GREAVES COTTON - Business Standard

INITIATING COVERAGE
GREAVES COTTON
Growth engine
India Equity Research| Metals and Mining
Greaves Cotton (GCL), a dominant player in the domestic three-wheeler
(3W) market, has now made significant inroads into the emerging four
wheeler (4W) small commercial vehicle (SCV) segment as well, ensuring
earnings sustainability. We believe the company is in a sweet spot to
benefit as LCV cycle recovers by virtue of its cost based leadership in the
low-ticket vehicle segment. Uptick in auto volumes, high growth in
agriculture business & ramp up in construction equipment sales will drive
utilizations for GCL from ~67% currently to 80% by FY16E. Also, imminent
operating margin and RoE expansion over FY14E-16E make it a prime
candidate for a valuation re-rating. We initiate coverage with ‘BUY’ and
target price of INR122 (42% upside), assigning 14.5x PE to FY16E.
3 wheeler dominance, rising 4 wheeler momentum to drive growth
We anticipate GCL to benefit from the imminent recovery in the CV cycle from H2FY15
by virtue of its pole position in the low-ticket, cost competitive market. Moreover, the
company’s dominant 80-85% market share in the 3W segment will sustain its long-term
growth rate of 12%. Also, rising traction in the emerging 4W SCV market and
sharpening focus on adding OEMs imparts long-term growth visibility.
EDELWEISS 4D RATINGS
Absolute Rating
BUY
Rating Relative to Sector
Outperformer
Risk Rating Relative to Sector
Medium
Sector Relative to Market
Equalweight
MARKET DATA (R: GRVL.BO, B: GRV IN)
CMP
: INR 86
Target Price
: INR 122
52-week range (INR)
: 88 / 53
Share in issue (mn)
: 244.2
M cap (INR bn/USD mn)
: 21 / 349.3
Avg. Daily Vol.BSE/NSE(‘000) : 222.1
SHARE HOLDING PATTERN (%)
Current Q3FY14
Q2FY14
Promoters *
51.6
51.6
51.6
MF's, FI's & BK’s
32.6
27.9
28.2
FII's
3.5
8.4
8.5
Market boost for agri business; RoE set to spur over FY14E-16E
Others
12.3
12.1
11.7
We expect GCL’s agri business to post robust 20% CAGR over FY14E-16E spurred by
increased need for mechanised farming, favourable demographics (60% of agri land <3
acre) and strong improvement in MSPs over the past four-five years (doubled). Also,
effective cost reduction drive, institutional focus and an expansive product portfolio
will help the company’s infra business turnaround beyond FY16. Riding these, we
expect RoE to expand from 17% in FY14E to 21% plus in FY16E.
* Promoters pledged shares
(% of share in issue)
Outlook and valuations: Positive; initiate with ‘BUY’
:
NIL
PRICE PERFORMANCE (%)
Sensex
Stock
Stock over
Sensex
1 month
2.0
17.5
3 months
5.8
33.1
27.3
12 months
18.9
14.1
(4.8)
Cost-based leadership in the low-ticket 3W and 4W SCV segments has helped GCL
sustain pole position. We expect it to benefit from SCV recovery over FY15-16, which
coupled with sustained growth in agri business will drive utilisation and RoE beyond
80% and 21%, respectively, by FY16E. We initiate coverage with ‘BUY/Sector
Outperformer’ recommendation/rating.
Financials
Year to March
Revenues (INR mn)
Rev. growth (%)
EBITDA (INR mn)
Net profit (INR mn)
EPS (INR)
EPS growth (%)
Diluted P/E (x)
ROE (%)
FY12
17,893
39.7
2,366
1,315
5.4
4.1
16.2
22.4
FY13
19,061
6.5
2,406
1,515
6.2
15.2
14.0
21.8
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
FY14E
17,541
(8.0)
1,998
1,309
5.4
(13.6)
16.2
17.2
FY15E
19,750
12.6
2,423
1,532
6.3
17.1
13.9
18.4
Amit Mahawar
+91 22 4040 7451
[email protected]
Click on image to view video
Swarnim Maheshwari
+91 22 4040 7418
[email protected]
April 17, 2014
Edelweiss Securities Limited
15.5
Engineering & Capital Goods
Investment Rationale
CV cycle recovery to drive growth; engine upgrades, OEM addition key
Post launching double cylinder 4W engine in FY06, GCL has scaled up significantly by
supplying to key OEMs, primarily Tata Motors (Ace Zip & Magic Iris) and Piaggio (Ape Truck).
We expect the company’s 4W volumes to post 15% CAGR over FY14-16E riding uptick in the
light commercial vehicle (LCV) cycle from H2FY15. GCL’s dominant presence in the lowticket segment of CV augurs well for the company as it will be at the forefront to benefit
from recovery in the CV cycle.
The company has been successful in diversifying its client base—currently derives revenue
from more than six SIAM registered OEMs compared to only Piaggio in 2002. While we have
modeled SCV volume surge by ramp up in existing client base (Tata, Piaggio), we believe any
further addition of OEM poses an upside risk to our volume estimate. Our auto analyst
believes that post tepid demand in the past three years, any signs of pick up in industrial
activity, mining/construction/infra activity will be a key trigger and drive demand in the next
two years. Our auto analyst expects the LCV market to grow by 10% in FY15E and 20% in
FY16E.
Table 1: Industry and company assumptions (auto segment)
FY12
Industry SCV Volume (Less than 3 tons)
361,147
% change
36
Greaves Assumption
3W Goods growth (%)
2
3W Passenger growth (%)
(3)
4W Goods Growth (%)
16
4W Passenger Growth (%)
1
Total Auto Engines growth(%)
(1)
FY13
437,875
21
FY14E
354,016
(19)
(4)
3
538
(2)
19
0
(8)
11
(22)
(4)
FY15E
389,418
10
FY16E
467,301
20
15
6
10
10
9
23
11
20
10
16
Source: Industry, Company, Edelweiss research
Due to addition
of Tata Ace ZIp
Table 2: GCL has inked long-term agreements with major industry players
OEM
Category
Model name
Tata Motors
4W Goods
Tata Ace Zip and Iris
Atul Auto
3W Goods & Passenger
Atul Smart, Atul Shakti, Atul Gem
M&M
3W Goods & Passenger
All 3W from M&M's stable
Piaggio
3W & 4W Goods , 3W Passenger
Ape Series
Aggrement
10 Years
7 Years
5 Years
8 Years
End of contract
Jan-21
Jul-19
Feb-16
Jun-16
Source: Industry, Company, Edelweiss research
Table 3: GCL’s key OEMs planning to increase capacities
OEM
Current capacity
Planned capacity
Atul Auto
48,000
12,000
Tata Motors Zip Ace & IRIS
90,000
90,000
Total capacity
60,000
180,000
Source: Industry, Company, Edelweiss research
2
Edelweiss Securities Limited
Greaves Cotton
Improving market share in fast growing 4W market
The company has been able to improve its market share in the 4W goods segment as a
result of strong sales of Tata Ace ZIP powered by GCL’s engines. Tata Motors has registered
an impressive 20% volume CAGR from FY06-13 (ACE model was launched in FY06). GCL’s
market share in the 4W SCV goods segment rose to around 15% in FY14 from less than 3%
in FY11.
Though Tata Motors
manufactures more than 1 ton
engines in house, it has
outsourced small engines to GCL
given GCL dominant position in
sub 1 ton segment.
Chart 1: GCL—Improving market share gradually
22.0
18.0
(%)
14.0
10.0
6.0
2.0
FY11
FY12
FY13
FY14
Greaves Market share in 4W
Source: Industry, Company, Edelweiss research
Strong positioning in 3W to sustain: Growth likely to be steady state
GCL has been successful in adding market share in the 3W segment overall—from 20% in
FY02 to 35-40% currently. Except Bajaj Auto, the company sells engines to all major OEMs
like Piaggio, Atul Auto, M&M, among others. The passenger segment, which accounts for a
major chunk of total 3W market (90%), has posted 13% volume CAGR over FY02-14. Strong
support from GCL has helped Piaggio (largest OEM for GCL) ramp up market share from 78% in FY02-03 to more than 20% currently in 3W passenger segment. GCL has maintained
more than 85% market share in 3W goods market with an annual volume of ~1,00,000 units
We expect 19% volume CAGR in 3W goods segment for GCL and have built 9% volume
CAGR in 3W passenger segment over FY14-16E.
3
Edelweiss Securities Limited
Engineering & Capital Goods
Chart 2: GCL’s clients have registered strong growth
3W Passanger growth for GCLs OEMs
270,037
Chart 3: Piaggio has improved its market share in long run
188,844
31.0
Avg market share 23% (FY08-FY14 )
117,545
Avg market
share - 12%
20.6
(FY02-FY07 )
(%)
(Units)
168,745
5.0
Ex Bajaj & TVS
Piaggio
FY14
10,597
FY12
16,808
FY10
10.2
FY08
46,246
FY06
67,454
FY04
15.4
FY02
81,896
118,100
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
(Units)
25.8
153,195
219,391
Piaggio-mkt share
Source: Industry, Company, Edelweiss research
Expanding portfolio to strengthen agri business
Given strong potential in agri market on account of increased need for mechanised farming,
favourable demographics (60% agri land <3 acre) and strong improvement in MSPs over the
past four-five years (doubled), we expect a strong 20-25% revenue CAGR in GCL’s agri
business over FY14-16E. The company has expanded its agri portfolio to include electric
pumps, light agri equipment (tillers) etc., for which it will leverage on existing delaer
network (presence in more than 40 districts across India). The company continues to hold
leadership position in the petrol / kerosene pump sets segment.
Table 4: Market size of pump sets
Market size
Product
(INR bn)
GCL market
share
Competitors
Diesel
5.2
15%
Usha, Kirloskar, Suguna
Petrol/ Kerosene
2.5
45%
Honda, Birla, Yamaha, Kirloskar
Electric
30
NA
Texmo, CRA
Source: Company, Industry, Edelweiss research
Entry in fast growing sub 20Hp tractors to enhance agri sales
GCL recently entered the tractors market by introducing a new mini tractor product
category in its farm equipment business. It launched maiden mini-tractor Ustad which
targets the new emerging segment of sub 20HP tractors. Ustad is fitted with a 11-12HP
single cylinder GCL engine and is priced between INR200,000 and INR240,000 per unit. The
rationale behind the launch is to gain synergies by leveraging the existing distribution
network for farm equipment (tillers). The mini tractor market forms ~4-5% of total tractor
volumes in India.
4
Edelweiss Securities Limited
Greaves Cotton
Chart 5: Agri business to post 20% revenue CAGR (FY14-16E)
5,335
33.0
2,709
13.2
1,833
6.6
958
0.0
GCL's agri biz sales (LHS)
Mini tractor sales
FY16e
FY15e
FY14
FY13
FY08
(%)
19.8
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
324
3,584
FY12
4,699
26.4
FY11
9,074
4,460
FY10
13,450
Exponential growth led by entry of
M&M Yuvraaj model
(INR mn)
(Units)
17,825
FY09
Chart 4: Mini tractor can turn out to be high growth product
22,200
Revenue growth (YoY)
Source: Company, Edelweiss research
Indigenisation of tillers, cost saving measures to aid margin expansion
10.2
8.9
8.9
20
1,340
1,300
1,200
(%)
60
1,140
1,100
7.0
1,000
3.5
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14E
FY15E
FY16E
EBITDA margins
Staff Cost
900
0.0
RM
10.5
15.1 15.1
13.4
13.2
12.6 12.3
11.4
FY14E
14.0
16.0
15.4
14.6
13.3
13.0
(bps)
17.5
Chart 7: Contributors to EBITDA margins
1,400
120
FY16E
Chart 6: Mini tractor can turn out to be high growth product
SG&A
GCL imports engines from China for its power tillers (~80% import content), which will be
replaced by in-house production commencing FY15. The company plans to use engines from
automobile division in its power tillers, which will further aid margin expansion. We
estimate the company’s operating margin to expand by 200bps to 13.4% in FY16E.
Source: Company, Edelweiss research
EBITDA margin to expand riding
improved capacity utilization, various
cost saving measures, indigenization
of tillers and substantial reduction in
infra business losses
5
Edelweiss Securities Limited
Engineering & Capital Goods
Infra business: Reining in costs, offering new products to curtail losses
The construction equipment business contributes 7-8% to GCL’s revenue and has been loss
making since FY09 due to tepid construction activity and the company’s weak traction in
both building and road segments. The company has launched a cost reduction drive to curb
losses, which is currently around INR4-5crore/quarter and has also launched a few products
to expand its current offerings to target institutional clients in the construction space. As per
management, GCL can achieve PAT breakeven at INR2.0bn, which we expect to be attained
only beyond FY16.
Chart 9: Infra business losses to subside by FY16
20.0
12.0
0.2
8.0
(35.4)
4.0
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
0.0
FY03
(71.0)
Greaves infra equipment growth (RHS)
Construction GDP growth (LHS)
32.0
(50)
(INR mn)
35.8
(%)
16.0
(%)
71.4
0
16.0
(100)
0.0
(%)
Chart 8: Infra business with construction GDP
107.0
(150)
(16.0)
(200)
(250)
(32.0)
FY13
EBIT (LHS)
FY14E
FY15E
FY16E
Revenue growth (YoY)
Source: Company, Edelweiss research
Robust free cash flow; RoE to expand over FY14-16
Uptick in auto volumes from H2FY15 coupled with sustained growth in agri business and
turnaround in infra segment will drive GCL’s free cash flow and operating margin. We expect
RoE to expand from 17% in FY14E to 21% plus in FY16E on better utilisation and margin
improvement. We expect the company’s margin to improve 200bps over FY14-16E led by
higher volumes, which will drive utilisation from current 65% to 80% by FY16E. Also,
reduction in infra losses over the next two years and localisation of tillers will further spur
margin surge. We expect GCL’s operating cash flow to improve from INR1bn in FY13 to
INR1.5bn in FY16E led by improvement in overall profitability without building any
relaxation in the working capital cycel. Given sustained capex of INR1.8bn over FY14E-16E,
we expect free cash to improve from INR385mn in FY13 to INR846mn by FY16E.
6
Edelweiss Securities Limited
Greaves Cotton
Chart 10: Operating Cash Flow and free cash flow to remain strong
2,100
(INR mn)
1,655
1,210
766
321
OCF
FY16E
FY15E
FY14E
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
(124)
FCF
Source: Industry, Company, Edelweiss research
7
Edelweiss Securities Limited
Engineering & Capital Goods
Valuation
GCL has sustained its cost-based industry leadership in the 3W auto market where it has a
strong 80% plus market share. Having made successful entry in the emerging 4W SCV
market, the company now aspires to attain dominant position therein, which we believe will
drive bulk of future growth. In the past two-three years of slowdown, GCL has not only
sustained its market position, but has also strengthened its overall business positioning
across auto, infra and agri segments. The company is planning to localise tillers
manufacturing from FY15, which will improve margin and reduce forex risk substantially.
Also, in the infra & construction vertical, the company has added a few product lines apart
from expanding its geographical reach, which augurs well for future growth.
Three key value drivers:
•
Pick up in LCV volumes from H2FY15 coupled with OEM addition.
•
Scale up in agricultural equipment volumes led by mechanisation drive and favourable
demographics.
•
Turnaround in infra business by FY16 to help attain 20% plus RoE.
We believe GCL will not only witness strong revenue traction beyond H2FY15, but will also
benefit from strong free cash flow generation, which we expect to catapult 1.5x over FY14-16E
to ~INR0.9bn. Uptick in auto engine volumes, strong growth potential in agri business & a
planned turnaround in construction equipment business over FY14E-16E will lead to a healthy
improvement in utilization levels(from 67% to 80% in FY16E) which in turn will drive both
margins(+200 bps over FY14E-16E) and RoEs(+400 bps over FY14E-16E). This clearly positions
GCL as a candidate for valuation re-rating. Thus, we ascribe a target price of INR 122 for GCL
assigning a PE of 14.5x on FY16E earnings, which we believe is a fair multiple considering
strong fundamentals and reasonable recovery prospects.
Chart 11: One year forward PE band
25.0
With greater than 25% volume
growth, GCL has traded at an
average PE of 14-15x in twin
bull runs in FY06-FY07 and
FY10-FY11
Vol growth :
Industry -29%,
GCL-27%
Vol growth :
Industry -29%,
GCL-28%
20.0
(x)
15.0
10.0
5.0
1 year forward P/E
Apr-14
Oct-13
Oct-12
Apr-13
Apr-12
Oct-11
Oct-10
Apr-11
Apr-10
Oct-09
Apr-09
Oct-08
Apr-08
Oct-07
Apr-07
Oct-06
Apr-06
Oct-05
Apr-05
Oct-04
Apr-04
0.0
Average PE
Source: Company, Edelweiss research
8
Edelweiss Securities Limited
Greaves Cotton
Key Risks
Revenue concentration risk
GCL earns a significant proportion of business from a few top players—Piaggio contributes
around ~40-45%, M&M ~20% and Tata Motors around ~20%—in the auto segment. Given
the macro headwinds, a dip in demand for 3W and 4W SCV could dent demand for engines,
impacting GCL’s revenue.
In-house manufacturing of engines by OEMs
Given the high cost proportion assigned to engines in a vehicle, combined with momentous
volumes, OEMs may be tempted to have an in-house engine manufacturing facility like Bajaj
Auto and M&M which manufacture their own engines. This can impact GCL’s revenue.
Cyclicality in business
GCL’s business segments like auto engines, auxiliary power division, and farm equipment
division and infra equipment is prone to economic downturn. Any slowdown in
consumption and other macro indicators can impact the volumes of the company.
Timely technological upgrades
In a technology-intensive business, timely upgrade in technology is of utmost importance in
order to cater to the existing or to new OEMs. Failure to do so may significantly impact
revenue and reputation of the company.
9
Edelweiss Securities Limited
Engineering & Capital Goods
Company Description
Overview
GCL, incorporated in 1922, is a well-diversified engineering company. Headquartered at
Mumbai, the company has a pan-India presence of marketing offices. It manufactures diesel
and petrol engines, gensets, agro equipment and construction equipment.
Fig. 1: GCL—History
Launched lightweight
diesel engine model
GL 400, complying with
Bharat Stage I (Euro I)
emission norms, for
three wheelers
Acquired two Plants
from Enfield India Ltd.,
to manufacture Petrol /
Kerosene engines
Pioneering industrialist
Lala Karamchand
Thapar bought
Greaves Became
an Indian Company
Greaves started
\manufacturing high
power MWM diesel
engines needed for
gensets and marine
propulsion
A state-of-the-art Technology
Centre and manufacturing
facility for new G Series engines
opened in Pune, New Compaction
Equipment plant opened in
Gummidipoondi, Tamil Nadu,
new manufacturing facility for
Agro Equipment inaugurated in
Gummidipoondi, Tamil Nadu
Greaves sets up Light
Engines Unit III at
Aurangabad, Greaves
opens a new Technology
Centre to design and
develop new generation
engines at Aurangabad
Millionth Light
Diesel Engine
rolled out
Greaves sets up
Light Engines Unit
V at Aurangabad
2011
2008
2006
2004
2012
2000
Greaves crosses three
million mark in light
diesel engines
2009
1994
2007
1980
Greaves crosses two
million mark in light
diesel engines
2005
1947
2001
1937
1996
JV with Crompton
Parkinson to for ceiling
fans and other electrical
products (now known
as CG ltd.).
1986
1962
1939
1859
James Greaves and
George Cotton founded
the company.
Joint Venture with
Ruston & Hornsby Ltd.,
U.K. and started
manufacturing diesel
engines in India
Greaves Power
Transmission Unit
set up in Pune in
collaboration with
David Brown Gear
Industries, U.K.,
and pioneered the
manufacturing of
industrial and marine
Gearboxes in India
Technical collaboration
with BOMAG GmbH,
Germany, to
manufacture
V ibratory Compactors
Introduced concreting
equipment in technical
collaboration with CIFA
of Italy
Eco friendly Light
Diesel Engine complying
with Bharat stage II
(Euro II) emission norms
launched
Greaves second Transit
Mixer manufacturing
facility opened near
Chennai, Greaves acquires
Bukh-Farymann GmbH
Diesel, Germany, Greaves
sets up Light Engines
Unit IV at Aurangabad
Launched Transit
Mixer and Batching
Plants
Source: Company
10
Edelweiss Securities Limited
Greaves Cotton
Table 5: Product profile
Product
Auto
Agriculture
Aux power
Single & double cyclinder Petrol/Kerosene/Diese Diesel Engine &
Engine
l Engine
DG set
Industrial
Diesel Engine
Construction Equipment
Various Concrete and road
equipments
Range
4.4 to 20HP (Light)
1-5HP
1.5-750KVA
Applications
3W , 4W and light agri
equipments
Pumpsets,Power
reapers, Power
sprayers
10-1000HP, 30400KVA
Aux power
Marine, Mining,
Construction,
Railways, etc.
construction of roads, bridges,
high rise buildings, mix
concrete applications etc
Plant location
Aurangabad & Ranipet
Gummidipoondi
Pune
Pune, Aurangabad,
Ranipet,
Gumminipoondi
Gummidipoondi
Competitors
Lambordini, OEM's (In
house manufacturing)
VST Tillers,
KOEL, Cummins
Mahindra& Mahindra,
TAFE
KOEL, Cummins
-
Source: Company, Edelweiss research
Current manufacturing set up
•
2 manufacturing units at Pune.
•
3 manufacturing units at Aurangabad.
•
4 manufacturing units at Gummidipoondi.
•
1 manufacturing unit at Ranipet.
•
1,500 dealers throughout India demonstrating strong pan-India reach.
•
25 distributors in the international market.
Fig. 2: GCL has pan-India presence
Source: Company,
11
Edelweiss Securities Limited
Engineering & Capital Goods
Key personnel
Mr. Karan Thapar, Chairman
Mr. Karan Thapar, Chairman of the Board of Directors of the company, is a qualified
Chartered Accountant who has held eminent leadership positions in his illustrious career
spanning over 30 years. With extensive knowledge and expertise in managing public and
private enterprises across diversified industries, he brings to the company his vision,
innovative thinking and ability to steer the enterprise to higher growth.
Mr. Sunil Pahilajani, MD & CEO
Mr. Sunil Pahilajani is a Bachelor of Technology in Mechanical Engineering from the reputed
Indian Institute of Technology, Roorkee. During his 27-years’ career, he built formidable
competencies across multiple disciplines and served in top management positions in
engineering, manufacturing and technology businesses. His career included leadership stints
in blue chip organisations. Mr. Pahilajani possesses extensive experience across myriad
functions such as sales, marketing, business development, techno-commercial evaluation
and production.
Mr. Narayan Barasia, CFO
Mr. Narayan Barasia serves as the Chief Financial Officer and is ex-CFO and Company
Secretary at Godrej Household (formerly Godrej Sara Lee). Mr. Barasia's pan-industry
experience spans over 14 years.
Mr. Sanjiv Kumar, CEO, Automotive Engines Business
Mr. Sanjiv Kumar is a Post Graduate from IIM, Ahmedabad, and a Bachelor of Technology
from Indian Institute of Technology, Kanpur. He has had an illustrious career spanning
nearly three decades in business strategy, operations, international markets, business
turnarounds, sales and marketing. In his earlier stints, Mr. Sanjiv Kumar has worked as the
CEO with companies like TACO, ABC Bearings, Cosmo Films, Cosmo Ferrites and India
Gypsum where he was Managing Director. He served as President, Varroc Engineering
Group, Aurangabad, prior to joining GCL. He is responsible for driving the company’s
Automotive Engines Business to achieve new levels of innovation and growth.
Mr. C. M. Ashok Muni, CEO, Farm Equipment Business
Mr. C.M. Ashok Muni is a Bachelor of Technology in Chemical Engineering from Indian
Institute of Technology, Chennai, which was followed by an Integrated Management course
from XLRI, Jamshedpur. Mr. Muni has 23 years of experience in various organisations
including Indian Aluminium, ICI India, ICI Europe, Monsanto and Atul. He has been holding
leadership positions since the past 8 years. Mr. Muni has been extensively associated with
the agri industry for the past 12 years and played a key role in expanding and growing the
business of Nagarjuna Agrichem. Prior to joining GCL, he was the CEO and Director at Sabero
Organics Gujarat. He is responsible for envisaging strategy and driving excellence for GCL’s
Farm Equipment Business.
12
Edelweiss Securities Limited
Greaves Cotton
Mr. Ramachandran Nandagopal, CEO, Construction Equipment Business
Mr. Ramachandran Nandagopal is a Post Graduate in Social Work from the Madras
University and has undertaken several professional training programmes including the
Strategy for Growth from Kenan Flagler Business School, USA, and Six Sigma. He brings with
his role 28 years of valuable experience in diverse fields and organisations of repute. He was
associated with Tube Products of India as Head – Employee Relations. He later worked with
Gmmco, as Senior Vice President, where he headed the Engines and Machines Groups
dealing with Power Generation, Marine, Petroleum and Gas, Construction and Mining
sectors. He is responsible for the expansion and growth of GCL’s Construction Equipment
Business.
Mr. Prakash Bhalekar, CEO, Industrial Engines Business, Auxiliary Power Business,
Engine Component Technologies
Mr. Prakash Bhalekar is a Bachelor of Technology in Mechanical Engineering from Indian
Institute of Technology, Mumbai, and a Master of Business Administration from the
Pennsylvania State University. He has over 22 years of experience with an exposure to
Indian and international markets. During his extensive career, he has worked with
organisations like Schlumberger, Wireline and Testing, Multi-Tech Software Systems,
Partsriver Technologies, Mahle Filter Systems India and Infinia Solar Private in various
capacities. He has also served on the boards of Behr India, Spicer India and Arvin Exhaust
India, Perfect Circle, Victor Gaskets and oversaw the Anand Group Aftermarket and R&D
efforts. Prior to joining GCL, Mr. Bhalekar headed Kohler Engines India (Lombardini India) as
MD. He is responsible for taking GCL’s Auxiliary Power Business and the Industrial Engines
Business to its next level of growth.
Mr. Vinay Khanolkar, CEO, Aftermarket Business
Mr. Vinay Khanolkar is a Bachelor of Technology graduate and has a Post Graduate degree
in Business Administration from S.P. Jain Institute of Management, Mumbai. He had a
distinguished career with Mahindra & Mahindra where he served for 25 years. At the
Mahindra Group, Mr. Khanolkar served as CEO for Mahindra Spares Business, wherein he
was completely responsible for the Aftermarket segment during which he ensured it
achieved an accelerated growth momentum. At GCL, he is responsible for growth and
expansion of the Aftermarket Business.
Mr. Sachin Parab, CEO, International Business
Mr. Sachin Parab is a Bachelor of Engineering (Mechanical) and holds a Post Graduate
Diploma in International Trade. He has over two decades of global business experience,
spanning four continents of America, Europe, Asia and Africa. This includes nearly 8 years at
senior and leadership positions in US and India driving growth and opening new market
avenues. In his earlier stints, Mr. Parab has worked with Tata Motors, Garware Wire Ropes,
Mafatlal Industries and Mahindra & Mahindra in different capacities. Prior to joining GCL, he
served Escorts (Escorts Agri Machinery) as Vice President & Head, International Business
and President of Board for its subsidiary in Europe for almost 3 years. At GCL, he is
responsible for engineering strategic growth of the international business.
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Edelweiss Securities Limited
Engineering & Capital Goods
Fig. 3: Porters 5 force model
Bargaining Power
(High)
Limited pricing power
due to threat of
inhouse
manufacturing
Threat of new
entrants
Suppliers bargaining
power (Low)
Industry Rivalry
(High)
Raw material are
widely available
Competition is high
across all the verticals
(Low)
Highly technical
intensive, Capital
intensive, Brand recall
and strong
distribution network
required
Threat of substitute
products(Low)
Vehicles based on
renewable energy still not
viable
Source: Company, Industry, Edelweiss research
Engines business contributes more than 85% to turnover
GCL is one of India's leading independent engine manufacturers with a wide range which is
both cost competitive and technologically superior. While auto engines form ~55% of total
revenue, power forms ~10% and agriculture & industrial engines ~20-25%.
Chart 12: Revenue mix within engine segment
Agri Engines
12%
Industrial
9%
Power
9%
Auto
70%
Source: Industry, Company, Edelweiss research
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Edelweiss Securities Limited
Greaves Cotton
The engine segment is split into 4 sub segments:
Auto engines: It manufactures single and double cyclinder engines for use in 3W and SCV. It
has business relationship with 52 OEMs. It enjoys 90% market share in 3W goods vehicles
and 25-30% market share in 3W passenger vehicles. Auto engines (including spares)
contribute ~55-60% to overall revenue.
Power gensets: Under this, the company manufactures dual fuel engines/gensets ranging
from 30-400KVA. Power Gensets contribute ~10% to overall revenue. It has a sizable market
share in 100-400KVA range .
Agro equipment: GCL manufactures lightweight petrol, diesel / kerosene engines ranging
from 1-4HP and gensets of 1.4KVA. The products are used in power sprayers, pump sets and
power reapers. This segment contributes ~10-15% to overall revenue.
Industrial: It offers customised engines of 1-1000Hp for industrial applications in marine,
railways & construction, amongst others. It contributes 5-10% to overall revenue.
15
Edelweiss Securities Limited
Engineering & Capital Goods
Auto engines
Dominant player in three wheeler segment
GCL caters to both 3W and 4W passenger and goods segments. The company has
maintained ~35% market share in 3W passenger segment, next to Bajaj Auto (which has inhouse engine manufacturing), which has close to 60% market share in the industry. The 3W
passenger segment clocked CAGR of 13% over FY02-14 with current annual sales of
~750,000 units. Apart from Bajaj Auto and TVS Motors, which have in-house engine
manufacturing units, Atul Auto, M&M and Piaggio are major players in the segment. The 3W
goods segment clocked CAGR of 8% over FY02-14 with current annual sales of ~100,000
units. Piaggio, Atul Auto and M&M collectively control ~90% market share. Off late, M&M
has been making significant inroads in the 3W goods market as it improved market share
from 16% in FY10 to ~40% in FY14 eating up Piaggio’s market share. However, this does not
impact GCL’s revenue as both of them are equipped with Greaves fitted engines. While the
3W passenger segment contributes 85-90% to the total 3W industry, balance 10-15% comes
from the 3W goods segment.
1,000,000
800,000
60.0
600,000
40.0
400,000
20.0
200,000
(%)
80.0
3W Passenger
3W Goods
GCL share in 3W
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
0
FY02
0.0
(Units)
Chart 13: GCL has maintained sustainable 35-40% market share in 3W
100.0
Overall 3 W sales
Source: Industry, Company, Edelweiss research
3W goods segment lost sheen with emergence of 4W goods segment
Till 2005 -06, the 3W goods segment was posting CAGR of 32% until the new sub category
‘Small Commercial Vehicle’ (SCV) was introduced in the light commercial vehicle segment
(less than 4.5 tonne). Tata Motors was the first company with the launch of Tata Ace which
somewhat changed the industry’s dynamics as the introduction of the SCV did not only
cannibalise the intermediate commercial vehicle and medium and heavy commercial vehicle
segment (MHCV), but also the lighter 3W goods carrier segment. This is evident from the
fact that from FY07-13, the 3W goods segment’s growth rate declined to 10% (CAGR).
Though the growth rate was also impacted by economic slowdown, major factor was
introduction of the new sub category. During the same period, the 4W goods segment
clocked 18% CAGR.
New launch by Tata Motors
(ACE) radically changed the
LCV industry, which led to
emergence of new SCV
category
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Edelweiss Securities Limited
Greaves Cotton
300,000
30.0
200,000
0.0
100,000
(30.0)
60.0
377,498
40.0
265,163
20.0
152,827
0.0
FY14
40,491
(20.0)
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
3W Goods (LHS)
3W Growth
FY12
FY10
FY08
FY06
FY04
(60.0)
FY02
0
20% CAGR
(FY06-FY14)
489,834
(%)
60.0
(Units)
400,000
Chart 15: 4W goods posted 20% CAGR over past 8 years
602,170
80.0
(%)
(Units)
Chart 14: 4W SCV growth has outpaced 3W Goods growth
500,000
90.0
4W Goods (LHS)
4W Growth
4W Goods (LHS)
Growth (YoY)
Source: Company, Edelweiss research
Tata Motors leads 4W goods pack with M&M making inroads
The shift in pattern of use from 3W goods carriers to 4W SCVs commenced following the
introduction of Tata’s one-tonne models and further introduction on sub one–tonne models.
These sub-one tonne models, which include Tata Ace Zip and Tata Magic Iris are powered
by GCL engines. Tata Motors, with four models in this space, remains the dominant player,
with 45% market share. This is followed by M&M (commands ~40% market share) with
three models. Piaggio, despite competitive product (APE Truck Plus), has done poorly.
Overall, it has three models in this segment—APE Truck Plus powered by GCL engines while
the other two APE Truck and Ape Mini are powered by engines from Koehler.
While Tata Motors has clearly
dominated the SCV segment,
M&M has been able to gain
higher market share over past 2
years
Chart 16: Tata Motors remains leader, though M&M is making inroads
54
56
FY02
FY03
FY04
FY05
33
32
62
60
60
34
40
61
56
50
FY14
48
32
28
FY13
51
26
FY12
32
25
FY11
30
26
(%)
60.0
31
33
FY10
80.0
FY09
100.0
40.0
20.0
65
69
65
Tata
FY08
FY07
FY06
0.0
M&M
Others
Source: Industry, Company, Edelweiss research
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Edelweiss Securities Limited
Engineering & Capital Goods
Power gensets or auxiliary power business
The auxiliary power division contributes ~10% to the total top line. In this segment, GCL
offers silent diesel gensets, control panels and complete installation and commissioning
service from the range of 15-550 KVA with a market share of ~5%. The company commands
market share of 10% in the 100-400KV segment. Up to the 200KVA segment, Kirloskar and
Mahindra are dominant players. GCL does not have presence in the high KVA range. Unlike
Cummins India, which markets its products through dedicated marketing companies (like
Powerica, Jakson), GCL makes and markets its products through its India-wide distributor
network. It has recently entered in to less than 100KVA range DG sets to tap expected
growth in the telecom towers. The company has already complied with CPCB II norms for its
DG sets/Engines.
Agricultural equipment
This division manufactures portable petrol / kerosene engines at its facility in
Gummidipoondi (Tamil Nadu) and assembles pumps. The engines are marketed as base
engines as well as complete pump sets designed to facilitate farm mechanisation. The
additional offerings of equipment, such as diesel pump sets, power tillers and mini agro
equipments, augment the division’s sales volumes and revenues while benefiting small and
marginal farmers by mechanising their operations. By reaching out to farmers in the farthest
corners of the country and facilitating their farm mechanisation efforts, the division has
been growing consistently over the past few years. The division’s key strengths lie in its
brand equity established through its value-for-money products, pan-India presence with
deep penetration into rural India and a well knit distribution and service network. This
enables GCL not only reach out to potential rural markets, but also service them well and
continue to grow its presence.
Chart 17: Current agri revenue mix
Ustaad
13%
Tiller
25%
Pump
62%
Source: Industry, Company, Edelweiss research
GCL’s core strategy in farm equipment business:
18
•
Expand into electrical pump sets.
•
Develop portfolio of own light agri equipments (tillers).
•
Leverage existing network and develop new to penetrate mini tractor segment.
Edelweiss Securities Limited
Greaves Cotton
Construction equipment division
GCL’s construction equipment business makes up ~7-8% of the top line. The segment is
divided into concreting and compacting equipment, which contribute ~60% and ~40%,
respectively, to the segment. Under concreting equipment, GCL manufactures and markets
equipment like batching plants, transit mixers, concrete pumps and truck mounted metro
pumps. Under the compacting segments, it offers single drum vibratory rollers, tandem
vibratory rollers and pneumatic tyred rollers. It markets these products both through its
distribution network and directly to customers like NCC, HCC and numerous other
contractors.
A technical collaboration agreement recently signed with world leader Bomag, Germany, to
manufacture the latest generation 19 ton vibratory soil compactors has enabled GCL meet
the growing demand from contractors involved in BOT road projects, airports, dam and
irrigation projects, which would in turn facilitate faster completion of jobs.
Current product portfolio under road making and concreting equipment is as under:
Road Making
•
Soil compactors.
•
Heavy tandem rollers.
•
Light tandem rollers.
Concreting equipment
•
Transit mixers.
•
Concrete pumps of capacity ranging from
•
46CUM/hrto87CUM/hr.
•
Greaves metro pumps
•
15M boom pumpBatching plants of 30 CUM/hr and 60 CUM/hr.
The segment has been contributing negatively to the bottom line since FY09. Over the past
11 fiscals, this segment has contributed negatively thrice. Management guidance indicates
the break even sales come to around INR2bn/annum, above which the segment starts
contributing positively.
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Edelweiss Securities Limited
Engineering & Capital Goods
Leveraging strong distribution network for after sales service, spares
GCL has around 1,000 dealers and around 10,000 touch points across India which is even
bigger than the distribution network of Tata Motors and Mruti Suzuki In India. The company
treats after sales service as an important business unit and has a dedicated CEO for the
same. Such a robust focus, strong OEM relationships and widening base of vehicles has
translated after sales service into a new revenue generating stream for GCL. OEMs like
Piaggio and Tata Motors are content with GCL’s touch points as it adds a lot of reputation
and respect for their products as well. We expect the company to post revenue CAGR of
17% over the next 2 years (FY14-16E).
With more than 10,000 touch
points across India, GCL’s after
sales and spares revenues have
posted 19% CAGR over past 12
years
Chart 18: Strong aftermarket sales riding wide distribution network
6,106
19% revenue CAGR
(FY03-FY13)
4,952
57.6
3,798
36.2
2,644
14.8
1,490
(6.6)
(%)
(INR mn)
79.0
Spares revenue
FY16e
FY15e
FY14e
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
(28.0)
FY02
336
Growth (YoY)
GCL is expanding the base of company-trained mechanics, which have a higher influence on
the decision for purchase of original spares by clients. Superior technology of the company’s
engines can be verified from the fact that warranties encashed as a % of sales have been on
an average ~0.6% over the past seven years.
Chart 19: Fewer warranties enchased demonstrate superiority of GCL engines
1.0
0.9
0.8
0.7
0.6
0.5
(%)
0.6
0.5
0.5
FY12
FY13
0.3
0.4
0.2
0.0
FY07
FY08
FY09
FY10
FY11
Warranties encashed as a % of sales
Source: Company, Edelweiss research
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Edelweiss Securities Limited
Greaves Cotton
Engine for growth: Ready for Quadricycle
While the concept of Quadricycle is pretty old, it was first introduced in India by Bajaj Auto.
The concept is yet to find acceptance as commercial sales have still not begun. After much
stage shows, the government has finally allowed the Quadricycle to ply in cities from
October 1, 2014.
While there are multiple companies which are exploring an entry into the segment, Bajaj
Auto with its in-house engine is ready with its RE60 Quadricycle. Piaggio and Mahindra &
Mahindra have also shown interest in entering the space. To ensure that GCL does not miss
out in the competition for Quadricycle engines, it has already come up with a 265cc petrol
engine to help automakers enter the segment.
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Edelweiss Securities Limited
Engineering & Capital Goods
Industry
Auto
Fig. 4: Indian auto industry—Snapshot
Auto Industry
Light Commercial
Vehicles (LCVs)
(less than 7.5 tonnes
Medium Commercial
Vehicles (MCVs)
(7.5-16 tonnes)
Heavy Commercial
Vehicles (HCVs)
(Above 16 tonnes
Small Commercial
Vehicle (SVC)
(Less than 3.5 tonnes)
less than 0.7 tonnes
Market size:
Goods Carrier
Passenger Carrier
More than 0.7 tonnes
less than 0.7 tonnes
3W
4W
4W
3W
4W
94,406
35,000
271,414
737,837
<10,000
Source: Industry, Company, Edelweiss research
Indian auto industry: Rise of the ‘hub and spoke’ model
The road transport industry has always been the backbone of a nation’s economic growth.
However, despite the presence of a number of big organised players, small fleet operators
(those who own 10 or less trucks) occupy an 80% share in road freight according to a study
by IFTRT (Indian Foundation for Transport Research and Training). The Indian road transport
industry had by and large relied only on the point-to-point delivery model. Using this system
meant increase in overall driver requirements; trucks are always running below their
optimum capacity and low profit margins.
This presented a unique challenge for the industry to devise a dependable, efficient system,
which would deliver goods to their destinations on time while achieving a sizeable profit
margin. The hub-and-spoke model is a system of connections arranged like a bicycle
wheel. The traffic moves along the spokes connected to the hub at the centre. Goods are
moved between hubs on HCVs where it is sorted and sent to spokes on LCVs.
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Edelweiss Securities Limited
Greaves Cotton
Emergence of a new Small Commercial Vehicle category
The Indian road transport industry was by and large relied only on the point-to-point
delivery model. A massive structural change took place within the industry. Earlier medium
trucks, weighing 13-16 tonnes, moved goods to their final destination. At the same time,
when the Indian highway network improved, demand moved away from MCVs and towards
both heavier and lighter trucks. The main reason for this spurt in demand is the move
towards the hub-and-spoke distribution model. The model’s popularity has led to a rapid
increase in demand for HCVs and LCVs and shift away from MCVs. Thus, demand for LCVs
increased.
Fig. 5: HUB and Spoke model
Spoke 2
Spoke 1
HUB
Spoke 3
Source: Edelweiss research
However, with the Supreme Court of India's ban of overloading of cargo vehicles and
restrictions on the entry of heavy commercial vehicles into cities, the necessity of an
intermediate segment was apparent. The need for small commercial vehicle (less than 3.5
tonnes) was felt which were suitable for short intra-city deliveries, plying on narrow village
roads, long highway hauls carrying small bulky loads or even heavy cargo. Tata became the
frontrunner to fill the gap by launching the first mini truck of India Tata Ace.
Current industry scenario: MHVC cycle at trough; SCVs also impacted
A tepid macro environment, rising fuel prices, subdued incomes and stubborn interest rates
had taken a toll on consumer sentiments leading to a sharp drop in demand in the MHCV
industry. The MHCV segment (Goods) has shrunk by ~50% (from 3, 00,000 units in FY12 to
1,50,000 units in FY14) in the last 2 years. While the SCV segment which is believed to fairly
insulate against the industrial slowdown, the growth slumped to negative 13% in FY14, led
by overall consumption weakness.
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Edelweiss Securities Limited
Engineering & Capital Goods
Chart 20: Loan disbursement growth has also slowed down
22.0
54.0
16.0
10.0
12.0
4.0
(2.0)
(2.0)
(16.0)
(8.0)
SCV Growth (LHS)
FY14
FY13
FY12
FY11
FY10
(%)
26.0
FY09
((%)
40.0
Vehicle Loans disbursement growth (RHS)
Source: Industry, Company, Edelweiss research
Consumption slowdown impacted SCV growth
An analysis of HUL’s volume growth since FY06 (SCV took off in the same year) indicates a
high degree of correlation between SCV and consumption growth. HUL being present in all
the 3 verticals of FMCG viz., soaps & detergents, food items and personal care segment
indicates the consumption slowdown in the last 2 years with growth tapering from 13% in
FY11 to 4% in FY14 . During the same period, SCV growth also tapered from 30% growth in
FY11 to negative 13% in FY14. So, while consumption growth is not the only factor for SCV
growth slowdown, it is surely one of the important attributes.
While MHCV segment got
impacted 2 years ago tracking
weak IIP data, SCV volumes
declined in past few quarters
showing high correlation to
consumption
Chart 21: SCV volumes have a strong correlation with consumption
12.0
54.0
9.0
36.0
6.0
18.0
3.0
0.0
0.0
(18.0)
HUL Volume growth (LHS)
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
(%)
72.0
(%)
15.0
SCV Growth (RHS)
Source: Industry, Company, Edelweiss research
Consumption, industrial slowdown impacted MHCV growth
The chart below indicates high degree of co relationship between the MHCV, consumption
growth and IIP growth. As can be seen MHCV cycle has been impacted not only due to IIP
growth slowing down but has also got impacted due to consumption slowdown where
MHCV vehicles are used to transport FMCG goods interstate.
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Edelweiss Securities Limited
Greaves Cotton
Chart 22: MHCV volumes impacted by both IIP and consumption slowdown
20.0
66.0
12.0
22.0
8.0
0.0
4.0
(22.0)
0.0
(44.0)
HUL Volume growth (LHS)
IIP (LHS)
FY14e
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
(%)
44.0
(%)
16.0
MHCV Goods growth (RHS)
Source: Industry, Company, Edelweiss research
Interest rates have a strong bearing on SCV segment
Interest rates have a strong correlation with the auto sector. Our analysis indicates that
while MHCV sales gets severely impacted in the high interest rate scenario, SCV (part of LCV)
segment is also impacted, but with a much lower intensity. We expect MHCV and SCV
segments to rebound from H2FY15 as interest rates turn softer and liquidity improves.
Chart 23: Interest rates will be key for auto sector to rebound
61.4
13.8
34.8
12.6
8.2
11.4
(18.4)
10.2
(45.0)
9.0
FY14E
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
(%)
15.0
(%)
88.0
MHCV Goods Volume growth (YoY)
LCV Goods Volume growth (YoY)
SCV Goods growth (YoY)
SBI PLR (RHS)
Source: Industry, Company, Edelweiss research
Replacement demand yet to kick in
The replacement demand is yet to play out. According to the industry reports, 30% of
vehicles in the MHCV segment are more than 10 years old and about 15% more than 15
years old. Given the upcoming emission norms change next year, if 15% of the parc were to
be replaced over a 5-year period, it would result in additional sales of 460,000 units during
this time, or an additional ~90,000 units per annum.
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Edelweiss Securities Limited
Engineering & Capital Goods
MHCV segment bottomed out in FY14; revival to boost SCV
Our auto analyst believes that post tepid demand in the past three years, any signs of pick
up in industrial, mining/construction/infra activity will be a key trigger and drive demand in
the next two years. Hence, we expect M&HCV (trucks) to witness a modest 10% growth in
FY15E (largely back ended) and strong 20% plus growth in FY16E.
Chart 24: SCV to MHCV sales ratio
3.0
2.6
2.4
2.1
1.8
FY05
FY11
FY04
1.1
FY10
0.3
0.6
FY07
0.3
0.6
FY06
0.3
0.4
FY03
0.6
FY02
1.2
1.2
FY09
(%)
1.4
1.2
0.8
FY14E
FY13
FY12
FY08
0.0
SCV to MHCV sales ratio
Source: Industry, Company, Edelweiss research
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Edelweiss Securities Limited
Greaves Cotton
Agriculture equipment
Rise in MSP and MNREGA scheme boost tractor sales
Sales have almost doubled in the past six years, as the government has raised minimum
support prices for crops, increasing availability of agricultural credit and introduced the
MNREGA scheme. The MNREGA scheme has led to limited availability of labour, catalysing
rising sales of tractors. Tractor sales in India have posted 10% CAGR over FY07-13 in line
with more than 11% CAGR for MSP for major crops like rice and wheat.
946
356,526
721
263,360
496
Tractor sales
MSP (Rice) (RHS)
(INR)
449,692
FY13
1,170
FY12
542,858
FY11
1,395
FY10
636,024
FY09
1,620
FY08
729,190
FY07
(Units)
Chart 25: Rise in minimum support prices of key crops led to rise in tractor sales
MSP (Wheat) (RHS)
Source: Industry, Edelweiss research
Landholding in India fragmented with 60% between 0-30 acres
The landholding in India is fragmented with 60% of land between 0 and 3 acres. Of the total
933 hectares of land in India, 565 acres falls under the category of 0-3 acres which has
somewhat to a certain extent depressed farm mechanisation growth rate in India. While the
long-term potential for mechanisation is encouraging, considering that India is the third
largest wheat producing country and the second largest rice producing country in the world,
the fragmented land holding pattern restricts benefits of economies of scale that are
derived from the above.
27
Edelweiss Securities Limited
Engineering & Capital Goods
Chart 26: Landholding in India is fragmented with 60% land between 0-3acres
Above 20 acres
14%
5-20 acres
13%
3-5 acres
13%
0-3acres
60%
Source: Industry, Company, Edelweiss research
Rise in disposable incomes good catalyst for agri mechanisation
However, despite being the most populated country in the world, there is a large scarcity of
manpower in rural markets in India. Also, farmers have far more disposable incomes than
they had in the past few decades which presents strong chances of agriculture
mechanisation to be in the spotlight. Farmers also want to reduce input costs, maximise
profits per acreage of whatever they cultivate. A combination of all these trends is fuelling
demand for tractors or any other mechanisation products in India.
Key drivers of mechanised farming:
28
•
Rising wage rates: Wage rates have increased more than 4x in the past 6-8 years led by
shortage of unskilled manpower.
•
Shortage of manpower: Various government schemes like MNREGA have led to
shortage of unskilled manpower for agri.
•
Availability of government farm credit schemes: Better availability of farm credit and
deeper penetration of banks/finance companies and interest subvention schemes etc.,
as been a key factor driving mechanised farming in India.
Edelweiss Securities Limited
Greaves Cotton
Construction equipment business
Growth impacted by deceleration in capex cycle on macro slowdown
The growth of this segment is intrinsically linked to infrastructure development in the
country. The recent cooling off in end segments like road construction, power projects,
ports, high-rises, mining, etc, coupled with a high competitive setting, has made the going
tough for GCL. However, GCL has maintained its market standing, retaining the second rank
(by market share) in concreting equipment and fourth rank in the compacting equipment
space. The company has also entered into a technical partnership with BOMAG, a player of
international repute, for compacting equipment.
Chart 27: High correlation with infra development in India
107.0
20.0
35.8
12.0
0.2
8.0
(35.4)
4.0
(71.0)
0.0
Greaves infra equipment growth (RHS)
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
(%)
16.0
(%)
71.4
Construction GDP growth (LHS)
Source: Industry, Company, Edelweiss research
GCL’s strategy in infra segment:
29
•
Shift from retail to institutional construction segment: GCL is now shifting its focus
from retail clients like small contractors to medium and large institutional clients
incrementally.
•
Product portfolio expansion: The company’s strategy of targeting niche institutional
construction market will benefit going ahead now that it has finished its product
expansion drive. GCL has added a few key equipments in its construction portfolio—
concrete pumps, boom pumps, 20-60 cu. mtr batching plant etc. The company now has
a well diversified product range in road making and concrete segment which is around
18-20% of total construction equipment market with size of INR30-35bn annually.
Edelweiss Securities Limited
Engineering & Capital Goods
Financial Outlook
Revenue to post 16% CAGR over FY14-16E
We expect GCL’s top line to post 15.6% CAGR over FY14-16E led by back ended growth in
FY15E and ~20% growth in FY16E as we believe that revival of MHCV cycle is imminent.
While we expect 3W goods and passenger vehicle volumes to remain flattish (0-5% growth),
4W volumes (Tata Ace Zip) are expected to post 20% CAGR from 0.07mn units in FY14E to
0.11mn units in FY16E. Tata Motors has expanded its Ace Zip capacity to 0.18mn units,
which is powered by GCL engines. The overall revenue growth will be further aided by
agriculture equipment business, which is expected to surge 20% led by healthy traction of
its new product Ustad tractor. Construction equipment business is expected to post healthy
momentum (20% revenue CAGR from FY14-16E) on account of improvement in macros and
hence demand in the infra space.
Chart 28: Revenue growth to be strong
66.0
26,048
27.6
23,116
8.4
20,183
(10.8)
17,251
(%)
46.8
(30.0)
(INR mn)
28,981
14,318
FY13
FY14E
Revenues
4W growth
Construction biz growth
FY15E
FY16E
3W growth
Agri biz growth
Source: Industry, Company, Edelweiss research
Higher capacity utilisation to spur EBITDA margin
We expect EBITDA margin to improve by 200bbps to ~13.4% over FY14-16E. The
improvement will be led by higher capacity utilisation (currently @67%) on account of
expected improvement in macros, thus aiding demand revival. As a result, GCL should
benefit from the operating leverage. We also expect losses in the infra segment to fall
meaningfully by FY16 as a result of new business strategy and improvement in demand in
the infra space. We do not expect profits from the segment until FY16 as the break even
level is ~INR2.0-2.2bn which is expected to be achieved only in FY17E. The company’s thrust
on indigenisation of power tillers (currently 80% raw material is imported) will also aid
margin expansion.
30
Edelweiss Securities Limited
Greaves Cotton
Chart 29: EBITDA margin to expand
100.0
20.0
60.0
12.0
40.0
8.0
20.0
4.0
0.0
0.0
Utilisation levels
FY16E
FY15E
FY14E
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
(%)
16.0
(%)
80.0
Margins (RHS)
Source: Industry, Company, Edelweiss research
Profit CAGR of 24% over FY14-16E
With 16% revenue CAGR and 200bps margin expansion over FY14-16E, GCL’s EPS is
expected to post 25% CAGR over the same period. Strong profit growth will be further aided
by the company’s debt-free balance sheet and high cash generating capacity, which will
ensure stability of other income.
195.0
2,000
130.0
1,500
65.0
1,000
0.0
(%)
(INR mn)
Chart 30: Strong profit growth over next two years
2,500
500
(65.0)
PAT (LHS)
FY16E
FY15E
FY14E
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
(130.0)
FY02
-
Growth (YoY)
Source: Industry, Company, Edelweiss research
31
Edelweiss Securities Limited
Engineering & Capital Goods
Average FCF to be maintained; working capital cycle to be stable
GCL’s average free cash flow has been around INR600mn in the past 10 years. Despite the
change in business cycles, the company has been able to demonstrate its command over
managing the working capital cycle. Average free cash flow over FY14-16E is expected to
improve to INR750mn riding improved profitability. Creditor days have historically remained
more than debtor days, allowing the company to maintain a net conversion cycle of ~30
days. GCL has a debt-free balance sheet in a high interest rate scenario to further add to the
financial comfort.
Chart 31: Average FCF to be maintained comfortably
1,786
(INR mn)
1,404
1,022
640
258
FCF
FY16E
FY15E
FY14E
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
(124)
Average FCF (FY02-FY13)
RoE to improve gradually led by operational improvement
Against past 10 years’ average RoE of 27%, GCL’s RoE is likely to dip to 17.2% in FY14E based
on 9mFY14 performance. This is primarily due to declining margin. However, we remain
confident that with improving operational margin, low capital intensive nature of the
business and consistent working capital cycle, the RoE will improve from 17.2% currently to
21.5% by FY16E, though it will be well below its 10-year average.
Chart 32: RoE to improve gradually
100.0
60.0
60.0
36.0
40.0
24.0
20.0
12.0
0.0
0.0
Utilisation levels
FY16E
FY15E
FY14E
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
(%)
48.0
(%)
80.0
ROE'e (RHS)
Source: Industry, Company, Edelweiss research
32
Edelweiss Securities Limited
Greaves Cotton
Near-term outlook challenging; long-term outlook upbeat
Due to the challenging macro economic conditions and consumption slowdown, auto
volumes have remained weak. We believe the near-term outlook (next 2 quarters) will
remain challenging and upside /recovery will come only from H2FY15. We remain confident
that GCL will be an early beneficiary of a recovery in the CV cycle.
33
Edelweiss Securities Limited
Engineering & Capital Goods
Financial Statements
Key Assumptions
Year to March
Macro
GDP (YoY %)
Inflation (Avg.)
repo rate (exit rate)
USD/INR (Avg)
Segmental revenues (INR mn)
Engines
Infra Equipments
Others
Total revenues
Segmental margins (%)
Engines
Infra Equipments
Others
Excise duty (%)
Engines Utilisation level (%)
Employee Head count
Employee cost per head (INR)
CAPEX (INR mn)
Income statement
FY13
FY14E
5.0
7.4
7.5
54.5
16,486
1,620
664
18,770
4.8
6.2
8.0
61.0
15,799
1,195
548
17,541
FY15E
5.4
5.5
7.8
60.0
17,749
1,398
602
19,750
FY16E
6.3
6.0
7.3
58.0
21,000
1,705
723
23,429
Year to March
FY13
FY14E
FY15E
FY16E
Income from operations
19,061
17,541
19,750
23,429
Direct costs
15,978
13,683
12,068
13,528
Employee costs
1,636
1,686
1,823
1,971
Other expenses
1,337
1,789
1,975
2,343
16,656
15,543
17,326
20,293
2,406
1,998
2,423
3,136
407
442
522
573
1,999
1,556
1,902
2,563
15
39
42
47
Total operating expenses
EBITDA
Depreciation and amortisation
EBIT
Interest expenses
Other income
16.6
16.0
16.5
17.5
(5.5)
(18.5)
(9.0)
(2.0)
17.4
12.0
13.0
15.0
10.5
10.5
10.5
10.5
70.1
67.0
70.0
80.0
1,636
1,686
1,823
1,971
403,975 412,055 432,658 454,290
662
600
650
700
(INR mn)
159
250
211
256
Profit before tax
2,143
1,768
2,070
2,773
Provision for tax
628
460
538
721
Extraordinary items gain/(loss)
(34)
(414)
-
-
Reported profit
1,480
895
1,532
2,052
Adjusted net profit
1,515
1,309
1,532
2,052
Equity shares outstanding (mn)
244
244
244
244
EPS (INR) basic
6.2
5.4
6.3
8.4
244.2
244
244
244
6.2
5.4
6.3
8.4
8
7
8
11
Diluted shares (mn)
EPS (INR) fully diluted
CEPS (INR)
Dividend per share
1.6
1.8
1.9
2.1
Dividend payout (%)
25.8
32.8
30.9
25.3
FY13
FY14E
FY15E
FY16E
68.2
Common size metrics- as % of net revenues
Year to March
Direct costs
71.8
68.8
68.5
Employee costs
8.6
9.6
9.2
8.4
Other expenses
7.0
10.2
10.0
10.0
Operating expenses
87.4
88.6
87.7
86.6
Depreciation
2.1
2.5
2.6
2.4
Interest expenditure
0.1
0.2
0.2
0.2
12.6
11.4
12.3
13.4
7.9
7.5
7.8
8.8
FY13
FY14E
FY15E
FY16E
EBITDA margins
Net profit margins (adjusted)
Growth metrics (%)
Year to March
Revenues
6.5
(8.0)
12.6
18.6
EBITDA
1.7
(16.9)
21.3
29.4
PBT
34
8.5
(17.5)
17.1
33.9
Net profit
15.2
(13.6)
17.1
33.9
EPS
15.2
(13.6)
17.1
33.9
Edelweiss Securities Limited
Voltas
Balance sheet
As on 31st March
Equity capital
Reserves & surplus
Shareholders funds
Cash flow metrics
(INR mn)
Year to March
FY13
FY14E
FY15E
FY16E
1,046
1,231
1,453
1,546
FY13
FY14E
FY15E
FY16E
488
488
488
488
Operating cash flow
6,932
7,327
8,310
9,757
Financing cash flow
(784)
(538)
(592)
(651)
10,245
Investing cash flow
(551)
(600)
(650)
(700)
7,420
7,816
8,798
Long term borrowings
38
38
38
38
Net cash flow
(289)
93
212
195
Short term borrowings
22
22
22
22
Capex
(662)
(600)
(650)
(700)
Dividend paid
(593)
(499)
(549)
(604)
FY16E
Loan funds
60
60
60
60
347
347
347
347
Sources of funds
7,828
8,223
9,205
10,653
Tangible assets
Deferred tax liability/asset
Ratios
3,680
3,839
3,967
4,095
Year to March
FY13
FY14E
FY15E
Intangible assets
-
-
-
-
ROAE (%)
21.8
17.2
18.4
21.5
CWIP (incl. intangible)
80
80
80
80
ROACE (%)
26.9
19.4
21.8
25.8
3,761
3,919
4,048
4,175
Total net fixed assets
Inventory days (x)
43
42
43
43
Debtors (Days)
72
72
69
69
Non Current Investments
254
254
254
254
Investments
685
685
685
685
Fixed assets t/o (x)
5.2
4.6
5.0
5.7
Cash and equivalents
414
507
718
913
Average working capital t/o (x)
8.5
6.3
6.2
5.8
Inventories
1,610
1,389
1,594
1,882
Payable (days)
79
79
79
79
Sundry debtors
3,751
3,437
3,748
4,447
Net debt/Equity
(0.1)
(0.1)
(0.2)
(0.2)
Loans and advances
3,682
4,014
4,455
5,124
Other current assets
30
30
30
30
Operating ratios
Total current assets (ex cash)
9,073
8,869
9,828
11,483
FY13
FY14E
FY15E
FY16E
Sundry creditors and others
2,960
2,612
2,928
3,458
Fixed assets turnover (x)
5.2
4.6
5.0
5.7
Provisions
3,399
3,399
3,399
3,399
Total asset turnover(x)
2.6
2.2
2.3
2.4
Total CL & provisions
6,359
6,011
6,327
6,857
Equity turnover(x)
2.7
2.3
2.4
2.5
Net current assets
2,715
2,858
3,501
4,626
-
-
-
7,828
8,223
9,205
10,653
FY13
FY14E
FY15E
FY16E
30
32
36
42
6.2
5.4
6.3
8.4
15.2
(13.6)
17.1
33.9
Others
Uses of funds
Book value per share (BV)
Year to March
Valuations parameters
-
Year to March
EPS (INR)
Y-o-Y growth (%)
Free cash flow
CEPS (INR)
Year to March
7.9
7.2
8.4
10.7
14.0
16.2
13.9
10.4
FY14E
FY15E
FY16E
P/E (x)
1,480
895
1,532
2,052
Price/BV(x)
2.9
2.7
2.4
2.1
407
442
522
573
EV/Sales (x)
1.1
1.1
1.0
0.8
Add: Deferred tax
-
-
-
-
EV/EBIDTA (x)
8.4
10.1
8.2
6.3
Add: Others
(62)
38
42
47
Dividend yield (%)
1.8
2.0
2.2
2.4
1,825
1,375
2,096
2,671
779
144
642
1,125
1,546
Net profit
Add: Depreciation
Gross cash flow
Less:Changes In Working Capital
Opertaing cash flow
FY13
1,046
1,231
1,453
Less: Capex
662
600
650
700
Free cash flow
385
631
803
846
Peer comparision valuations
PE (x)
Name of the companies
Kirloskar Oil Engines
Greaves cotton
Cummins India
Market cap
(INR bn)
28.6
21.2
155.2
CMP
198.0
87.0
560.0
P/BV (x)
ROE (%)
2015E
2016E
2015E
2016E
2015E
2016E
14.5
13.9
23.7
12.6
10.4
20.0
2.1
2.4
5.1
1.9
2.1
4.5
15.1
18.4
22.7
15.7
21.5
23.8
Source: Bloomberg, Edelweiss research
35
Edelweiss Securities Limited
Engineering and Capital Goods
Additional Data
Directors Data
Karan Thapar
Vijay Rai
Vikram Tandon
Dr. Clive Hickman
Chairman
Independent director
Independent Director
Independent Director
Sunil Pahilajani
Suresh N. Talwar
Sukh Dev Nayyar
MD & CEO
Independent Director
Independent Director
Auditors - Walker, Chandiok & Co.
*as per last annual report
Holding – Top10
Perc. Holding
8.19
4.81
3.29
2.42
1.15
Reliance Capital Trustee
Templeton Ass. Man
New India Assurance
Franklin resources
Comgest
Perc. Holding
5.00
4.13
2.58
1.19
1.10
IDFC MF
LIC
GIC
Oriental Insuracne
Birla AMC
*in last one year
Bulk Deals
Data
Acquired / Seller
B/S
Qty Traded
Price
No Data Available
*in last one year
Insider Trades
Reporting Data
Acquired / Seller
B/S
Qty Traded
No Data Available
*in last one year
36
Edelweiss Securities Limited
RATING & INTERPRETATION
Company
Absolute
Relative
Relative
reco
reco
risk
REDUCE
SU
L
HOLD
SU
REDUCE
SU
Cummins India
BUY
Kalpataru Power
BUY
Larsen & Toubro
ABB India
BGR Energy
Bharat Heavy Electricals
Thermax
Company
Absolute
Relative
Relative
reco
reco
Risk
Bajaj Electricals
BUY
SO
M
M
Bharat Electronics
BUY
SO
H
M
Crompton Greaves
HOLD
SP
M
SO
L
Havells India
BUY
SO
M
SO
M
KEC International
BUY
SO
M
BUY
SO
M
Siemens
HOLD
SP
L
REDUCE
SP
L
Voltas
BUY
SO
L
ABSOLUTE RATING
Ratings
Expected absolute returns over 12 months
Buy
More than 15%
Hold
Between 15% and - 5%
Reduce
Less than -5%
RELATIVE RETURNS RATING
Ratings
Criteria
Sector Outperformer (SO)
Stock return > 1.25 x Sector return
Sector Performer (SP)
Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU)
Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING
Ratings
Criteria
Low (L)
Bottom 1/3rd percentile in the sector
Medium (M)
Middle 1/3rd percentile in the sector
High (H)
Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings
Criteria
Overweight (OW)
Sector return > 1.25 x Nifty return
Equalweight (EW)
Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW)
Sector return < 0.75 x Nifty return
37
Edelweiss Securities Limited
Engineering & Capital Goods
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: [email protected]
Vikas Khemani
Head Institutional Equities
[email protected]
+91 22 2286 4206
Nischal Maheshwari
Co-Head Institutional Equities & Head Research
[email protected]
+91 22 4063 5476
Nirav Sheth
Head Sales
[email protected]
+91 22 4040 7499
Coverage group(s) of stocks by primary analyst(s): Engineering and Capital Goods
ABB India, BGR Energy, Bharat Electronics, Bharat Heavy Electricals, Bajaj Electricals, Crompton Greaves, Havells India, Jyoti Structures, KEC International,
Cummins India, Kalpataru Power, Larsen & Toubro, Siemens, Sterlite Technologies, Techno Electric & Engineering, Thermax, Voltamp Transformers, Voltas
Recent Research
Date
Company
Title
Price (INR)
Recos
01-Apr-14
Blue Star
Recovery in sight; Visit Note
200
Not
Rated
25-Mar-14
Praj
Industries
Business transformation
underway; Visit Note
53
Not
Rated
18-Mar-14
Cummins
India
Growth engine: Best
positioned for recovery;
Company Update
565
Buy
Distribution of Ratings / Market Cap
Rating Interpretation
Edelweiss Research Coverage Universe
Rating Distribution*
* 1 stocks under review
> 50bn
Market Cap (INR)
126
Buy
Hold
133
40
Reduce
Total
16
190
Between 10bn and 50 bn
< 10bn
55
Rating
Expected to
Buy
appreciate more than 15% over a 12-month period
Hold
appreciate up to 15% over a 12-month period
Reduce
depreciate more than 5% over a 12-month period
9
38
Edelweiss Securities Limited
Greaves Cotton
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