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Greaves Cotton Q4FY14 results update

May 5, 2014, Monday, 12:54 GMT | 07:54 EST | 16:24 IST | 18:54 SGT
Contributed by Nirmal Bang


Greaves Cotton (GC) results were below expectations with decline in revenues and EBITDA margins. The company reported exceptional items to the tune of Rs 33.4 cr related to sale of assets.

- Revenues declined YoY led by decline in volumes across all segments. Volumes witnessed sharp decline across the entire auto segment as both 3W and 4W volumes declined. Revenues in the engine segment witnessed decline of 6.7% YoY and was flat QoQ.

- Infrastructure segment continued to report loss – Rs 9.9 cr vs Rs 3.2 cr in Q4FY13 and Rs 6.5 cr in Q4FY14. For FY14 revenues in the infra segment witnessed decline of 23.3% and stood at Rs 124.3 cr.

- We expect an uptick in demand in the automobile segment as well as construction equipment post election and revival in macro-economic environment and expect revenues to grow 10.7% CAGR over FY14-FY16E.

- On account of the slowdown and challenging industry environment, GC reported de growth in auto engines volumes. Volume in 3W and 4W segment was down ~15% YoY.

- Although RM cost as % of sales witnessed improvement on YoY basis, EBITDA margins witnessed substantial decline led by lower top line growth (lower capacity utilization). Moreover, EBIT loss in the infra segment also impacted overall margins.

- Management aims to improve the capacity utilization from current levels which will aid in improving margins. We expect margins to improve to 11.9% by FY16E.

- Despite the slowdown in the overall macro environment which impacted the company’s business, GC has been able to maintain market share in every segment which is commendable.

- GC has reduced its short term and long term borrowings to zero and is now debt free company. GC does not have any major capex plan in FY15E.

The overall impact of slowdown in the auto and the construction equipment segment has impacted the performance of Greaves in FY14. 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, only a revival in these segments would 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 in the range of 18-21% for FY15E and FY16E. The strong balance sheet position with zero debt, healthy free cash flow and attractive return on equity continue to remain the key positives for the company. At CMP the stock is trading at 14.83x FY15E and 12.06x FY16E earnings respectively. We maintain our HOLD rating with a target price of Rs 90 indicating an upside of 7.9% from current levels.