Business is set to turn around for Greaves Cotton during FY18
Greaves Cotton Limited is engaged in manufacturing of engines, engine applications, manufacturing and trading of agro products, trading of spares related to engines and construction equipment etc. The Company has manufacturing facilities in the states of Maharashtra and Tamil Nadu. The products are mainly sold in India with some export to Middle East, Africa & South East Asia Region. The Company has one direct and two indirect subsidiaries having operations in India and Sharjah.
Company’s business performance has been muted over the last three years due to weak industry scenario and closure of its loss making infra business. Company derives more than 50% its revenues from 3W diesel engines. The muted volume growth and loss of market share of its customers have impacted company’s top line. The revenues were declined by 3% during FY12-FY16. However to address the concerns around its 3W diesel engine business, company has developed three new business streams – Leap engine, in-house manufacturing of power tillers and Multi brand spares across categories. Company’s growth is expected to pick up as the revenue will start flowing from new business streams from FY18.
Multi Cylinder leap engine – Innovative product catered to 4W market
Greaves has developed leap engine in Germany with the help of a knowledge partner. It is benchmarked to global standards and is fully capable to transition to the BSVI emission norms which are applicable in India from 2020. Engine outsourcing is very common in India. Greaves is looking for OEM customers to sell this product. OEM’s follow stringent quality norms and perform various tests before taking product from their suppliers. Though it is a tough process, sign-up of even single OEM can significantly drive the business growth for the company. Company is confident of its product success as its very flexible (can be upgraded from 3 to 4-5 cylinders) and is fully capable of transitioning to BSVI norms.
New Power Tiller to drive strong growth in farm equipment business
Farm equipment segment contributes around 14% to the overall turnover. About 50% of its revenue has come from engines used in pump sets, 30% from trading of power tillers (used to import from china) and remaining from engines used in power sprayers and power reapers. Recently, Company has launched its new range of farm equipment products – mini power tillers and paddy weeders which are in-house manufactured products. Increasing mechanization, labor shortage and reducing acreage are demand drivers for farming equipment in India. We believe power tiller offers good growth opportunity for this segment.
Multi-brand spares business – Offers good growth with high profitability
Greaves recently entered into a multi-brand spares business for 3W and SCV, which is Rs.3500cr per annum market. Greaves will be offering the complete range of multi brand spares across categories such as engine, transmission, electrical rubber parts, lubricants and body parts. Company has entered this business to leverage its already existing distribution strength (network of 1200 dealers, 3000+ outlets, and 10,000 mechanics). It has already tied up with 40 vendors to start this business. Margins in this business are very high at around 30%+. If company can scale up this segment it will help to boost profitability.
Profitability to improve and re-rating to happen.
Company’s operating margin has increased from 10.8% in FY14 to 16.5% in FY16 led by closure of its loss making infra business, consolidation of players and softening of commodity prices. We expect the company to sustain current margins levels. There is more scope for more expansion in margins with increased business contribution from leap engine and spare parts business. With strong metrics like 7.2% of OCF yield and RoCE of more than 25% company is trading at discount to its peers. With favorable factors in place, we expect the stock rerating to happen in the near future. Please contact our investment advisory department before taking any final decision on this company’s stock.