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Greaves Cotton: Volumes decline - Views on News from Equitymaster

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Greaves Cotton: Volumes decline
Mar 4, 2014

Greaves Cotton has announced the third quarter results of financial year 2013-2014 (3QFY14). The company has reported around 17.7% YoY decline in sales while net profits have grown by 9.9% YoY during the quarter.

Performance summary
  • Sales decline by 17.7% YoY during 3QFY14. Revenues from the engine division declined by 16.1% YoY while that from the infrastructure equipments (IE) division declined by 44.6% YoY. However, revenues from the others segment increased 58.8% YoY.
  • Operating profits decline 34% YoY during the quarter.
  • Net profits increased 9.9% YoY despite poor performance at the operating level as exceptional losses declined during the quarter. Exceptional losses to the tune of Rs 13.4 m pertaining to employee separation expenses were incurred during the quarter. This was significantly low as compared to exceptional losses of Rs 141.8 m pertaining to provision for diminution in value of investment in 3QFY13. However, after adjusting for exceptional items net profits declined by 19.5% YoY.
  • The board of directors declared an interim dividend of Rs 0.4 per share during the quarter.

Standalone performance snapshot
(Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Income from operations 5,146 4,234 -17.7% 13,775 12,837 -6.8%
Expenditure 4,429 3,761 -15.1% 11,985 11,365 -5.2%
Operating profit (EBDITA) 717 474 -34.0% 1,790 1,473 -17.7%
Operating profit margin (%) 13.9% 11.2%   13.0% 11.5%  
Other income 69 68 -1.0% 118 192 62.5%
Interest 2 9 318.2% 7 27 289.9%
Depreciation 99 111 12.9% 282 318 12.9%
Exceptional items (142) (13) NM (176) (414) NM
Profit before tax 543 407 -25.0% 1,444 906 -37.2%
Tax 199 30 -85.0% 449 291 -35.2%
Profit after tax/(loss) 344 378 9.9% 995 615 -38.1%
Net profit margin (%) 6.7% 8.9%   7.2% 4.8%  
No. of shares (m)         244.2  
Basic earnings per share (Rs)         2.5  
P/E ratio (x) *         14.4  
* On trailing 12 month basis

What has driven performance in 3QFY14?
  • Topline declined by 17.7% YoY in 3QFY14. For the nine month period revenues declined 6.8% YoY. In all, the company sold 240,000 engines in the 3 wheel segment, 50,000 engines in the 4 wheel space and about 75,000 pump-sets during 9MFY14. Poor performance is a reflection of dismal operating environment. Nonetheless, the company has been making technological advancements and value additions to the current product portfolio (Eg: Central Pollution Control Board (CPCB) complaint engines have been launched) to boost revenue growth.

  • Operating profits fell 34.0% YoY during the quarter due to rise in other expenses and employee expenses by 5.5% YoY and 11.7% YoY respectively. As a result, margins fell from 13.9% in 3QFY13 to 11.2% in 3QFY14.

    Segment-wise performance (Standalone)
      3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
    Engines
    Revenue (Rs m) 4,698 3,942 -16.1% 12,661 11,858 -6.3%
    % share 91.0% 93.2%   91.7% 92.3%  
    PBIT margin 17.1% 16.0%   16.5% 15.9%  
    Infrastructure Equipments
    Revenue (Rs m) 430 238 -44.6% 1,104 863 -21.8%
    % share 8.3% 5.6%   8.0% 6.7%  
    PBIT margin -2.6% -27.2%   -5.2% -20.0%  
    Others
    Revenue (Rs m) 32 51 58.8% 39 122 212.3%
    % share 0.6% 1.2%   0.3% 0.9%  
    PBIT margin 9.4% -0.4%   10.3% 8.5%  
    Total*
    Revenue (Rs m) 5,160 4,231 -18.0% 13,804 12,843 -7.0%
    PBIT margin 15.4% 13.4%   14.7% 13.4%  
    *Excluding inter-segment revenues

  • Despite poor performance at the operating level, net profits increased 9.9% YoY as exceptional losses declined during the quarter. Exceptional losses to the tune of Rs 13.4 m pertaining to employee separation expenses were incurred during the quarter as compared to losses of Rs 141.8 m pertaining to provision for diminution in value of investment in 3QFY13. However, after adjusting for exceptional items net profits declined by 19.5% YoY.
What to expect?
At the current price of Rs 58, the stock is trading at a multiple of 14.4 times its trailing twelve month earnings. In all, the company sold 240,000 engines in the 3 wheel segment (6-7% decline) and 50,000 engines in the 4 wheel space (10-12% decline) during 9MFY14. The business volumes have been impacted due to weak demand. However, the farm equipment business is performing well. But the IE business is a cause of concern. While management expected the division to break even in 4QFY13, the division is still registering losses at the EBIT level. However, it may be noted that the market size of the IE division itself has been shrinking since the last 2-3 quarters. Hence, fixed cost absorption has become difficult.

While the current quarter results are disappointing the long term picture is bright. The company has launched new products in the construction space to cater to new demand and fill gaps in the existing product line. Further, it already has an engine portfolio that can comply with the new emission norms that are expected to be rolled out soon. Based on these factors we maintain our BUY view on the stock.

However, we would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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