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Greaves Cotton: Exited from a loss making subsidiary - Views on News from Equitymaster
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  • Nov 7, 2013 - Greaves Cotton: Exited from a loss making subsidiary

Greaves Cotton: Exited from a loss making subsidiary
Nov 7, 2013

Greaves Cotton has announced the second quarter results of financial year 2013-2014 (2QFY14). The company has reported around 0.6% YoY decline in sales with a net loss of Rs 80 m during the quarter.

Performance summary
  • Sales decline by 0.6% YoY during 2QFY14. Revenues from the engine division declined by 2.4% YoY while that from the infrastructure equipments (IE) division declined by 12.5% YoY.
  • However, revenues from the others segment increased by 96.1% YoY.
  • Operating profits decline by 12.5% YoY during the quarter.
  • The company reported a net loss of Rs 80 m during the quarter compared to a profit of Rs 336 m in 2QFY13. Provision for diminution in value of investments to the tune of Rs 401 m resulted in a loss at the net level. However, after adjusting for this exceptional item net profits stood at Rs 320.7 m for the quarter, representing a decline of 13.3% on a YoY basis.
  • The debt/equity ratio stood at 0.04 times at the end of the quarter.

Standalone performance snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Income from operations 4,508 4,481 -0.6% 8,629 8,603 -0.3%
Expenditure 3,932 3,976 1.1% 7,556 7,604 0.6%
Operating profit (EBDITA)  577 504 -12.5% 1,073  999 -6.9%
Operating profit margin (%) 12.8% 11.3%   12.4% 11.6%  
Other income 20 64 214.7% 50 124 149.8%
Interest 2 12 656.3% 5 18 276.6%
Depreciation 94 104 10.7% 183 206 12.8%
Exceptional items  (34)  (401) NM  (34) (401) NM
Profit before tax 467 52 -88.9% 901 499 -44.6%
Tax 131 132 0.2% 250 261 4.4%
Profit after tax/(loss) 336 (80) NM 651 238 -63.5%
Net profit margin (%) 7.4% -1.8%   7.5% 2.8%  
No. of shares (m)         244.2  
Basic earnings per share (Rs)         1.0  
P/E ratio (x) *         16.5  
*On a trailing 12 month basis

What has driven performance in 2QFY14?
  • Topline was relatively flat during 2QFY14. Revenues from the engine division declined 2.4% YoY. In all, the company sold 110,000 engines during the quarter. Out of that roughly 80,000 belonged to the 3 wheeler category, 14,000 to SCV’s category with the balance coming from the rest. Revenues from the IE division declined 12.5% YoY. However, revenues from the others segment increased 96.1% YoY due to higher volumes in the power tiller business.

  • Greaves Cotton’s overall operating margins declined by 1.5% YoY to 11.3% predominantly due to increase in other expenses as a percentage of sales. Other expenses increased from 9.5% in 2QFY13 to 10.6% in 2QFY14 due to receivables being written off post concluding the sale in one German subsidiary. Staff costs also increased on a YoY basis thereby impacting margins.

    Segment-wise performance (Standalone)
      2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
    Engines
    Revenue (Rs m) 4,090 3,992 -2.4% 7,719 7,519 -2.6%
    % share 90.5% 89.0%   89.3% 87.3%  
    PBIT margin 16.2% 17.3%   16.2% 16.5%  
    Infrastructure Equipments
    Revenue (Rs m)  319 279 -12.5% 674 625 -7.3%
    % share 7.1% 6.2%   7.8% 7.3%  
    PBIT margin -9.4% -27.4%   -6.9% -17.2%  
    Others
    Revenue (Rs m) 111 217 96.1% 252 468 86.0%
    % share 2.4% 4.8%   2.9% 5.4%  
    PBIT margin 22.3% -2.9%   14.1% 5.5%  
    Total*
    Revenue (Rs m)  4,519 4,488 -0.7% 8,644 8,612 -0.4%
    PBIT margin 14.6% 13.5%   14.3% 13.4%  
    *Excluding inter-segment revenues

  • The company reported a net loss of Rs 80 m during the quarter. This was mainly due to a provision on diminution in value of a divested German subsidiary. Adjusting for the exceptional loss (Rs 401 m) net profits declined by 13.3% YoY. Interest cost increased by almost 6 times during 2QFY14 due to the increase in long term borrowings. Total long term debt stood at Rs 313.9 m at the end of September 2013.
What to expect?
At the current price of Rs 65, the stock is trading at a multiple of 16.5 times its trailing twelve month earnings. The company sold roughly 110,000 engines during the quarter. The business volumes have been more or less flat due to weak demand. Nonetheless, the company managed to gain market share in the power generation sets business amidst launch of new products. The farm equipment business is also performing well. But the IE business is a cause of concern. While the management expected the division to break even in 4QFY13, the division is still registering losses at the EBIT level. However, it may be noted that the market size of the IE division itself has been shrinking since the last two quarters.

During the quarter, the company divested its stake in a German subsidiary as it was not performing as per expectations. This led to an exceptional loss of Rs 401 m during the quarter. Also, receivables to the tune of Rs 30 m were written off in the divestment exercise.

While the current quarter results are disappointing the long term picture is bright. The company added TVS motors to its client list this quarter. It has also launched new products in the auxiliary power segment to cater to new demand. Further, it already has an engine portfolio that can comply with the new emission norms that are expected to be rolled out soon. Based on these factors 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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