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Greaves Cotton: Engine volumes decline - Views on News from Equitymaster

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Greaves Cotton: Engine volumes decline

Aug 6, 2013

Greaves Cotton has announced the first quarter results of financial year 2013-2014 (1QFY14). The company has reported around 0.1% YoY growth in sales while net profits have grown by 0.7% YoY.

Performance summary
  • Sales grow by 0.1% YoY during 1QFY14. Revenues from the engine division declined by 2.8% YoY while that from the infrastructure equipments (IE) division declined by 2.6% YoY. However, revenues from the others segment increased 78% YoY.
  • Operating profits decline 0.4% YoY during the quarter with margins remaining more or less flat on a YoY basis.
  • Net profits declined by 0.7% YoY during the quarter. Despite a decline in profits at the operating level, bottom line registered a growth due to 104.8% YoY growth in other income.

Standalone performance snapshot
(Rs m) 1QFY13 1QFY14 Change
Income from operations 4,121 4,123 0.1%
Expenditure 3,624 3,628 0.1%
Operating profit (EBDITA) 497 495 -0.4%
Operating profit margin (%) 12.1% 12.0%  
Other income 29 60 104.8%
Interest 3 6 80.6%
Depreciation 89 102 15.1%
Profit before tax 434 447 3.0%
Tax 119 130 9.1%
Profit after tax/(loss) 316 318 0.7%
Net profit margin (%) 7.7% 7.7%  
No. of shares (m)   244.2  
Basic earnings per share (Rs)   1.3  
P/E ratio (x) *   10.5  
*On a trailing 12 month basis

What has driven performance in 1QFY14?
  • Topline was relatively flat during 1QFY14. Revenues from the engine division declined 2.8% YoY. The business volumes in auto engines space was down 1% YoY. Volumes in the industrial engines and auxiliary power space were also sluggish. However, farm equipment business displayed strong growth amidst better monsoons this time around. Revenues from the IE division declined 2.6% YoY as volumes in the concrete equipment business declined. However, revenues from the others segment increased 78% YoY due to higher volumes in the power tiller business.

  • Greaves Cotton's overall operating margins were relatively flat at 12.0% in 1QFY14 compared to 12.1% as reported in 1QFY13. While the raw material cost (as a percentage of sales) declined to 68.6% in 1QFY14 from 69.7% in 1QFY13 increase in staff cost and other expenses (both as a percentage of sales) ensured that margin growth was constrained and remained flat.

    Segment-wise performance (Standalone)
      1QFY13 1QFY14 Change
    Revenue (Rs m) 3,628 3,527 -2.8%
    % share 88.0% 85.5%  
    PBIT margin 16.1% 15.5%  
    Infrastructure Equipments
    Revenue (Rs m) 355 346 -2.6%
    % share 8.6% 8.4%  
    PBIT margin -4.6% -8.9%  
    Revenue (Rs m) 141 251 78.0%
    % share 3.4% 6.1%  
    PBIT margin 7.6% 12.7%  
    Revenue (Rs m) 4,124 4,124 0.0%
    PBIT margin 14.0% 13.3%  
    *Excluding inter-segment revenues

  • Net profit growth was also flat at 0.7% YoY during the quarter. Flattish performance at the operating level, coupled with increase in interest (+80.6% YoY) and depreciation (+15.1% YoY) expenses curtailed profitability growth. Other income almost doubled on a YoY basis. The increase was predominantly due to sale of property and higher treasury income. Had it not been for that, profitability growth would have declined during the quarter.

What to expect?

At the current price of Rs 58, the stock is trading at a multiple of 8.8 times our estimated FY15 earnings. During the quarter, the company sold 66,000-67,000 units of 3 wheeler engines. Unit sales to Tata Motors stood at 15,000 in 1QFY14. While business volumes in the overall auto engine space were down by 1%, the volumes in 3 wheeler engine space registered a fall of 3% due to weak demand. Nonetheless, strong growth in the power tiller space (Others segment) supported revenue growth to an extent. But the IE business is a cause of concern. While management expected the division to break even in 4QFY13, even during 1QFY14 the segment reported a loss at the EBIT level. While the road equipment business showed modest growth in volumes, the performance of concrete equipment business was disappointing.

With respect to margins it may be noted that the cost reduction efforts undertaken via frugal value engineering have started bearing fruits. Thus, taking into consideration all these factors and current valuations (the stock trades at 8.8x FY15 earnings) 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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