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Greaves Cotton Q1FY15 results update

August 7, 2014, Thursday, 18:05 GMT | 14:05 EST | 22:35 IST | 01:05 SGT
Contributed by Nirmal Bang

Greaves Cotton (GC) results were below expectations with marginal increase in revenues. EBITDA margins declined on YoY basis and PAT declined 9.5% YoY. Adjusted PAT stood at Rs 29.4 cr; down 7.5% YoY.

- Engines segment reported a healthy volume growth and 3W engines increased ~6% YoY and gensets increased ~30% YoY. Pre buying ahead of implementation of new CPCB norms led to spurt in volumes of Gensets. However, 4W SCV witnessed decline of ~20% YoY while pumps and tillers declined ~10% YoY.

- Although RM cost as % of sales witnessed improvement on YoY basis, the benefit could not flow in the EBITDA margins due to higher operating expenses. Moreover, EBIT loss in the infra segment continue to impact overall margins. On QoQ basis increase was led by improvement in gross margins and decline in operating expenses.

- After witnessing subdued growth in the engine segment (negative to lower single digit growth), GC has witnessed double digit growth in the current quarter. However, 4W engine segment continues to witness lower growth. We believe that the growth in the engine segment will pick up gradually and expect full benefit to come up in FY16E.

- Construction and infrastructure equipment division continues to remain an underperformer in line with overall industry trends. Management is striving to breakeven the segment by FY16E which we believe will only be led by recovery in industrial capex cycle and focus on infrastructure spending by the government. GC has been taking steps internally by adhering to cost control measures and has reduced its fixed cost from Rs 12 cr to Rs 6 cr.

- We expect an uptick in demand in the automobile segment as well as construction equipment with a revival in economic environment and expect revenues to grow 10.7% CAGR over FY14-FY16E (-8.9% in FY14). We expect margins to improve to 11.9% by FY16E from 10.8% in FY14.

The overall impact of slowdown in the auto and the construction equipment segment has impacted the performance of Greaves in the last 2 years. Despite this, Greaves has been focusing on reducing the overall cost through various efforts like vendor rationalization, change in product mix, rebuilding distribution network, focus on increasing spare parts business etc which will help in improving margins. However, all these efforts are not showing the desired impact as the key segments where the company operates have remained subdued. In our view, once the macro environment turns supportive, all these measures will lead results and lead to improvement in performance.

We expect PAT to witness CAGR of 20.6% over FY14-FY16E. We expect RoE to remain in the range of 15-17% and RoCE to be at 18-21% for FY15E and FY16E.

Strong balance sheet position with zero debt, healthy free cash flow and attractive return on equity remains key positives. At CMP stock is trading at 19.47x FY15E and 15.84x FY16E earnings respectively. We maintain our HOLD rating with a TP of Rs 121 indicating an upside of 10.6% from current levels.