Stock Review: Greaves Cotton

Greaves Cotton is one of the country's reputed engineering companies. It manufactures a wide range of industrial products including generating sets, diesel and petrol engines (both industrial and automotive) and agri as well construction equipment. The stock has risen 27% on the bourses over the last one-year period, outperforming the Sensex which gained about 6%.

FINANCIALS

The company changed its financial year from July-June to April-March with effect from July 2010. It therefore reported a nine-month financial performance for FY11. Top line during this period grew by about 25% compared to the corresponding period last year. This was led by a healthy growth in both its business units — engines (23%) and infrastructure equipment (43%). The company's net profit rose by more than 41%, boosted by a significant rise in the other income and a decline in interest expenses.
A rise in the prices of raw materials impacted margins by about 30 basis points. Margins are likely to remain under pressure from material costs in the near future. The company is, however, better placed as far as interest costs are concerned as it has negligible debt. But with cash balance of just about 62 crore as on March 31, 2011, it will need third-party funding to meet working capital needs.

GROWTH DRIVERS

Greaves Cotton has long-term supply agreements with auto majors like Tata Motors and Piaggio. It has now added M&M to the list. The company will supply single cylinder engines for three wheelers to M&M for a period of five years. The company is also exploring opportunities in the small car engine segment.
It is expanding its current capacities with a new engine manufacturing plant coming up at Aurangabad, Maharashtra. Greaves has invested 60 crore in the project already, and is likely to pump in 40 crore more in phases. The plant in expected to become operational soon and will add about 80,000 engines per year to the company's existing capacity of more than 3 lakh engines per annum.

VALUATIONS

Greaves Cotton's stock currently trades at Rs 89 per share, commanding a P/E of 14 on a trailing four-quarter basis, which appears a bit expensive compared to its peers. However, given its longstanding contracts with auto majors and plans to cater to the small car segment, the company's forward P/E of 11.2 (FY12E) is decent.