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Greaves Cotton: Steady performance - Views on News from Equitymaster

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Greaves Cotton: Steady performance
Nov 1, 2011

Greaves Cotton has announced the second quarter results of financial year 2011-2012 (2QFY12). The company has reported around 16.2% YoY and 6.5% YoY growth in sales and net profits respectively.

Performance summary
  • Sales grow by 16.2% YoY during 2QFY12, led by strong performance from the engines division.
  • Operating profits increase 5.4% YoY during the quarter. However, operating margins decline to 14.4% in 2QFY12 from 15.8% in 2QFY11 due to increase in raw material cost as a percentage of sales.
  • Net profits increase 6.5% YoY during the quarter.
  • The company declared an interim dividend of Rs 0.4 per share during the quarter.
  • The company inaugurated its fifth manufacturing facility in Aurangabad recently. The new plant will have a production capacity of 87,000 units per annum.

Standalone performance snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Income from operations 3,784 4,396 16.2% 7,261 8,414 15.9%
Expenditure 3,185 3,765 18.2% 6,208 7,214 16.2%
Operating profit (EBDITA) 599 631 5.4% 1,053 1,201 14.0%
Operating profit margin (%) 15.8% 14.4%   14.5% 14.3%  
Other income 17 19 11.4% 55 36 -33.9%
Interest 22 22 -3.1% 49 34 -31.6%
Depreciation 68 75 9.7% 136 147 7.9%
Profit before tax 525 553 5.4% 922 1,056 14.5%
Tax 162 167 2.8% 281 320 13.7%
Profit after tax/(loss) 363 386 6.5% 640 736 14.9%
Net profit margin (%) 9.6% 8.8%   8.8% 8.7%  
No. of shares (m)         244.2  
Basic earnings per share (Rs)         3.0  
P/E ratio (x) *         13.2  
*On a trailing 12 month basis

What has driven performance in 1HFY12?
  • The 16.2% YoY growth in sales during 2QFY12 was largely a result of strong performance from the engines division. Sales from the engines division recorded a healthy growth of 21.9% YoY. However, sales from the Infrastructure equipment division registered a decline of 21.0% YoY during the quarter.

  • Margins from the engines division declined 2.1% to 16.6% in 2QFY12 compared to 18.7% in 2QFY11. At the same time, the Infrastructure equipment division recorded a loss during the quarter.

    Segment-wise performance (Standalone)
      2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Engines
    Revenue (Rs m) 3,188 3,887 21.9% 6,143 7,269 18.3%
    % share 84.2% 88.4%   84.6% 86.4%  
    PBIT margin 18.7% 16.6%   17.9% 17.1%  
    Infrastructure Equipments
    Revenue (Rs m) 428 339 -21.0% 806 824 2.3%
    % share 11.3% 7.7%   11.1% 9.8%  
    PBIT margin -0.1% -3.5%   -1.5% -1.0%  
    Others
    Revenue (Rs m) 168 170 1.3% 312 321 2.7%
    %share 4.4% 3.9%   4.3% 3.8%  
    PBITmargin 28.2% 25.6%   27.5% 22.4%  
    Total
    Revenue (Rs m) 3,784 4,396 16.2% 7,261 8,414 15.9%
    PBITmargin 17.0% 15.4%   16.2% 15.5%  

  • Greaves Cotton’s overall operating margins declined to 14.4% during the quarter. This was mainly due to increase in raw material expenses as a percentage of sales. The raw material expenses (as a percentage of sales) increased from 68.6% in 2QFY11 to 71.2% in 2QFY12 thereby impacting margins.

  • Net profits increased by 6.5% YoY during the quarter due to strong performance at the operating level and increase in other income.

What to expect?
At the current price of Rs 89, the stock is trading at a multiple of 10.7 times our estimated FY14 earnings. Despite a slowdown in sales volumes from Piaggio the engines segment of the company has performed well during the current quarter. Inauguration of the new production capacity also suggests that the demand dynamics in the engines segment are likely to remain buoyant in the near future. However, performance of the infrastructure equipment division was a big disappointment and it would continue to remain a major challenge for the company. Nonetheless, in the light of current valuations we maintain our positive view on the stock from the medium term perspective.

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