Greaves Cotton Ltd (GCL ) – Offers 20-30% upside potential in medium term
GCL is one of the oldest engineering and diversified company which caters to a wide range of industrial products to meet the requirement of core sectors in India and abroad. The company manufactures Diesel / Petrol Engines, Gensets and Pumpsets which are primarily used in the automotive and farm segments. In the diesel engine 3 wheeler category, apart from Bajaj Auto which manufactures engines in-house GCL has emerged as the other major player in the segment with about 30% market share. In the 3wheeler sub 1 tonne category GCL is the undisputed market leader with about 90% market share. In this segment Piaggio is the market leader and is one of the major customer for GCL.GCL has manufacturing plants in 11 locations in India apart from Overseas offices in UAE, Tanzania and China.
Auto Engine Business
GCL’s Auto Engine’s business is one of the largest contributor to revenues with 60% of the overall share. The company went through a challenging phase in FY17 as the end customer businesses were impacted by weak demand which can be attributed to demonetization and transition from BS-III to BS-IV emission norms. The company’s 3 wheeler segment volumes de-grew by 16.3% and 19.4% in the 3rd & 4th quarter of FY17. However the weakness in the 3 wheeler segment was offset by the 4 wheeler segment which saw 6.7% volume growth in the 4th quarter thereby softening any major drop in volumes during the year. However we see recovery in FY19 & FY20 which will benefit the company’s volume growth. The other major challenge for the company is the emergence of environment friendly electric vehicles. However the company is taking steps to de-risk its engine portfolio by positioning itself as a fuelagnostic engine maker including electric mobility. CGL is planning for one 2W engine in the range of 110-115cc and one 3W engine in the range of 200-240cc.
The company is gradually improving its Genset business with focus on concentrated geographical expansion. The company currently has a 3% market share in the Genset business on a Pan India basis except in Gujarat & Maharashtra where the company has double digit market share.GCL plans to scale it up its geographical expansion with concentrated marketing and service back up apart from new product launches which has paid rich dividends. The company believes that the prospects of its Genset business are bright and expects double digit market share in the medium term on account of its geographical expansion and service back up.
Agriculture Farm Equipment Business
GCL has emerged as one of the top three players in the Agricultural farm equipment business where it offers a wide range of products such as portable engines, pump set, power tiller etc. The company is a major player in the pump segment with about 40% market share while in the tiller business it commands about 17% market share. The company is also continuously focusing on R&D initiatives to cater to mechanization of farms. With normal monsoon this year the company is likely to witness strong volume growth during the year.
After Market Business
GCL has been continuously striving to increase its network and currently has about 3000 service outlets and 1200 dealers across the country. This service network is on par with India’s leading car manufacturer Maruti Suzuki which has about 3000 dealers across the length and breadth of the country. This increase in service outlets has enabled the company to continuously increase its revenues from the Aftermarket Business which currently stands at 20%. The company believes that the addressable market for this segment to be Rs.1500 crores and has been growing at a steady pace.
We expect the company’s business to improve during the next couple of years driven by recovery in CV space which will benefit the company. The stock at the CMP of Rs.151/- trades at about 18.19x its FY18 EPS. The growth will henceforth be driven by new product launches in the electric mobility space and how the company adapts to technological changes in the auto sector. We recommend medium term investors to BUY the stock.