Initiating Coverage June 6, 2013
Rating Matrix Greaves Cotton (GREAVE) Rating : Buy
Target : | 86 | 68
Target Period : 12-18 months Steady and dominating play… Potential Upside : 26% Greaves Cotton (GCL) is a dominant player in supplying engines to the three wheeler (3W) auto industry, especially the 3W goods segment where YoY Growth (%) it commands 80-90% share. Strong technology, optimum capacities and (YoY Growth) FY12 FY13E FY14E FY15E low turnaround time (in developing new engines vis-à-vis industry) have Net Sales 39.9 6.7 13.4 10.1 EBITDA 21.2 (1.3) 15.7 11.1 augured well for GCL, as it has earned a place in the books of almost all Net Profit 45.8 (27.1) 26.2 11.4 OEMs in the 3W industry. With the 3W segment entering a stable growth
phase, we expect the pick-up of the four wheeler (4W) small commercial vehicles (SCVs) to provide the next leg of growth, as GCL’s engines power Valuation Matrix Tata Motor’s Ace Zip and Magic brands, which are a runaway hit in the SCV FY12 FY13E FY14E FY15E P/E 9.0 12.3 9.7 8.7 segment. GCL, on the other hand, is also expanding its non-auto business Target P/E 11.3 15.5 12.3 11.0 (~45% of revenues: farm equipment, power gensets and infra equipment) EV / EBITDA 6.3 6.4 5.6 4.9 by spending more on R&D, new product launches and focusing on costs to P/BV 2.6 2.3 2.1 1.9 increase competitiveness. Coupled with this, GCL boasts a solid balance RoNW 28.6 19.0 21.4 21.2 sheet, efficient working capital cycle, robust free cash flows and generous RoCE 31.0 27.3 28.5 28.3 dividend payouts, which is commendable for an engineering company in such challenging times. We initiate coverage on GCL with a BUY rating. Stock Data 4W SCVs to provide bump up; 3W segment growth sobers up Bloomberg/Reuters Code GRV IS / GRVL.NS Sensex 19,568.0 With 28.9% volume CAGR over FY13-15E, we expect the SCV segment to Average volumes 99,245 be the key driver for GCL. We expect total supplies to the SCV segment to Market Cap (Rs crore) 1,660.6 ramp up ~2.5x from 39,000 units in FY12 to 108,000 units in FY15E, with 52 week H/L 86 / 61 SCVs accounting for 14% of consolidated revenues by FY15E. On the other Equity Capital (Rs crore) 48.8 hand, GCL will dominate in the 3W segment, where we expect volumes to Promoter's Stake (%) 51.6 grow at 2.9% CAGR over FY13-15E. FII Holding (%) 8.4 Infra segment break even: Critical driver of non-auto segment performance DII Holding (%) 27.2 The infrastructure segment (dealing in construction equipment) contributes
Comparative return matrix (%) 10-12% of overall revenues while contributing negatively on the EBIT front. Return % 1M 3M 6M 12M Management’s guidance on FY14E break even can provide the much Greaves Cotton 3.0 (9.4) (8.6) (9.1) required financial leverage and enhanced margins and RoEs (21.2% over Cummins India 3.7 4.3 7.6 13.8 FY14E-15E). Other non-auto businesses, like farm equipment and power Kirloskar Oil Engines 7.7 (5.2) (5.9) 20.6 genset businesses are expected to perform steadily witnessing revenue Larsen & Toubro 11.6 2.4 (5.6) 33.3 CAGR of 9.0% and 8.0% over FY13-15E, respectively.
Solid credentials despite challenging environment calls for BUY Price movement Leadership status in three wheeler segment will help keep fundamentals 6,500 90 steady while exposure to SCVs, on the other hand, would provide next leg 6,000 80 up, as we expect overall volumes in the auto segment to grow at a CAGR of 5,500 70 7.6% over FY13-15E. Being a product based engineering company, GCL 5,000 60 commands a solid balance sheet, supported by robust FCF (yield at ~5% on FY14E FCF), generous dividend payouts and strong RoE profile (21.5% 4,500 50 over FY14E-FY15E), provides margin of safety. We forecast 11.7% and 4,000 40 18.6% CAGR in revenues and profitability, respectively, over FY13-15E and 3,500 30 value the stock at 11x FY15E EPS to arrive at a fair value of | 86/share. May-12 Aug-12 Nov-12 Feb-13 May-13 Exhibit 1: Key financials Price (R.H.S) Nifty (L.H.S) (Year-end March) FY11 FY12 FY13E FY14E FY15E Net Sales (| crore) 1,250.5 1,750.0 1,867.9 2,118.1 2,331.9 EBITDA (| crore) 197.8 239.6 236.6 273.7 304.0 Analyst’s name Net Profit (| crore) 127.2 185.4 135.2 170.6 190.0 EPS (|) 5.2 7.6 5.5 7.0 7.8 Chirag J Shah P/E (x) 13.1 9.0 12.3 9.7 8.7 [email protected] Price / Book (x) 3.2 2.6 2.3 2.1 1.9 EV/EBITDA (x) 7.7 6.3 6.4 5.6 4.9 Sonabh .Bubna RoCE (%) 23.0 22.9 18.7 19.9 19.8 [email protected] RoE (%) 24.2 28.6 19.0 21.4 21.2 Source: Company, ICICIdirect.com Research
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Shareholding pattern (Q4FY13) Company background Shareholding Pattern Holdings (%) With an operational history of more than a century and a half, Greaves Promoters 51.6 Cotton (GCL) is a manufacturer of single cylinder engines, which run 3Ws Institutional investors 35.7 (like Piaggio Ape, Atul Shakti, Mahindra Alfa) and 4W SCVs (like Tata Ace Others 12.7 Zip). The company also manufactures and markets auxiliary power gensets, farm equipment (like portable engines, pump sets, tillers), industrial engines Institutional holding trend (%) and construction & concreting equipment (like batching plants, transit mixers). GCL is an established player in the majority of these categories, with the market leader tag in the 3W goods segment, commanding a 30 27.9 27.2 27.2 26.98 market share of ~80-90%. The business model being a product-based one, 25 helps maintain a steady state of revenues, with short execution and working capital cycle. Hence, the company, in the past, has exhibited a steady 20 growth profile coupled with a robust balance sheet. 15 (%) 8.74 The company was originally founded in 1859 by James Greaves and 7.6 7.9 8.4 10 George Cotton. GCL was purchased by the Thapar group in 1947. Since 5 then, the company has come a long way in earning the reputation of an established engine manufacturer. GCL commands employee strength of 0 4,400 people. The company is head-quartered in Mumbai. GCL has 11 Q1FY13 Q2FY13 Q3FY13 Q4FY13 manufacturing units located all over India. Over time, the company has also FII DII developed an extensive pan-India after sales service and dealership network, which would be hard for any new entrant to replicate.
Exhibit 2: Key milestones for Greaves Cotton got
Launched Introduced Opens new New manufacturing JV with Crompton Thapar group, Technical transit mixer concreting technology facility for new G Series CromptonParkinson for the current collaboration and batching equipment in centre to engine in Pune, Parkinsonceiling fans for and promoters, with BOMAG plants technical design and compaction equipment ceilingother electronic fans buys the GmbH, collaboration develop new plant and agro anditems. other JV went on company, Germany, to with CIFA of generation equipment plant opened electronicto become making it an manufacture Italy engines at in Gummidipoondi, items,Crompton JV Indian vibratory Aurangabad Tamil Nadu wentGreaves on to company compactors become Crompton Greaves
1859193719371939 19391947 19471980 19861980 1986 19861996 19961986 1996 1996 2001 2005 2006 2007 2008 2012
Co JV with Ruston Commenced Acquired two JV with Piaggio Co launches Eco Acquires Bukh- Crosses founded & Hornsby, UK manufacturing plants from Veicoli Europei SpA friendly light diesel Farymann GmbH three million by James for high power MWM Enfield India Ltd to of Italy, for making engine complying Diesel, Germany. mark in light Greaves manufacturing diesel engines manufacture the APE series of with Bharat stage II Sets up light diesel and diesel engines needed for petrol / kerosene three wheelers. The (Euro II) emission engines Unit IV at engines George in India gensets and engines stake in this JV was norms Aurangabad Cotton marine propulsion later divested
Source: Company, ICICIdirect.com Research
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Exhibit 3: Business model
Business Divided into Division What GCL Makes
GCL makes Engines Supplies them to OEM's like OEMs use them to run their GCL's engines are industry 3Ws and LCVs like recognised, with 80% share in 3W goods segment, and 10% in 4W LCVs. Contributed ~55% to GCL's topline in
Auto Division Auto FY12
Offers gensets in range of 25 KVA GCL makes complete to 500 KVA gensets Retail outlets, commercial With tough competition & tepid For GCL, the best category is complexes, hotels, hospitals, volume growth, the outlook is 15KVA to 135KVA. SMEs are chief user industries flattish. This segment contributed of these products ~15% to the topline in FY12
Power Division Power Unlike Cummins, which appoints OEMs to market its gensets, GCL both makes and markets it gensets
GCL makes complete products and Subsidies play a key role, which transfers them to regional GCL offers constitute nearly 40-50% for distributors. They later, in turn, GCL's product range. In most Petrol/kerosene/diesel With increased thrust on farm pump sets, engines, transfer them to end dealers cases, farmers have to get mechanisation, government support, E N G I B U S I N E S power tillers, Reapers etc subsidy approved and, and farming literacy, the outlook for For spare parts, GCL has a similar thereafter, pay reduced amount segment is positive. It contributed supply chain Agri Division Agri to dealer + the approval ~15% to topline in FY12 certificate. The dealer would be GCL primarily focuses on products, entrusted to collect this amount which are used by small farmers from the government (less than 2 acres land)
GCL makes customised The division makes application as per user Started in 2009, segment is still specialised engines needs/supplies engines to small, with contribution to topline at applications for varied Various user industries like marine, application developers for ~| 80 crore. Highly dependent on user industries. construction, agricultural industrial purposes, in the range industrial capex Industrial Engine equipment, fire fighting pumps, of 1 HP to 700 HP defence, etc
Higher activity levels in construction These products are mainly used Makes complete range of industry augur well for growth in this Makes equipment like transit for construction of roads, Compaction and Concrete segment, which is currently mixers, concrete pumps, batching bridges, high rise buildings, equipment for use in undergoing a slowdown. The plants in concrete segment. In major construction sites, ready Construction Industry segment contributed ~10% to topline compaction segment, it makes, mix concrete applications, etc in FY12 Construction Equipment Construction
I N F R A S E G M N T heavy tandem rollers, soil compactors
Source: Company, ICICIdirect.com Research
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Investment Rationale GCL supplies engines to products, which find their end-use Relatively stable business model in challenging sector in consumption-demand driven segments. The 3W and 4W We believe that GCL, being a product based company, with steady SCV primarily help in last mile distribution of goods, thus clientele, stands tall enough to survive a subdued economy, despite a de-risking GCL from a direct linkage with the capex situation where many of the capital goods companies are facing de-growth. intensity in the economy for growth. Segments like farm GCL possesses a more diversified business model (auto-55% of revenues, equipment and smaller KVA auxiliary power gensets agri-15%, power-15% and infra 10-12%). On the other hand, it commands a portray similar trends. With consumption demand still market leadership position and a strong customer association (long term remaining buoyant in India, and more than 70% of the contracts with OEM’s). This is contrary to the dynamics of an engineering revenues linked to consumption-driven sectors (like auto company, which feeds on the capex of other industries, especially power. 55%, farm 15% and auxiliary power 15%), we believe GCL’s Barring segments like infra and industrial engines, most of the end use business would continue to be steady despite a slowing segments are consumption driven, which in itself provides reasonable economy visibility for continued business ahead. Deriving comfort from this fact, we drill deeper into GCL for its investment candidature.
Exhibit 4: Demographic drivers for three wheeler and four wheeler LCV segment
Increasing per capita rural GDP growth... ….along with increased urbanisation and increasing number of middle class households..
20000 CAGR 11.5% 120 16000 100 CAGR 10%
80 113.8 12000 15879 Rural Urban Urban
1951 2011 Rural (in mn) 60 (|) 82.7% 17.3% 31.2% 8000 68.8% 40 10839 53.3
4000 7407 20 0 31.4 0 2011-12 2015-16 2025-26 2004-05 2007-08 2010-11*
…has provided sustained demand for 3W …which with emergence of hub and spoke ...has led to sustained demand for consumer and and 4W SCVs model for reaching the last mile customer.. non consumer goods...
1000000 3W CAGR of9.6%, 4W 80 40 CAGR of 15.4% 800000 60 30 20 600000 40 10 20 (%) (%) 400000(in units) 0 0 200000 -10 -20 -20 Jul-11 Oct-09 Apr-06 Feb-12 Jan-08 Jun-07 Sep-12 Dec-10 Nov-06 Mar-09 Aug-08 0 May-10 -40 -30
FY07 FY08 FY09 FY10 FY11 FY12 Consumer Durables (LHS) Consumer Non Durables (RHS) 3W 4W
Source: Siam, CSO, Company, ICICIdirect.com Research Economic survey census 2011, MART-Rural growth story
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Auto segment: Banking on two side of same coin! Outlook for 3W segment (4W SCVs to provide bump up as 3W segment enters steady state of growth)
FY13 performance of 3W segment clearly mirrors the GCL manufactures (primarily) single cylinder (diesel and gasoline engines) moderation in the economy. In line with our expectation, and dual cylinder engines, which find application in running 3W and 4W FY13 turned out to be a decline year for both passenger SCVs. The manufacturing capacity has recently been ramped up to 5,25,000 (-4% YoY) and goods segment (-10% YoY) units engines per annum. It has two plants for the same, one at Ranipet and the other at the recently commissioned Aurangabad facility. Key clients in Going into FY14E and FY15E, we expect the passenger this space include Piaggio, Mahindra & Mahindra, Tata Motors, Atul Auto, segment to grow at 5.0% CAGR as we expect more states to allow new permits etc.
We have built up in volume growth at 4.5% CAGR for Greaves dominantly placed in 3W segment 3W goods segment over FY13-15E as we believe the segment will grow a notch below GDP growth rates GCL derives ~55% of revenues (engine supply to OEM + spares sales) from the automotive segment. In the past, GCL has maintained an overall We expect Bajaj Auto to maintain its leadership in 3W passenger segment but it will face some market share 3W auto segment share ranging between 35% and 38% over FY08-12, loss as other OEMs like Atul Auto and M&M gain second only to Bajaj Auto (which has in-house engine manufacturing). In share on the back of new product launches and the 3W goods segment (sub 1-tonne category), GCL commands a capacity expansion dominating position of 80-90% share (as of FY13) as the market leader OEM On 3W goods segment, we expect Piaggio to maintain i.e. Piaggio (single largest client of GCL) sells the highest 3W goods carrier market share while players like Atul Auto would gain in the domestic market. Going ahead, we expect GCL to maintain its share marginal share owing to new capacity at 35-40% in the overall segment as some 3W OEMs will see new product Share of 3W goods will be at ~12% in FY15E from launches (Piaggio) while others will gain share owing to capacity additions ~13% in FY12 as there will be continued cannibalisation from the SCV segment (Atul Auto). Even in terms of volume growth, we have built in a CAGR of 7.6% over FY13-15E (~29% volume CAGR from 4W SCVs space will play a GCL dominating role in volume growth as the 3W segment will witness a steady
Going ahead, we expect growth rates for GCL in the profile for GCL over FY13-15E). 3W segment to sober up vis-à-vis the historical trend Exhibit 5: GCL commands dominating position across 3W auto category
We expect GCL’s volumes in the 3W segment to witness a CAGR of 2.9% over FY13-15E vs. 14.9% 100 88.2 84.5 CAGR seen during FY09-12 79.7 81.3 73.3 80 We believe SCVs would drive the growth for GCL as we expect (on the volume front) their contribution to 60 scale up from 10-11% of GCL overall auto volumes in 40.7 39.3 (%) 38.9 37.9 33.3 32.2 34.8 FY12 to ~25% of GCL’s auto volumes by FY15E. In 40 26.5 30.5 27.7 terms of revenues, 4W SCVs will contribute | 315 crore or ~14% to consolidated topline by FY15E 20
Supply of engines to SCVs has grown 67% in FY13 as 0 the average run rate to scaled up to 6000 units up FY08 FY09 FY10 FY11 FY12 from 3200 units FY12.
Going ahead, with enhanced capacity addition of 2x 3W Goods 3W Passenger Goods 3W Overall by Tata Motors (Dharwad facility of 90000 units for Ace and Iris brands), we expect the run rate to inch up to 8000 units and 9000 units in FY14E and FY15E, respectively Source: Siam, Company, ICICIdirect.com Research
We expect the auto segment revenues for GCL to rise at a CAGR of 14.4% over FY13-15E Going ahead, into FY13-15E, we expect the passenger segment to grow at 5.0% CAGR and goods segment at 4.5% CAGR.
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Exhibit 6: Robust CAGR for 3W volume across FY07-13E for GCL Exhibit 7: Passenger: Goods segment ratio at 2:1 over FY09-13E for GCL
4 Wheelers Segment 100% 450,000 11.0 3 Wheeler Goods Segment (in units) 90% 16.3 3 Wheeler Passenger Segment (in units) 33.0 31.5 31.5 400,000 80% 51.3 29.0 350,000 70% 57.5 24.1 300,000 60% 50% 250,000 40% 67.0 68.5 68.5 200,000 30% 60.0 59.7 48.7 150,000 20% 42.5 100,000 10% 0% 50,000 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY07 FY08 FY09 FY10 FY11 FY12 FY13
3W Passenger Segment 3W Goods Segment 4W Segment
Source: Siam, Company, ICICIdirect.com Research Source: Siam, Company, ICICIdirect.com Research
In line with industry, 3W segment to be steady source for GCL, going ahead Going ahead, we expect growth rates in the 3W segment to moderate vis-à- vis the historical trend. We expect 3W volumes (industry wide) to grow at a CAGR of 4.9% over FY13-15E vs. a strong 20.9% CAGR, which was witnessed over FY09-12. On similar lines, we expect GCL’s volumes in the 3W segment to witness a CAGR of 2.9% over FY13-15E vs. 14.9% CAGR seen during FY09-12.
On an individual segment basis, we expect GCL’s 3W passengers to post volume CAGR of 5.0% over FY13-15E. This would be on the back of key OEMs (using GCL engines) gaining market share on the back of new launches and capacity addition (Piaggio is planning to launch a petrol base version of 3W while Atul Auto’s market share gains will come from doubling of capacity by FY14E end). Given the slowdown in GDP and continuing cannibalisation by SCVs as a substitute, we have built in a conservative volume CAGR of 4.5% in the 3W goods segment for GCL over the same period. Even in this category, we expect OEMs of GCL on a base case basis to maintain their respective market shares and provide steady volume growth prospects.
Exhibit 8: 3W passenger volume CAGR at 5.0% over FY13-15E (for GCL) Exhibit 9: 3W goods volume CAGR at 4.5% over FY13-15E (for GCL)
250,000 3 Wheeler Passenger Segment (in units) 110,000 3 Wheeler Goods Segment (in units)
100,000 200,000 90,000 150,000 80,000
100,000 70,000
50,000 60,000 FY09 FY10 FY11 FY12 FY13E FY14E FY15E 50,000 FY09 FY10 FY11 FY12 FY13E FY14E FY15E
Source: Siam, Company, ICICIdirect.com Research Source: Siam, Company, ICICIdirect.com Research
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4W SCVs to drive way forward for GCL With the launch of Tata Ace in 2005-06, a new sub-category of SCVs emerged in the LCV segment, which not only cannibalised the intermediate commercial vehicle (LCVs <4.5 tonne) and medium and heavy commercial vehicle segment (MHCV) but also the lighter 3W goods carrier segment. To highlight our above stance, one should look at the decline in market share of the 3W goods segment as the overall 3W auto basket declined 1800 bps over FY07-12. This was mainly owing to 22.1% volume CAGR in the SCVs segment over the same period.
Tata Motors, with four models in this space, remains the dominant player in this segment, with 55% of market share in the goods space as of FY13 end. This is followed by M&M (commands ~36% market share) with three models. Piaggio, despite a very competitive product (APE Truck Plus), has done very poorly. Overall, it has three models in this segment. APE Truck Plus is powered by Greaves engines while the other two - APE Truck and Ape Mini are powered by engines from Koehler.
Growth drivers for 4W • There is widespread acceptance of the hub and The shift in pattern of use from 3W goods carriers to 4W SCVs commenced spoke model. With increasing urbanisation, following the introduction of Tata’s one-tonne models and further expanding distribution reach in rural India and introduction on sub one–tonne models. These sub one tonne models, sustained consumption demand, coupled with which include Tata Ace Zip and Tata Magic Iris, are powered by GCL many drivers-turned-entrepreneurs, the demand for engines. Tata Motors has already entered into a 10-year contract for supply 4W has remained buoyant of engines for this category. The supply of engines has commenced in • Higher stability, speed, space, style and safety in Q2FY12 with average monthly run rate of 3250 units in FY12. This has comparison to 3W grown almost by 67% in FY13 as the average run rate scaled up to 6,000 • They can be overloaded more than the 3W and units. Going ahead, with enhanced capacity addition of 2x by Tata Motors emerged as a better choice for transporting cargo (Dharwad facility of 90,000 units for Ace and Iris brands); we expect the over longer terms, with a shorter turnaround time. monthly run rate to inch up to 8,000 units and 9,000 units in FY14E and As per user and dealer feedback, overloading for FY15E, respectively. On an absolute basis, volumes from Tata Motors are 4W goes up to 30-40% while the same for 3Ws expected to grow from a meagre 39,000 units in FY12 to 1,08,000 units in goes up to 20% FY15E, representing 28.9% volume CAGR over FY13-15E. • The Tata Ace Zip has very similar cost economics to that of 3W cargo, which had led to its intense Exhibit 10: Average monthly run rate of 4W SCV engines over FY12-FY15E popularity. They share a similar profile both in terms of capex and opex structure 10000 • Another reason for the growing popularity of 4W 9000 SCVs is the easier availability of finance over three 8000 wheelers. There has been a higher delinquency in 7000 three wheelers, which make cooperative banks 6000 and unorganised/money lenders the accepted 5000
(Units) 9000 choice for the financing. SCVs from large 4000 8000 commercial vehicle manufacturers enjoy easier 3000 5417 finance availability due to long term association 2000 with financiers and higher resale value 3250 1000 • While SCVs provide higher monthly income on the 0 back of large distance and higher capacity, 3W FY12 FY13 FY14E FY15E remains popular among first time users, owing to lower risk appetite and unsure load availability Source: Company, ICICIdirect.com Research
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Exhibit 11: Trend in volumes (yearly) of 4W SCV engines over FY12-FY15E 120000
100000
80000
60000 (Units) 108000
40000 96000 65000 20000 39000 0 FY12 FY13 FY14E FY15E
Source: Company, ICICIdirect.com Research
Further, Atul Auto and Piaggio are in advanced stages of launching a 4W model on the lines of Ace Zip. Given the long history between them, along with the one-sided success story of Ace Zip, GCL has a strong set of credentials to be the engine supplier for these new models. However, our current volume estimates do not factor in any additional volume upswings that may come in from these potential sources. Hence, we believe SCVs should drive the growth for GCL from here on as we expect that what just contributed to 10-11% of GCL’s overall auto volumes in FY12 will scale up- to ~25% of GCL’s volumes by FY15E. In terms of revenues, 4W SCVs will contribute | 315 crore or ~14% to the consolidated topline by FY15E.
Exhibit 12: Further capacity expansion by few key customers of GCL OEM Segment Current Capacity Further Expansion New Capacity Atul Auto 3W 24,000 24,000 48,000 Tata Motors 4W 90,000 90,000 180,000 Piaggio 4W NA 10,000 10,000 Source: Company, ICICIdirect.com Research
Exhibit 13: SCVs to command almost 1/4th of overall auto volume of GCL by FY15E
100% 11.0 16.3 22.2 23.3 33.0 31.5 31.5 75% 29.0 24.1 22.5 22.1
50%
67.0 68.5 68.5 60.0 59.7 25% 55.3 54.6
0% FY09 FY10 FY11 FY12 FY13 FY14E FY15E 3W Passenger Segment 3W Goods Segment 4W Segment
Source: Siam, Company, ICICIdirect.com Research
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Boasts steady visibility, diversified OEM base that cushions adversity... Despite below industry trend in growth (CAGR basis), GCL boasts a steady growth profile as it has a diversified OEM base in the auto segment. We believe this has cushioned GCL in tough times, contrary to industry trends. The diversified OEM base de-risks the revenue visibility as the faltering of one OEM can be cushioned with a wide base. This is clearly evident from the history wherein FY08 and FY09 proved to be -10% and -1% decline years for the overall industry, respectively. GCL’s volumes ended in the positive zone of 1.2% and 3.7% for the respective periods.
Exhibit 14: GCL’s diversified OEM base helps it outperform industry during challenging times
950,000 35 850,000 30 750,000 25 20 650,000 15 550,000 10 450,000 (%) 5 (Nos) 350,000 0 250,000 -5 150,000 -10 50,000 -15 FY08 FY09 FY10 FY11 FY12 Greaves Volume Total 3W Industry Volumes Volume growth for Greaves (RHS) Volume growth for 3W Industry (RHS)
Source: Siam, Company, ICICIdirect.com Research
GCL has already entered into long term contracts for supplying engines to OEMs. Among these, the most prominent OEMs are Piaggio (biggest client contributing 40-50% of GCL’s auto segment revenues) followed by M&M and Atul Auto (witnessing robust 43% volume CAGR over FY09-13E and has plans to double capacity by FY14E end). This augurs well for GCL’s performance. This is since, on the one hand, agreements with OEMs provide longer duration contracts (five to 10 years) that allow GCL to supply engines for existing product portfolio while also exploiting potential prospects for new vehicle launches if it happens during the period of agreement.
Exhibit 15: Contract details of GCL with key OEMs OEM Model Agreement Comments Tata Motors Tata Ace Zip and Iris 10 Years Contract effective from January 2011 Atul Auto Atul Smart, Atul Shakti, Atul Gem 7 Years Duration has been extended from 3 years of earlier contracts M&M All 3W from M&M's stable 5 Years Contract effective from February 2011 Piaggio Ape Series 8 Years Contract effective from 2008 Source: Company, ICICIdirect.com Research
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Exhibit 16: Three wheeler players in India Number of Engines powered Market Share* OEM Category models Models by Units Sold* (in %) Remarks APE Xtra Pick Up APE Xtra High Body Piaggio, the most valued customer Goods Carrier 4 GCL 59519 54 APE Xtra DV Van for GCL, is market leader in 3W
Piaggio APE Xtra LD goods carrier space Passenger Carrier 1 APE Xtra Passenger GCL 145,905 19
Alfa Load Goods Carrier 2 GCL 20553 19 M&M has managed to maintain its Alfa Load Plus market share at these levels over
M & the years Passenger Carrier 1 Alfa Passenger GCL 52,302 7
Shakti Standard Shakti CNG Atul Auto has long standing Shakti Plus Goods Carrier 6 GCL 14,213 12 relationship with GCL, which dates Gem Cargo - MC back to its inception. Like other Gem Cargo - MCL majors, Atul Auto is also looking to Smart Standard introduce 4W SCVs. We believe, Shakti Passenger following the runaway success of Atul Auto Shakti Passenger CNG Tata Ace Zip and Magic Iris Shakti Passenger LPG (supplied by GCL), Atul Auto would Passenger Carrier 6 GCL 13350 2 extend the contract for 4Ws also Gem Passenger to GCL Shakti Smart Passenger Smart Passenger CNG
GC Max Diesel Goods Carrier 2 Kobuta 7767 7 GC Max CNG Bajaj remains the undisputed RE 2S Passenger leader in 3W passenger space, led RE 2S CNG Passenger by high sales of its passenger RE 2S LPG Passenger vehicles. However, it is more city and export oriented, with RE 4S Passenger In House inclination towards petrol and CNG Passenger Carrier 9 RE 4S CNG Passenger manufacturing by 506,171 66 Bajaj Auto based models. For the rural Bajaj Auto RE 4S LPG Passenger economy, both are not feasible. RE Diesel Passenger Bajaj has in-house engine RE GDI Passenger manufacturing capability Mega Max Passenger
Source: SIAM, Company, ICICIdirect.com Research. * for the year ended FY12
Exhibit 17: Expected market share of players in three wheeler industry, going ahead, in FY13-15E Passenger (units) FY09 FY10 FY11 FY12 FY13 FY14E FY15E Goods (Units) FY09 FY10 FY11 FY12 FY13 FY14E FY15E Bajaj Auto 64 64 63 66 65 65 64 Atul Auto 5 8 9 12 15 15 15 Piaggio 25252319191919Bajaj Auto121057366 Atul Auto 2122233 Piaggio Vehicles55576154535555 M&M 6667677 M&M 19161919211919 Others 3476767 Scooters India6778866 Others 2100000
a. In the passenger segment, we expect the market leader, Bajaj Auto, to retain leadership whereas GCL’s OEM like Piaggio and M&M are expected to gain share marginally. Atul Auto (GCL OEM) is expected to gain 100 bps share and maintain its share, going ahead, owing to capacity ramp up b. In the 3W goods segment, Atul Auto is expected to make significant gains of 300 bps over FY12-15E whereas the share of Piaggio will hover between 53% and 56% over the same period
Source: Company, ICICIdirect.com Research
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On an overall basis, after sales and services segment GCL’s key strength also lies in solid after sales service and spares comprises 15-20% of total revenues. It constituted 20% of GCL has well leveraged its strong OEM relationship and widening base of the topline in FY13. This segment commands both stable vehicles that has translated into revenue generating new revenue stream, year on year sales and higher margins for GCL, in the form of after-sales and spares. This, we believe, does add to brand value for OEMs as a few industry products in the past have been withdrawn owing to limited availability of spares and after sales service. On the one hand, the company is strengthening its dealer and distribution network to enhance availability of spares. On the other hand, it is expanding the base of company-trained mechanics, which have a higher influence on the decision for purchase of original spares by clients. Spares contributed nearly 20% to overall revenues in FY13.
Exhibit 18: Fewer warranties encashed, illustrative of superior technology (| Crore) FY07 FY08 FY09 FY10 FY11 FY12 Net Sales 1063.1 1275.2 1037.1 1347.2 1250.5 1750.0
Warranties at the beginning of the year 6.4 5.5 6.4 7.2 9.9 15.0 Additional provision made during the year 5.4 7.8 9.8 12.2 9.4 3.4 Warranties enchased during the year 6.4 6.9 9.0 9.5 4.3 8.4
Warranties Encashed (as a % of Net Sales) 0.6 0.5 0.9 0.7 0.3 0.5
Source: Company, ICICIdirect.com Research
Outlook We maintain our positive stance on the 3W and 4W SCV segment. This is given the consumption driven demand, cost efficient option, increased marketing penetration of consumer companies, additional choices in the 4W segment from new product launches, high population base (translating into an opportunity for a deeper customer reach and employment creation for the youth) and low permit/legal bottlenecks in running the goods carriers that would keep demand intact. We expect GCL’s 3W category to post 2.9% CAGR over FY13-15E whereas the 4W LCV segment is expected to maintain a CAGR of 28.9%, going ahead. With sustained demand from the auto sector, we expect auto segment revenues for GCL to rise at a CAGR of 14.4% over FY13-15E.
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Farm equipment
Segment Description: Outlook
• The farm equipment segment contributes ~12- Over FY09-12, the farm business revenue has grown at a healthy CAGR of 13% to the total topline (~15-16% inclusive of 26.5%. Going ahead, we expect the growth momentum to continue, as the spare sales). Under this segment, unexplored market territory still remains substantial. GCL has also increased • GCL deals in agricultural equipment like pump its focus on this business line, with capex plans of more than | 50 crore in sets (1.5-10 HP), power tillers, paddy reapers, the coming fiscals in this segment alone. Taking stock of the rising brush cutters, sprayers, weeders and competitive intensity, we have built in conservative revenue CAGR of 9.0% transplanters over FY13-15E. Further, we expect some additional business in the current year, in the backdrop of impending elections, where governments tend to • The segment is witnessing increased resort to populist measures. competition from players across the globe, a The management claims it is the market leader in the pump segment, with a marked under penetration for mechanisation till market share of ~56%. On an overall basis, it ranks fourth after Kirloskar, date leaves enough room for all Usha International and Field Marshall. • It manufactures (diesel, kerosene, petrol) engines, which are offered as base engines and as complete pump sets. GCL markets power Exhibit 19: Trend in farm revenues (inclusive of spare revenues) tillers on a pan-India basis for Changzhou
Dongfeng Agricultural Machinery Group 400 Revenues in the farm segment has grown at a CAGR 50 of 18.3 CAGR over FY08-13 350 40 300 30 Growth drivers: 250 • Subsidies are a major driver for growth in the 200 20 sector. (%) (| crore) • Over the years, GCL has built an extensive 150 10 service and dealer network, which is a key for 100 surviving in this business. Chinese substitutes, 0 despite being significantly cheaper than their 50 Indian counterparts, remain laggards due to the 0 -10 absence of an after sales network FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E • Higher wage costs, coupled with acute labour shortage and an expanded impetus of hiring Revenues Growth (RHS) activities • Deeper penetration of finance companies, Source: Company, ICICIdirect.com Research augmented government efforts to provide farm
credit and interest subvention scheme to farmers
provides the much needed capital at cheaper
rates
• Growing rural income and education levels, along
with a drive to increase the farm yield
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Segment Description Power sector and industrial engine business The auxiliary power division contributes ~14-15% of the total topline. In this segment, GCL offers silent Outlook diesel gensets, control panels and complete Over FY09-12, power segment revenues have grown at a CAGR of 19.1%. installation and commissioning service from the This is expected to moderate to 8.0% over FY13-15E. In the near to medium range of 25-500 KVA. The most lucrative segment for term, we believe demand constraint and competitive levels will keep the company is 35-125 KV. GCL commands a market pressure on pricing. However, a renewed focus on strengthening the after share of 10% in the 150-500 KV segment. Up to the sales services, combined with the entry into new market segments, would 200 KVA segment, Kirloskar and Mahindra are assist GCL in maintaining its market share. In order to leverage on its dominant players. Unlike Cummins India, which existing dealership network, GCL has lately taken a new initiative where one markets its products through dedicated marketing dealer would be supplying products from other segments also. By companies (like Powerica, Jakson), GCL both makes expanding the product/service offerings of the dealer, it could reach newer and markets its products though its India wide and existing customers at minimum new investments. Further, softening of distributor network. interest rates, coupled with a pick-up in industrial activity would act as a key catalyst for a buoyed demand scenario.
Despite heightened competitive pressure, the company has been able to Drivers: maintain its market share across most categories. GCL is also planning to • Unabated power shortfall continues to keep enter the sub 15 KVA segment, in order to expand its product portfolio. the demand for back up power high Further, in order to tide over the crisis, GCL has increased its distribution • Mandatory backup power requirement in reach by roping in distributors with a larger geographical presence. various end industries like hospitals, hotels, etc. With new CPC emission norms about to come into force, the company • Higher infrastructure activity in rural areas, expects a part of the competition to fade away. Except Kirloskar, all other where auxiliary power doubles up as primary players import engines and assemble other parts. Since Indian imports power form a small part of the exporter’s portfolio, the incentive to meet the new • Fundamental shift in lifestyle and emergence emission norms would be fewer for exporters, thus diminishing the of high-end residential complexes, where back competitive intensity. up power has become a part of the package • Increasing real estate activity across the board, resulting in new demand from shopping Exhibit 20: Trend in power revenues… centres, movie theatres, retail outlets, commercial complexes, SMEs, etc. 350
300
250
200 328 (| crore) (| 303 281
150 263 219 216 211
100 166 144
50 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E
Source: Company, ICICIdirect.com Research
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Infra segment - The prodigal one; to breakeven by FY14 Outlook: The long term outlook for the segment remains positive, given the strong market standing for GCL, increased product offerings, increase in locally manufactured components and government’s renewed focus to boost road construction activity (most recent being the Union Budget 2013-14 announcements where the government seeks to award 3,000 km of road within six months). Over FY04-12, revenues of construction equipment For the year ended FY13, the infra segment clocked have grown at a CAGR of 10.8%. Over FY13-15E, we have factored in revenues of | 162 crore, with the last quarter posting a revenue CAGR of 12.6%. topline of | 51.6 crore. Management commentary has Segment description maintained a plus | 50 crore revenue/quarter in this The construction equipment business makes up ~11-12% of the topline. business as the necessary break even point. However, The segment is divided into concreting and compacting equipment, which during the past quarter, despite benchmarked revenues, have ~60% and ~40% business contribution to the segment. Under the company reported a loss of | 3.2 crore. This loss concreting equipment, GCL manufactures and markets equipment like stemmed from one-time restructuring exercises in the batching plants, transit mixers, concrete pumps and truck mounted metro segment pumps, etc. Under the compacting segments, GCL 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.
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. GCL has also entered into a technical partnership with BOMAG, a player of international repute, for compacting equipment.
The segment has been contributing negatively to the bottomline since FY09. Over the last 11 fiscals, this segment has contributed negatively thrice. The management guidance indicates the break-even sales come to around | 180-200 crore/annum, above which the segment starts contributing positively.
Exhibit 21: Revenue and EBIT contribution from infra segment
400 30
350 25
300 20
250 15
200 10 (%) (| Cr) (| 150 5
100 0
50 -5
0 -10 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Revenues, in | Cr (LHS) EBIT, in % (RHS)
Source: Company, ICICIdirect.com Research
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Key financials: Stable business model to provide steady revenues
The market acknowledged strong technological offerings, 4W SCV sales to Tata Ace Zip, new alliances to provide revenue traction long term tie-ups with customers, consistent after sales The overall topline grew 7% in FY13. We expect it grow at 11.6% CAGR revenue and lack of competition in the key segment (auto over FY13-15E. For FY14E and FY15E, we expect the consolidated topline to three-wheelers); provide comprehensible visibility to the grow by a modest 13% and 10% YoY, respectively. This is on the back of future revenue growth. Over FY09-12, GCL has achieved a flattish volume growth in the 3W engine segment and 28.9% CAGR in the topline growth of 19.1% CAGR. With 4W SCVs attracting 4W segment. We expect the farm equipment division to post a CAGR of more traction, sales of 3Ws are likely to grow in single 9.0% over FY13-15E. In the auxiliary power equipment division, we have digits. Overall, we expect the auto segment revenue to factored in growth of 8.0% over FY13-15E. We expect the segment to grow at a CAGR of 14.4% over FY13-15E to |1348 crore, derive more business from increasing export focus (especially from the owing to a ramp up from the 4W SCVs segment MENA and South East Asian countries), expanded product portfolio (entry into sub 15 KVA segment), softening interest rates, and subsequent pick-up in real estate activity. For the infrastructure segment, we have built in growth at 12.6% CAGR over the same period, factoring in a bear case setting, where a pick-up in overall macro environment and new business would happen in the medium to long term.
Exhibit 22: Net sales to grow at CAGR of ~11.6% in FY13-15E
Expected to by a CAGR of Growth at a CAGR of 19.1% 11.6% over FY13-FY15E over FY09-FY12 2500 2335.9 50 2122.1 1873.3 40 2000 1751.2 30 1500 1277.5 1347.2 1250.5 20 1063.1 1037.1 10
(| crore) 1000 0 -10 500 -20 0 -30 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E
Topline YoY Growth
Source: Company, ICICIdirect.com Research
Exhibit 23: Auto segment to continue to dominate GCL’s revenues over FY12-15E
FY12
FY11
FY10
FY09
FY08
FY07
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Auto Power & Industrial Farm Equipments Infrastructure Spares Others
Source: Company, ICICIdirect.com Research. The revenue contribution from sales of spares has been shown separately and not included with individual business segments
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EBITDA margin: to remain stable in 12.8-13.0% over FY4E-FY15E GCL has been able to maintain a stable EBITDA margin profile in the range of 13.5-15.5% over the years (except for FY09 where the same stood at 11.0% on the back of abysmally low volumes). This has primarily been a function of disciplined timely price increases, long term agreements with OEMs and a good market standing. For the auto segment (comprising more than 50% of the topline), price increases are taken on a timely basis, contingent upon the increase in raw material prices, price hikes taken by OEMs and overall demand scenario for end vehicles. This generally results in an orderly price increase, resulting in stable operating margins.
Further to a stable market standing and the government bearing almost half the price of the agri equipment, operating margins remain steady in the farm segment also. The power segment has lately been witnessing some pricing pressure on the back of subdued demand activity. Overall, margins have remained stable. We expect them to remain so in the near to medium term. For FY14E and FY15E, we have built in EBITDA margins of 12.9% and 13.0%, respectively. We have not factored in the improvement in margins if the infrastructure segment performs and turns into the black. Historically, over FY09-13E, the infrastructure segment has contributed negatively to the tune of 1-5%.
Exhibit 24: EBITDA margin to remain steady over FY13-15E
18 16 14 12 10 (%) 8 15.2 15.3 15.8 13.3 13.7 12.6 12.9 13.0 6 11.0 4 2 0 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E EBITDA Margin
Source: Company, ICICIdirect.com Research
Exhibit 25: Infra segment to stop contributing negatively, going ahead!
30 27.2 30 25 25 21.6 20 20 15 13.7 15 12.5 10 (%) 11.8 (%) 9.0 9.0 8.8 9.2 5 10 0 5 -5 0 -10 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E
Infra revenues as % of total revenues EBIT as % of Overall EBIT
Source: Company, ICICIdirect.com Research
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Adjusted net profit likely to grow at CAGR of ~10% in FY12-15E PAT margins have ranged between 8.5% and 10.5% over FY07-12. Going ahead, we have built in PAT margins of 8.0% and 8.1% for FY14E and FY15E, respectively. On an adjusted basis, net profits are expected to grow at a CAGR of 10% over FY12-15E to | 190.4 crore.
Note: We have taken adjusted PAT of | 143.3 crore in FY12 as reported PAT included extraordinary income of | 43 crore on account of profit on sale of land & buildings.
Exhibit 26: PAT margins expected to remain firm, going ahead, leading to more profit…
200 14 180 12 160 11.5 10.6 140 10.2 10 120 8.6 8.7 8.0 8.1 8 100 7.2 (%) 190 185
(| crore) 6 80 171 5.4 135
60 127 122 4 117 110 40
56 2 20 0 0 FY07 FY08 FY09 FY10 FY11 FY12* FY13E FY14E FY15E FY07 FY08 FY09 FY10 FY11 FY12* FY13E FY14E FY15E
PAT (in | Crore) (LHS) PAT Margin (RHS)
Source: Company, ICICIdirect.com Research. *FY12 has an exceptional gain from sale of asset of |43.3 crore, leading to higher profits
Strong operational cash flows and efficient working capital cycle GCL’s business generates strong cash flows from operations, which stood at | 159.6 crore in FY12. Strong cash inflows from operations keep the business cash rich and debt free, something which most other players have on their wish list. The net working capital (NWC) as a percentage of net sales has remained in the region of ~13-16%, next only to the likes of leaders like L&T. A clean and debt free balance sheet, in a current dissuading macro setting augments investor confidence in the business.
Exhibit 27: Standalone net working capital as percentage of sales Exhibit 28: Short working capital cycle
120 20 100 103 77 15 68 84 80 78 76 57 57 55 53 10 60 57 59
(%) 55 55 (Days) 55 58 58 17.6 16.2 16.1 40 39 49 42 40 15.0 15.0 36 14.1 31 5 30 35 38 40 20 5.6 5.6 4.3 0 0 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E NWC/Sales Debtor Days Inventory Days Creditor Days
Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research
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Creditor days have historically remained more than debtor days, allowing the company to maintain a robust working capital cycle. Further, with most customers being from the private sector, we expect debtor days to remain stable. In the farm equipment business, almost 40-50% of the sales proceeds come from government departments, as a part of subsidies, which have to be collected directly by the dealer. Our channel checks indicate that even these receivables come in within 60 days of sales, which in tough times go up to 90-100 days but still remain within manageable limits.
Exhibit 29: Strong operating cash flows leading to higher net cash flows
250 400 350 200 300 150 250 200 100 150 (%) (| Crore) 50 100 50 0 0 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E -50 -50 In | Crore (LHS) As a % Annual Bottomline (RHS) Operating Cash Flows Net Cash Flows Operating Cash Flows Net Cash Flows
Source: Company, ICICIdirect.com Research
Return ratios to range between 20%-22% over FY13-15E We have adjusted the books for one-time exceptional gains Post the restructuring exercise between FY01 and FY04, the company made made from the sale of assets in FY12 amounting to | 43.3 a strong comeback, with return ratios clocking north of 30%. This was crore in profits. We have adjusted the profit and net worth except for FY09, where it dipped to ~13.7%. This strong track record for this one-time gain, to arrive at a level-headed range of primarily stems from a stable operational margin profile and low capital return ratios from the business intensive nature of the business. A consistent working capital cycle keeps return ratios reliable.
Exhibit 30: Robust RoE and RoCEs Exhibit 31: RoE trend (post adjustment for one-time exceptional profit of FY12)
45 35 40 30 40.9 35 25 29.4 30 20 29.4 28.6 (%)
25 26.6 15
24.2 26.6 22.3 (%) 24.2 23.5 22.6 21.4 20 21.2 10 20.2 19.0 13.7 15 5 13.7 10 0 5 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E 0
Source: Company, ICICIdirect.com Research FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E Note: The net worth is adjusted for (FY12 onwards) for the one time exceptional gains ROE ROCE from sale of assets in FY12 to reflect the core business RoE
Source: Company, ICICIdirect.com Research
Going ahead, we expect the adjusted RoEs to remain buoyant, clocking 22.6% and 22.3% in FY14E and FY15E, respectively, on an adjusted basis.
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Risk & concerns Revenue contingency on handful of players GCL earns a significant majority of the business from a few top players like Piaggio, Mahindra and Tata Motors. Any loss of business from these key customers would come as a major setback. Piaggio contributes around ~40-45%, Mahindra ~11% and Tata Motors around ~6% in the auto segment. Given the unrelenting macro headwinds, a dip in demand for 3W and 4W SCV could dent the demand for engines in a significant way. In-house manufacturing of engines by OEMs Given the cost proportion assigned to engines in a vehicle, combined with momentous volumes, OEMs may get tempted to have an in-house engine manufacturing facility like Bajaj Auto, which manufactures its own engines. In case this happens, a significant portion of business would be lost forever. However, we assign a low probability to this concern materialising as engine development is a long term process (lasting up to three to four years), with end vehicles being able to deliver the same performance being the key challenge. Stiff competition in soft economic growth environment GCL’s business segments like auxiliary power division, farm equipment division and infra equipment are prone to strong competition, with no major product demarcation. This leads to price-based strategies to remain a popular choice to garner market share, which comes at the cost of margins. A stagnant demand scenario could lure GCL and its competitors to resort to these strategies, which could negatively impact both the topline as well as the bottomline. Farm loan waiver deterring banks from providing new loans Business dynamics in the farm equipment segment have a direct relation with government impetus to subsidies and banks providing new loans for equipment. A ground check on the current scenario has given us an indication that after the farm loan waiver scheme in the last general elections, a few banks have become reluctant to dole out new loans in the current year. Timely technological upgrades, cost pass through dependent on OEMs For the automotive segment, the cost pass on to OEMs is partly dependent on the trend of OEMs influencing their end product prices. A constraint on the part of the OEMs to do so will also limit GCL’s ability to pass on cost increases, thereby negatively impacting operational margins. Further, cost increases in other segments of power, farm and infra would be dependent on the competition intensity and the company’s courage in putting a part of its market share at risk.
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Sensitivity analysis Base Case In our base case scenario, we have arrived at a company valuation of | 86, based on 11x FY15E EPS. Bear Case In our bear case scenario, we have arrived at a base valuation of | 49/share, based on 8x FY14E EPS. Here, we have further slimmed down our key growth assumption, to factor in negative growth in the 3W goods segment, zero growth in the 3W passenger segment and both farm equipment business and auxiliary power business facing de growth. Bull Case In our bull case scenario, we take 10% YoY growth for 3W passenger segment, 6% for 3W goods segment, farm equipment and power auxiliary segments for both FY14E and FY15E. We also factor in a 4W SCV volume offtake of 9000 engines and 10000 engines per month for FY14E and FY15E, respectively. This leads us to arrive at a per share value for Greaves Cotton at | 111/share, applying a valuation of 12x FY15E EPS.
Exhibit 32: Sensitivity Analysis Bull Case Base Case Bear Case FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E
3 Wheeler Goods(%,YoY) -10.4 -5 0 -10.4 5 5 -10.4 -5 0
3 Wheeler Passenger(%,YoY) -4 10 10 -445-4 -2 0
4 Wheeler offtake/month 5500 9000 10000 5500 8000 9000 5500 6500 7500
Farm Equipments Segment (%,YoY) 71215 7810733
Auxiliary Power Segment(%,YoY) 71215 788733
EBITDA Margin(%) 13 14.1 14 13 13.1 13 13 12.6 12.5
Target Multiple (X) 12 11 8
Valuation on Year FY15E FY15E FY14E
Target Price 111 86 49
Source: Company, ICICIdirect.com Research
Implications of reverse valuation at | 69, P/E of 10x on FY14E implies:
Our reverse valuation assumption, at the CMP of | 69/share, is factoring in the following set of growth factors for FY14E.
Exhibit 33: What the Current Market Price of |68 is discounting … Basic Assumption Implied Output/What the price is discounting CMP 68 3W Auto Segment growth O% Valuation Base FY14E 4W Auto Segment p.m. volumes 8000 units Target P/E Multiple 10x Farm & Industrial Segment growth 10% EBITDA Margins 13% Source: Company, ICICIdirect.com Research
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Valuation Commanding ~80-90% share in the 3W goods engine industry and catering to almost all OEMs in the category reflects the leadership reign Greaves enjoys. Going ahead, we believe the 3W industry growth will follow a steady path and grow in single digits given the large base coupled with the emergence of SCVs as close competitor/substitutes.
Though SCVs have become a runaway hit in the goods and passenger markets in urban areas, there still exists a lot of scope for the same to catch up in the urban area and penetrate rural areas. This, we believe, will provide the next leg of growth for GCL, as it has shown good traction in the LCV segment. Volumes in the segment are expected to grow at a CAGR of 28.9% over FY13-15E. Our estimates have upside risks as GCL may get contracts from OEMs for new SCVs as many OEMs are planning product launches in the sub 1-tonne category.
Keeping above factors in minds, we believe GCL’s performance will exhibit a steady state for the next couple of years as we build in 11.6% CAGR in sales and 13.0% in average EBITDA margin, over FY13-15E. Given GCL is entering a steady phase of growth in the auto segment it is interesting to note that efforts of the management would be to revive the non auto leg of the business (40-45% of overall revenues). This could provide the required alpha to profitability and, hence, shareholder value creation.
Given the asset light balance sheet, manageable capex levels (under | 100 crore in FY14-15E) and solid cash flow generation (CFO averages at | 120- 150 crore over FY08-12), we believe P/E multiples would be the right valuation tool to determine the fair value of the company’s business.
Exhibit 34: Performance velocity to sober up in FY13-15E vis-à-vis FY09-12
25.0 19.1 20.0 15.0 15.0 13.0 11.7 (%) 10.0
5.0
0.0 Sales CAGR Average EBITDA Margins
FY09-FY12 FY13-FY15E
Source: Company, ICICIdirect.com Research
Over the past five year period of FY07-11, GCL has commanded a one year P/E multiple of 12x given the backdrop of 19.1% revenue CAGR in FY09-12 coupled with margins ranging from 15-17% over the same period. Going ahead, we believe the 3W industry will ride single digit growth rates while 3W goods segment would get cannibalised by the SCV segment in the medium term. We believe this will provide the next leg up for GCL’s auto business. We believe till the time SCVs’ next phase of growth picks up, P/E multiples for GCL would moderate in the near to medium term as we forecast 11.7% and 18.6% CAGR in revenues and profitability, respectively, over FY13-15E. On the other hand, a pick-up in the infrastructure segment will also lead to a revival of fortunes and, consequent, re-rating of multiples. Consequently, we value GCL at 11x FY15E EPS to arrive at a fair value of | 86/share. While calculating the same, we take ~20% discount to factor 1x on the PEG ratio (0.7x for 19% CAGR earnings over FY13-15E) as we try to capture downside risks for forecasts that we have built in.
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Exhibit 35: Historically 12x has been mean one year forward multiple
140 +1 Std. Dev. 120 100 80 (|) 60 40 20 -1 Std. Dev. 0 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 May-07 May-08 May-09 May-10 May-11 May-12 May-13 Greaves 8.0 X 10.0 X 12.0 X 14.0 X 16.0 X
Source: Company, ICICIdirect.com Research
Exhibit 36: Trend in P/BV multiple
140 120 100
80 (|) 60 40 20 0 Jan-13 Jan-12 Jan-11 Jan-10 Jan-09 Jan-08 Sep-12 Sep-11 Sep-10 Sep-09 Sep-08 Sep-07 May-13 May-12 May-11 May-10 May-09 May-08 May-07
Greaves 1.5 X 2.5 X 3.0 X 3.5 X 4.0 X
Source: Company, ICICIdirect.com Research
How does GCL stack up in whole engineering space? One has to take cognizance of the fact that GCL is a midcap engineering company and as such a challenging macro environment has taken a toll on the performance of all engineering companies over the last couple of years. The key challenges for the EPC and engineering companies have been tepid order inflows, execution challenges, competitive intensity and high input costs impacting margins, stretched working capital and leveraged balance sheet. The consequence of the above challenges is record low valuations for companies based in the sector. We believe GCL is relatively well placed when it comes to current challenges faced by the sector as a whole.
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Exhibit 37: Product based engineering companies like GCL have outperformed EPC based engineering companies over FY08-12
1000.0 900.0 800.0 700.0 600.0 500.0
(Rebased to 100) (Rebased 400.0 300.0 200.0 100.0 Jul-09 Jul-10 Jul-11 Jul-12 Jan-10 Jan-11 Jan-12 Jan-13 Sep-09 Sep-10 Sep-11 Sep-12 Nov-09 Nov-10 Nov-11 Nov-12 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 May-09 May-10 May-11 May-12 May-13
BGR Energy KEC International Kalpataru Power Engineers India Greaves Cotton Cummins India
Source: Company, ICICIdirect.com Research
• Majority of GCL’s’ revenues are exposed to sectors such as automobiles and agriculture, which at this point in time are facing cyclical challenges (high interest rates and base effect, cannibalisation of 3W goods segment by 4W SCVs and low subsidy payout in the agriculture segment affect volume growth) vis-à-vis other engineering companies that are facing challenges relating to adequate order inflows (amid high competition) and execution challenges owing to regulatory concerns • Pricing/repricing pressure is relatively low given GCL commands ~80-90% share in the 3W goods engine market. Also, even in the SCV segment it has tie-ups with Tata Motors ACE and Magic series model, which have been runaway hits. Hence, margin volatility will be less in case of GCL. We have built in ~13% margins over FY13- 15E whereas various sub segments of the EPC sector are facing tremendous competitive intensity/pricing erosion and their margins have come between 6% and 13% • GCL’s balance sheet boasts an efficient working capital cycle and zero leverage over the past many business cycles, which instils confidence in challenging times such as these. Debtor days over FY07-12 have not exceeded 80 days (NWC at 15-16% of sales) as compared to other engineering companies where debtor days have been ranging between 160 and 180 days thereby calling for short- term loans and, hence, high leverage (ranging between 1.3x and 1.6x) and depressing cash flows
Exhibit 38: Greaves Cotton vis-à-vis madcap engineering players Sales Growth (%) EBITDA Margins Interest /EBITDA (%) Debt/Equity (x) Debtor Days ROE (%) FY11 FY12 FY13E FY14E FY11 FY12 FY13E FY14E FY11 FY12 FY13E FY14E FY11 FY12 FY13E FY14E FY11 FY12 FY13E FY14E FY11 FY12 FY13E FY14E BGR 55.0 -27.5 -4.6 20.6 11.3 13.6 13.6 11.5 29.0 40.1 35.7 37.7 1.3 1.5 1.9 1.6 242.0 335.0 305.0 32.5 18.9 13.3 13.8 KEC 30.0 17.9 9.3 10.1 8.1 5.5 5.8 6.1 33.9 51.0 51.0 43.1 1.4 1.5 1.5 1.4 184.4 179.0 170.0 165.0 18.7 5.6 8.5 11.1 KPTL 6.8 15.0 12.4 15.7 10.9 9.8 9.9 9.9 32.9 36.0 30.5 33.2 0.3 0.3 0.3 0.3 183.0 170.0 180.0 170.0 9.5 8.0 8.8 9.1 EIL 41.4 30.7 -17.1 0.1 23.1 19.2 21.8 22.5 NA NA NA NA NA NA NA NA 41.0 31.0 40.0 45.0 40.6 38.1 25.3 24.7 Greaves -7.2 39.9 6.7 13.4 13.7 12.6 12.9 13.0 NA NA NA NA NA NA NA NA 83.8 55.4 57.8 57.9 24.2 23.5 20.2 22.6
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 23
How does it stack up in comparison to its close comparables? GCL’s business model on a like-to-like basis can be compared to Cummins India and Kirloskar Oil Engines. Greaves earns majority revenues from auto engines while Cummins and Kirloskar derive majority revenues from power genset engines. However, we believe the dynamics of the business are somewhat comparable as all three players are product based companies and leaders in their own areas (Cummins leads in the HHP segment while Kirloskar enjoys a strong market in the LHP-MHP power genset range). Even in terms of financial performance, all three companies have strong balance sheets with zero leverage, efficient working capital cycle and strong cash flow generation characteristics.
However, in terms of size and scale, GCL compares with Kirloskar as it is relatively smaller when compared to Cummins India. Hence, our sense is that GCL should trade at a significant discount to Cummins and at par with Kirloskar’s valuations. On a one year forward basis, GCL should trade at a ~50% discount to Cummins’ multiple (20x on FY15E). Historically, we have observed that GCL’s forward multiple trades at a 33% discount range to that of Cummins India. Hence, our argument for absolute (PEG based) valuations and relative comparison, imply a target multiple of 11x on FY15E EPS to arrive at a fair value.
Exhibit 39: Greaves Cotton vis-à-vis other engine manufacturers Sales Growth (%) EBITDA Margins Interest /EBITDA (%) Debt/Equity (x) Debtor Days ROE (%) FY11 FY12 FY13E FY14E FY11 FY12 FY13E FY14E FY11 FY12 FY13E FY14E FY11 FY12 FY13E FY14E FY11 FY12 FY13E FY14E FY11 FY12 FY13E FY14E Cummins 38.7 4.4 11.8 14.9 16.9 16.9 18.3 18.5 NA NA NA NA NA NA NA NA 75.0 69.0 69.0 32.7 26.4 30.6 29.3 KOEL 6.5 -3.7 5.0 13.2 1.2 11.2 13.9 14.3 8.6 6.3 1.6 1.5 0.3 0.2 0.1 0.1 58.2 47.3 53.8 54.8 22.1 20.0 18.1 18.6 Greaves -7.2 39.9 5.3 9.8 13.7 13.0 13.6 14.0 NA NA NA NA NA NA NA NA 83.8 55.4 57.8 55.9 24.2 23.5 20.3 22.7 Source: Company, ICICIdirect.com Research
On a one year forward P/E basis, GCL has traded at an average discount of 33% to Cummins India’s multiple over FY08-13. Going ahead, our target P/E multiple of 11x assumes ~50% aggressive discount to multiple of Cummins India (trading at 20x FY15E EPS).
Exhibit 40: Greaves Cotton has traded at a discount to Cummins on one year forward basis
60
40
20
0
-20 (%) Jan-13 Jan-12 Jan-11 Jan-10 Jan-09 Jan-08 Sep-12 Sep-11 Sep-10 Sep-09 Sep-08 Sep-07 May-13 May-12 May-11 May-10 May-09 May-08 May-07 -40
-60
-80
-100
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 24
Exhibit 41: How do we stack up against the consensus??? Idirect Estimates Consensus % Diff. with street FY14E FY15E FY14E FY15E FY14E FY15E Sales (| crore) 2118.1 2331.9 2134.8 2404.4 0.8 3.1 EBITDA Margins (%) 12.9 12.9 13.6 13.7 - - PAT (| crore) 170.6 190.0 173.5 200.4 1.7 5.5
Source: Company, ICICIdirect.com Research
GCL also commands a strong cash flow profile as average Debt free balance sheet, strong cash flows and handsome dividends cash flow from operations (CFO) ranges around | 120 crore GCL has been able to maintain its net working capital cycle at very over FY11-13E. The company had met capex requirements comfortable levels of ~15% of net sales next only to industry leaders like from internal accruals and generated FCF, averaging | 80 L&T. Going ahead, we expect the same trend to continue and forecast NWC crore over FY09-12. Going ahead, we expect capex in the cycle of 15-16% of sales over FY13E-15E. range of | 70-80 crore for FY14E. These, we believe, are critical variables that create shareholder value in the long run. In terms of rewarding shareholders, GCL has been generous in distributing dividends among shareholders. The average payout ratio has exceeded 30% over FY08-13E. Going ahead, we expect the payout to go up in excess of 40% owing to higher CFO generation and reasonable capex requirements.
Exhibit 42: GCL has key ingredients to create shareholder value…
Strong Cash Flows from Operations... Coupled with almost zero debt obligation... Leading to high net cash flows
250 0.14 250 200 0.12 0.10 200 150 0.08 150 (X) 100 0.06 (| Crore) 0.04 100 50 0.02 (| Crore) 50 0.00 0 0 FY08 FY10 FY12 FY08 FY10 FY12 FY14E -50 FY08 FY10 FY12 FY14E Strong operating cash flows Debt Equity Ratio FY14E FreeCash Flows
..allowing the company to dole out high dividends, ..translating into a payout ratio of >30% averaging a ~2% dividend yield
100 12 5 80 10 4 8 60 3 (%)
6 (|) (%) 2 40 4 2 1 20 0 0 0 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dividend Yield(LHS) Payout Ratio Retention Ratio Trailing 12 months dividend (RHS)
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 25
Exhibit 43: Income statement (Consolidated) (Year-end March) FY11 FY12 FY13E FY14E FY15E Net Sales 1,250.5 1,750.0 1,867.9 2,118.1 2,331.9 Other Operating Income - 1.2 5.4 4.0 4.0 Total Operating Income 1,250.5 1,751.2 1,873.3 2,122.1 2,335.9 ------Total Operating Expenditure 1,052.7 1,511.6 1,636.7 1,848.4 2,031.9 Raw Material Expenses 868.6 1,232.0 1,318.6 1,495.6 1,651.0 Employee Expenses 83.2 127.5 147.9 164.7 176.4 Other Expenses 101.0 152.1 170.2 188.1 204.5 ------EBITDA 197.8 239.6 236.6 273.7 304.0 Other Income 14.1 8.2 15.6 12.0 14.0 Interest 7.2 8.2 1.1 1.0 1.1 Depreciation 21.0 31.8 36.9 41.0 45.5 Less: Exceptional Items - (43.3) 16.7 - - PBT 183.6 251.2 197.5 243.7 271.5 Total Tax 56.4 65.8 62.3 73.1 81.4 PAT 127.2 185.4 135.2 170.6 190.0
Source: Company, ICICIdirect.com Research
Exhibit 44: Balance sheet (Consolidated) (Year-end March) FY11 FY12 FY13E FY14E FY15E Equity Capital 48.8 48.8 48.8 48.8 48.8 ESOP - - - - - Reserve and Surplus 477.7 600.6 663.8 748.6 845.8 Total Shareholders funds 526.5 649.4 712.6 797.5 894.6 Secured Loan 3.0 0.2 0.2 0.2 0.2 Unsecured Loan 3.2 20.0 20.0 20.0 20.0 Total Debt 6.2 20.2 20.2 20.2 20.2 Deferred Tax Liability 26.4 30.0 30.0 30.0 30.0 Liability side total 559.1 699.5 762.7 847.6 944.8 Assets - - - - - Total Gross Block 459.3 545.6 595.6 665.6 725.6 Less Accumulated Depreciation on Tangible Assets - - - - - Net Block 264.2 326.1 339.2 368.2 382.7 Capital Work in Progress in Tangible Assets - - - - - Total Fixed Assets 287.5 326.1 339.2 368.2 382.7 Net Intangible Assets - - - - - Liquid Investments 83.8 111.4 121.4 136.4 152.0 Other Investments - - - - - Total Current Assets 639.6 654.1 725.1 798.0 902.0 Inventory 186.8 170.0 194.5 232.1 255.6 Debtors 287.1 265.9 296.8 330.8 376.9 Loans and Advances 103.7 147.8 186.8 211.8 233.2 Other Current Assets - - - - - Cash 62.0 70.4 47.0 23.3 36.3 Total Current Liabilities 451.9 392.1 423.0 455.0 491.9 Creditors 352.3 275.8 291.7 325.0 351.4 Provisions 99.6 116.3 131.3 130.0 140.6 Other Current Liability - - - - - Net Current Assets 187.7 262.0 302.1 343.0 410.1 Deferred Tax Assets - - - - - Assets side total 559.1 699.5 762.7 847.6 944.8
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 26
Exhibit 45: Cash flow statement (| Crore) (Year-end March) FY11 FY12 FY13E FY14E FY15E Profit after Tax 127.2 185.4 135.2 170.6 190.0 Depreciation 21.0 31.8 36.9 41.0 45.5 Cash Flow before working capital changes 155.5 225.4 173.2 212.6 236.6 - - - - - Net Increase in Current Assets (112.5) (6.1) (94.4) (96.6) (91.0) Net Increase in Current Liabilities 39.5 (59.8) 30.8 32.0 37.0 Net cash flow from operating activities 82.5 159.6 109.7 148.0 182.6 - - - - - Minority Interest - - - - - Miscellaneous Expenses not written off - - - - - Liquid Investments 46.3 (27.6) (10.0) (15.0) (15.6) (Purchase)/Sale of Fixed Assets (42.4) (70.4) (50.0) (70.0) (60.0) Inc / (Dec) in Loan Funds - - - - - Inc / (Dec) in Loan Funds 1.9 3.6 - - - Deferred Tax Assets - - - - - Net Cash flow from Investing Activities 5.8 (94.3) (60.0) (85.0) (75.6) Equity Capital - - - - - ESOP - - - - - Closing Cash/ Cash Equivalent 2.6 (2.8) - - - Unsecured Loan (1.6) 16.8 - - - Total Outflow on account of dividend (42.4) (62.1) (71.4) (85.7) (92.9) Securities Premium Account - - - - - Net Cash flow from Financing Activities (48.6) (56.8) (73.1) (86.7) (93.9) - - - - - Net Cash flow 39.7 8.5 (23.4) (23.8) 13.0 Cash and Cash Equivalent at the beginning 22.3 62.0 70.4 47.0 23.3 Cash 62.0 70.4 47.0 23.3 36.3
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 27
Exhibit 46: Ratio analysis (Year-end March) FY11 FY12 FY13E FY14E FY15E Per Share Data EPS 5.2 7.6 5.5 7.0 7.8 Cash EPS 6.1 8.9 7.0 8.7 9.6 BV 21.6 26.6 29.2 32.7 36.6 Operating profit per share 8.1 9.8 9.7 11.2 12.4
Operating Ratios EBITDA Margin 15.8 13.7 12.6 12.9 13.0 PAT Margin 10.2 10.6 7.2 8.0 8.1
Return Ratios RoE 24.2 28.6 19.0 21.4 21.2 RoCE 23.0 22.9 18.7 19.9 19.8 ------Valuation Ratios EV / EBITDA 7.7 6.3 6.4 5.6 4.9 P/E 13.1 9.0 12.3 9.7 8.7 EV / Net Sales 1.2 0.9 0.8 0.7 0.6 Sales / Equity 2.4 2.7 2.6 2.7 2.6 Market Cap / Sales 1.3 0.9 0.9 0.8 0.7 Price to Book Value 3.2 2.6 2.3 2.1 1.9
Turnover Ratios Asset turnover 2.4 2.8 2.6 2.6 2.6 Debtors Turnover Ratio 4.4 6.6 6.3 6.4 6.2 Creditors Turnover Ratio 3.5 6.3 6.4 6.5 6.6
Solvency Ratios Debt / Equity 0.0 0.0 0.0 0.0 0.0 Current Ratio 1.4 1.7 1.7 1.8 1.8 Quick Ratio 1.0 1.2 1.3 1.2 1.3
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 28
Appendix 3W industry posts stellar run; to enter steady growth phase ahead
The 3W auto industry is basically classified into passenger vehicles (PV) and goods carrier category. The overall 3W industry (both passenger & goods industry) has enjoyed stellar volume growth over FY07-12. This was on the back of rapid economic growth, improving road infrastructure, strong growth in urbanisation and emergence of a hub and spoke model in various user industries like FMCG, consumer durables and modern retail, which propelled demand for higher transportation of people and goods on an interstate and intrastate basis. Hence, this was the genesis of growth for the 3W auto industry.
Exhibit 47: Trend in 3W auto segment over FY07-15E (Units) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E Passenger Carrier 385562 367676 417434 530203 696984 767173 736839 773681 812365 % Growth 0.0 -4.6 13.5 27.0 31.5 10.1 -4.0 5.0 5.0 Goods Carrier 170564 132916 79586 88890 102569 110538 99053 103015 108166 % Growth 0.0 -22.1 -40.1 11.7 15.4 7.8 -10.4 4.0 5.0 3 wheeler total 556126 500592 497020 619093 799553 877711 835892 876696 920531 % Growth -10.0 -0.7 24.6 29.1 9.8 -4.8 4.9 5.0
Source: Siam, Company, ICICIdirect.com Research
Snapshot of facts and emerging trends in 3W space • Growth in the 3W industry took off in FY02-07 wherein the volume CAGR stood at 32%. FY07-09 was a subdued period for volumes owing to the global recession
• Post FY09, volumes picked up and the 3W segment grew at a CAGR of ~21% over FY09-12 while industry volumes stood at ~0.9 million units
• In the overall 3W segment, the passenger segment dominates the space with a share of 88.2% as of FY13, which has consistently risen from 73% in FY09. The passenger segment has grown at a CAGR of 22.5% over FY09-12
• On the other hand, the 3W goods segment has witnessed ~416 bps fall in overall portfolio share since FY09 to 11.8% as of FY13. This was mainly due to the introduction and subsequent success of SCVs, which have become a strong substitute/competition for the 3W goods segment. The goods segment has grown at a CAGR of ~11.6% over FY09-12
• Bajaj Auto leads the 3W passenger market with a share of 65% (FY13) followed by Piaggio with ~19% share and M&M commanding 6%. GCL supplies engines to all OEMs expect Bajaj Auto, which implies a market share of 25-30% share in the passenger segment
• The goods segment is dominated by Piaggio, followed by Mahindra, Atul Auto and Scooters India. These players cumulatively have almost 90% of the market, thereby providing GCL a dominating status in this segment
ICICI Securities Ltd | Retail Equity Research Page 29
Exhibit 48: Greaves leads in 3W goods segment (80-90% share) while commanding No. 2 spot in passenger space Goods Segment (%) FY07 FY08 FY09 FY10 FY11 FY12 Passenger Share (%) FY07 FY08 FY09 FY10 FY11 FY12 Atul Auto Limited 5 4 5 8 912 Bajaj Auto Ltd 747164646366 Bajaj Auto Ltd 262012105 7 Piaggio Vehicles Pvt Ltd202625252319 Piaggio Vehicles Pvt Ltd394555576154 Atul Auto Limited 212122 Mahindra & Mahindra Ltd192519161919 Mahindra & Mahindra Ltd006667 Scooters India Ltd 446778 Others 433476 Others 732100 GCL Clients
In the 3W goods segment, GCL dominates market share as it supplies engines to almost all OEMs barring Bajaj Auto and some vehicles of M&M Similarly, GCL is No 2 in the passenger segment, which is mainly dominated by Baja Auto (66% share). Source: Siam, Company, ICICIdirect.com Research
3Ws to grow at steady pace, going ahead... • We believe the FY13 performance of the 3W segment clearly mirrors the moderation in the economy. In FY13, both passenger and goods segment de-grew 4% and 10%, respectively
• FY13 has been a better half for the passenger segment owing to release of permits whereas the performance of the goods segment was subdued as the economic slowdown became more prominent in H2FY13
• Going into FY14E and FY15E, we expect the passenger segment to grow at 5.0% CAGR as we expect more states to allow new permits (states like Delhi, Maharashtra and Tamil Nadu) and demand pick-up from the rural segment (pent up demand will emanate from social spending and upcoming elections coupled with no permit requirement)
• The goods segment, being highly sensitive to GDP growth rates, exhibited a weak trend in H2FY13 and posted a 10.4% YoY decline. On the other hand, the runaway success of the 4W SCVs (<1 tonne) category has also been a key contributor to 3W goods volume decline over FY09-12. Also, it will continue to be so, going ahead, as OEMs gear up for more product launches in FY14E-15E in the 4W SCV space
• We have built in a CAGR of 4.5% volume growth for the 3W goods segment over FY13-15E as we believe the segment will grow a notch below GDP growth rates
ICICI Securities Ltd | Retail Equity Research Page 30
Exhibit 49: Driver for 3Ws passenger and goods carrier industry
The 6+1 segment remains popular in the rural segment, on account of overloading capacity, cost effective model, capable of Urban segment highly travelling long distances in rural India contingent on the issue of new permits.
Rural - With improving rural connectivity, coupled with Strong support from export Passenger Carriers lesser permit regulations, it sales, arising from emerging depends on the buoyancy of economies like Africa, Latin rural economy America & South Asia, on evolving consumption pattern, Replacement demands remain developing public transport and healthy, on the back of active 3W being a low capital infrastructure. trading of old permits, investment business, makes transgressing to CNG engine, and for a popular choice for self 4 stroke engines employment
Most cost effective option for Mainly driven by the last mile transport, with No major stipulations of Consumption demand, as it is added advantage of smaller size, permit requirements, even most employed for last mile which allows perfect mobility in in major cities transport of consumer Indian conditions durables and non durables
Goods Carriers
Sustained demand on the back With the advent of 4W SCVs, of increasing adoption of hub-n- and the latter's popularity over 3W goods carrier, its spoke model, on -demand A category dominated by growth has slowed down to deliveries from smaller players, Piaggio, Mahindra and Atul post a flattish YoY jump low expenses and turnaround Auto. Bajaj Auto has an time almost insignificant share in this segment
Source: Industry, CRISIL Research,, ICICIdirect.com Research
Aspects where GCL walks the extra mile…
Over time, GCL has built both the capacity and the technological expertise, to supply engines to OEMs for newer products at a short notice. GCL has both the scale and the expertise to match the demand for OEMs at competitive rates. Further, after the runaway success of Tata Ace Zip (powered by Greaves’ engines), it is in advanced stage of discussion with other major OEMs to supply engines for their forthcoming 4W launches. Both Atul Auto and Piaggio are in advanced stages of planning to launch their own line of 4W SCVs and capitalise on their increasing popularity. Given the long term association and market accepted engine performance of GCL, we believe it presents a strong set of credentials to bag these new orders. Further, Tata Motors is also working to double its production of Tata Ace Zip, which would also ramp up GCL’s engine supply for the same.
ICICI Securities Ltd | Retail Equity Research Page 31
Exhibit 50: Vehicles that run on GCL’s engines Piaggio Ape Xtra Passenger Piaggio Xtra LD Piaggio Ape Xtra Pickup
Mahindra Alfa Passenger Mahindra Alfa Load Mahindra Alfa Load Plus
Atul Shakti Passenger Atul Shakti Atul Shakti Tipper version
Tata Ace Zip Tata Magic & Iris
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 32
Exhibit 51: India’s agricultural equipment industry across value chain
Land development, Weeding, inter Harvesting and Post Harvest and tillage and seed bed Sowing and Planting cultivation, plant threshing agro processing preparation protection PURPOSE
Tractors Drill Shovel/plough Harvester Seed Extractor Levelers Seeder Harrow Thresher Dehusker Ploughs Planter Tillers Digger Huller/dehuller Dozers Dibbler Sprayers Reaper Cleaner Scrapers Transplanter Duster Sheller Grader EQUIPMENT Sickle/dao Mill Dryer
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 33
RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock.
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: > 10%/ 15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;
Pankaj Pandey Head – Research [email protected]
ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai – 400 093
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ICICI Securities Ltd | Retail Equity Research Page 34