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Greaves Cotton: Time to book profits
May 12, 2014

Greaves Cotton has announced the fourth quarter results of financial year 2013-2014 (4QFY14). The company has reported around 12.2% YoY decline in sales while net profits have grown by 34.0% YoY during the quarter.

Performance summary
  • Sales decline by 12.2% YoY during 4QFY14. Revenues from the engine division declined by 10.4% YoY while that from the infrastructure equipments (IE) division declined by 26.4% YoY.
  • Operating profits decline 26.8% YoY during the quarter.
  • Net profits increased 34% YoY despite poor performance at the operating level as the company recorded an exceptional gain of Rs 363.3 m pertaining to sale of property during the quarter. However, after adjusting for exceptional items, net profits declined by 52.8% YoY.
  • The board of directors declared an interim dividend of Rs 0.6 during the quarter. This takes the total dividend to Rs 1.30 per share in FY14.
  • The company continues to remain debt free at the end of the year.

Standalone performance snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Income from operations 4,958 4,352 -12.2% 18,733 17,189 -8.2%
Expenditure 4,325 3,889 -10.1% 16,310 15,254 -6.5%
Operating profit (EBDITA) 633 463 -26.8% 2,423 1,936 -20.1%
Operating profit margin (%) 12.8% 10.6%   12.9% 11.3%  
Other income 37 76 104.0% 156 268 72.4%
Interest 4 20 353.5% 11 46 314.3%
Depreciation 108 117 8.2% 390 435 11.6%
Exceptional items - 334 NM (176) (80) NM
Profit before tax 557 736 32.1% 2,002 1,643 -17.9%
Tax 173 221 28.0% 622 512 -17.7%
Profit after tax/(loss) 385 516 34.0% 1,380 1,131 -18.0%
Net profit margin (%) 7.8% 11.8%   7.4% 6.6%  
No. of shares (m)         244.2  
Basic earnings per share (Rs)         4.6  
P/E ratio (x) *         18.1  
(* on trailing twelve months earnings)

What has driven performance in 4QFY14?
  • Topline declined by 12.2% YoY in 4QFY14. For the full year revenues declined 8.2% YoY. Poor performance is a reflection of dismal operating environment. Infrastructure equipment suffered the most with 26.4% YoY decline amidst declining product demand. Revenues from the engines division also declined 10.4% YoY. Nonetheless, the company has been making technological advancements and has launched several products (sub 20 KVA gen set in the power business, pollution compliant range of engines and products) in FY14 to boost revenue growth. The benefits are likely to occur over the next year.

  • Operating profits fell 26.8% YoY during the quarter due to poor performance at the top line level. As a result, margins fell from 12.8% in 4QFY13 to 10.6% in 4QFY14.

    Segment-wise performance (Standalone)
      4QFY13 4QFY14 Change FY13 FY14 Change
    Engines
    Revenue (Rs m) 4,376 3,922 -10.4% 17,037 15,780 -7.4%
    % share 88.1% 90.2%   90.8% 91.8%  
    PBIT margin 17.1% 17.1%   16.6% 16.2%  
    Infrastructure Equipments
    Revenue (Rs m) 516 380 -26.4% 1,620 1,243 -23.3%
    % share  10.4% 8.7%   8.6% 7.2%  
    PBIT margin -6.2% -26.1%   -5.5% -21.8%  
    Others
    Revenue (Rs m) 73 48 -34.7% 112 170 51.0%
    % share  1.5% 1.1%   0.6% 1.0%  
    PBIT margin 9.4% 9.2%   9.7% 8.7%  
    Total*
    Revenue (Rs m) 4,966 4,349 -12.4% 18,770   17,192 -8.4%
    PBIT margin 14.6% 13.2%   14.7% 13.4%  
    * Excluding inter-segment revenues

  • Despite poor performance at the operating level, net profits increased 34.0% YoY as the company recorded an exceptional gain of Rs 363.3 m pertaining to sale of property during the quarter. However, after adjusting for exceptional items, net profits declined by 52.8% YoY. Rise in interest expenses by 353.5% YoY hurt profitability growth.
What to expect?
At the current price of Rs 84, the stock is trading at a multiple of 18.1 times its trailing twelve month earnings. The performance over the last one year has been really disappointing. With economic slowdown, the demand for the company's products waned as reflected in an 8.2% YoY decline in top line in FY14. As a result, profits also declined by 18.0% YoY.

In order to improve its performance, the company has adopted a 2x2 strategy to drive revenue growth and improve profitability. It launched new products in the power business and CPCB2 compliant engines during the year. The company also entered into a partnership with TVS Motors for supply of diesel engines and expanded its client portfolio. All these steps, undoubtedly, will bring the company back on its growth track.

Nonetheless, we believe that valuations at 18x earnings are not cheap. The multiple has been expanding in the recent past despite poor financial performance as expectations of a new government forming power at the Centre started appearing more realistic. We believe that the recent rally is backed more by sentiments rather than fundamentals. As such, it is an opportune time for investors to SELL the stock and book profits . Subscribers are requested to note that with this, we close our position on the stock and there will be no future updates as we remove it from our coverage.

Since our recommendation the total gains have been in the region of 27-28%. The stock was also included in our TOP 5 BUY list. From that level, the returns have been in the region of 47% odd.

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