Sanasecurities

Home Greaves Cotton – Stock of the Month (April 2017)

Greaves Cotton – Stock of the Month (April 2017)

Date: 21 March 2017

Price: Rs. 167.75

Greaves Cotton Limited (“Greaves Cotton” or the “Company”) manufactures a wide range of industrial products to meet the requirement of core sectors in India and abroad. The Company’s core competencies are in manufacturing of diesel / petrol engines, gensets and pumpsets. The Company operates through 6 manufacturing units located all over India, with overseas offices in UAE, Tanzania and China.

Business:

  • Farm Equipment – Petrol / Kerosene Engines: 1 to 5 HP, Pumpsets and Power Tillers
  • Automotive Engines – Light Diesel Engines: 4.4 to 20 HP – caters primarily to the 3-wheeler and SCV segment.
  • Auxiliary Power – Large Diesel Generating Sets Range: 500 VA (Volt-ampere) to 500 kVA single unit and upto 2500 kVA in parallel running
  • Industrial Engines – Diesel Engines: 1.4 to 1000 HP range

Greaves Cotton

  • Engines include Agro products and Gensets
  • Infrastructure Equipment comprises of equipment used in road construction, bridges, dams, mining, etc
  • Others include products traded by international and aftermarket business.

INVESTMENT RATIONALE

Strong Financial Position

Greaves Cotton has shown consistent growth over the last ten years (i.e. 2006-07 to 2015-16). It’s net revenue from operations over this period grew at an impressive CAGR of 10 %. For FY 2016 PAT increased by 139.64 % to Rs. 200.41 Cr. from Rs. 83.63 Cr. Greaves Cotton has reserves in excess of Rs. 810.79 Cr and operates with ZERO debt on its books.

For Complete Financial Analysis – click here

AT THE CURRENT PRICE OF Rs. 168.70, GREAVES COTTON’s DIVIDEND YIELD IS 3.28%.

Growth in Farm Equipment Segment – Boost in Agriculture Segment

Greaves Cotton is among the top 3 players in the farm equipment segment wherein the Company provides wide array of products such as portable engines, pumpsets, power tiller etc. Farm equipments contribute about 15‐18% of the revenues. In pumpset category, Greaves Cotton enjoys more than 40 % market share, while in power tiller, the Company has 16-17% market share.

The Company is continuously increasing its manufacturing capabilities to introduce various mechanized farming equipments. New products or solutions continue to be introduced at regular intervals to suit various crop cycles and meet the requirement of different crops and different markets, depending on soil condition, etc. The Company continued its R&D efforts to indigenously expand its product portfolio in line with the strategy to discontinue the import of equipment.

Strong Market Positioning within 3W & SCV Engines Market

Automotive segment contributes 55-60% in the Company’s revenue; the segment manufactures fuel efficient, lightweight diesel / gasoline engines for 3-wheelers and small 4-wheeled commercial vehicles. Greaves Cotton clientele includes Piaggio, Mahindra and Mahindra, Atul Auto, Tata Motors and TVS. Over the years Greaves Cotton has been able to command an overall 3W auto segment share at about 35%, second only to Bajaj Auto (which has in-house engine manufacturing).

With both the rural and urban consumption showing signs of revival, three-wheeled truck and four-wheeled mini truck segment — used in last mile connectivity for delivery of goods in the neighborhood or doorstep of the consumers should continue to benefit the Company. The Company also added Eicher-Polaris to its client list last year, supplying engines for their small truck, Multix. Greaves Cotton has also developed engines compliant with BS IV standards. The Company 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.

INVESTMENT CONCERNS

Slowdown in the Automobile Sector

Improvement in economic scenario will play a key role in determining the demand and fortunes of the industry, which is moving out of the long spell of de-growth. The pace of the actual roll-out of infrastructure, mining projects and industrial projects will have a trickle down impact on demand for CVs, especially LCVS.

Dependency on Monsoon

Although the Government has been providing incremental support to the farm sector through various policy measures, the decision of farmers to invest in mechanization is still closely linked to the vagaries of monsoon. Irregular rainfall / dramatic change in climatic conditions impacts the cropping / harvesting pattern, leading to further adverse impact on the agro sector and the growth in this business segment.

Competition

Name

Last Price*

Market Cap.
(Rs. cr.)*

Sales
Turnover**

Net Profit**

Cummins

910.15

25,229.36

4,704.31

754.29

Kirloskar Oil

390.00

5,639.94

2,454.69

140.53

Greaves Cotton

167.20

4,083.14

1,616.20

198.78

Swaraj Engines

1,380.00

1,713.94

525.91

51.20

Kirloskar Ind

975.05

946.64

4.75

60.25

*20 March 2017

**FY 2016

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.