Buy Greaves Cotton Ltd For Target Rs.210 - ICICI Direct
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Gets growth capital for EV business…
About the stock: Greaves Cotton (GCL) is a leading diversified engineering company with a presence in automotive, non-automotive, aftermarket, retail, electric mobility solution and finance
* New business share increased to ~49% while engine reduced to ~48% in FY17-22
* E-mobility is expected to drive future growth (~38% of FY22 revenue)
Event Update:
* Abdul Latif Jameel has committed to invest up to US$220 million in Greaves Electric Mobility. Abdul Latif Jameel will initially invest US$150 million for a 35.8% stake on a fully diluted basis in the company. GCL (and Esop holders) will have 64.2% in GEMPL on a fully diluted basis
* Greaves Electric Mobility has an option to draw down US$70 million within 12 months at a pre-agreed valuation formula
* The implied valuation of the EV subsidiary is around 3.4x sales, which is in line with our estimates. Pre-money EV is US$301 million (mn) (~| 2350 crore) and post money EV of US$451 mn (~| 3500 crore)
* Post-closing, GCL Group will have consolidated net cash of more than | 1300 crore for growth investment
What should investors do? E-mobility and new initiatives businesses may provide much needed long term growth uptick amid languishing engine volumes
* We remain long term positive and continue our BUY rating on the stock
Target Price and Valuation: We value GCL at | 210 on SoTP basis.
Key triggers for future price performance:
* Transformation strategy to increase E-mobility and new-initiatives business share to drive long term growth and help transform and de-risk its business
* Expecting a positive surprise on volume front, with additional capital coming in expected to accelerate EV penetration of 2-W and 3-W segments
* We expect revenue, EBITDA to grow at CAGR of ~13.6%, 76.8%, respectively, in FY22-24E
Alternate Stock Idea: We also like ABB India in our coverage
* It expects operating margins to improve with increase in capacity utilisation, change in revenue mix, cost optimisation programmes and localisation prospects
* BUY with target price of | 2625
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