Greaves Cotton: Buy

Investors can buy the stock of Greaves Cotton with a two-three year holding perspective. Strong growth in the infrastructure equipment business, recent overseas acquisition and product launch, apart from its success in turning around operations, lend confidence to its growth prospects.

Though the stock has been weighed down by concerns about Piaggio setting up its own plant, the company has taken initiatives to improve contribution from the power engines segment and ensure that business does not suffer from the gradual withdrawal of its single largest customer — Piaggio.

The stock trades at 11 times its expected earnings for FY-09 at the current market price. This is at a discount to a few other players in the engines business.
No major threat from Piaggio exit

Greaves Cotton has been supplying 100 per cent of Piaggio’s engine requirements locally. The latter now plans to have its own plant, which is likely to take off by FY-10.

While it is true that Piaggio has been a major customer for Greaves’ single cylinder engine (auto engines accounted for about 57 per cent of its total revenues for FY-07), there are a number of other players in the three-wheeler segment whose relatively low volumes do not allow them to set up their own plant for engines.

While traditional players in the segment such as Bajaj Auto and Force Motors have achieved backward integration through engine manufacturing, newer players such as Atul Auto, Mahindra and Mahindra and Scooters India depend on outsourced engines. Greaves also supplies to a number of regional OEMs. The company’s efforts to broad-base customers may take off by the time Piaggio starts its production, which is two years away.

Greaves’ recent acquisition of a German engine-maker (single cylinder engine) may also provide better technology to the company apart from better access to a global distribution network.

This apart, the success of the one-tonne four-wheeler ‘Ace’ by Tata Motors has induced players such as Bajaj Auto and Atul Auto to enter this space. Piaggio has already launched its four-wheeler in India. Greaves, anticipating this demand, has launched twin cylinder engine for one-tonne four wheelers. Piaggio and Atul Auto are expected to source the same from Greaves. We expect this segment to make a visible contribution to revenues over the next few years.
Expanding non-auto segments

Greaves also makes air-cooled and water-cooled diesel industrial engines that find application in various quarters. The company has managed a 15 per cent share in a market dominated by unorganised players. It is now exploring sources of fuel for dual-fuel gensets on the back of escalating diesel prices. It is also simultaneously looking at introducing enhanced range of engines for industrial applications and gensets, improving its prospects for market penetration.

Similarly, in the agricultural engines segment (portable petrol/kerosene engines), the company has been successful in combating low-cost imports from China. While it makes its own engines, it exports them to China for conversion into power tillers, before importing them.
Not just engines

Greaves has also ramped up presence in road construction and concreting equipment. While there are quite a few players in the construction equipment segment, the concreting segment (consisting of transit mixer, batch mix plants and concrete pumps), is dominated now by Schwing Stetter (India), a subsidiary of a German company. With improved construction methods and stiffer execution time targets, concreting may offer a huge business opportunity.

While the construction segment contributes about 20 per cent to sales, we expect significant growth in the segment, which may also make up for any slowdown in the auto engines segment in the near term.

Greaves had a tepid September quarter on the back of slowdown in three-wheeler sales. Any policy move that further dampens the interest rate-sensitive auto sector may slow auto-engine sales. We however, expect the infrastructure equipment segment to provide some cushion through enhanced volumes from the recently commissioned facility in Tamil Nadu.