Stock Review: Greaves Cotton

Outlook Looks Rosy, But Select Segments, Geographies Need To Fire Up

 

GREAVES Cotton, the engine manufacturing company, has gained about 15% over the past month against a negligible return for the Sensex during the period. Over the past one year, the stock has gained nearly 160%, significantly outperforming Sensex, which rose nearly 15%. The impressive growth in earnings over the past three quarters has kept the P/E ratio in check, which stands at an attractive 16.6 times, even after the sharp rise in stock price. Looking at its financials and prospects, the stock is likely to keep up its momentum for at least a few more months.

   The company was among the worst affected due to the global meltdown, which led to its profits falling by almost two-thirds between June 2007-June 2009. The recovery has also been equally sharp, with the company posting third consecutive quarters of more than doubled profits for the quarter ended June 2010. Almost all the cost items — raw materials, staff and interest — have registered a fall as a percentage to net sales. The full-year profit at nearly Rs 118 crore is now back to its pre-crisis level on an absolute basis. Furthermore, the efficiency measures undertaken during the crisis period leading to reduction in debt and interest burden, are helping it improve the margins, aided by volumes growth.

   The company is mainly into manufacture of engines for agricultural, industrial and automobiles sector. The company is an important engine supplier for 3-wheeler segment, which provides almost half of its revenues. Besides, it also manufactures equipment used for road construction and is developing the business through various technological alliances. However, this segment hasn't seen much growth yet due to lack of pick-up in the activities in road development projects. To tap the overseas market, the company had acquired a small engine manufacturing company in Germany, just before the global meltdown began. While the acquisition offers a production facility and an existing distribution, the results have not been satisfactory so far due to changed global environment. The outlook for the company looks reasonable although some of the segments and geographies are still to record a pick-up.