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Greaves Cotton: Cost rationalization helps
May 3, 2013

Greaves Cotton has announced the fourth quarter and full year results of financial year 2012-2013 (4QFY13). The company has reported around 11.3% YoY growth in sales. However, net profits have declined 50.5% YoY.

Performance summary
  • Sales grow by 11.3% YoY during 4QFY13 due to 34.8% YoY growth in the infrastructure equipments (IE) division. The engines division also grew at a healthy pace of 6.4% YoY. For the full year, revenues grew 6.8% YoY.
  • Operating profits increase 6.1% YoY during the quarter. Operating margins, however, declined from 13.4% in 4QFY12 to 12.8% in 4QFY13.
  • Net profits declined by 50.5% YoY during the quarter. However, it may be noted that the profits in 4QFY12 were inflated due to exceptional gain arising from profit on sale of land and building. Adjusting for these gains, profits grew 11.7% YoY.
  • The board of directors declared a final dividend of Rs 0.5 per share during the quarter. With that the total dividend declared in FY13 stood at Rs 1.6 per share.
  • The company continues to remain virtually debt free at the end of the quarter.

Standalone performance snapshot
(Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
Income from operations 4,454 4,958 11.3%  17,534  18,733 6.8%
Expenditure 3,858 4,325 12.1% 15,169 16,310 7.5%
Operating profit (EBDITA) 597 633 6.1% 2,365 2,423 2.4%
Operating profit margin (%) 13.4% 12.8%   13.5% 12.9%  
Other income 34  37 8.5% 60 156 160.0%
Interest 14 4 -68.4% 35 11 -67.8%
Depreciation 88 108 23.4% 317 390 22.8%
Exceptional items 433 - -100.0% 433 (176)  
Profit before tax 962 557 -42.1% 2,506 2,002 -20.1%
Tax 185 173 -6.8% 651 622 -4.5%
Profit after tax/(loss) 777 385 -50.5% 1,855 1,380 -25.6%
Net profit margin (%) 17.5% 7.8%   10.6% 7.4%  
No. of shares (m)         244.2  
Basic earnings per share (Rs)         5.6  
P/E ratio (x) *         12.6  
*On a trailing 12 month basis

What has driven performance in 4QFY13?
  • The 11.3% YoY growth in sales during 4QFY13 was largely driven by strong performance from engines and IE division. Revenues from the engine division increased 6.4% YoY while that from the IE division increased 34.8% YoY. For the full year, the engine division recorded a growth of 7.8% YoY. Strong volumes from Tata Ace Zip and Tata Magic Iris (65,000 engines) supported the growth for the year. However, industrial engine growth was moderate while the farm equipment business was impacted due to delays in subsidies.

  • Greaves Cotton's overall operating margins fell to 12.8% during the quarter from 13.4% in 4QFY12. Increase in raw material expenses from 68.3% (as a percentage of sales) to 70.4% in 4QFY13 hurt the margins for the quarter. However, it may be noted that the company has taken cost rationalization initiative to keep costs under control. As a result, the company was able to keep the material cost lower by 1%. For the full year, margins declined by 60 bps to 12.9% as company invested in capability building with an increase in employee cost.
  • Segment-wise performance (Standalone)
      4QFY12   4QFY13  Change  FY12   FY13  Change
    Engines
    Revenue (Rs m) 3,947 4,202 6.4%  15,299  16,486 7.8%
    % share  88.6% 84.6%   87.2% 87.8%  
    PBIT margin 18.5% 16.8%   17.1% 16.6%  
    Infrastructure Equipments
    Revenue (Rs m) 383 516 34.8% 1,572 1,620 3.1%
    % share  8.6% 10.4%   9.0% 8.6%  
    PBIT margin -10.9% -6.2%   -5.2% -5.5%  
    Others
    Revenue (Rs m) 126 248 96.5% 678 664 -2.1%
    % share  2.8% 5.0%   3.9% 3.5%  
    PBIT margin -1.4% 20.3%   11.5% 17.4%  
    Total*
    Revenue (Rs m) 4,456 4,966 11.4% 17,549 18,770 7.0%
    PBIT margin 15.4% 14.6%   14.8% 14.7%  
    *Excluding inter-segment revenues

  • Net profits declined 50.5% YoY during the quarter. However, it may be noted that the profits in 4QFY12 were inflated due to exceptional gain arising from profit on sale of land and building. Adjusting for these gains, profits grew 11.7% YoY for the quarter. For the full year, profits were down 25.6% YoY. However, after adjusting for exceptional items profits were up 9.4% YoY.

What to expect?

At the current price of Rs 71, the stock is trading at a multiple of 12.6 times its TTM earnings. The current quarter and the full year performance was noteworthy considering the overall slowdown in the auto industry. We believe the gradual shift in focus to cater to small commercial vehicles in the 4 wheeler (4W) space has benefited the company. Volumes from Ace Zip and Magic Iris have been good and the company is gradually increasing its presence in the 4W space. In order to diversify further, the company has ear marked Rs 1 bn in 2014.

However, the IE business is a cause of concern. While management expected the division to break even in 4QFY13, it has not happened. Also, for the full year the losses have widened as compared to FY12.Nonetheless, the cost reduction efforts taken by the company are already evident. The initiative resulted in material cost reduction of 1% which supported margins. Thus, taking into consideration all these factors and current valuations 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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