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Greaves Cotton: Cost control is the key
Nov 16, 2012

Greaves Cotton has announced the second quarter results of financial year 2012-2013 (2QFY13). The company has reported around 2.2% YoY growth in sales. However, net profits have declined 13.1% YoY.

Performance summary
  • Sales grow by just 2.2% YoY during 2QFY13 due to a 5.8% YoY decline in the infrastructure equipments division.
  • Operating profits decline 7.9% YoY during the quarter. Operating margins decline to 12.8% in 2QFY13 from 14.2% in 2QFY12.
  • Net profits decline 13.1% YoY during the quarter due to muted performance at the operating level and rise in depreciation expenses. However, after adjusting for the exceptional loss relating to employee separation, profits declined 4.3% YoY.
  • The company declared an interim dividend of Rs 0.4 per share during the quarter. Considering the first interim dividend of Rs 0.3 per share announced in 1QFY13, the total interim dividend stood at Rs 0.7 per share for 1HFY13.

Standalone performance summary
(Rs m) 2QFY12  2QFY13  Change 1HFY12  1HFY13  Change
Income from operations  4,404 4,501 2.2% 8,429 8,617 2.2%
Expenditure  3,778 3,925 3.9% 7,238 7,544 4.2%
Operating profit (EBDITA) 626 577 -7.9% 1,192 1,073 -9.9%
Operating profit margin (%) 14.2% 12.8% 14.1% 12.5%
Other income 10 20 96.2% 21 50 134.9%
Interest 9 2 -81.8% 10 5 -52.5%
Depreciation 75 94 26.0% 147 183 24.3%
Exceptional items  - (34)   - (34)
Profit before tax 553 467 -15.6% 1,056 901 -14.6%
Tax 167 131 -21.2% 320 250 -21.8%
Profit after tax/(loss) 386 336 -13.1% 736 651 -11.5%
Net profit margin (%) 8.8% 7.5%   8.7% 7.6%  
No. of shares (m)         244.2  
Basic earnings per share (Rs)          2.7  
P/E ratio (x) *         10.5  
*On a trailing 12 month basis

What has driven performance in 2QFY13?
  • The 2.2% YoY growth in sales during 2QFY13 was largely a result of poor performance from the infrastructure equipment (I&E) division. Sales from I&E division declined 5.8% YoY. However, revenues from the engine division increased 5.5% YoY. In terms of volumes, the auto engines growth was relatively modest at 7% YoY. However, generation set volumes grew 20% YoY. The overall volumes stood at 130,000 in 2QFY13 compared to 110,000 in 2QFY12.

  • Greaves Cotton's overall operating margins declined to 12.8% during the quarter. This was mainly due to increase in staff cost as a percentage of sales. The staff cost increased from 6.9% in 2QFY12 to 8% in 2QFY13. However, cost rationalization on the raw material front arrested a massive fall in margins. The raw material cost declined from 71.1% in 2QFY12 to 69.9% in 2QFY13.

    Standalone performance summary
      2QFY12  2QFY13  Change 1HFY12  1HFY13  Change
    Engines 
    Revenue (Rs m) 3,871 4,083 5.5% 7,249 7,706 6.3%
    % share  87.9% 90.5%   86.0% 89.3%  
    PBIT margin 16.2% 16.3%   16.7% 16.2%  
    Infrastructure Equipments
    Revenue (Rs m) 339 319 -5.8% 825 674 -18.3%
    % share  7.7% 7.1%   9.8% 7.8%  
    PBIT margin -3.7% -9.4%   -1.4% -6.9%  
    Others 
    Revenue (Rs m) 195 111 -43.3% 355 252 -29.1%
    % share  4.4% 2.5%   4.2% 2.9%  
    PBIT margin 23.2% 22.3%   20.7% 14.1%  
    Total*
    Revenue (Rs m) 4,404 4,512 2.5% 8,429 8,632 2.4%
    PBIT margin 15.0% 14.6%   15.1% 14.3%  
    *Excluding inter-segment revenues

  • Net profits declined 13.1% YoY during the quarter due to muted performance at the operating level and increase in depreciation expenses. Also, exceptional cost of Rs 34.3 m relating to employee separation hurt the profitability growth. Adjusting for that, net profits de-grew 4.3% YoY. Nonetheless, other income grew substantially by 96.2% YoY due to higher treasury income providing some cushion to profits.

What to expect?
At the current price of Rs 76, the stock is trading at a multiple of 10.5 times its TTM earnings. Considering the downturn in the auto sector, overall volume figures of 130,000 in 2QFY13 were really commendable. Going forward, management expects the demand environment to improve in 3QFY13 on the back of festive push. Increasing demand from Tata Ace should also help. It may be noted that until now the quarterly run rate for Tata Ace was 5,000 engines. Management expects the same to increase to 6,000-7,000 engines in the next few quarters.

However, as far as the infrastructure equipment division is concerned, the future is mixed. While the outlook for roads (helps in uptick of road equipments) has improved, the concrete division is facing muted demand. With respect to margins, cost rationalization efforts through man power separation and raw material optimization shall bear fruits in the long term. Thus, taking into consideration the long term growth prospects, and attractive valuations, we maintain our BUY rating on the stock.

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