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Greaves Cotton: Hurt by employee cost
Aug 3, 2012

Greaves Cotton has announced the first quarter results of financial year 2012-2013. The company has reported around 2.3% YoY growth in sales. However, net profits have declined 9.7% YoY.

Performance summary
  • Sales grow by just 2.3% YoY during 1QFY13 due to a 27% YoY decline in the infrastructure equipments division.
  • Operating profits decline 12.1% YoY during the quarter. Operating margins decline to 12.1% in 1QFY13 from 14% in 1QFY12.
  • Net profits decline 9.7% YoY during the quarter due to muted performance at the operating level.
  • In July, the company entered into a long term agreement with Atul Auto to supply diesel engines for its 3 wheeled vehicles. The agreement will be for 7 years and Greaves Cotton will be the sole supplier for all the requirements of Atul Auto.

Standalone performance snapshot
(Rs m) 1QFY12 1QFY13 Change
Income from operations 4,025 4,116 2.3%
Expenditure 3,460 3,619 4.6%
Operating profit (EBDITA) 566 497 -12.1%
Operating profit margin (%) 14.0% 12.1%  
Other income 11 29 172.2%
Interest 1 3 181.8%
Depreciation 73 89 22.6%
Exceptional items - -  
Profit before tax 503 434 -13.6%
Tax 153 119 -22.5%
Profit after tax/(loss) 350 316 -9.7%
Net profit margin (%) 8.7% 7.7%  
No. of shares (m)   244.2  
Basic earnings per share (Rs)   1.3  
P/E ratio (x) *   8.7  
* On the basis of trailing 12 months earnings

What has driven performance in 1QFY13?
  • The 2.3% YoY growth in sales during 1QFY13 was largely a result of poor performance from the infrastructure equipment (I&E) division. Sales from I&E division declined 27% YoY. However, revenues from the engine division increased 7.2% YoY. In terms of volumes, the auto engines growth was relatively flat due to a general slowdown in the industry. However, the non auto engines growth was relatively better.

  • Greaves Cotton's overall operating margins declined to 12.1% during the quarter. This was mainly due to increase in staff cost as a percentage of sales. Margins from the engines division declined to 16.1% in 1QFY13 compared to 17.2% in 1QFY12. At the same time, the Infrastructure equipment division recorded a loss during the quarter. Margins of the company took a hit due to rise in employee cost. The employee cost increased from 7.1% in 1QFY12 to 8.9% in 1QFY13 as the company is on a hiring spree.

    Segment-wise performance (Standalone)
      1QFY12 1QFY13 Change
    Engines      
    Revenue (Rs m) 3,379 3,623 7.2%
    % share 83.9% 88.0%  
    PBIT margin 17.2% 16.1%  
    Infrastructure Equipments      
    Revenue (Rs m) 486 355 -27.0%
    % share 12.1% 8.6%  
    PBIT margin 0.2% -4.6%  
    Others      
    Revenue (Rs m) 160 141 -11.9%
    % share 4.0% 3.4%  
    PBIT margin 17.7% 7.6%  
    Total*      
    Revenue (Rs m) 4,025.2 4,119.4 2.3%
    PBIT margin 15.2% 14.0%  
    *Excluding inter-segment revenues

  • Net profits declined 9.7% YoY during the quarter due to muted performance at the operating level and increase in interest and depreciation expenses. While the interest expenses, though miniscule, grew 181.8% YoY the depreciation expenses increased by 22.6% YoY. Nonetheless, a substantial increase (172.2% YoY) in other income arising from income tax refunds and higher treasury income partially supported the profitability.

What to expect?
At the current price of Rs 65, the stock is trading at a multiple of 8.7 times its TTM earnings. Going forward, the growth in the auto engines segment will depend on how the growth in the auto sector picks up. In the current quarter, the volumes in the 3 wheeler market were down which was partly compensated by volume growth from Tata Motors. Thus, the volumes were better managed this quarter. Meanwhile, it may be noted that the company is also in a continuous process of initiating dialogues with various original equipment manufacturers (OEMs), including Piaggio, to supply engines for its new launches.

Going forward, the core profitability of the company can come under pressure if the pricing pressure does not ease out. Volumes from the auto division and the segmental profitability of the infrastructure equipment division will also be key factor to watch out for. Nonetheless, taking into consideration the long term growth prospects, and attractive valuations we maintain our buy rating on the stock.

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