1QFY2017 Result Update | Capital Goods
August 6, 2016
Greaves Cotton (GC)
NEUTRAL
CMP
`139
Performance Highlights
Target Price
-
Quarterly highlights - Consolidated
Investment Period
-
Y/E March (` cr)
1QFY17
1QFY16
% chg (yoy)
Stock Info
Gross Sales
444
422
5.1
Sector
Capital Goods
EBITDA
59
59
0.3
Market Cap (` cr)
3,045
Adj. PAT
44
36
21.0
Net debt (` cr)
(90)
Source: Company, Angel Research;
Beta
0.6
Greaves Cotton reported in-line gross sale numbers at `444cr. Reported sales
52 Week High / Low
162/114
were up 5.1% yoy. Engines segment (96% of 1QFY2017 revenues) reported 3.1%
Avg. Daily Volume
267,635
yoy increase in sales to `427cr. Others segment (4% of 1QFY2017 revenues)
Face Value (`)
2
benefitted from strong performance seen across their Farm Equipment business &
BSE Sensex
28,078
Auxiliary Power business. This segment on lower base, reported strong 68.6% yoy
Nifty
8,683
increase in revenues to `18cr.
Reuters Code
GRVL.BO
GC reported 65bps yoy decline in its EBITDA margins during 1QFY2017 to
Bloomberg Code
[email protected]
13.3%. Strategic initiatives to build the business for future led to increase in other
expenses, which witnessed 13% yoy increase to `39cr (8.7% of 1QFY2017 sales).
Shareholding Pattern (%)
If we look at segment-wise EBIT margins, then both, Engines & Others segment
Promoters
51.0
reported 31bps and 97bps, yoy decline in 1QFY2017 to 15.5% and 6.8%,
MF / Banks / Indian Fls
31.4
respectively.
FII / NRIs / OCBs
4.9
In-line with yoy EBITDA margin decline, PAT margins also declined 169bps yoy to
Indian Public / Others
12.7
8.7%. On adjusting for exceptional items, Adj. PAT margins expanded 131bps
yoy to 9.9% in 1QFY2017.
Abs. (%)
3m 1yr 3yr
Valuation: Considering margin expansion scenario, debt free status and strong
Sensex
4.9
(0.8)
49.9
cash flow generating profile, we expect Greaves stock to trade at premium
Greaves Cotton
1.5
(4.6)
146.4
valuations. At CMP of `139, Greaves is trading at FY2017E and FY2018E, P/E
multiple of 17.8x and 16.4x, respectively. Given that the current valuations are
capturing all the positives, we have NEUTRAL rating on the stock.
3-Year Daily Price Chart
180
Key financials (Standalone)
160
140
Y/E March (` cr)
FY13
FY14
FY15
FY16
FY17E
FY18E
120
Net Sales
1,873
1,719
1,689
1,655
1,755
1,881
100
80
% chg
7.0
(8.2)
(1.8)
(2.0)
6.0
7.2
60
Adj. Net Profit
150
121
147
181
191
207
40
20
% chg
6.5
(19.4)
21.8
22.7
5.7
8.5
0
EBITDA (%)
12.9
11.3
11.8
16.6
16.8
16.9
EPS (`)
6.1
5.0
6.0
7.4
7.8
8.5
P/E (x)
22.6
28.1
23.0
18.8
17.8
16.4
Source: Company, Angel Research
P/BV (x)
4.1
3.7
3.7
3.4
3.2
3.0
Adj. RoE (%)
21.6
15.5
18.0
21.1
20.6
20.9
RoCE (%)
43.0
32.4
32.4
42.8
43.4
44.1
EV/Sales (x)
1.8
2.0
2.0
2.0
1.9
1.7
Yellapu Santosh
022 - 3935 7800 Ext: 6811
EV/EBITDA (x)
12.7
15.6
15.1
10.8
10.0
9.2
[email protected]
Source: Company, Angel Research; Note: nmf- Not Meaningful; CMP as of August 5, 2016
Please refer to important disclosures at the end of this report
1
Greaves Cotton | 1QFY2017 Result Update
Exhibit 1: Quarterly Performance (Consolidated)
(` Cr)
1QFY17*
1QFY16*
% chg (yoy)
Gross Sales
444
422
5.1
Raw Material
307
290
5.9
Employee Cost
39
39
(0.2)
Other Expenses
39
34
13.0
Total Expenditure
384
363
5.9
EBITDA
59
59
0.3
EBITDA %
13.3
14.0
Interest
0
0
(66.7)
Depreciation
11
11
(2.8)
Other Income
12
11
4.7
PBT before Excep. Item
60
59
1.9
Exceptional Item
(6)
7
nmf
PBT after Excep. Item
55
66
(17.8)
Total Tax
16
23
28.9
Effective Tax rate (%)
26.7
38.3
Rep. PAT (after Min. Int.)
39
44
(12.0)
PAT Margins (%)
8.7
10.4
Adj. PAT
44
36
21.0
Adj. PAT Margins (%)
9.9
8.6
15.1
EPS (`)
1.6
1.8
(11.7)
Source: Company, Angel Research; Note: nmf- Not meaningful;*Reported as per Ind AS, FY2016
numbers & other remaining quarters continue to be reported as per Indian GAAP; It needs to be
noted that yoy growth for FY2017E is not comparable as FY2016 continues to be reported under
Indian GAAP
Others segment drive 5.1% yoy sales growth in 1Q
Greaves Cotton reported in-line sale numbers at `444cr. Reported sale numbers
were up 5.1% yoy. Engines segment (96% of 1QFY2017 revenues) reported 3.1%
yoy increase in sales to `427cr. Others segment (4% of 1QFY2017 revenues)
benefitted from strong performance seen across their Farm Equipment business &
Auxiliary Power business. This segment on lower base, reported strong 68.6% yoy
increase in revenues to `18cr. Also management attributed this growth to launch
of new range of solutions (reported under Other’s segment), enhancement in the
service quality, and entry in to newer geographies.
EBITDA margin declines to 13.3%
GC reported 65bps yoy decline in its EBITDA margins during 1QFY2017 to 13.3%.
Strategic initiatives to build the business for future led to increase in other
expenses, which witnessed 13% yoy increase to `39cr (8.7% of 1QFY2017 sales).
If we look at segment-wise EBIT margins, then both, Engines & Others segment
reported 31bps and 97bps, yoy decline in 1QFY2017 to 15.5% and 6.8%,
respectively.
Expenses incurred with regards to product development initiatives, entering new
geographies could have led to this margin compression in the Others segment.
August 6, 2016
2
Greaves Cotton | 1QFY2017 Result Update
Adj.PAT margin expand to 9.9%
In-line with yoy EBITDA margin decline, PAT margins also declined 169bps yoy to
8.7%. PAT numbers benefitted from 4.7% yoy increase in other income to `12cr.
Exhibit 2: Exceptional Item details
(` Cr)
1QFY17
1QFY16
Impairment of Assets
(3.4)
0.0
Employee Separation Cost
(4.0)
(0.6)
Profit on sale of Intangibles/ Properties
3.3
8.0
Provision for Inventory devaluation
(1.4)
0.0
Exceptional Items
(5.5)
7.4
Source: Company, Angel Research
On adjusting for exceptional items, Adj. PAT margins expanded 131bps yoy to
9.9% in 1QFY2017.
Exhibit 3: Details of Other Comprehensive Income
PAT reconciliation (` Cr)
1QFY16
PAT under IND-GAAP
43.34
Interest Income due to fair valuation of
0.03
interest free security deposit given
Effect of measuring investments at fair value
0.94
through P&L account
Effect of measuring forward contract at fair value
0.08
Prepaid rent due to fair value of interest free
(0.03)
security deposit amortized
Reclassification of actuarial gains/ losses (arising in respect
(0.33)
of employee benefit schemes, to other comprehensive income)
Tax adjustments on above items
(0.22)
Total IND-AS Adjustments
0.47
PAT as reported under IND-AS
43.81
Other Comprehensive Income
0.21
Total Comprehensive Inc. as reported under IND-AS
44.02
Source: Company
Risks & Concerns
Delays in release of subsidies could impact demand for Farm Equipments,
which could act as risk to our assumptions.
Slower than expected demand for SCVs could act as risk to our assumptions.
Shift in the mix in favor of Farm Equipments could act as risk to our earnings
growth estimates.
August 6, 2016
3
Greaves Cotton | 1QFY2017 Result Update
Outlook & Valuation
Margin recovery (owing to shut-down of Infrastructure Equipment division),
coupled with improving demand scenario should help GC report 12% PAT CAGR
during FY2015-18E. At CMP of `139/share, GC is trading at FY2017E and
FY2018E, P/E multiple of 17.8x and 16.4x, respectively.
Given that GC has strong 70%+ market share in the 3W goods engine industry
and it caters to almost all the leading OEMs, it indicates that GC enjoys strong
market positioning within the space. In the back-drop of gradual revival in the
business, we expect GC to report 3.7% top-line and 12% adj. bottom-line CAGR
during FY2015-18E. Given their lean balance sheet (zero debt and cash balance
of `21cr as of 4QFY2016) and strong cash flow generation potential (expect
`748cr during FY2016-18E), we expect the strong to trade at higher valuations.
On assigning 17.0x multiple to our FY2017E estimates, we arrive at price target of
`133. Accordingly, we have Neutral rating on the stock.
Company background
Founded in 1859, Greaves Cotton is a Thappar Group promoted company, which
over the years has emerged as largest manufacturer of light weight single/dual
cylinder’s engines, used by Auto & Industrial sectors. The company enjoys a strong
market positioning with in the 3-wheeler (3W) diesel engines market, given their
exclusive diesel engines supply agreement with Piaggio and M&M. Over the years,
the company has diversified to new verticals such as Infrastructure Equipments
(Road Construction Machinery, Concrete Equipment Machinery & batching Plants),
Agriculture Equipments (Power Tillers & Reapers), & Auxiliary Power & Industrial
Equipments (Power gensets used across industrial applications). On incurring
losses, GC in 2QFY2015 announced that it would shut-down its Infrastructure
Equipments division.
August 6, 2016
4
Greaves Cotton | 1QFY2017 Result Update
Profit & Loss (Standalone)
Y E March (` cr)
FY13
FY14
FY15
FY16
FY17E FY18E
Net sales
1,873
1,719
1,689
1,655
1,755
1,881
Growth %
7.0
(8.2)
(1.8)
(2.0)
6.0
7.2
Materials & Compo.
1,313
1,181
1,147
1,079
1,141
1,224
Consumed
Employee cost
148
162
161
154
160
171
Other Operating Expenses
170
182
181
148
159
168
Total Operating Expenses
1,631
1,525
1,489
1,381
1,460
1,563
EBITDA
242
194
200
274
295
317
Growth %
1.4
(20.1)
3.2
37.1
7.8
7.5
EBITDA Margin %
12.9
11.3
11.8
16.6
16.8
16.9
Depreciation
39
43
47
47
50
52
EBIT
219
177
177
256
278
301
EBIT Margin %
11.7%
10.3%
10.5%
15.5%
15.8%
16.0%
Other Income
16
27
24
30
33
36
Interest
1
5
2
1
1
1
Exceptional Item
(18)
(8)
(66)
6
0
0
PBT
200
164
109
261
277
301
Tax
62
51
27
75
86
93
Effective tax rate %
31.1
31.2
25.0
28.6
31.0
31.0
PAT
138
113
82
187
191
207
Adj. PAT
150
121
147
181
191
207
Growth %
6.5
(19.4)
21.8
22.7
5.7
8.5
Adj. PAT margin %
8.0
7.0
8.7
10.9
10.9
11.0
August 6, 2016
5
Greaves Cotton | 1QFY2017 Result Update
Balance Sheet (Standalone)
Y E March (` cr)
FY13
FY14
FY15
FY16
FY17E FY18E
SOURCES OF FUNDS
Share Capital
49
49
49
49
49
49
Reserves & Surplus
693
769
771
849
911
976
Net Worth
742
818
820
898
960
1,024
Total Loan Funds
2
0
0
0
0
0
Total Deferred Tax
35
33
13
13
13
13
Provisions
13
13
10
10
10
10
Other Liabilities
4
4
4
4
5
5
Total Liabilities
796
868
846
925
987
1,052
APPLICATION OF FUNDS
Gross Block
589
625
616
662
711
758
Accumulated Depreciation
221
257
290
338
388
440
Net Block & Cap. WIP
376
373
334
328
327
322
Investments
94
178
309
390
440
490
Current Assets
709
647
511
541
572
618
Inventories
161
158
105
107
115
124
Sundry Debtors
375
333
237
236
250
263
Cash & Bank Balance
41
34
34
90
107
135
Loans & advances
131
122
135
109
100
97
Current Liab. & Provisions
384
332
310
336
355
380
Current Liabilities
296
252
220
249
263
282
Provisions
88
80
90
86
91
98
Net Current Assets
325
315
202
206
218
238
Other Assets
1
2
2
1
2
2
Total Assets
796
868
846
925
987
1,052
August 6, 2016
6
Greaves Cotton | 1QFY2017 Result Update
Cash flow Statement (Standalone)
Y E March (` cr)
FY13
FY14
FY15
FY16
FY17E FY18E
Profit before Tax
200
164
109
261
277
301
Depreciation
39
43
47
47
50
52
Other adj. prior to WC changes
3
(3)
9
5
(13)
(14)
Changes in working capital
(78)
9
103
31
1
3
Tax
(60)
(58)
(44)
(75)
(86)
(93)
Cash flow from Operations
105
157
223
270
229
249
Capital expenditure
(66)
(10)
(45)
(42)
(50)
(47)
Free Cash Flow
171
166
268
312
279
295
Inc/Dec. in Investments
11
(113)
(119)
(64)
(33)
(32)
Cash flow from Investments
(55)
(123)
(164)
(106)
(82)
(78)
Equity capital raised
0
0
0
0
0
0
Inc./ (Dec.) in Borrowings
(18)
(2)
(0)
0
0
0
Dividend & Interest paid (incl tax)
(60)
(39)
(59)
(108)
(130)
(143)
Cash flow from Financing
(78)
(41)
(59)
(108)
(130)
(143)
Net change in cash
(29)
(7)
0
56
17
28
Cash at the beginning of the year
70
41
34
34
90
107
Cash at the end of the year
41
34
34
90
107
135
August 6, 2016
7
Greaves Cotton | 1QFY2017 Result Update
Ratio Analysis
Y E March
FY13
FY14
FY15
FY16
FY17E FY18E
Valuation Ratio (x)
Adj. P/E (on FDEPS)
22.6
28.1
23.0
18.8
17.8
16.4
Adj. P/CEPS
19.8
21.7
26.4
14.5
14.1
13.1
Dividend yield (%)
0.9
1.1
0.6
0.4
0.3
0.3
EV/Sales
1.8
2.0
2.0
2.0
1.9
1.7
EV/EBITDA
14.2
17.4
16.8
12.1
11.1
10.3
EV/Total Assets
2.8
2.8
2.9
2.6
2.5
2.3
Per Share Data (`)
Adj. EPS (fully diluted)
6.1
5.0
6.0
7.4
7.8
8.5
Cash EPS
7.0
6.4
5.3
9.6
9.9
10.6
DPS
1.6
1.3
2.5
3.7
4.5
4.9
Book Value
30
33
34
37
39
42
Returns (%)
RoCE (Pre-tax)
43.0
32.4
32.4
42.8
43.4
44.1
Angel RoIC (Pre-tax)
19.1
15.3
19.0
29.2
31.0
33.0
Adj. RoE
21.6
15.5
18.0
21.1
20.6
20.9
Turnover ratios (x)
Asset Turnover (Gross Block)
1.6
1.4
1.5
1.3
1.3
1.3
(x)
Inventory / Sales (days)
32
34
28
23
23
23
Receivables (days)
62
75
62
52
51
50
Payables (days)
67
61
54
54
56
55
WC (days)
26
48
37
22
18
18
August 6, 2016
8
Greaves Cotton | 1QFY2017 Result Update
Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
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offering of securities of the company covered by Analyst during the past twelve months.
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Disclosure of Interest Statement
Greaves Cotton
1. Financial interest of research analyst or Angel or his Associate or his relative
No
2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives
No
3. Served as an officer, director or employee of the company covered under Research
No
4. Broking relationship with company covered under Research
No
Ratings (Based on expected returns
Buy (> 15%)
Accumulate (5% to 15%)
Neutral (-5 to 5%)
over 12 months investment period):
Reduce (-5% to -15%)
Sell (< -15)
August 6, 2016
9