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Greaves Cotton: One off items impact profits
Feb 7, 2012

Greaves Cotton has announced the third quarter results of financial year 2011-2012 (3QFY12). The company has reported around 10.8% YoY growth in sales. However, net profits have declined 23% YoY.

Performance summary
  • Sales grow by 10.8% YoY during 3QFY12, led by strong performance from the engines division.
  • Operating profits decline 18.1% YoY during the quarter. Operating margins decline to 12.6% in 3QFY12 from 17% in 3QFY11. Out of the 440 bps contraction witnessed in operating margins approximately 200 bps was due to non-recurring items, another 200 bps due to raw material price inflation and the balance 40 bps due to higher operating expenses.
  • Net profits decline 23% YoY during the quarter due to fall in other income and increase in depreciation expenses.
  • The company declared an interim dividend of Rs 0.4 per share during the quarter.


Standalone performance snapshot
(Rs m) 3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
Income from operations 4,192 4,644 10.8% 11,453 13,058 14.0%
Expenditure 3,479 4,059 16.7% 9,687 11,259 16.2%
Operating profit (EBDITA) 713 584 -18.1% 1,766 1,799 1.9%
Operating profit margin (%) 17.0% 12.6%   15.4% 13.8%  
Other income 26 12 -53.7% 80 48 -40.3%
Interest 26 26 1.6% 75 74 -1.1%
Depreciation 70 83 17.7% 207 230 11.2%
Profit before tax 643 488 -24.2% 1,565 1,543 -1.4%
Tax 199 146 -26.8% 481 466 -3.1%
Profit after tax/(loss) 444 342 -23.0% 1,084 1,078 -0.6%
Net profit margin (%) 10.6% 7.4%   9.5% 8.3%  
No. of shares (m)         244.2  
Basic earnings per share (Rs)         4.4  
P/E ratio (x) *         13.0  
* On a trailing 12 months basis

What has driven performance in 3QFY12?
  • The 10.8% YoY growth in sales during 3QFY12 was largely a result of strong performance from the engines division. Sales from the engines division recorded a healthy growth of 16.9% YoY. As far as the revenue breakdown in the engines division is concerned, auto sector continues to contribute more than 50% to the division's top-line followed by industrial engines (contribute 6-7% to the top-line). However, sales from the Infrastructure equipment division registered a decline of 24.8% YoY during the quarter.

  • Margins from the engines division declined to 16.7% in 3QFY12 compared to 20.3% in 3QFY11. At the same time, the Infrastructure equipment division recorded a loss during the quarter. Management is of the opinion that quarterly revenue figure of approximately 500 m would help the company break even in the infrastructure division.

    Segment-wise performance (Standalone)
      3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
    Engines            
    Revenue (Rs m) 3,502 4,094 16.9% 9,634 11,335 17.7%
    % share 83.5% 88.0%   84.1% 86.7%  
    PBIT margin 20.3% 16.7%   18.8% 17.0%  
    Infrastructure Equipments            
    Revenue (Rs m) 483 364 -24.8% 1,289 1,188 -7.8%
    % share 11.5% 7.8%   11.3% 9.1%  
    PBIT margin 0.5% -7.8%   -0.7% -3.1%  
    Others            
    Revenue (Rs m) 207 195 -5.8% 530 547 3.2%
    % share 4.9% 4.2%   4.6% 4.2%  
    PBIT margin 26.6% 3.0%   26.6% 14.6%  
    Total*            
    Revenue (Rs m) 4,192 4,653 11.0% 11,453 13,070 14.1%
    PBIT margin 18.3% 14.2%   17.0% 15.0%  
    * Excluding inter-segment reveneus

  • Greaves Cotton's overall operating margins declined to 12.6% during the quarter. This was mainly due to increase in raw material expenses and certain one off items recorded during the quarter. Brand building exercise resulted in a higher than normal advertising expenses while there were some losses on obsolete inventory disposal impacting the margins by 200 bps in the quarter.

  • Net profits declined by 23% YoY during the quarter due to weak performance at the operating level and decline in other income.

What to expect?
At the current price of Rs 83, the stock is trading at a multiple of 13 times its TTM earnings. Going forward, management is confident of future revenue growth as slowdown in volumes from the three-wheeler segment will be offset by higher volume growth in the four-wheeler segment. While there are concerns of revenue cannibalization (replacement of 3 wheelers with 4 wheelers) management is taking steps to position itself solidly in the four wheeler segment. Further, the new plant at Shendra is also ramping up and once it is fully functional, operating leverage would kick in, supporting margins in the future. Based on these factors, we maintain our positive view on the stock.

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