Buy Greaves Cotton: The Dark Horse

Rudra Shares And Stock Brokers | Jan. 20, 2017, midnight

Investment Rationale

Ventures into Multi Brand Spares Business, an extension to its after-market services

The company, will initially, offer fast-moving vehicle and engine spare parts through its strong retail network this will be in addition to its generic parts. In the next phase even relatively slow- moving parts will also be offered to customers thus becoming a one-stop-shop for most parts requirements irrespective of the brand of 3-wheeler passenger and commercial vehicles.

Greaves will be the first to offer spares across all categories in three wheeler segment.

Company have tied up with more than 40 vendors for the supply of various spares. Greaves has a strong distribution channel and service network which can be utilized to serve customers of other brands & can reap an opportunity to create value.

The company has strong presence in the after-market services with a network of over 3000 outlets spread across the country will provide a complete range of multi brand spares across categories like engine, transmission, electrical, rubber parts, lubricants and body parts. It will be using its manufacturing facility and sourcing capability to produce and source vehicle and engine parts. The company further plans to increase its footprint by adding an additional 1500 outlets in the coming three to five vears.

Grasping the Market Share

In terms of market, Company is amongst the top 3 players in the country and in some of the products like Pump sets it is the leader. In terms of market share it varies from product to product and with a variety of products, for example in pump sets alone it is holding more than 40% market share today, With respect to the Tiller business, it lies in the range of 16% to 18% today and is again amongst the top three players. In terms of the three wheeler segment, Greaves has a very strong position in terms of supplying engines, having 100% market share other than Bajaj.


And for the rest of the products company wants to be among top two or three leading players and is hoping to strengthen its position going forward.

An Eye on the Quarterly numbers- Q4 FY16

The net revenue of the Company for the quarter is recorded at Rs 405 crores as against Rs 394 crores in the same period last year recording a growth of 3%. EBITDA for the quarter ended March 31, 2016 was Rs 63 crore as against Rs 45 crore for the same period last year, thereby recording a growth of 40%. The material cost reduction and value engineering initiatives gave good results. Employee cost, overheads and other expenses were well within the tight control of the management. This has helped the EBITDA margin to improve from 12% for the quarter ending March, 2015 to 17% for quarter ending March, 2016. The profit after-tax(PAT) for the quarter is reported at Rs 38 crores against Rs 24 crores for the same quarter previous year. Moreover, there have been a minor decline in turnover in the last quarter (Q-Q basis), however, the company have started pulling back & started growing. But on on overall basis there has been a slight decline.

Further more, the company is well placed to implement the BS IV norms for 4-wheelers and 3-wheelers in 2016-17 and is confident of providing the necessary solutions to meet BS VI norms by working closely with OEMs, suppliers and technology specialists. On the new product development initiatives, company have showcased the 3-cylinder engine in the Auto Expo as well and have received an encouraging response. Going forward, would continue its focus and build Farm Equipment product range & With the forecast of a normal monsoon, company have readied a range of products that will be launched through the coming year.

Valuation:Estimating the share price of the company as per P/E valuation, considering P/E at 25x on FY17E EPS at Rs8.75, the estimated share price for next 2-3 years tenure turns around to be Rs 219. Therefore, we recommend to BUY this script.

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