Greaves Cotton: New initiatives to drive growth, de-risk business

Expansion of products across segments, entry into new markets and to drive growth and de-risk business

Greaves Cotton, which largely caters to automobile clients that account for almost 60% of its revenue, has chalked a strategy to de-risk its business and maintain high growth. The company recently launched a mini-tractor branded as "Ustad" in the range of Rs 2-2.4 lakh per unit. This is among steps intended to expand its products, markets and enter newer geographies.

Such initiatives will help alleviate some of the concerns analysts have about the company's exposure to slowing growth in automobile volumes, industrial and infrastructure space, which had earlier led to a correction in its share price. Its stock too reacted positively and is up almost 6% since the mini-tractor launch on April 15th. At current price of Rs 73.05, it trades at 10 times FY14 estimated earnings, which is reasonable for a zero-debt company generating Rs 200 crore in annual free operating cash flow, 23% return on equity and notably, is expected to record earnings growth of 15-16% over the next two years. At the current price, the dividend yield is also healthy at 3.5%.

Though in some of these segments (infrastructure, automobile and industrial) the company is currently facing slowdown, the impact of the same is relatively lower given its product profile, which is less prone to slowdown. Like in automobiles, higher LCV demand and higher road sector investments in infrastructure has shielded its growth in the recent past. Additionally, recent launches by Tata Motors in LCV space (second major customer in automobile segment) have helped Greaves Cotton grow its business which is reflected in its financial performance too. For instance, in December 2012 quarter, the company's major segments namely, engine and infrastructure grew 11-18% on a year-on-year basis. Going ahead as well, growth is expected to be good as a result of its efforts to de-risk the business. 

"In case of recent launch of Ustad (mini-tractor), Greaves is likely to leverage existing tiller distribution network. Risk-reward is favourable given low capital intensity and an early entrant in the emerging segment. This lends 2-3% upside to our earnings estimates assuming a 10% market share for Greaves and upsides from use of in-house engine - though yet not factored," said Pritesh Chheda who tracks the company at Emkay Global Financial Services.

Similarly, the company is also hoping to launch more products in the construction equipment space, which accounts for about 10% of the revenue. It is spending about Rs 120-130 crore in capex, which will help in expanding its product portfolio. Infrastructure business is currently loss-making and reported a turnover of Rs 110 crore and loss of Rs 5.8 crore in the nine months ending December 2012. The company believes that to break-even it needs to reach an annual turnover of about Rs 200-220 crore, which it is hopeful of achieving with the help of new products and entry in new markets.

That apart, in automobiles as well the company is working on more products and to acquire new clients. It is already working with Tata Motors for CNG-based engines, which will be another addition to the product portfolio. Notably, it will soon add to its growth as the launch is expected anytime now. In industrial segment as well, it is looking for new variants of gensets to capture a bigger pie of the market, while in terms of geographies the company has chalked out plans to gain larger export presence. Exports currently account about 4% of its annual turnover of Rs 1,926 crore in FY12, which it intends to take to about 10% over the next four years.