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Greaves Cotton: Volumes drive growth
Feb 1, 2013

Greaves Cotton has announced the third quarter results of financial year 2012-2013 (3QFY13). The company has reported around 10.9% YoY growth in sales. However, net profits have grown at a meager pace of 0.6% YoY.

Performance summary
  • Sales grow by 10.9% YoY during 3QFY13 due to 11.7% YoY growth in the engines division. The infrastructure equipment (I&E) division also grew at a healthy pace of 18.3% YoY.
  • Operating profits increase 24.2% YoY during the quarter. Operating margins also increased from 12.4% in 3QFY12 to 13.9% in 3QFY13. Cost rationalization and higher volumes boosted margins.
  • Net profits grew by 0.6% YoY during the quarter due to provision amounting to Rs 142 m incurred over diminution in value of investment in a subsidiary company. However, after adjusting for this exceptional item, profits increased 42.1% YoY.
  • The company declared an interim dividend of Rs 0.4 per share during the quarter.

Standalone performance snapshot
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Income from operations 4,651 5,158 10.9% 13,080 13,775 5.3%
Expenditure 4,074 4,441 9.0% 11,312 11,985 6.0%
Operating profit (EBDITA) 577 717 24.2% 1,769 1,790 1.2%
Operating profit margin (%) 12.4% 13.9%   13.5% 13.0%  
Other income 4 69 1493.0% 26 118 363.9%
Interest 11 2 -80.5% 21 7 -67.5%
Depreciation 83 99 19.4% 230 282 22.6%
Exceptional items - (142)   - (176)  
Profit before tax 488 543 11.4% 1,543 1,444 -6.4%
Tax 146 199 36.6% 466 449 -3.5%
Profit after tax/(loss) 342 344 0.6% 1,078 995 -7.7%
Net profit margin (%) 7.3% 6.7%   8.2% 7.2%  
No. of shares (m)         244.2  
Basic earnings per share (Rs)         4.1  
P/E ratio (x) *         11.6  
*based on trailing 12 months earnings

What has driven the performance in 3QFY13?
  • The 10.9% YoY growth in sales during 3QFY13 was largely driven by higher volumes from the engine division. In auto space the company sold 115,000 engines (up 9.5% YoY) and in the generation sets and industrial space 1,200 engines (up 33% YoY). It also sold about 37,000-38,000 diesel and other pump sets during the quarter. Price increase with one large customer from the auto space in the region of 5% also supported sales growth from the engine division. Sales from I&E division also increased by 18.3% YoY mainly due to strong volumes registered in the road construction and concrete equipment space.

  • Greaves Cotton's overall operating margins increased to 13.9% during the quarter from 12.4% in 3QFY12. Higher volumes during the quarter and cost rationalization efforts undertaken boosted the margins.

    Segment-wise performance*
      3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
    Engines
    Revenue (Rs m) 4,100 4,578 11.7% 11,352 12,284 8.2%
    % share 88.0% 88.5%   86.7% 89.0%  
    PBIT margin 16.3% 17.0%   16.5% 16.5%  
    Infrastructure Equipments
    Revenue (Rs m) 364 430 18.3% 1,189 1,104 -7.1%
    % share 7.8% 8.3%   9.1% 8.0%  
    PBIT margin -7.8% -2.6%   -3.4% -5.2%  
    Others
    Revenue (Rs m) 197 164 -16.5% 552 416 -24.6%
    % share 4.2% 3.2%   4.2% 3.0%  
    PBIT margin 3.0% 18.0%   14.4% 15.6%  
    Total*
    Revenue (Rs m) 4,660 5,172 11.0% 13,092 13,804 5.4%
    PBIT margin 13.9% 15.4%   14.6% 14.7%  
    *Excluding inter-segment revenues

  • Net profits increased 0.6% YoY during the quarter due to an exceptional item relating to provision on diminution of investment in subsidiary. Adjusting for that, profits increased 42.1% YoY. Profit growth was also boosted by substantial rise in other income which increased due to property sale and higher treasury income.

What to expect?
At the current price of Rs 84, the stock is trading at a multiple of 11.6 times its TTM earnings. Considering the slowdown in the auto sector overall volume figures of 115,000 engines in 3QFY13 were really commendable (out of those 22,000 engines were for Tata Motors). Also, considering that pricing is competitive and demand was down in power gen sets space, the volume figures of 1,200 engines signify that the company is slowly gaining foothold in the market.

However, the big surprise came in from infrastructure equipment division. The division posted healthy growth in revenues on the back of strong demand in road equipments and construction space. Apart from that reduction in losses from the division was quite encouraging. Management believes that breakeven will be achieved in this segment during the next quarter. And once the division reaches a sales figure of Rs 2.5-3 bn, margins will become more predictable. Thus, taking into consideration the revival in I&E division, strong volume growth from the engine division, and attractive valuations, we maintain our BUY rating on the stock.

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