* Q1FY2018 weak results:
Greaves Cotton Limited (GCL) reported a weak set of numbers for Q1FY2018, below our estimates across parameters. The company’s topline remained flat at Rs.406 crore. Subdued automotive engine volumes and slowdown in the aftermarket segment due to dealer destocking prior to GST offset growth in agri-related segments. The company’s operating margin at 13.6% contracted by ~140BPS YoY because of inability to take price hikes, given the subdued demand environment. EBITDA at Rs.55 crore declined by 8% YoY, below our estimates. Higher tax outgo (Tax/PBT – 34% in Q1FY2018 vs. 27% for Q1FY2017) further dragged PAT. Adjusted PAT at Rs.35 crore dipped by 20% YoY, below our estimates. During the quarter, GCL realised exceptional gain of Rs.6 crore (compared to Rs.2.1 crore loss in Q1FY2017) on account of profit on sales of intangibles/property.
* Demand revival on the anvil – Improved macroeconomic scenario, new product introductions and price hikes to result in improved revenue and margins:
GCL’s performance across product segments was muted in Q1FY2018 due to a feeble demand scenario. However, the outlook has improved substantially with key concerns of GST roll out and transition to new emission norms left behind. Improvement in rural sentiments and better economic growth would lead to revival in the automotive segment. Further, GST roll out is expected to result in significant re-stocking in the aftermarkets business and a demand shift in favour of organised players, resulting in strong growth. The company’s consistent focus to enhance its distribution reach would further increase the brand value and add to its topline growth. In addition, GCL has launched two new power tillers in the agri-equipment segment. Cumulatively, we expect GCL’s revenue to grow at a 10% CAGR over FY2017- FY2019. Additionally, management has hinted at possible prices hikes in the near future (price hikes deferred as Q1FY2018 witnessed a weak demand scenario), across segments, which is likely to result in improved margins. We believe GCL will sustain its margins and expect a 10% profit CAGR over the next two years.
* Outlook - Earnings growth to gain pace:
Positive economic indicators including better economic growth post the normal monsoon season and successful roll out of GST and new product launches are expected to boost demand. Further, added focus on enhancing the distribution reach would lead to enhancing brand value and could aid market share gains in the aftermarket segment. After flat earnings in FY2017, we expect double-digit earnings growth over FY2017-FY2019.
* Valuation - Broadly retain estimates; Maintain Buy with a PT of Rs.190:
GCL’s revenue and earnings are expected to grow at a 10% CAGR each over the next two years. Given the subdued performance for Q1FY2018, we have revised downwards our earnings estimates marginally by 5% and 4% for FY2018 and FY2019, respectively. We retain our Buy recommendation on the stock with an unchanged price target (PT) of Rs.190.
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