Published on 16/05/2017 12:24:56 PM | Source: Sharekhan
Buy Greaves Cotton Ltd For Target Rs.190.00 - Sharekhan
* Weak operating performance:
Greaves Cotton has reported a weak operating performance across the key parameters in Q4FY2017. The topline fell by 3.4% YoY to Rs390.7 crore (slightly below our estimate of Rs404.5 crore), driven by a 6% YoY drop in the Engine segment revenue. Subdued demand in Three Wheelers (3W) and Small Commercial Vehicles (SCV) in the aftermath of demonetisation continued to drag the topline. Operating Profit Margin (OPM) contracted by 180BPS YoY to 13.6%, due to an increase in the Raw Material cost (RM/Sales up 230BPS YoY). Greaves Cotton was unable to take price hikes in view of the transition from BS-III to BS-IV emission norms given the weak demand scenario. Consequently, the EBITDA declined by 15% YoY to Rs53.3 crore, which was below our estimate of Rs61 crore. During the quarter, the company reported an exceptional income of Rs6.5 crore (exceptional loss of Rs6.6 crore in Q4FY2016) on the back of profit on the sale of intangibles/property. Weak operating performance and higher depreciation charge (up 13% YoY) led to the adjusted PAT contracting by 12.5% YoY to Rs40.4 crore, coming in below our estimate of Rs44 crore.
* Growth to pick up gradually in FY2018; price hikes to aid topline growth:
Greaves Cotton’s core business, including Engines, Power Tillers, Auxiliary Power and Farm Equipment are expected to witness traction in demand going ahead owing, to new product launches and a wider distribution network. Successful pilots of the recently launched Power Tillers (in Agriculture segment) and pick-up in the Gensets business would boost demand for these products. With the liquidity situation improving post demonetisation (announced in early November 2016), the demand for Automotive Engines from the Auto OEMs (3W and 4W) is likely to improve, which would have a positive rub-off effect on Greaves Cotton. Also, the company has taken a price hike of 8-10%, primarily to pass on the increased cost on account of the transition to the new BS-IV norms, the full impact of which would be reflected in FY2018. Cumulatively, the above positive catalysts would boost revenue growth and we expect Greaves Cotton’s topline to grow at a CAGR of 12% over FY2017-FY2019.
* Multi-brand business (Aftermarket) to be new growth avenue; expected to gather pace in medium term:
Greaves Cotton has forayed into the Multi-brand Spares business targeted at the Automotive Segment (3W and 4W). Under the agreement, Greaves Cotton will manufacture as well as source Aftermarket products from vendors (who meet company’s reliability and quality standards) and distribute the same through its well-penetrated pan- India distribution network. The Multi-brand Spares market is estimated at ~Rs1,500 crore, with a 35-40% share cornered by the unorganised players. With the expected implementation of GST (w.e.f. July 1, 2017), the organised players like Greaves Cotton are set to benefit, as the unorganised players would lose their competitive advantage (unorganised players would increase prices to claim input credit). This would enable the organised players such as Greaves Cotton to grab market share from unorganised players, translating into higher revenues for the company. We expect the company to gain 8-10% market share in the Multibrand Spares business over the next two years. As per Greaves Cotton, the Multi-brand Spares business would not be capex-intensive and would enable the company to maintain its higher return ratios.
* Maintain estimates - Retain Buy with revised PT of Rs190 as we rollover target multiple to FY2019E earnings:
Over the next two years, Greaves Cotton’s revenue is expected to grow at a CAGR of 12% on the back of a pick-up in the core business, driven by new product launches and a wider distribution network. Also, price hikes taken by the company to pass on the higher cost due to the new BS-IV norms and likely improvement in demand give us comfort on the topline growth going forward. The recent foray by Greaves Cotton in the Multi-brand Spares business offers an additional growth avenue to the company. We have broadly retained our earnings estimates for FY2018/FY2019. We maintain our ‘Buy’ recommendation with a revised price target of Rs190 (21x FY2019E EPS), as we rollover our target multiple to FY2019E earnings.
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