© Emkay Greaves Cotton Your success is our success Ready for Gen-next; Retain BUY

July 15, 2013 n Auto on overdrive - (1) Changes in last mile goods transport, both 3-W and 4-W & (2) inroads in 4-W passenger Rating Previous Reco and alternative fuels. Expect 13% volume growth Buy Buy n Efforts underway to strengthen agri equipment, gensets and CMP Target Price infrastructure businesses; it concurrently promises robust Rs62 Rs100 growth in ensuing years

EPS Chg FY14E/FY15E (%) NA n Attractive financial matrix; ROIC of +35%, FCF generation of Company Update Target Price change (%) NA Rs2.7 bn in FY13-15E period, dividend payout of 35-40% and Nifty 6,009 dividend yield of 5% Sensex 19,979 n Greaves is trading at 40% discount to capital goods sector & Price Performance 15-30% discount to auto-ancillaries. Valuations are attractive; (%) 1M 3M 6M 12M retain BUY with price target of Rs100/Share Absolute -10 -9 -27 -7 Auto engines business on overdrive; underlying drivers promise 13% Rel. to Nifty -10 -14 -26 -15 volume growth Source: Bloomberg Strong growth drivers for auto engines business promises underlying volume growth of Relative price chart 13% annually. Those which are factored are (1) last mile goods transport through small 90 Rs % 30 goods carrier is gaining popularity; both 3-W and 4-W should stand to gain; Greaves 82 20 holds 90% market share in 3-W and 94% market share in 4-W (2) passenger vehicles is 74 10 moving towards alternative fuels and 4-W’s; Greaves has made inroads in 4-W through 66 0 Magic Iris and alternative fuels as well. Those not factored and could yield upsides are 58 -10 (1) success in 2- engines and (2) new applications for auto engines.

50 -20 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Efforts underway to strengthen agri equipment, gensets and Greaves Cotton (LHS) Rel to Nifty (RHS) Source: Bloomberg infrastructure businesses Efforts underway by Greaves are as under – (1) Agri equipment business (a) foray into Stock Details Rs30 bn electrical pumpset market (b) indigenization of power tillers and (c) new product Sector Engineering & Capital Goods launches in light farm equipment (2) Gensets business (a) foray into low HP gensets i.e. Bloomberg GRV IB less then 100 kVA (b) increase distribution network and (c) gains from revised emission Equity Capital (Rs mn) 488 norms and (3) Infrastructure business (a) technology tie-up with Samil Korea will drive Face Value(Rs) 2 product innovation, already introduced S-Valve Concrete Pump & Boom Concrete Pump No of shares o/s (mn) 244 In spotlight: cashflow generation, strong return ratios and high dividend payout 52 Week H/L 88/ 59 § Capex spends pegged at Rs0.4-0.5mn annually and scope for reduction in working Market Cap (Rs bn/USD mn) 15/ 250 capital, Greaves is expected to generate free cash-flows of Rs2.7bn (FY13-15E) Daily Avg Volume (No of sh) 114,898 § ROIC for Greaves is +35% on a sustained basis - top quartile of capital goods sector Daily Avg Turnover (US$mn) 0.1 § Dividend payout at +35-40%; expect Rs3/Share and Rs4/Share in FY14E/15E Shareholding Pattern (%) Jun'13 Mar'13 Dec'12 Valuations at discount to peers; Superior financial matrix supports BUY Promoters 51.6 51.6 51.6 The earnings are forecasted to grow at 16% CAGR in FY13-15E period. At the CMP, FII/NRI 8.5 8.7 8.4 Greaves is trading at 8.5x FY14E and 7.4x FY15E earnings, representing a 48% discount to valuations of the capital goods sector (ex-BHEL) and 15-30% discount to Institutions 27.7 27.0 27.2 auto-ancillary sector. With strong free cash generation, high ROIC and dividend yield of Private Corp 2.8 3.3 3.3 5%; steep discount in valuation makes it attractive. We retain BUY rating with price Public 9.4 9.5 9.6 target of Rs100/Share. Source: Bloomberg Financial Snapshot (Consolidated) (Rsmn)

YE- Net EBITDA EPS EPS RoE EV/

Mar Sales (Core) (%) APAT (Rs) % chg (%) P/E EBITDA P/BV FY12A 17,893 2,367 13.2 1,302 5.3 -16.6 23.1 11.5 5.9 2.4

FY13A 19,061 2,406 12.6 1,461 6.0 12.2 21.5 10.3 5.8 2.1 FY14E 21,494 2,880 13.4 1,779 7.3 21.8 22.8 8.4 4.0 1.8 FY15E 24,450 3,311 13.5 2,050 8.4 15.2 22.9 7.3 3.1 1.6

Emkay Global Financial Services Ltd. 1 Greaves Cotton Company Update

A snapshot of Greaves Cotton # 1 Greaves Cotton Ltd., one of India’s leading and well-diversified engineering companies, is primarily engaged in the manufacture of diesel, petrol and kerosene engines for automotives, agri-equipment, power gensets and industrial applications. The company’s agri-equipment business includes light agricultural equipment such as tillers, tractors, bush- cutters, sprayers and harvesters. Besides, it also deals in construction equipment, which are used mostly in road-making and road-concreting work. Greaves operates under three business segments: engines, infrastructure and others. The following are the details of the segments.

Engines segment Greaves’ engines segment is the largest contributor to its total revenues at 87-90%. It has an manufacturing capacity of around 0.60mn units per annum. The units are spread across four plants located in Aurangabad and (Maharashtra) and Gummidipoondi and Ranipet (Tamil Nadu). The engines segment is split into four sub-segments as follows:

In 3-W, Greaves enjoys a +90% § Auto engines – Greaves manufactures single- and double-cylinder diesel engines market share in goods carrier for use in three-wheelers and small commercial vehicles (SCVs). It has business and a 22% market share in relations with 52 original equipment manufacturers (OEMs), besides long-term passenger carriers supply agreements with Piaggio, , Atul Auto, and Mahindra & Mahindra (M&M). The company, a market leader in three-wheeler goods carriers (vehicles with outsourced engines), enjoys a dominant market share of +90% (Details of vehicles fitted with Greaves engines are given in Exhibit 7&10). The company has a 22% market share in the three-wheeler passenger segment (vehicles with outsourced engines). Auto engines contribute 60-70% of the engine segment’s revenues and about 70% of total volumes. § Agriculture equipment – Greaves manufactures lightweight diesel, kerosene and petrol-kerosene engines in the 1-5HP range for applications in pumpsets, power- reapers and power-sprayers. It enjoys a combined market share of 25% of the agri- pumpsets market. Its light agri-equipment such as bush-cutters, sprayers, rotavators and reapers are largely targeted towards small land parcels. The segment contributes 15-20% of the engine segment’s revenues and around 27% of total volumes (agri-engines only). § Power gensets – Greaves earns 5-10% of the engines segment’s revenues from power gensets. It has product offerings in the 15-550kVA range, with a market share of 3-5%. It is relatively strong in 100-400kVA range, with a sizeable market share, though it has no presence in the high kVA range, besides being a late entrant in the below 100kVA range. § Industrial – Greaves offers customized engines of 1-1000hp for industrial applications in marine, railways, mining and construction, among others. It contributes 5-10% of the total engine segment’s revenues. § Segment financials – The segment contributes about 90% of the company’s total revenues and is the sole EBIT contributor. Its segment revenues have grown at a CAGR of 14% over FY05-13 to Rs16.6bn, while EBIT margins have expanded by 80bps to 16.6%.

Infrastructure segment

Greaves has a 10% market Greaves manufactures and assembles road compaction (rollers) and concreting equipment share of the Rs16bn equipment (batching plants, transit-mixers and concrete-pumps). The segment contributes around market (relevant category) 10% of total revenues. But it has been losing money because of the low scale of operations. The company’s revenues have declined at a CAGR of 15% over FY08-13P. Its losses have been attributed to a weak business environment. Greaves has a 10% market share of the Rs16bn equipment market (factor-relevant product category), with an 11.5% and 9.0% market shares in concreting and compaction markets, respectively.

Emkay Research July 15, 2013 2 Greaves Cotton Company Update

Exhibit 1: Engines segment break-up Auto Agriculture Power Gensets Industrial Type of engines Light single- and Diesel/ petrol/ Diesel engines Diesel engines manufactured double-cylinder kerosene engines diesel engines Engine capacity 4.4 to 20HP 1-5HP Single unit: 1.4-1000HP 500VA to 500kVA Parallel units: up to 2500kVA Applications 3-W and 4-W Engine pumpsets, Auxiliary power Marine, mining & (SCV), light agri- power-reapers and construction, equipment (in- power-sprayers material handling house) (cranes, forklifts), railways, etc. Revenue 60-70% 15-20% 5-10% 5-10% contribution to the engine segment Volume 71% (410,000 27% (153,000 1% (6,000 units) 1% (6150 units) contribution units) units) Plant location Aurangabad Gummidipoondi Pune Pune & (Maharashtra) (Tamil Nadu) (Maharashtra) Aurangabad and Ranipet, (Maharashtra) (Tamil Nadu) Ranipet and Gummidipoondi (Tamil Nadu) Source: Company, Emkay Research

Exhibit 2: Greaves share-holding pattern – Mar’13 Exhibit 3: Top institutional holders – Mar’13 Name of Holder No. of Shares % of Holding Public Private Corp Amansa Capital 10,472,884 4.29 9% 3% General Insurance Corp of India 6,448,950 2.64 LIC of India 10,074,305 4.13 Reliance Capital Trustee Co. Ltd. 19,472,152 7.98 SBI Magnum Global Fund 3,812,378 1.56 Institutions Promoters The New India Assurance 8,027,305 3.29 27% 52% The Orient Insurance Company 3,029,917 1.24 Total 61,337,891 25.13 FII/NRI Source: Company, Emkay Research 9%

Source: Company, Emkay Research

Emkay Research July 15, 2013 3 Greaves Cotton Company Update

What is the industry landscape for auto engines? # 2

Exhibit 4: Auto Industry Snapshot Auto Industry

Goods Carrier Passenger

< 0.7 tons > 0.7 tons Less than 0.7 tons

3W 4W 4W 3W 4W

Market Size 94,40635,000271,414737,837<10,000 (FY13) In-house 00526,404 Outsourced 94,40635,000211,433

OEMs Atul Auto, Tata Motors Tata Motors, Atul Auto, M&M, Tata Motors, , M&M Piaggio, Scooters India, Bajaj Auto, M&M, Piaggio, Bajaj Auto (Inhouse), M&M Scooters India TVS (Inhouse) Engine GCLGCL Suppliers Growth CAGR %) FY02-13 11.4NANA14.6NA FY08-13 0.0NA14.9NA

Source: Company, Emkay Research

Goods carrier (GC) market: Last-mile transport connectivity § The last-mile transport connectivity is provided by three-wheelers (3-W) and four- wheelers (4-W). § Three-wheelers have a maximum load-carrying capacity of 0.6 tons. Four-wheelers, which can carry loads up to 2.0 tons, are called small commercial vehicles (SCVs), while those with a load-carrying capacity of 2.0-7.5 tons are classified as light commercial vehicles (LCVs).

Understanding the 3-W GC segment; presence of cannibalization between 3- W and 4-W § There are about 14 models in the 3-W GC segment, with a load-carrying capacity of 0.5-0.6 tons, which are priced between Rs153,000 and Rs178,000. § Piaggio is the market leader in 3-W GC with a 56% market share, followed by M&M (20%), Atul Auto (16%), Scooters India (6%), and Bajaj Auto (3%).

The 3-W segment has not § The 3-W segment has an annual industry size of around 94,406 units (FY13), which grown (0% CAGR) during has grown at a CAGR of 11.4% over FY02-13. However, the industry has not grown FY08-13 Vs CAGR of 11% (0% CAGR) during FY08-13 due to: a) weak demand, b) launch of fewer products, during FY02-13 period and c) cannibalization by the 4-W segment. § Dealers have ruled out any changes in registration rules for 3-W GC in metros. Registrations can be availed of: 1) for 8 years for diesel vehicles, 2) for 15 years for CNG vehicles, and 3) for 15 years for diesel and CNG vehicles in non-metros. Dealers have dismissed the changes in registration rules as rumours circulated by 4-W OEMs to influence buyers. § As per our market research, 4-W (<0.7 tons) is a competitive product with economics comparable to 3-W. While the initial capital cost is about 31% higher than 3-W, it is merely 3% higher than 3-W on a cost per KG basis. In fact, the fuel

Emkay Research July 15, 2013 4 Greaves Cotton Company Update

cost of 4-W is 3% cheaper than 3-W. Zip is fitted with Greaves engines, whereas Piaggio Ape Mini and Mahindra Gio have Lombardini engines. § 3-W runs on single-cylinder diesel engines; Greaves enjoys a clear monopoly and commands a market share of over 90%.

Exhibit 5: Piaggio is market leader with 56% market share Exhibit 6: 3-W GC witnessed no growth over FY08-13

Scooters Atul Auto India, 5.8% Limited,

Bajaj Auto 100% 15.6% 130000 Ltd, 3.0% Period of NO growth 50% Units 65000 0% Growth in % Piaggio

Vehicles Pvt Mahindra & 0 Ltd, 56.0% Mahindra Ltd, FY02 FY04 FY06 FY08 FY10 FY12 -50% 19.6% 3W - Goods Growth

Source: Company, Emkay Research Source: Company, Emkay Research

Exhibit 7: Product specification – 3W Goods Carrier Mileage Engine Engine Kerb Load Gross Capital Cost Fuel Cost Fuel (Km/ Specs Specs Weight Carrying Weight Price For Load Rs Per Type Litre) (CC) (Cylinder) (In Kg) (In Kg) (In Kg) (Rs) (Rs/Kg) Kg/Km Engine Piaggio Ape Xtra DAC Diesel 36 395/436 One 400 575 975 Closed - - Greaves Piaggio Ape Xtra Pick up Diesel 36 395/436 One 415 560 975 152,847 227 0.00219 Greaves Piaggio Ape Xtra Hi- Body Diesel 36 395/436 One 435 540 975 155,000 239 0.00227 Greaves Piaggio Ape Xtra DV - Diesel 36 395/436 One 440 535 975 162,000 252 0.00229 Greaves Piaggio Ape Xtra LD Diesel 36 436 One 438 537 975 160,454 249 0.00228 Greaves Mahindra Alfa Load Diesel 36 395 One 460 535 995 162,419 253 0.00229 Greaves Mahindra Alfa Plus Diesel 34 395 One 460 535 995 169,885 265 0.00243 Greaves Atul Shakti Standard Diesel 30 395 One 420 570 990 162,000 237 0.00258 Greaves Atul Shakti CNG CNG 30 395 One 420 570 990 162,000 237 0.00166 Greaves Atul Shakti Plus Diesel 30 442 One 490 500 990 162,000 270 0.00294 Greaves Atul GEM Cargo (MC) Diesel 30 436 One 420 575 995 164,000 238 0.00256 Greaves Atul GEM Cargo (MCL) Diesel 33 436 One 425 565 990 167,000 246 0.00237 Greaves Atul Shakti Smart Standard Diesel 33 395 One 420 570 990 162,000 237 0.00235 Greaves Bajaj GC Max Diesel Diesel 30 417 One 425 565 990 164,800 243 0.00261 Kubota Bajaj GC Max CNG CNG 30 200 One 425 565 990 178,405 263 0.00167 Kubota Averages 33 395 435 552 987 163,201 247 0.00232 Source: Company, Emkay Research

Understanding 4-W <2.0 ton - The emerging SCV segment § The 4-W <2.0 tons category is also addressed as the SCV segment. This segment has grown at a CAGR of 26.0% over FY08-13.

Tata Ace driving SCV § The annual industry size in FY13 is 271,414 units. Although the industry’s genesis category… Tata Motors has a may be traced to the early last decade, the volume ramp-up has largely been 80% market share attributed to Tata Ace and , with annual volumes of 156,940 units and 65,000 units, respectively. § Twelve models are currently available at varying price-points and pay-loads, including pick-up trucks such as Mahindra Genio and Force Trump. These models are priced in the range of Rs194,000-588,000. § Tata Ace (HT, EX, Super Ace, Zip, and Xenon) has been driving growth in this category, with annual volumes of 221,940 units in FY13. Tata Motors enjoys a dominant 82% market share in this segment followed by M&M (17%) and Piaggio (1%).

Emkay Research July 15, 2013 5 Greaves Cotton Company Update

Greaves is yet to make strong § The 4-W segment has three models, with a load-carrying capacity of <0.7 tons: inroads into SCVs with higher Mahindra Gio, Piaggio Ape Mini, and Tata Ace Zip. But the segment has largely than 0.8 tons pay-loads been dominated by Tata Ace Zip, with volumes of around 65,000 units in FY13. With a two-year history, the segment‘s growth rates are high. Monthly volumes of Tata Ace Zip have risen from 500 units to 7500 units in two years. § 4-W GC up to 0.7 tons runs on a single-cylinder ; Greaves commands a 94% market share in this category. The company caters to the market leader, Tata Ace Zip. § OEMs have their own platforms and engines for vehicles >0.7 tons – Tata Ace has Fiat’s two/four-cylinder engines, which are manufactured in a Tata-Fiat JV, while M&M has an in-house built engine that has been reengineered from a jeep’s engine. § Only Piaggio Ape Truck Plus runs on a twin-cylinder diesel engine supplied by Greaves. This vehicle has not been well accepted in the market for certain inherent reasons. § Greaves is yet to make strong inroads into SCVs, with pay-loads higher than 0.8 tons and greater engine specifications.

Exhibit 8: Tata Motors is market leader with 82% market share Exhibit 9: 4-W GC (<2.0 ton) has grown at 26.0% (CAGR) over FY08-13 Mahindra & Bajaj Auto Ltd Hindustan Mahindra Ltd 0% Motors Ltd. 150% 0% 17% 300000 Piaggio Vehicles Pvt 90% Ltd Units 150000

1% 30% Growth in %

Tata Motors 0 -30% Ltd. FY06 FY08 FY10 FY12 82% 4W - Goods Growth

Source: Company, Emkay Research Source: Company, Emkay Research

Exhibit 10: Product specification – 4W Goods Carrier Mileage Engine Engine Kerb Load Gross Capital Cost Fuel Cost Fuel (Km/ Specs Specs Weight Carrying Weight Price For Load Rs Per Type Litre) (CC) (Cylinder) (In Kg) (In Kg) (In Kg) (Rs) (Rs/Kg) Kg/Km Engine Piaggio Ape Truk Plus Diesel 22 870 Twin 810 1,000 1,810 330,000 236 0.00172 Greaves Piaggio Ape Mini Diesel 29 441 One 597 503 1,100 194,000 275 0.00260 Koehler Mahindra Gio Diesel 27 442 One 610 500 1,110 193,993 277 0.00280 Koehler Mahindra Maxximo Diesel 17 910 Twin 950 850 1,800 331,498 279 0.00262 M&M Mahindra Genio Diesel 14 2,489 Four 1,680 1,250 2,930 588,405 336 0.00216 M&M Tata ACE HT Diesel 18 702 Twin 815 735 1,550 340,959 331 0.00286 Fiat Tata ACE EX Diesel 18 702 Twin 815 735 1,550 352,368 342 0.00286 Fiat Tata ACE Super Ace Diesel 15 1,406 Four 1,180 1,000 2,180 433,191 309 0.00252 Fiat Tata ACE Zip Diesel 28 610 One 685 600 1,285 214,090 255 0.00225 Greaves Force Trump 15 Diesel 18 600 One 870 790 1,660 279,691 253 0.00266 Force Force Trump 40 Diesel 18 1,947 Three 1,350 1,100 2,450 457,000 297 0.00191 Force Ashok Dost LE/LS/LX Diesel 18 1,478 Three 1,250 1,250 2,500 408,000 233 0.00168 Nissan Averages 20 1,050 968 859 1,827 343,600 285 0.00239 Source: Company, Emkay Research Combined market (3-W and 4-W) for 0.5-0.7 ton is expected to grow at a CAGR of 13% – Greaves to be the sole beneficiary § During FY13, the 3-W GC segment was impacted due to a weak demand environment and cannibalization by 4-W, which have resulted in a volume decline of 7%. As a result, the impact on Greaves has been greater with Piaggio’s market share coming down from 58.8% in FY12 to 56.0% in FY13.

Emkay Research July 15, 2013 6 Greaves Cotton Company Update

Long term cannibalization of 3- § In our opinion, long-term cannibalization of 3-W is misplaced, because: 1) upfront W is misplaced – 3-W has ownership costs are 110% higher in 4-W, and 2) the fuel cost (operating cost) is lower ownership and operating higher by 3%. Also, 3-W, with its low tonnage, would remain a preferred choice in costs rural hinterlands and SME businesses. § The SCV market is also undergoing changes: 1.0 ton is being cannibalized by 0.7 ton and 1.5 ton because of: a) convenience, b) economics, and c) product availability. The share of 0.7 ton in SCVs is likely to increase in the future. § The combined market of 3-W and 4-W (05-0.7 ton) has grown at a CAGR of 10.8% over FY08-13. The 4-W segment has grown at a greater pace than 3-W. § 3-W runs on a single-cylinder diesel engine. Hence, Greaves enjoys a clear leadership, with a market share of over 90%. Even 4-W incorporates a single- cylinder diesel engine, and Greaves supplies these engines to the market leader, Tata Ace Zip. Being an engine supplier to both 3-W and 4-W, Greaves would be the sole beneficiary. § We expect the market for 0.5-0.7 ton to grow at a CAGR of 13% in the future. The 3-W segment and 4-W segment are expected to clock a CAGR of 7% and 30%, respectively. § With Greaves enjoying a dominant market share of over 90% in the 3-W segment GC and a 94% share in 4-W segment GC, volumes for Greaves are expected to grow at a CAGR of 13%.

Passenger Carrier (PC) segment; currently dominated by 3-W § The PC segment is dominated by 3-Ws. But an emerging class of 4-Ws called Quadricycle is making its presence felt. § The 3-W PC segment 3-W PC segment driven by § The domestic 3-W PC segment has an annual industry size of 438,335 units, small passengers, dominated which has grown at a CAGR of 14% during FY08-13. The 3-W export market, by Bajaj Auto with volumes currently at 299,521 units, is dominated by Bajaj Auto with an 85% market share. § The domestic 3-W PC segment is further split into the big PC (216,000 units), alternative fuels (145,000 units), and the small segment (77,000 units). § This segment is dominated by Bajaj Auto, with a 51% market share, followed by Piaggio (30%), M&M (10%), TVS Motors (4%), Atul Auto (4%), and Scooters India (1%). § Trends observed in the last two years: 1) small passengers grew 43% in FY13, 2) big passengers declined 2% in FY13, and 3) alternative fuels held the fort. Dominance of Bajaj Auto in small passenger (82% market share) and polarization of growth led to the loss of market shares for Piaggio in the 3-W PC segment. § Greaves supplies diesel engines to Piaggio, Atul Auto, and Scooters India. It has a market share in above (domestic) segment of 35%. Presumably, Greaves does not have product offerings in alternative fuels. § The 4-W PC segment: The new emerging class Quadricycle is the new § It is an emerging class, which is also known as Quadricycle. The engine emerging class – But awaiting specifications are 400-900cc, with a single- or twin-cylinder. regulatory clearances § The current industry size is less than 10,000 units. There are only three models on the market, namely, Iris, Mahindra Gio Cab, and Mahindra Maxximo. § Greaves supplies engines to on the same platform as Tata Ace. The engine specifications are 611cc single-cylinder diesel engines. § Growth of Quadricycle is constrained by regulatory restrictions. These vehicles cannot avail of permits from urban transport authorities to ply within city limits. is the only exception, where they do not require a permit.

Emkay Research July 15, 2013 7 Greaves Cotton Company Update

§ At present, Quadricycles are a reasonable success for inter-city transportation, cannibalizing 3-W big passenger vehicles. As a result, 3-W big passengers registered a 2% volume decline in FY13. § Industry observers believe that Quadricycle would eventually change the mode of public transport. While the 3-W would be preferred in rural India because of its superior cost economics, Quadricycle would be the preferred choice as an inter-city and intra-city vehicle. The regulatory support would emerge as the biggest catalyst.

We expect the passenger § We expect the passenger market (public transport in discussion) to grow at a CAGR market to grow at a CAGR of of 13% in the future. The 3-W segment would register a CAGR of <5%, while the 4- 13% - led by 4-W W segment a CAGR of >50%. We see upside risks to Quadricycle’s growth. § Greaves could grow lower than industry due to: 1) the loss of market shares in Piaggio, 2) regulatory changes, and 3) success of new concepts such as Bajaj RE 60. § We expect Greaves to register volume growth of 13% (CAGR) in the near future.

Exhibit 11: Product specifications: 4-W passenger vehicles Fuel Mileage Engine Engine Specs Kerb Weight Gross Weight

Type (Km/Ltr) Specs (CC) (Cylinder) (In Kg) (In Kg) Mahindra Gio Cab Diesel 27 442 One 610 1,110 Mahindra Maxximo Diesel 18 909 Twin 1,090 1,700 Tata Magic Iris Diesel 28 611 One 685 1,285

Source: Company, Emkay Research

What are quadricycles? - Quadricycles are four-wheeler vehicles, with fully enclosed body structure and hard roofs and doors. They are expected to be a ‘safer’ alternative to three-wheel auto-rickshaws for commercial operations (passenger & goods) Norms to be applied under the notification – Quadricycles will be included as a separate category notified in the (1) three-wheeler category (L5) under the Central Motor Vehicle Rules of India or (2) the European Union (EU) quadricycles, whichever is more stringent Usage guidelines - The quadricycles were recommended for registration under commercial transport (both passenger and goods) category intra-city movement only within the municipal limits and the vehicles can be driven only by licensed (commercial) drivers.

Regulatory approvals § In May’13, Quadricycle received in-principal approval from Ministry of Road Transport & Highways for inclusion as an additional category of vehicle, to be manufactured and registered in the country § 2 Jul’13 - Transport Minister approved draft regulations on quadricycles and forwards the same to Law Ministry for further clearance Further regulatory requirements – (1) Post clearance by the Law Ministry, the draft regulation / notification will be put up for 60 days on website for public comments (2) Release of final quadricycles notification (3) Approvals from various state governments

Emkay Research July 15, 2013 8 Greaves Cotton Company Update

What are the key growth drivers for auto engines? # 3 We have identified growth drivers for the auto engines business: a few are factored in our earnings forecasts and others create strong tailwinds. Our engines forecasts for FY14E and FY15E factor in a 13% growth, with an annual volumes forecast of 467,100 units and 527,595 units, respectively.

In the earnings forecast, growth drivers adequately factored are. § Current target market on a strong footing

Greaves is favourably placed to § 3-W GC has inherent advantages: 1) upfront ownership costs are cheaper than capture the 13% growth in auto 4-W, and 2) fuel economics (operating cost) is 3% better than 4-W. Eventually, industry volumes 3-W would remain a preferred choice in rural hinterlands and SME businesses for its low tonnage and superior economics. § The SCV market is undergoing changes, wherein 1.0 ton is cannibalized by 0.7 ton and 1.5 ton due to: 1) convenience, 2) economics, and 3) product availability. The share of 0.7 ton in SCV is likely to increase in the future. § Industry observers believe that Quadricycle would eventually change the mode of public transport. The 3-W would be preferred in rural India for its superior cost economics, while Quadricycle would be a preferred choice for inter-city and intra-city routes. The regulatory support is expected to emerge as the biggest catalyst. § Greaves has a 35% market share in 3-W passenger (domestic), with over 90% share in 3-W GC and a 94% share in 4-W GC. With industry volumes expected to grow at a CAGR of 13%, Greaves would emerge as the sole beneficiary.

Prima facie comparison with the The European SCV market – A study European SCV market reveals § The European commercial vehicles market is divided into three categories: 1) scope for further growth on SCV/LCV – less than 3.5 tons, 2) MHCV – 3.5-16.0 tons, and 3) HCV – more than sustained basis 16.0 tons. § We observed the following market trends by analyzing volume and tonnage data collected over a period of 8 years. § The total commercial vehicle industry stands at 1.96mn units per annum (or about 12.03mn tons) - declined by a CAGR of 4% over FY05-12.

§ The industry has largely stabilized with contribution of each of the three segments, SCV, MHCV and HCV, largely remaining constant, both in volume and tonnage terms.

§ The proportion of LCV: MHCV: HCV stands at 75:15:10 in volume terms and at 23:24:53 in tonnage terms.

§ Comparing the domestic market § In comparison, the domestic SCV (<3.5 tons market) contributes 49% in volume terms (0.23mn units), which has increased substantially from 15% in FY05.

§ In tonnage terms, the contribution of SCV/LCV (<3.5 tons) has increased from 3% in FY05 to 18% in FY13 (0.87mn tons), though it still remains lower than that prevalent in Europe.

§ We believe that the domestic market will eventually tend towards and behave akin to developed markets. Thus, we see scope for further growth in the SCV/LCV (<3.5 tons) market segment.

Emkay Research July 15, 2013 9 Greaves Cotton Company Update

Exhibit 12: European market – Higher share of LCV in total tonnage

100 100 9.8 9.7 10.5 11.3 8.9 8.9 10.9 11.3 13.4 13.0 80 13.9 13.6 14.7 15.5 14.6 15.1 80 52.2 52.1 53.5 54.8 50.1 50.2 54.6 55.1 60 60

40 76.3 76.7 74.7 77.7 78.1 74.5 40 24.4 24.0 73.2 73.6 24.1 23.8 24.3 24.5 23.7 23.9 20 20 23.7 24.1 22.1 20.8 25.5 25.8 21.7 20.9 Volume Propotion (%) 0 Tonnage Propotion (%) 0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

LCV MHCV HCV LCV MHCV HCV

Source: Emkay Research

Exhibit 13: Domestic market – SCV / LCV market as yet evolving… contribution has increased from <3% in FY05 to about 18% in FY13

100 100 20.0 20.3 22.5 23.4 23.4 23.4 29.0 25.3 20.7 80 80 48.6 49.5 51.0 57.9 55.3 51.6 52.5 56.8 56.5 31.3 60 32.4 60 46.4 35.5 33.8 64.7 62.1 56.4 53.8 40 40 33.5 47.7 44.8 40.2 38.6 33.2 40.9 46.9 48.7 36.9 38.3 34.5 20 30.2 35.6 20

Volume Propotion (%) 22.8

20.1 Tonnage Propotion (%) 15.0 15.4 10.3 17.9 0 0 2.8 4.2 5.2 6.4 8.3 8.8 8.8 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

LCV MHCV HCV LCV MHCV HCV

Source: Emkay Research § Piaggio getting its act together; plugging the product gaps § Piaggio’s contribution to Greaves’ auto business is 55-60%. Although the dependence is now lesser than in the past, it is still notably high. Hence, it is imperative to monitor Piaggio’s strategy.

Piaggio has launched Porter § Piaggio’s market share eroded largely due to its absence in the 3-W small 600, with a pay-load of 0.7 tons passenger segment. However, it introduced Piaggio Ape City Passenger and fitted with Greaves engine (alternative fuel), which successfully addressed the product gap issue. Consequently, it was able to maintain its market share at 19.3% in FY13 (19.1% in FY12) in the 3-W PC segment. § The last-mile transport market is currently undergoing changes, with a growing preference for 4-W vehicles in the 0.5-0.7-ton category. Piaggio has launched Porter 600, with a pay-load of 0.7 tons and fitted with a Greaves single-cylinder engine. § Piaggio is expected to make a foray into SCVs, with pay-loads of 1.0-1.5 ton. Its earlier foray into SCVs with Greaves twin-cylinder engines could still remain an advantage. Our channel-checks reveal better cost economics for Greaves twin- cylinder engines fitted in Piaggio Ape Truck Plus compared to the Fiat engine in Tata Ace. § Successful product offerings in alternative fuel

Greaves filling product gaps in § Greaves largely supplies single-cylinder diesel engines, where it has a 35% alternative fuels - developing market share in the domestic 3-W passenger, over 90% share in 3-W GC and CNG engine for Tata Ace Zip 94% share in 4-W GC. and Tata Magic Iris § Greaves is developing a single-cylinder CNG engine for Tata Ace Zip and Tata Magic Iris. These vehicles are expected to roll out in Q1FY14. The success in alternative fuels should open a new innings for the company.

Emkay Research July 15, 2013 10 Greaves Cotton Company Update

Drivers yielding strong tailwind; upside risks to forecasts § Success in new customers and applications § Greaves has secured a new customer, Vibgyor Vehicles Ltd. It will supply to the company single-cylinder diesel engines for 3-W passenger and goods carriers. Vibgyor is targeting annual sales of 12,000 units in East and North-East markets. § is undergoing a test-run for its diesel variant on three engine platforms; Greaves is one of the suppliers of engines. The success of the engine in Tata Nano could prove to be a game-changer. Tata Nano’s annual volumes are around 100,000 units. Around 40,000 units, or 10% of auto engines production, find applications in light equipment such as tillers, tractors and harvesters, among others. Any degree of success in the new applications should result in volume additions.

§ Moving up the ladder; Success not factored in § Greaves is the undisputed leader in single-cylinder diesel engines. The company has successfully met evolving emission requirements of the country. Our channel - check indicates that Greaves is ready with Bharat Stage-IV emission norms.

Game changer for Greaves - § Greaves has the requisite in-house R&D wherewithal to move up the value- Moving up the value-chain to chain from a single-cylinder to three-cylinder engines. Any success in this area three-cylinder engines would be viewed as a game-changer and lead to re-rated valuations. A case in point in India’s auto industry is Sonalika, which clocked healthy volumes by …Greaves has the necessary supplying its engines to General Motors’ Tavera. R&D wherewithal § Only Piaggio Ape Truck Plus runs on a twin-cylinder diesel engine supplied by Greaves. But the vehicle failed to make an impact in the market for certain inherent reasons. Our channel-checks reveal better cost economics for Greaves’ twin-cylinder engines fitted in Piaggio Ape Truck Plus compared to Fiat’s engine in Tata Ace. Thus, the twin-cylinder diesel engine continues to raise hope.

Emkay Research July 15, 2013 11 Greaves Cotton Company Update

Initiatives in agri-business and growth expectations? # 4 Solely focused on small landholdings; presence across the value- chain of light farm equipment Greaves sells light farm equipment mainly targeted at small landholdings of less than 3 acres. The product-line addresses the entire gamut of agricultural production: soil preparation, de-weeding, seed spraying, irrigation and harvesting. The primary products include pumpsets, power-reapers, power-sprayers and power-tillers. Recently, it has introduced a mini-tractor, with multiple features, including 2-ton haulage, a cultivator, a seed drill and a pesticide sprayer. The distribution network is the company’s key strength. It has a presence in as many as 440 districts of 600 districts in India. The business remains asset-light, with outsourced manufacturing accounting for up to 30-40% of annual sales.

Distribution network is the key strength; reaping the benefits

Greaves has touch-points in § Distribution is the strength – touch-points in 440 districts of 600 districts of India. 440 districts – expanding at § An exclusive dealer network for power-tillers, light equipment and tractors. 10% annually Pumpsets are distributed through multi-brand dealers § Greaves continues to expand its dealer network at 10% annually, which promises equivalent growth for business.

Pumpset is the key product; growth depends on the electrical segment § Pumpset is the key product for Greaves. The company sells petrol, kerosene and diesel pumpsets and has roughly 20% of India’s pumpset market § Greaves commands a dominant 45% market share of the Rs2.5bn petrol-kerosene pumpset market and a 15% market share of the Rs5.0bn diesel pumpsets market. § Both diesel and kerosene pumpsets have growth expectation of 3% and 8% (CAGR). Hence, it is imperative to focus on electrical pumpsets, which contribute 80% of the market. § Greaves has ventured into Rs30.0bn electrical pumpsets market, which is expected to grow at a CAGR of 10%. This segment benefits from initiatives taken by the government on electrification of the agriculture sector.

Exhibit 14: Domestic pumpsets market snapshot To benefit from government Market Size Market Market initiatives, Greaves has entered Pumpsets market (Rs bn) share (%) growth (pa) Other players the Rs30bn electrical pumpsets Petrol / Kerosene 2.5 45% 3% Honda, Birla Yamaha, market Southern Agro, Kirloskar Engines Diesel 5.0 15% 8% Usha, KSB Pumps, Kirloskar Engines, Suguna Electrical 30.0 NA 10% CRA, Texmo Source: Company, Emkay Research

Power tillers – Expect margin improvement from indigenization § Greaves plans to fully indigenize power tillers during FY14E; which will replace outsourcing from China. The company will use engines from its auto division for its power-tillers. § This is likely to improve EBIT margins, as Greaves will earn higher EBIT on indigenized tillers compared to outsourcing. Greaves has posted revenues of about Rs0.5bn from the sale of power-tillers in FY13P. We expect revenues to grow at a CAGR of 7% during FY13-15E.

Emkay Research July 15, 2013 12 Greaves Cotton Company Update

Eyeing the larger gamut of light farm equipment § The light farm equipment market is estimated at Rs2.5bn, which is growing at 20% per annum. The growth-drivers for the market are strong, which include: 1) a shortage of labour; wages 4X in 8 years 2) availability of credit, and 3) subsidies and support from the government. This has resulted in rapid mechanization and demand for farm equipment.

Greaves has lined up a slew of § Greaves has lined up a slew of launches and initiatives to drive growth in the launches and initiatives in light business segment. farm equipment § The company is expected to expand its portfolio of offerings, but within the larger ambit of light farm equipment. New product offerings could include piston-sprayer and lawn-movers. § Greaves has recently launched a mini-tractor (11-12hp) to capitalize on fast-growing mini-tractors market (size of 14,200 units). It is strategic product to the light farm equipment portfolio. § The company is aiming for indigenization, especially of engines from the auto division, to improve product quality and margins profile.

Exhibit 15: Growth spurt witnessed in mini-tractors market Exhibit 16: M&M now market leader – previously dominated by VST

16000 TAFE 14205 International VST Tillers Spike in volumes in FY13 owing to entry of new 5% 14000 Tractors 30% players - M&M, International Tractors, TAFE 12000 4% 10000 7033 8000 VST Tiller was the lone player until FY12

Units Grew at 37% CAGR during FY03-12 4729 6000 3761 4000 2329 1228 1495 1721 2000 406 532 935 0 M&M FY03 FY05 FY07 FY09 FY11 9MFY13 61%

Source: Emkay Research Source: Emkay Research

Some business myths perceived as concerns § Greaves sells through its dealer network. Depending on the product-line, the credit extended varies between 1 month and 3 months. The subsidy collection being the prerogative of the dealer, Greaves does not have receivables from government bodies. § Entry in the tractor market does not alter the business landscape. The tractors play would be capped at 25hp (mini-tractors), reiterating its focus on light farm equipment. § Greaves continues to keep the business asset light with outsourced manufacturing up to 30-40% of annual requirements. A similar strategy has also been adopted in new product introductions.

Emkay Research July 15, 2013 13 Greaves Cotton Company Update

What is the strategy in gensets and industrial engines? # 5 Gensets business is nudging alone; concrete plans to enrich product portfolio § Greaves earns 5-10% of the engines segment revenues from power gensets. It has product offerings in the 15-550kVA range, with a combined market share of 3-5% in value terms. § It is relatively strong in the 100-400kVA range, with a high market share. But it has no presence in the high kVA range. Besides, it is a late entrant in the below 100kVA range.

Greaves has made foray into § Business operations of Greaves are nowhere close to competition (KOEL, Cummins the less than 100kVA HP and Caterpillar) on: 1) product range, 2) manufacturing, and 3) distribution. Greaves market has 65 distribution centres and 6 OEMs. § The strategy of Greaves is to: 1) enrich the product portfolio, and 2) increase the distribution network. The company has already made a foray into the low HP market with gensets less than 100kVA. § Greaves’ genset engines are geared to meet new emission norms requirements. It should also stand to gain from the increase in engine prices and the concurrent hike in gensets prices. § The gensets business is forecasted to grow at a CAGR of 15% over FY13-15E. The growth would be frontloaded in FY14E. The growth drivers are: a) power deficits keeping demand buoyancy intact, b) changes in emission norms, leading to price increases, and c) strengthening product offerings in low HP and high HP categories.

Industrial business lacks zest § Industrial – Greaves offers customized engines of 1-1000hp for industrial applications in marine, railways, mining and construction, among others. It contributes 5-10% of the total engine segment’s revenues. § The industrial business is forecasted to grow at CAGR of 7% over FY13-15E. Some pick-up in industrial activity on a favourable base is the sole growth-driver.

Exhibit 17: Engines and Gensets market landscape Caterpillar Cummins Greaves Cotton KOEL MTU Perkins Volvo Penta Presence >15 Year >15 Year <10 Year >15 Year <10 Year >10 Year >15 Year Market Share (Volume) 2% 28% NA NA <5% 5% <5% Market Share (Value) 6% 27% 5% 21% NA NA NA Product Range 200-3000 KVA 7-3000 KVA 30- 400 KVA Upto 750 KVA 200-3000 KVA 200-2500 KVA 200- 600 KVA Manufacturing Hosur Pune & Phaltan Aurangabad Pune Imported Imported Imported Facilities (Upto 375 KVA) (All Range) (Upto 740 HP) Distribution & Spares 140 400 65 338 NA NA NA Touch Points Source: Emkay Research

Exhibit 18: Understanding the different business models followed in the power gensets market Caterpillar Cummins Greaves Cotton KOEL MTU Perkins Volvo Penta Scale Of Operations National National National National National Regional Regional OEM’s 2 5 6 13 5 2 None Sales Model OEM, Dealer OEM Driven, But Procures Engines OEM Driven, But OEM, Dealer OEM Driven Direct Selling Driven Service by & Manufactures Service by KOEL Driven Cummins Gensets. But service by Greaves Sales To Dealers Fully Built Engines Fully Built Gensets Engines Engines Engines Fully Built Gensets Gensets Engine Types Electronically Mechanically Mechanically Mechanically Electronically Mechanically Electronically Controlled Controlled Controlled Controlled Controlled Controlled Controlled Source: Emkay Research

Emkay Research July 15, 2013 14 Greaves Cotton Company Update

Will the fortunes of the infrastructure business revive? # 6 Greaves is a reasonable player in concreting and compacting equipment Since it made a foray in 1996, Greaves has established a formidable presence in the Rs16bn equipment market for road compaction (Rs6 bn) and road concreting (Rs9 bn). The company is a serious No. 2/3 player, which commands a 10% market share in the said equipment market. The product offerings in road compaction are loaders and compactors, while in road concreting product offerings include transit-mixers, concrete-pumps and batch-mixing plants. Incidentally, Schwing Stetter, with a 50% share, is the market leader in the road concreting market. However, the market-size of the construction and mining equipment segment is Rs350bn, which is still outside the purview of the company.

Exhibit 19: Road Equipment Industry – Market Snapshot Construction Equipment Market (Rs350 bn)

Mining Equipment Construction Equipment Material Handling Equipment

Road Making Equipment (Rs16 bn)

Road Concreting Road Making / (Rs9 bn) Compacting (Rs6 bn)

Equipments: Transit Mixers, Concrete Pumps & Batch Mixing Rollers

Players: Schwing, Greaves & Putzmeister Multiple

Greaves Market Share: 10% 10%

Greaves Revenue Split: 67% 13%

Principal product is Transit Mixers Remarks: - contributes 50% of revenues

Source: Company, Emkay Research

Tie-up with SAMIL, Korea, to enrich product portfolio Greaves’ limited product offerings (only concreting and compacting) could curtail growth in the business segment. But the technology tie-up with Samil, Korea, gives the company an opportunity to enrich its product portfolio and address product gaps. It has already introduced S-Valve Concrete Pump and Boom Concrete Pump in Q4FY13. The tie-up renders scope to address the Rs350bn construction and mining equipment market. However, Greaves has not yet unveiled a strategy to tap potential growth.

Business in tailspin in recent years; promise of robust growth is intact

Growth drivers intact – Expect In recent years, the construction equipment market has been in a tailspin hit by the revenue growth at 13% CAGR slowdown in investments and multiple roadblocks in the infrastructure sector. The market over FY13-15E period… growth has come to a standstill, which had clocked a CAGR of over 30% during FY04-08. remains well below peak The business has entered the worse phase: the company has earned revenues of Rs1.5bn in FY13 as against Rs3.5bn in FY08, a decline of more than 50% in last 4 years. The promise of robust growth is intact by virtue of: 1) new product introductions, both in the existing space and newer segments, and 2) demand improvement backed by a higher investment spend in the infrastructure sector. We have factored in revenue of 13% (CAGR) over FY13-15E, which is still far from the peak cycle growth.

Emkay Research July 15, 2013 15 Greaves Cotton Company Update

Asset utilization slated for improvement; improvement in profitability will follow Erosion in profitability (EBIT margins down from 14.3% in FY07 to -4.9% in FY13P) had been a function of: 1) operating leverage following a 50% decline in revenues during FY07- 13P, and (2) fall in asset turns (down from 6.3x in FY07 to 1.3x in FY13P). A gradual improvement in business is forecasted with 13% revenue (CAGR) over FY13-15E. This will drive asset turns from 1.3x FY13P to 1.7x in FY15E and a notch closer to profitability. Even Greaves has pegged the breakeven for its business at Rs2.0bn.

Exhibit 20: Revenue expected to grow at 13% (CAGR) during FY13-15E Exhibit 21: …But improvement in profitability not factored in; led by improvement in asset utilization represents upsides

Infrastructure EBIT Margins 20 100 4000 50 10 0 2000 In % Terms In Rs Million -50 In % Terms 0

0 FY04 FY06 FY08 FY10 FY12 FY14E FY04 FY06 FY08 FY10 FY12 FY14E -100 Infrastructure Segment Growth -10 Source: Emkay Research, Company Source: Emkay Research, Company

Emkay Research July 15, 2013 16 Greaves Cotton Company Update

What are the earnings forecasts? # 7 Engines segment to report healthy growth and retain EBIT margins § Volumes in auto engines are forecasted to grow at 13% in FY13-15E. Volume Expect engines segment to assumptions for FY14E and FY15E are 467,100 units and 527,595 units, grow at a CAGR of 13.7% over respectively. However, Q1FY14 would have lacklustre start to the year. FY13-15E period to Rs21.6bn § We forecast a revival in the 3-W segment considering the favorable base in with EBIT margins of 16.6% FY13 and FY12, and strong inherent growth-drivers. We expect 3-W OEM volumes to grow at 6% and 7% to 328,600 units and 353,245 units in FY14E and FY15E, respectively. § Volumes to Tata Motors would grow from 65,000 units in FY13 to 100,000 units in FY14E to 132,000 units in FY15E aided largely by acceptance of Tata Magic Iris and CNG variant of Tata Ace Zip. At 100,000 units, the monthly run rate is 8,000 units, 15% higher than the exit run-rate of 7,000 units in FY13. § Even Tata Motors is getting ready with Phase-2 expansion at Dharwad. § The non-OEM segment is expected to grow at 10% per annum to 38,500 units and 42,350 units in FY14E and FY15E, respectively. § The agriculture business is expected to grow at a CAGR of 13% over FY13-15E. The growth-drivers are: 1) consistent growth in petrol and diesel pumpsets, 2) foray into electrical pumpsets in mini-tractors, 3) 20% growth in light farm equipment, and 4) new product initiatives. § The gensets business is forecasted to grow at a CAGR of 15% in FY13-15E. The growth would be front-loaded in FY14E. The growth-drivers are: 1) power deficits keeping demand buoyancy intact, 2) changes in emission norms, leading to price increases, and 3) strengthening product offerings in low HP and high HP categories. § Our revenue forecasts are Rs18.8bn and Rs21.6bn in FY14E and FY15E, respectively. § Our EBIT margin forecasts for FY14E and FY15E are 16.6%.

Exhibit 22: Auto segment volume composition is changing in favour of 4-W OEM manufacturers 100% 600000 50% 400000 Auto Engine s in Units Auto Engines Compo s ition 0%

200000 FY11 FY12 FY13P FY14E FY15E FY11 FY12 FY13P FY14E FY15E 3-W Non OEM 4-W 3-W Non OEM 4-W

Source: Emkay Research

Exhibit 23: Expect revenue growth at 13.7% CAGR during FY13-15E Exhibit 24: Expect EBIT margins to stabilize at 16.6% during FY14-15E

20 Engines EBIT Margins 50 24000 16 16000 0 In % Terms In Rs Million 8000 In % Terms 12 0 -50 FY04 FY06 FY08 FY10 FY12 FY14E 8 Engines Segment Growth FY04 FY06 FY08 FY10 FY12 FY14E

Source: Emkay Research, Company Source: Emkay Research, Company

Emkay Research July 15, 2013 17 Greaves Cotton Company Update

Expect Infrastructure to reduce losses

Infrastructure segment § We have factored in revenue growth of 13% (CAGR) over FY13-15E on the back of: breakeven is at a revenue size 1) new product introductions, both in existing space and newer segments, and 2) of Rs2.0bn. demand improvement backed by a higher investment spend in the infrastructure sector. The expansion of the market share creates tailwinds. § Business growth will drive asset turns from 1.3x FY13P to 1.7x in FY15E. This will trigger a reduction in peak loss of Rs82mn in FY12 to Rs21mn in FY15E. Greaves has pegged the segment breakeven for the business at a revenue size of Rs2.0bn.

Expect earnings to grow at a CAGR of 16% over FY13-15E § Our revenue forecasts are Rs21.2bn and Rs24.1bn for FY14E and FY15E, We expect earnings to grow at respectively. This translates into revenue of 13.6% (CAGR) for FY13-15E. a CAGR of 16% over FY13-15E § We expect EBITDA margins to improve by 100bps in FY14E to 13.6% led by: a) period to Rs8.4/share higher asset utilizations in the engines and infrastructure segment, and b) reduction in loss in the infrastructure segment. § Our EBITDA forecasts are Rs2.9bn and Rs3.3bn for FY14E and FY15E, respectively. This translates into EBITDA of 18% (CAGR) for FY13-15E. § We expect earnings CAGR of 16% over FY13-15E. Our earnings forecasts are Rs7.3/share and Rs8.4/share for FY14E and FY15E, respectively.

Exhibit 25: Revenue CAGR of 14% for FY13-15E Exhibit 26: EBITDA CAGR at 18% for FY13-15E 18 40 3600 27000 16 2700 20 18000 14 1800 0 In % Terms In Rs Million In % Terms In Rs Million 9000 12 900 0 0 10 -20 FY04 FY06 FY08 FY10 FY12 FY14E FY04 FY06 FY08 FY10 FY12 FY14E Revenue Growth EBITDA EBITDA Margins

Source: Company, Emkay Research Source: Company, Emkay Research

Exhibit 27: Expect earnings CAGR of 16% over FY13-15E to Rs8.4/share in FY15E

10 EPS 150 2400 100 1600 50 5 0 In % Terms In Rs Million 800 Rs per Share -50 0 0 -10 FY04 FY06 FY08 FY10 FY12 FY14E 0 Net Profit Growth FY04 FY06 FY08 FY10 FY12 FY14E

Source: Company, Emkay Research

Emkay Research July 15, 2013 18 Greaves Cotton Company Update

What is the differentiator? # 8 Cash-flow is of paramount importance § Greaves has highly been consistent in cash-flow generation. Over the past 9 years, the company’s cumulative cash generation has been Rs7bn, at an average of Rs0.7bn per annum. Its high asset turns and higher conversion rate of profits remains the key. § The strength of the model was put to test in FY13. A challenging business environment during FY13 did not restrict the company from cash generation.

Vantage point - Greaves § Greaves incurred its highest capex till date of Rs0.7bn in FY13. Despite this the company generated a free cash-flow of Rs429mn in FY13 (standalone). Consistent cash generator… § With capex spends pegged at Rs0.4-0.5mn annually and the scope for the reduction Expect free cash generation of of working capital (especially debtors), Greaves is expected to generate strong Rs2.7bn during FY13-15E cash-flows over FY13-15E. We have forecasted free cash generation of Rs2.7bn during FY13-15E. Asset turns at 4.4X ROIC +35% on sustained basis ROIC in top quartile of capital goods universe Asset turns are extremely strong at 4.4X in FY13E, whereas working capital Quarterly dividend payout – § requirements are merely 40 days. This is an extremely attractive matrix and Dividend yield at 3-5% indicates at low capital requirements for the business. § ROIC for Greaves is higher than 35% on a sustained basis. The business also achieved a peak ROIC of 67% at the upper end. § On a relative comparison with the capital goods universe, the company stays in the top quartile of capital efficiency and return ratios.

Strong dividend paying track record; Dividend yield at 3-5% § Greaves has maintained a healthy dividend payout ratio of about 40% over the past decade. We expect the payout ratio at 35% levels in the ensuing years. Consequently, we expect DPS to increase to Rs3 per share by FY15E, and further to Rs4 per share in FY17E. § Greaves is the only capital goods company that distributes quarterly dividend, which is synonymous with IT/ITES and FMCG sectors. The cash generation is evenly distributed during the year; providing adequate scope for regular distribution of dividends. § At the CMP, Greaves’ dividend yield is 4% on DPS of Rs2.6/share for FY14E. This improves to 6.6% on DPS of Rs4.1/share for FY17E.

Exhibit 28: Dividend payout ratio remains healthy at 35% levels Exhibit 29: Robust dividend yield at +3% levels 6 4 4.9 4.8 120 4.2 3.6 4 80 2.6 2.3 2.3 2.3 2.4 2 1.9 1.3 2 In % Terms 40 In % Terms Dividend yield has increased In Rs Per Share to 3% levels during FY12-13 0 0 0 FY05 FY07 FY09 FY11 FY13 FY15E FY05 FY07 FY09 FY11 FY13 FY15E DPS Payout Ratio Dividend Yield

Source: Company, Emkay Research Source: Company, Emkay Research

Emkay Research July 15, 2013 19 Greaves Cotton Company Update

Valuation - Hits and Misses # 9 Greaves trades at a significant +40% discount to capital goods At the CMP, Greaves is trading at 8.5x FY14E and 7.4x FY15E earnings, representing a 48% discount to valuations of the capital goods sector (ex-BHEL). On comparing to the product business (short-duration cycle), Greaves trades at a discount of about 45%. This is in spite of the superior return ratios and cash-flow generation on a relative basis.

Exhibit 30: Comparing valuations vs. ECG peers 1-Year Forward PER (x) FY11 FY12 FY13p FY14e FY15e Product Companies Blue Star 8.8 -12.7 24.9 15.0 11.2 Cummins India 21.1 24.2 19.1 17.8 15.5 Elecon Engineering 4.4 3.6 8.4 7.8 6.6 Greaves Cotton 12.8 11.5 10.0 8.4 7.3 Thermax 19.3 18.7 23.0 19.6 16.7 Voltas 8.5 8.5 13.6 11.2 9.1 Project Companies BHEL 7.5 6.4 6.9 9.5 16.8 Larsen & Toubro 25.9 20.4 18.7 16.5 14.7 Mcnally Bharat Engineering 2.5 3.8 12.9 2.9 2.4 Punj Lloyd -23.1 -11.4 -152.6 39.8 36.4 TRF 4.2 9.4 -1.4 -764.0 6.0 Averages Despite superior returns and Cap-Goods Product Companies 15.8 19.4 18.2 15.9 13.4 cash generation, Greaves Cap-Goods (Ex-L&T & Bhel) 16.2 21.2 20.5 15.9 13.3 trades at a discount of 45% to Cap-Goods (Ex-Bhel) 22.7 20.6 19.1 16.4 14.3 capital goods sector Cap-Goods 14.4 12.6 12.7 13.6 15.0 Source: Company, Emkay Research Greaves also trades at a 15-30% discount to auto-ancillary companies (comparable business models) Greaves earns 55% of annual revenues from supply of engines and spares & services to the automotive sector. Hence, it is also considered a quasi auto-ancillary company. Surprisingly, Greaves trades at a 15-30% discount to the auto-ancillary sector (comparable business models).

Exhibit 31: Comparing valuations vs. Auto-ancillary companies 1-Year forward PER (x) FY11 FY12 FY13p FY14e FY15e Amara Raja Batteries 29.6 20.4 14.8 12.4 10.0 Apollo Tyres 6.5 6.5 4.8 4.0 3.6 Exide Industries 17.1 22.3 19.7 15.0 12.3 Motherson Sumi 31.7 32.8 20.7 12.6 9.0 Auto Ancillaries 18.7 19.8 14.7 10.9 8.7 Greaves Cotton 12.8 11.5 10.0 8.4 7.3 Discount (%) 31.4 41.7 32.2 23.3 16.1 Source: Company, Emkay Research

…But Greaves offers superior dividend yield, cash-flows and returns § As shown in Exhibit 30, Greaves is in the top quartile of capital goods universe in: 1) earnings growth, 2) return generation, and 3) cash-flow generation. § On comparison with auto-ancillary companies, Greaves’ return profile and free cash-flow generation are at par. But earnings growth for Greaves is lower compared to auto ancillary companies. It is largely due to robust replacement demand in the auto-ancillary business.

Emkay Research July 15, 2013 20 Greaves Cotton Company Update

§ Greaves has the highest dividend yield at 3-5% relative to both cap-goods and auto- ancillary companies. The company distributes dividend on a quarterly basis, which is synonymous with IT/ITES and FMCG sectors.

Exhibit 32: Financial matrix for capital goods companies Earnings growth (%) Free Cash-flow (Rs Mn) ROE (%) Dividend Yield (%) 1-year forward PER (x) FY13p FY14e FY15e FY13p FY14e FY15e FY13p FY14e FY15e FY13p FY14e FY15e Product Companies Blue Star L/P 66.2 33.9 -127 2,774 2,191 11.7 17.9 21.1 1.2 1.8 2.5 Cummins India 26.4 7.2 15.3 3,932 -671 738 29.5 27.2 27.1 3.1 2.5 2.9 Elecon Engineering -57.0 7.0 18.9 2,830 1,082 1,165 7.6 7.7 8.7 3.6 3.6 3.6 Greaves Cotton 15.5 19.2 15.1 223 3,233 1,746 22.2 22.9 23.0 3.2 4.1 4.8 Thermax -18.8 17.0 17.3 91 688 2,515 18.4 18.8 19.2 0.2 0.1 0.1 Voltas -37.5 21.0 23.9 1,393 -56 1,026 12.6 13.8 15.3 2.0 2.2 2.5 Project Companies BHEL -7.5 -27.3 -43.3 935 16,668 23,598 23.4 14.7 7.6 3.1 2.2 1.3 Larsen & Toubro 9.3 13.2 12.4 26,037 27,226 44,975 17.2 16.9 16.6 1.3 1.4 1.6 Mcnally Bharat -70.2 339.4 21.5 -2,750 3,416 1,771 3.1 12.5 13.4 2.2 2.9 3.8 Punj Lloyd -92.6 L/P 9.5 207 4,372 6,787 -0.3 1.0 1.1 0.4 0.4 0.4 TRF P/L -99.8 L/P -520 5 213 12.6 13.8 15.3 0.0 0.0 0.0 Cap-Goods -0.7 -6.3 -9.1 32,250 58,736 86,725 17.8 14.7 12.1 1.9 1.7 1.6 Cap-Goods (Ex-Bhel) 7.9 16.6 14.1 31,315 42,068 63,126 8.6 8.8 9.1 1.5 1.5 1.7 Remarks Among the few companies to Expect steady cash-flow Greaves return profile is in the Greaves offers the best have delivered consistent generation. top quartile. dividend yield among its cap- earnings growth during FY13- goods peers (except Elecon 15E, while other companies Engineering). were turning around (from loss) / decline in earnings. Source: Company, Emkay Research

Exhibit 33: Financial matrix for auto-ancillary companies Earnings growth (%) Free Cash-Flow (Rs Mn) ROE (%) Dividend Yield (%) 1-Year forward PER (x) FY13p FY14e FY15e FY13p FY14e FY15e FY13p FY14e FY15e FY13p FY14e FY15e Amara Raja Batteries 37.6 19.7 24.2 2,122 -707 3,241 31.4 29.3 28.6 1.0 1.2 1.5 Apollo Tyres 35.2 18.0 13.7 6,995 5,820 6,737 19.2 18.8 17.8 0.9 1.5 1.6 Exide Industries 13.4 31.5 21.2 1,934 5,533 6,604 16.1 18.7 19.6 1.3 1.5 1.7 Motherson Sumi 58.3 64.0 39.4 6,032 7,699 13,605 27.2 35.8 39.0 1.0 2.4 3.3 Auto Ancillaries 34.3 34.9 25.9 17,082 18,346 30,187 21.1 23.8 24.8 1.1 1.8 2.3 Greaves Cotton 15.5 19.2 15.1 223 3,233 1,746 22.2 22.9 23.0 3.2 4.1 4.8 Remarks Higher growth for auto-ancillary Consistent cash flow Return profile is at par with But dividend yield is far attributed to incremental generation - similar to the auto-ancillary companies superior to the auto-ancillary demand from replacement. auto-ancillary companies companies Besides Greaves witnessed steady earnings growth while auto-ancillaries typically have cyclical earnings growth Source: Company, Emkay Research We value Greaves at 12x FY15E earnings; represents a 61% upside The steep discount in valuation for Greaves (relative comparison to auto-ancillary and capital goods companies) is unjustified. The company remains our preferred pick in the capital goods sector due to: a) the top quartile of earnings performance [a CAGR of 16%], b) attractive return ratios at 22%, and c) dividend yield of +3%. Concerns over lower 3-W volumes are adequately factored in valuations. Reiterate our Buy rating with price target of Rs100 (@12X FY15E.

Emkay Research July 15, 2013 21 Greaves Cotton Company Update

Key Financials (Consolidated) Income Statement Balance Sheet Y/E Mar (Rsmn) FY12A FY13A FY14E FY15E Y/E Mar (Rsmn) FY12A FY13A FY14E FY15E Net Sales 17,893 19,061 21,494 24,450 Equity share capital 488 488 488 488 Growth (%) 4.8 6.5 12.8 13.8 Reserves & surplus 5,822 6,845 7,899 9,117 Expenditure 15,526 16,656 18,614 21,139 Net worth 6,310 7,333 8,388 9,606 Raw Materials 12,478 13,271 14,913 17,048 Minority Interest 0 0 0 0 Employee Cost 1,426 1,637 1,829 2,063 Secured Loans 0 0 0 0 Other Exp 1,585 1,708 1,831 1,985 Unsecured Loans 330 159 159 159 EBITDA 2,367 2,406 2,880 3,311 Loan Funds 330 159 159 159 Growth (%) -8.8 1.6 19.7 15.0 Net deferred tax liability 301 347 347 347 EBITDA margin (%) 13.2 12.6 13.4 13.5 Total Liabilities 6,941 7,839 8,894 10,111 Depreciation 311 379 473 529 Gross Block 5,525 6,218 6,718 7,318 EBIT 1,951 1,999 2,407 2,782 Less: Depreciation 2,218 2,486 2,959 3,488 EBIT margin (%) 10.9 10.5 11.2 11.4 Net block 3,307 3,732 3,759 3,830 Other Income 48 116 176 187 Capital work in progress 203 80 -20 -120 Interest expenses 37 15 15 15 Investment 937 919 919 919 PBT 1,961 2,100 2,567 2,954 Current Assets 6,486 7,188 9,714 11,704 Tax 660 639 788 904 Inventories 1,821 1,802 2,244 2,552 Effective tax rate (%) 33.6 30.4 30.7 30.6 Sundry debtors 2,581 3,657 3,022 3,438 Adjusted PAT 1,302 1,461 1,779 2,050 Cash & bank balance 715 422 3,078 4,157 Growth (%) -16.6 12.2 21.8 15.2 Loans & advances 1,351 1,291 1,354 1,541 Net Margin (%) 7.3 7.7 8.3 8.4 Other current assets 19 16 16 16 (Profit)/loss from JVs/Ass/MI 0 0 0 0 Current lia & Prov 3,991 4,080 5,478 6,221 Adj. PAT After JVs/Ass/MI 1,302 1,461 1,779 2,050 Current liabilities 2,816 3,052 3,955 4,491 E/O items 588 20 0 0 Provisions 1,175 1,028 1,523 1,730 Reported PAT 1,889 1,480 1,779 2,050 Net current assets 2,495 3,109 4,236 5,483 PAT after MI 1,302 1,461 1,779 2,050 Misc. exp 0 0 0 0 Growth (%) -16.6 12.2 21.8 15.2 Total Assets 6,941 7,839 8,894 10,111

Cash Flow Key Ratios Y/E Mar (Rsmn) FY12A FY13A FY14E FY15E Y/E Mar FY12A FY13A FY14E FY15E PBT (Ex-Other income) 1,914 1,983 2,392 2,767 Profitability (%) Depreciation 416 407 473 529 EBITDA Margin 13.2 12.6 13.4 13.5 Interest Provided 37 15 15 15 Net Margin 7.3 7.7 8.3 8.4 Other Non-Cash items -795 -50 0 0 ROCE 32.5 28.8 31.0 31.4 Chg in working cap -310 -860 1,527 -167 ROE 23.1 21.5 22.8 22.9 Tax paid -656 -604 -788 -904 RoIC 42.4 35.0 42.8 55.7 Operating Cashflow 1,899 808 3,620 2,239 Per Share Data (Rs) Capital expenditure -1,059 -710 -400 -500 EPS 5.3 6.0 7.3 8.4 Free Cash Flow 839 98 3,220 1,739 CEPS 7.0 7.6 9.2 10.6 Other income 48 116 176 187 BVPS 25.7 29.9 34.2 39.2 Investments -405 18 0 0 DPS 2.2 1.6 2.6 3.0 Investing Cashflow -1,416 -575 -224 -313 Valuations (x) Equity Capital Raised 0 0 0 0 PER 11.5 10.3 8.4 7.3 Loans Taken / (Repaid) 196 -171 0 0 P/CEPS 8.8 8.0 6.7 5.8 Interest Paid -37 -15 -15 -15 P/BV 2.4 2.1 1.8 1.6 Dividend paid (incl tax) -539 -596 -725 -832 EV / Sales 0.8 0.7 0.5 0.4 Income from investments 0 0 0 0 EV / EBITDA 5.9 5.8 4.0 3.1 Others 0 0 0 0 Dividend Yield (%) 3.6 2.6 4.2 4.8 Financing Cashflow -380 -782 -740 -847 Gearing Ratio (x) Net chg in cash 102 -549 2,655 1,080 Net Debt/ Equity -0.2 -0.1 -0.4 -0.5 Opening cash position 612 715 422 3,078 Net Debt/EBIDTA -0.5 -0.4 -1.3 -1.4 Closing cash position 715 165 3,078 4,157 Working Cap Cycle (days) 36.3 51.4 19.7 19.8

Emkay Research July 15, 2013 22 Greaves Cotton Company Update

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