Investors with a one-to-two year perspective can buy the shares of Greaves Cotton Ltd (GCL). The company is mainly in the business of manufacturing engines for auto rickshaws and other three/four-wheel small commercial vehicles (CVs). This segment accounts for half its revenues. The rest comes from supply of engines for industrial, auxiliary power, farm uses and infrastructure equipments.
Bright prospects for small CVs when the rest of the auto industry is passing through a slowdown make the stock an attractive proposition. Coupled with this is the improved outlook for the farm equipment division, thanks to the good monsoons. The debt-free status of the company is an added positive.
After touching its one-year low earlier this week, the stock now trades at about 8 times its estimated earnings for FY14. This is well below its historical average of 13 times, making it a good entry point.
Better times
GCL has about 35 per cent market share in the supply of engines to auto rickshaws and over 80 per cent share in engines for three-wheel cargo carriers.
The company also supplies engines to four-wheel mini-trucks. It counts Piaggio, Atul Auto, Tata Motors and Mahindra and Mahindra among its clients.
These segments typically, tend to be less cyclical in comparison with the medium and heavy CVs. For example, in 2012-13 even as the medium and heavy CV sales dipped 23 per cent, three-wheelers managed to eke out almost 5 per cent growth.
Similarly, volumes in the light CV segment (of which mini-trucks form a part) grew by a robust 14 per cent.
This is because the sale of auto rickshaws is not dependent on economic cycles. They are more reliant on opening up of permits by the state governments.
Also, with smaller goods carriers being used only for last mile connectivity, they don’t suffer as much as bigger carriers from lack of adequate freight during a slowdown. Besides, their lower price points are an advantage during times of high interest costs.
Going forward, these segments should continue to do well. GCL’s three-wheeler clients are either expanding capacities or product lines. Atul Auto is doubling its production capacity to 48,000 units. GCL is supplying CNG engines for Piaggio’s newly-launched Ape City. It has also added TVS to its client base. Besides, opening up of permits for autorickshaws in Delhi and Hyderabad recently is a positive for the company.
Mini-trucks are increasingly being preferred, thanks to advantages such as greater cabin comfort, higher mileage/fuel efficiency and low maintenance costs.
While GCL currently has a ten-year contract (beginning 2011) to supply engines to the Ace Zip from Tata Motors, it will also supply for an upcoming CNG-powered mini-truck. Piaggio is also roping in GCL for its new four-wheeled truck.
With Mahindra and Mahindra also manufacturing small CVs, such as the Gio and Maxximo, given its existing relationship for supply of three-wheeler engines, GCL stands a good chance of winning a similar contract from them. Even as minor segments such as industrial engines, gensets (auxiliary power) and infrastructure equipment continue to struggle, the demand for farm equipment perked up, thanks to the good monsoons.
Promise in farm equipment
The company manufactures a range of products for this segment, such as engines, pumpsets, power tillers, reapers, sprayers, brush cutters and mini-tractors.
To cash in on the demand, GCL has expanded its offerings. It has launched variants of power weeders, tillers and brush cutters.
The recently-launched mini-tractor is expected to extend the company’s footprint to States such as Gujarat, Maharashtra and Karnataka in the current year.
Financials
For the quarter ended June 2013, net sales and net profit remained almost flat at Rs 410 crore and Rs 32 crore, respectively.
While overall margins too, stood at the same levels as the June 2012 quarter (12 per cent), the engines segment witnessed a slight deterioration in margins to 15.5 per cent, from 16 per cent a year ago.