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Greaves Cotton (formerly Greaves Limited), part of the B M Thapar group, is India’s
leading and well-diversified engineering company. It is the largest manufacturer of diesel
engines in India, with factories located at Pune, Aurangabad, Ranipet, Thoraipakkam, and
Chennai.
After divesting its polymer business in FY 2004 and power transmission (industrial
products segment) from 1 July 2004, Greaves Cotton is left with the core business of
engines and infrastructure equipment. Its core competencies are in diesel/petrol engines,
gensets, agro equipment and construction equipment.
The engine division of Greaves Cotton manufactures diesel engines of 20-1000 HP for
gensets, compressors, construction equipment and defence applications; lightweight
petrol/kerosene engines in 1-4 HP range mostly used in pumpsets and power sprayer
applications; and lightweight diesel engines for automotive applications such as two and
three wheelers and mini cars.
The engine division is the mainstay of Greaves Cotton. In the half year ended December
2004, the sales of the engine division were up by 13% to Rs 287.20 crore (80% of total
sales). The profit before interest and tax (PBIT) of the same increased by 40% to Rs 49.30
crore (90% of total). In the year ended June 2004, the segment sales were
Rs 517.96 crore (up by 28%) and accounted for 71% of sales. PBIT was up by 37% to
Rs 70.25 crore (76% of total).
The increased focus on new products, a pick-up in industrial activity and the service
sector growth have augured well for the engine division. The performance looks more
impressive if one takes into account the illegal strike at the light engine division at
Aurangabad since 10 October 2004 affecting production. The strike was called off on 14
February 2005, and this should increase production.
The infrastructure division of Greaves Cotton comprises const-ruction equipment like
concrete pumps, transit mixers, vibratory compactors; drilling equipment like rock roller
bits for oilfield, mining and water wells; cast and forged rolls; man-riding systems;
shearers; and continuous miners.
In the half year ended December 2004, the sales of the infrastructure segment was up by
38% to Rs 46.60 crore and accounted for 13% of the overall sales. PBIT of the division was
down by 14% to Rs 2.23 crore, largely due to the fall in the segment margin. In future,
the infrastructure division is poised for sustainable growth due to the government’s
increased thrust on the infrastructure and construction sector.
In the half year ended December 2004, Greaves Cotton registered sales of Rs 353.45
crore. The operating profit rose 22% to Rs 47.81 crore with a 240 basis-point improvement
in the operating profit margin to 13.5%. The profit before tax was up 126% to Rs 39.60
crore and the profit after tax was up 103% to Rs 26.32 crore.
Greaves Cotton is planning to leverage the current strong demand conditions by hiking
its capacity to 2,50,000 light diesel engines a year from approximately 1,50,000 currently
at the Ranipet unit. For this, it has drawn capex plans of Rs 100 crore. The light diesel
engine business, which caters to the requirement of the three-wheeler industry, has a
market share of over 60%.
The three-wheeler industry is currently witnessing a significant change. The goods
segment is seeing strong growth, but the passenger segment is on a decline. Moreover,
while Piaggio is gaining by leaps and bounds, Bajaj Auto is losing market share. In the 10
months ended January 2005, the three-wheeler industry recorded a 6% growth in sales to
287615 units. However, Piaggio recorded a 51% rise to 65,004 units. In future, this trend
is expected to continue. This will benefit Greaves Cotton: it does not supply engines to
Bajaj Auto, but is the sole supplier to Piaggio.
In FY ending June 2005, we expect Greaves Cotton to register sales and a net profit of
Rs 752 crore and Rs 53.69 crore, respectively. After adjusting for extraordinary items and
tax, EPS on fully diluted equity (after considering full conversion of warrants issued to
promoters) works out to Rs 11.1. EPS can rise to Rs 14.1 in FY 2006. The share
trades around Rs 133. P/E at the current price is just 12 on FY 2005 EPS and 9.4 on
FY 2006 EPS. |
