compared to Rs 14.18 crore towards provision for diminution in value of investment in corresponding previous period), the fall at PBT (after EO) moderated to 25% to Rs 40.74 crore. Eventually gained by lower taxation, the Profit after Tax (PAT) stood higher by 12% to Rs 38 crore.

Other expenditure for Q3FY14 also includes Rs 2 crore of one off item pertaining to settlement towards residential flats.

Performance affected due to industrial situation. Both capital goods and auto sector demand is down and that has resulted in reduced OEM schedule for the company.

Lower sales are largely due to fall in volumes of 3-wheelers in the last two months.

The company has been working on technological improvements and value additions in its current product portfolio and has recently opened a Technology Centre for the Farm Equipment Business at Gummudipoondi, Chennai.

The Company has been focusing on building its products based on technology and value. The new 265 cc quadricycle petrol engine is developed on an all]new platform and could be adapted to run on compressed natural gas, if there is need. This technology is going to be relevant for the future and demonstrates the companyfs ability in meeting the technology requirements of the market.

MET CPCB II norms for gensets range will come into application in next few months.

The construction business launched the 37 metre Boom Pump to plug in the product gap and refurbish the product portfolio along with the newly introduced concrete S valves.

International business: Exports growth though less than the expectation of the company, it is still positive. Exports are about 5% of total sales and that is growing. The company is able to widen its global footprint in South East Asia, East Africa and Middle East markets and has set up a distribution and aftermarket network to service customers in these regions.

Auto engine volume for the quarter was about 110000 units compared to 120000 units in the corresponding previous period. Of the auto engine sales, the volume of 3 wheelers were down by 10% to 90000 units for Q3FY14 and that of 4 wheelers volume was down by 20% to 20000 units. For the same period the pump sets were down by 7-8% and the DG sets volume was down by 7-8%. Between volume and value decline there is not much difference. The company maintained itfs market share even in the declining trend of the overall market.

The sales volumes of 3 wheelers were down by 6-7% to 240000 units for 9mFY14. The 4 wheelers volume was down by 10-12% to 50000 units, that of pump-sets were down by 17-18% to 75000 units. The DG sets volume was roughly about 2000 units. On spares sales while the 3-wheeler auto spares sale was down 6% that of other spares business registered growth.

The sharp volume decline for overall three wheelers in Nov-Dec 2013 period has resulted in sharp fall in sales for the engines to the segment. It is a temporary phenomenon and the market will not go this way for long.

The agri portfolio (pumpsets & tillers) sales of the company correlates to subsidy and the delay in releasing of subsidy has hurt the sales.

Once CPCB implemented expect margin to improve. On CPCB II gensets as the company has done some innovation it expects margin to improve. The companyfs range is upto 500 kva. The price depends on the competition so the itfs difficult to tell now what will be the increase in price.

Now the company has localized power tillers unlike earlier where the company imported and traded in India. On account of this the tillers are reclassified with engines unlike earlier. Power tillers volume grew by 2-3%.

Auto business normally accounts for close to 60% of sales and rest of the business is in the range of 12-15%.

Capacity utilization for Q3FY14 was about 65-70% compared to 70-75% for FY13.

Lot of cost reduction actions taken out in earlier quarters continues. Though this cost reduction measures yielded good results that are not good enough to offset the lower sales impacting the margin. There was 210 bps reduction in material cost.

Net Working capital was down by Rs 50 crore as the company managed to reduce inventory and debtors. The inventory and drs days are about 60 days.

Capex incurred was Rs 40 crore for 9mFY14.

Given tough market situation the company has not increased the price for auto OEM but it is working on for a rise.

Current quarter (i.e Q4FY14) not much of change in sales trend is expected as auto continue to be sluggish with other segment improving a bit. Quarter to come Q1FY15 and Q2FY15 are expected to be positive.

**Co.rep by Sunil Pahilajani, MD & CEO.**Key takeaways of the call by Capital Mkt

Sales for the quarter ended Dec 2014 was up by 2% to Rs 431.08 crore and the operating profit was up by 9% to Rs 51.50 crore as the operating profit margin expand by 70 bps to 11.9%. Hurt by lower other income and higher depreciation the growth at PBT before EO level moderated to 4% (to Rs 43.84 crore). The EO for the quarter was an expense of Rs 40.66 crore compared to an expense of Rs 1.34 crore in the corresponding previous period. Thus the PBT after EO was down by 925 to Rs 3.18 crore. Eventually the PAT was lower by 95% to Rs 1.76 crore.

Excluding the discontinued infra business the revenue was up by 6% and the profit from operations before other income, interest and EO was up by 12% to Rs 45 crore compared to 8% growth (to Rs 39.10 crore) if not excluding the discontinued infra business .

EO expenses for the quarter comprise of Rs 8.86 crore towards impairment of assets, Rs 25.58 crore towards write off of inventories, Rs 5.12 crore towards provision for or write off of advances/ receivables and Rs 1.10 crore is towards employee separation cost. The company which has discontinued its construction equipment business has taken process to sell its asset and this has resulted in impairment of assets. In engines business with upgradation to higher emission norms i.e. CPCB II norms, some of the inventory has become redundant resulting in written off to the tune of Rs 5-6 crore and accounted as part of EO under inventory written off. Balance inventory written off pertains to discontinued infra business.

Loss from discontinued business for the quarter ended Dec 2014 was Rs 40.79 crore compared to Rs 23.10 crore in Q2FY15 and Rs 3.92 crore in Q3FY14. Jump in loss of discontinued business is largely on account of sale/write off machinery and pending inventory over and above the over head expenses. Going forward while the overhead loss to continue, no significant losses on account of inventory/machinery to occur as the outstanding inventory is insignificant. Overhead expenses of Rs 1.5 crore per quarter is expected to occur on account of discontinued infra business going forward.

Auto engines volume for Q3FY15 was marginally up by 2% compared to the volumes of corresponding previous period. While the 3 wheeler volume was up by 8% the 4-wheeler volume declined by 25% in Q3FY15.

The pumpset volume in Q3FY15 stood at 30000 numbers compared to 20000 numbers in corresponding previous period.

The company sold about 4000 units of gensets in Q3FY15. The upto 500 kva genset market decline by 13% in Q3FY15 and the company maintained its market share.

In infra businesses the company continues to trade with equipments sourced from contract manufacturing and serve the after-market demand. The company will leverage is IPR built up so far in this segment.

CPCB II complaint engines â the company so far have launched new emission norm complaint products in certain segments only. It is yet to launch any product in 250 kva. It has recently only launched a product in 500 kva segment. With more product launches the company expect margin to improve in gensets segment going forward.

Overall auto engine market size is growing and the company is working to get new accounts and both of this to drive growth going forward.

…Looks like finally Greaves cotton is turning…this is from Capital market - They will supply engines to Multix…
Greaves Cotton
Set to return to growth
Product and client diversification and discontinuation of loss-making business augur well for this leading small engine manufacturer
Related Tables
Standalone financials

Greaves Cotton is a multi-product and location company. One of the leading engineering companies in India with core competencies in diesel and petrol engines, farm equipment and gen sets sustains its leadership through seven manufacturing units producing world-class products backed by comprehensive marketing and service and parts network throughout the country.

The engines business finds application in the automotive, industrial, auxiliary power and farm sectors. Trading is conducted in light agricultural equipment, a few construction equipments and other adjacent products.

The largest domestic manufacturer of light diesel engines for the three-wheeler and small four-wheeler commercial vehicles (more than 70% of diesel three-wheelers in India are consumers) enjoys an enviable competitive position due to economies of scale, strong brand recall among three-wheeler operators, and established dealer network, leading to timely availability of spare parts.

The growth of the three-wheeler and small commercial vehicle segments of the automobile industry declined in the last two years due to higher fuel prices, accounting for around 65% of total operating cost; increase in interest rates as around 65% of vehicles are purchased through borrowings; and general slowdown across the country. This is expected to reverse as the economy picks up pace and fuel costs and interest rates come down.

A new range of Central Pollution Control Board (CPCB) II-compliant engines and gen sets, which offer better life-cycle costs and enhanced value to customers were launched in the fiscal ended March 205 (FY 2015). After a slowdown in the three-wheeler industry over the last four years, investment has started in the gen set business. The introduction of the new CPCB II norms in July 2014 has been used to successfully launch a new gen set with mechanical technology. Gen set revenue grew compared with decline recorded by other leading players. Thus, competitive pricing has proved effective.

From the initial offering of pump sets, manufacturing capabilities have been strengthened over the past two years to introduce various mechanized farming equipment. The product range covers more than 25 to 30 kinds of mechanized equipment. New products or solutions continue to be introduced at regular intervals to suit various crop cycles and meet the requirement of different crops and markets, depending on soil condition. R&D is deployed to indigenously expand the product portfolio in line with the strategy to discontinue import of equipment.

The increasing thrust on farm mechanization on account of rising cost of farm labor is expected to improve the prospects of light agri equipment including power tillers. Overall, investment is being channelized to develop various light agri equipment, which is expected to drive future growth of the business.

The manufacture of customized industrial engines is a perfect fit for numerous machine and equipment applications in a variety of industries. The products serve the critical needs of a vast spectrum of industries including construction, mining, agriculture, marine, rail cars, fire control and material handling. The challenging business environment, however, affected the demand for products, and the performance of various segments remained moderate in FY 2015. But with expectations of a benign investment climate and revival of investor confidence, economic activity is forecast to pick up in FY 2016, fuelling demand for industrial engines.

On 16 September, 2014, manufacturing operations of construction equipment were discontinued due to non-viability. Accordingly, related assets will eventually be disposed of. Necessary disclosures will be made as and when any concrete development takes place. This should do away with the negative contribution from this division (normal loss of Rs 34 crore in FY 2015) and also fetch some cash flow once the assets are sold. Thus, overall profitability will improve.

Sales fell 2%to Rs 1688.70 crore and the operating profit margin improved 11.3% to 11.8%, taking up operating profit 3% to Rs 199.80 crore in FY 2015 over a year ago. Extraordinary (EO) loss stood at Rs 65.92 crore as against Rs 7.99 crore. Thus, profit before tax after EO fell 34% to Rs 108.74 crore. After providing for tax (down 47% to Rs 27.21 crore), profit after tax (Pat) fell 28% to Rs 81.53 crore.

We expect Greaves Cotton to register sales of Rs 1857.57 crore and Pat of Rs 143.17 crore in FY 2016. EPS works out to Rs 5.9. The stock was trading around Rs 136 on 27 July 2015.

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my take from q1 call

Greaves Cotton - Volume to pickup with margin improvement to continue - Looks attractive

· Outlook – Company has tied up with Eicher for its MCV vehicle and have started supplying in small quantities. This will boost the quarterly volumes of 4 wheelers which is seeing some decline over past few qtrs. As per Eicher, they are targeting 60000 units for FY16 and 120000 units in FY17 which brings the quarterly engine requirement at around 15000 units for FY16 vs Q1 4-wheeler engine sales of only 9000 units by Greaves Cotton. This will bum-up volume growth from Q3 onwards as Eicher will ramup its production.

· Margin- Q1 ewngine margin improvement on back of operational cost control and debottlenecking of processes. Company is yet to see full benefit of commodity price and product mix going forward. Management indicated that Q1 margin can be sustained over the course of the year.

· Capacity Utilization stands at 70% and there is ample scope to improve once Auto-segment starts improving which will also margin accretive

· Capex – not much capex.

· Cash balance at Rs 400cr vs Rs 340cr in Mar’14. No debt.

· Q1 Revenue breakup- Auto – 60%, Farm – 15%, Genset – 15% and Aftersales – 10%

· Q1 Volume – 3-wheeler 70000 units (flat yoy), 4-wheeler 9000 units (down 18% yoy), Pumps 15000 units (down -28% yoy) and Gensets 500 units (down 9% yoy)

At CMP of Rs 140 – Stock trades at PE of 22x and Ev/Ebitda of 14.3x its ttm earnings. Potential of earning growth is good with growth in volumes in Auto segment.

in conclusion, if they are able to increase engines volume - margins will show sharp improvement - one from higher utilization (operational leverage) and two from lower commodity prices giving them further boost to margins… which will directly flow to PBT as no debt on books…i think tehre will be upside to earnings in fy16 estimates…

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Sunil Pahilajani MD & CEO & Narayan Narasia CFO addr callHighlights by Capital Mkt
In September 2015 quarter, sales fell 4%to Rs 424.73 crore. Engines Division sales fell 4% to Rs 408.20 crore.While the revenue growth is still a concern on account of weak market conditions, various operational excellence initiatives have started yielding results and has been reflected in the EBITDA margins improvement.OPM jumped 510 basis points from 12.7% to 17.9% taking OP up 35% to Rs 75.97 crore.PBT grew 55% to Rs 75.42 crore. EO loss stood at Rs 1.85 crore against Rs 14.80 crore. PBT after EO soared 117% to Rs 73.57 crore. After providing for tax (up 195% to Rs 19.31 crore), PAT jumped 99% to Rs 54.26 crore.
For the six months ended September 2015, sales fell 7%to Rs 805.39 crore. For the six months, Engines Division sales fell 5% to Rs 778.34 crore.OPM jumped 520 basis points from 11.9% to 17.1% taking OP up 34% to Rs 138.11 crore.PBT grew 51% to Rs 133.71 crore. EO gains stood at Rs 5.54 crore against a loss of Rs 15.43 crore. Thus PBT after EO soared 90% to Rs 139.25 crore. After providing for tax (up 140% to Rs 41.65 crore), PAT jumped 74% to Rs 97.60 crore.
The company has show caused its modern 105 HP three cylinder, BS IV complaint, ’ leap Engine’ for automotive applications at recent Society of Automotive Engineers - China Congress & Exhibition at Shanghai, China which offers attractive value proposition to its OEMs. This thrust on farm Equipment sector continues with launch of indigenized Mini Power Tiller and Paddy Weeder. The company can provide more such engines of different variants.These farmer friendly products are value for money and suitable for local soil condition.
The launch of Greaves Mini Power Tiller and Greaves Paddy Weeder is a testimony to its continuous efforts in innovation and product development.Its Farm Equipment Business is focused on transforming the lives of small & marginal farmers by enabling them to mechanize various farming practices backed with strong service network & easily availability of Spare Parts in rural markets at affordable prices. These machines are certified by Government of India as per the latest standards andare backed by Greaves cotton’s nationwide authorized dealer networks.The company has focused on few things. These include focus on genset business, farm equipment business, cost minimization and working capital improvement.Value engineering and other cost initiatives has helped the company in getting better margins. Benefit of lower commodity prices also has helped in improving the OPM.Going forward, commodity benefit will have to be passed on.Volumes for 3 wheeler was 80000 in September 2015 quarter (against 90000 y-o-y) and 4 wheeler was 10000 (10000) respectively.Pump business volume was 22000 in September 2015 quarter (against 25000 y-o-y) tiller was 1000 (against 2000).
Second half should be better than fist half in auto business.The company’s market share in 4 wheeler segment is around 85%. The company is in Small Commercial Vehicle (SCV) segment which is sub 1 ton vehicle. The company can offer solutions for 3.5 tons also.Auto business accounts for 55% of its sales.After Markets sales accounts of 18-19 of sales.In tax the company enjoys benefits for R&D spends so it is 26-27%.The company has Rs 100 crore capex.Utilisation is 75% in Auto Engines.Around 55% of sales come from Auto OEMs, 18-19% comes from After Market and rest comes from agri power generation.3 wheeler and 4 wheelers segments will get better for the OEM’s. This is what the company is hearing from the OEMs.Exports is 4% of sales and the company is hoping it to enhance it to 10% of sales in next 3 years.Price negotiations with the OEMs happen around twice a year.Volume wise second half is expected to be better than the first half.

CONFERENCE CALL - from Capital Markets

Greaves Cotton

EBITDA margins are sustainable

The company held its conference call on 8th February 2016 to discuss results for December 2015 quarter.
Sunil Pahilajani MD and CEO addressed the call

Highlights of the call:

Sales for the December 2015 quarter stood at Rs 406 crore against Rs 431 crore.

EBITDA was Rs 67 crore against Rs 51 crore, up 31%.

PBT before EO was Rs 68crore against Rs 44 crore.

In the weak market scenario where revenue growth is challenging, the company has continued its focus on margin enhancement.

It has sharply improved its EBITDA margins from 12% to 17%.

On the recent development around tightening of emission norms the management said that as an engine manufacturer, it is their prerogative to support OEMs with emission complaint engines and maintain preparedness for any changes in emission regime.

Greaves is ready for proposed nationwide implementation of BSVI norms for 4-wheelers and for 3-wheelers in 2017.

For the proposed advancement of BSVI, the company has accelerated its plans and initiated discussions with OEMs as well as its partner network of suppliers and technology specialists and is confident of achieving BSVI with a cost effective solution.

The company sustains leadership through seven manufacturing units

The company is one of the leading engineering companies in India with core competencies in diesel /petrol engines, farm equipment and gensets.

The economy continues to be subdued.

The company has maintained market share in key products.

The company has been able to maintain focus on new product development, new customers and new geographies.

The company has reduced its cost which is sustainable.

The company has 53 OEMs as its clients.

During the quarter 3 wheeler volume is 80000 against 85000 y-o-y. For nine months it was 230000 against 245000

During the quarter 4-wheeler volume is 7000 against 10000 y-o-y. for the nine month it was 25000 versus 31000.

During the quarter pumps volume was 29000 same y-o-y.

The commodity benefits have been passed to the OEMs. But value addition and other benefits remain with the company.

Genset volume grew 4% to 460. Volumes in genset business have grown above industry as genset industry has not grown much and the company is a small players in that basket.

The company will soon launch 250 KVL engines in the next quarter.

The EBITDA margins are sustainable.

The company has already provided for the retrospective bonus for the employee in December 2015 quarter.

The company sold 500 tillers during the quarter same as last quarter.

After market growth was 7-8% during the quarter largely led by auto business.

After market accounts for 18-20% of sales.

The company has around Rs 500 crore of cash.

Exports accounts for 4% of sales.

Out of the agri sales, half comes from the pumps business.

Urilisation was 70%.

The company does not foresee any growth in volumes as OEMs are not seeing any uptick in demand.

Volumes in BSIV will go up sharply next year.

The company will give an idea on capex at the year end.

Greaves Cotton partners with Altigreen Propulsion Lab. Interesting idea that will help the company.

This company will be earlier ones to disrupted by e-Rickshaws

Chart looks interesting - 120 looks like long term support and it does looks like inverted head and shoulder pattern to me.

disc: Invested & i’m novice in reading charts

It is Cup & handle pattern & scrip is taking support at neckline.Bullish.

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What will be the impact of e rickshaw?

Huge. 3-wheelers is polluting and easier to replace with e-vehicles as they are used for short commutes.