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Greaves Cotton: Exceptional gain boosts profits - Views on News from Equitymaster
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Greaves Cotton: Exceptional gain boosts profits
May 16, 2012

Greaves Cotton has announced the fourth quarter and full year results of financial year 2011-2012. The company has reported around 1.8% YoY decline in sales. However, net profits have increased 66.6% YoY.

Performance summary
  • Sales decline by 1.8% YoY during 4QFY12, due to 41.2% YoY decline in the infrastructure equipments division.
  • Operating profits decline 8.9% YoY during the quarter. Operating margins decline to 13.4% in 4QFY12 from 14.4% in 4QFY11.
  • Net profits increase 66.6% YoY during the quarter due to an exceptional gain on sale of building. Adjusting for this exceptional gain, net profits decline 26.2% YoY.
  • The company declared a final dividend of Rs 0.2 per share during the quarter. Thus, the total dividend for the year works out to be Rs 2.2 per share.
  • The total debt/equity ratio of the company as at the end of FY12 stood at 0.03x.
  • The Shendra and the Chakan plants were commissioned during the year. The Ranipet expansion is underway.

Standalone performance snapshot
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Income from operations 4,537 4,454 -1.8% 16,004 17,534 9.6%
Expenditure 3,882 3,858 -0.6% 13,637 15,169 11.2%
Operating profit (EBDITA) 655 597 -8.9% 2,367 2,365 -0.1%
Operating profit margin (%) 14.4% 13.4%   14.8% 13.5%  
Other income 90 34 -62.0% 157 60 -61.9%
Interest 5 14 195.7% 12 35 194.9%
Depreciation 72 88 22.3% 278 317 14.1%
Exceptional items - 433   - 433  
Profit before tax 669 963 43.9% 2,234 2,506 12.2%
Tax 202 185 -8.5% 683 651 -4.7%
Profit after tax/(loss) 467 777 66.6% 1,551 1,855 19.6%
Net profit margin (%) 10.3% 17.5%   9.7% 10.6%  
No. of shares (m)         244.2  
Basic earnings per share (Rs)         7.6  
P/E ratio (x) *         9.7  
* On a trailing 12-months basis

What has driven performance in 4QFY12?
  • The 1.8% YoY decline in sales during 4QFY12 was largely a result of poor performance from the infrastructure equipment (I&E) division. Sales from I&E division declined 41.2% YoY. However, revenues from the engine division increased 5.2% YoY. For FY12, revenues increased 9.6% YoY. The growth was driven by strong demand emanating from the automotive segment. However, growth from the construction equipment business was impacted by the slowdown in the infrastructure spend.

  • Greaves Cotton's overall operating margins declined to 13.4% during the quarter. This was mainly due to increase in overall expenses. Margins from the engines division increased to 18.6% in 4QFY12 compared to 17.9% in 4QFY11. At the same time, the Infrastructure equipment division recorded a loss during the quarter. Slowdown in the infrastructure sector has impacted the offtake of construction equipments. Thus, slowdown in equipment volumes has impacted the fixed overhead absorption rate and thereby margins.

    Segment-wise performance (Standalone)
      4QFY11 4QFY12 Change FY11 FY12 Change
    Engines            
    Revenue (Rs m) 3,752 3,947 5.2% 13,397 15,299 14.2%
    % share 82.7% 88.6%   83.7% 87.2%  
    PBIT margin 17.9% 18.6%   18.2% 17.1%  
    Infrastructure Equipments            
    Revenue (Rs m) 652 383 -41.2% 1,943 1,572 -19.1%
    % share 14.4% 8.6%   12.1% 9.0%  
    PBIT margin 0.6% -10.9%   -0.6% -5.2%  
    Others            
    Revenue (Rs m) 133 126 -5.2% 664 678 2.2%
    % share 2.9% 2.8%   4.1% 3.9%  
    PBIT margin 24.3% -1.3%   25.9% 11.5%  
    Total*            
    Revenue (Rs m) 4,537 4,456 -1.8% 16,004 17,549 9.7%
    PBIT margin 15.6% 15.5%   16.2% 14.8%  
    * Excluding inter-segment revenues

  • Net profits increased by 66.6% YoY during the quarter due to an exceptional gain on sale of building. Adjusting for this exceptional item, net profits declined 26.2% YoY.

What to expect?
At the current price of Rs 74, the stock is trading at a multiple of 9.7 times its TTM earnings. Management expects to incur a capex of Rs 1.5 bn in FY13 to focus on technology and product development capabilities as well as to complete the Ranipet expansion. It is also planning new initiatives for its construction equipment division so as to resurrect the business. The initiatives are in the area of technology transfer. In fact, the company has already tied up with Samil Korea, a Korean company, in that regards.

It may be noted that the return ratios for the current fiscal were under pressure due to core profitability concerns and pricing pressure in certain sectors. Considerable time lag for the capacities to become fully operational also impacted the return ratios. Going forward, the core profitability of the company can come under pressure if the pricing pressure does not ease out. Further, the segmental profitability of the infrastructure equipment division will also remain under scanner. Nonetheless, taking into consideration the long term growth prospects, current capacity expansion plans and attractive valuations, we maintain our positive view on the stock.

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