Stock Update

Muted earnings outlook

Key points
Greaves Cotton
ŠŠ Q4FY2019 earnings below estimates: Greaves
Reco: Hold | CMP: Rs148 Cotton Limited (GCL) reported lower than
expected earnings for Q4FY2019. Revenues grew
9% y-o-y to Rs 528 cr. The traditional 3W engines
Company details business reported a healthy volume growth of
Price target: Rs155 8% y-o-y, while the new business of multi brand
spares (aftermarkets) remained under pressure
Market cap: Rs3,624 cr for the quarter due to liquidity crunch. Healthy
52-week high/low: Rs165/111 growth in agri pumpset business further aided
the revenue growth. Revenues were broadly in
NSE volume: (No of shares) 3.4 lakh line with estimates. However, operating margins
BSE code: 501455 dropped 110 bps y-o-y to 13.3% driven by higher
raw material cost pressures. (RM/Sales rose 150
NSE code: GREAVESCOT bps yoy). Margins were lower than our estimates
of 14.4%. EBIDTA at Rs 70 cr was flat on a y-o-y
Sharekhan code: GREAVESCOT
basis. Lower depreciation and tax expenses
Free float: (No of shares) 11.8 cr largely offset the weak operating performance.
Adj Net Profit grew 16% y-o-y to Rs 50.3 cr
but was lower than our estimates of Rs 55 cr.
Shareholding pattern During the quarter, GCL reported exceptional
expenses of Rs 12.9 cr relating to provision for
Institutions fixed deposits. Reported Net Profit dropped 34%
16% y-o-y to Rs 37.4 cr.
Corporate Bodies
ŠŠ Traditional 3W diesel business to remain under
2%
Promoters pressure; electric scooter and agri business to
52% Foreign remain under stress in near term: GCL derives
15% around 40% of its revenues from the 3W diesel
engine segment. The diesel engine segment
Public and Others demand has been under pressure in the recent
15% past given the Government thrust to promote
environment friendly fuel to curb pollution
levels. Various OEM’s have launched CNG
Price chart
powered vehicles even in the goods segment
which is leading to market share loss for the
170 diesel powered vehicles. The Government has
160 also lifted the need for permits for alternate
150 fuel (CNG and petrol) in the 3W passenger
140
category in which GCL supplies to only one OEM
130
customer compared to 4-5 customers currently,
120
which would lead to the underperformance of
110
the GCL. As diesel forms around 95% of the 3w
100
engines business, GCL is likely to be impacted
90
substantially by the changing trends. Further the
80
BS6 emission norms would come into effect from
Jan-19

May-19
May-18

Sep-18

1st April 2020, would result in a 10-12% increase

in the vehicle costs which would adversely
Price performance impact the volumes in the 3w segment. We
expect GCL’s 3w segment volumes to remain flat
(%) 1m 3m 6m 12m in the FY2020. Further with Government making
stringent norms for electric scooters under the
Absolute 6.0 24.3 31.3 23.4
revised FAME 2 scheme and weak sentiment in
Relative to Sensex 5.0 15.3 15.5 9.8 rural areas we expect these segments to remain
under stress in the near term.

May 02, 2019 5

Sharekhan Stock Update

ŠŠ Margin pressures to sustain; improving electric
scooter business to partially offset cost
increases due to BS6: GCL’s margins dropped
70bps in FY2019. We expect margin pressures
to sustain and expect OPM to fall 40 bps in
FY2021. Cost increases due to transmission
from BS4 to BS6 norms would entail steep
price increases of about 10-12%. GCL would be
unable to entirely pass on the cost increases
to customers particularly in the environment
of muted volumes. We expect the improved
financial performance of the electric scooter
business (on account of increased volumes and
cost control measures) to partially offset the
margin pressure on account of BS6 norms.
ŠŠ Outlook – GCL’s earnings growth to decelerate
sharply; expect flat earnings CAGR over
FY2019-FY2021: GCL’s 3W business is
expected to remain under pressure over the next
two years triggered by a shift towards gasoline/
CNG engines. Further, margin is expected to
remain under pressures due to the adverse mix
and challenges in passing BS6 related costs.
Morever, other income is expected to drop
given the cash balance which will be utilized for
the buyback announced by the company. We
expect flat earnings over the next two years.
ŠŠ Valuations: Cut estimates on lower other
income and margin pressures; retain Hold;
Buyback to support stock price: GCL’s
Q4FY2019 results were below estimates. We
have lowered other income (on account of
reduction in cash balance due to buy back)
and also lowered our margin assumptions as
GCL will be unable to entirely pass BS6 cost
increases. Factoring in the above concerns, we
have revised our estimates downwards by 6%
and 7% for FY20/21 respectively. At CMP, the
stock is trading at 19.8x and 19.1x FY2020 and
FY2021 earnings respectively. Given the muted
earnings growth, we retain our Hold rating on
the stock with an unchanged PT of Rs 155. The
Buyback offer would enhance GCL’s return
ratios from 18.5% currently to 22% in FY2020.
We expect the buyback programme to support
company’s stock price in the near term.

Results Rs cr
Particulars Q4FY19 Q4FY18 YoY% Q3FY19 QoQ%
Revenues 528.1 486.2 8.6 506.5 4.3
EBITDA 70.0 69.9 0.2 70.6 -0.8
EBITDA margins (%) 13.3 14.4 (110 bps) 13.9 (60 bps)
Depreciation 11.7 13.1 -11.0 12.1 -3.1
Interest 0.5 0.6 -13.3 1.0 -48.0
Other income 8.6 15.0 -43.0 10.1 -14.9
PBT 66.3 71.1 -6.7 67.5 -1.8
Tax 16.1 27.8 -42.2 19.8 -19.0
Adjusted PAT 50.3 43.3 16.0 47.7 5.3
Reported PAT 37.4 56.7 -34.0 42.7 -12.5
Adjusted EPS 2.06 1.77 16.0 1.95 5.3

Valuations Rs cr
Particulars FY17 FY18 FY19E* FY20E* FY21E*
Net sales (Rs cr) 1,634.3 1,792.1 2,015.3 2,216.9 2,438.5
Growth (%) 1.3 9.7 12.5 10.0 10.0
EBITDA (Rs cr) 243.4 255.3 272.2 299.3 319.4
OPM (%) 14.9 14.2 13.5 13.5 13.1
Adjusted PAT (Rs cr) 178.1 154.5 180.5 172.1 180.4
Growth (%) 3.0 -13.3 16.9 -4.6 4.8
FD EPS (Rs) 7.3 6.3 7.5 7.5 7.8
P/E (x) 20.3 23.4 19.8 19.8 19.1
P/B (x) 3.9 3.8 3.7 4.4 4.3
EV/EBITDA (x) 13.1 12.1 11.6 10.6 9.9
RoE (%) 19.3 16.1 18.5 22.4 22.4
RoCE (%) 25.9 25.1 25.9 32.4 32.6
*Includes electric scooter subsidiary results

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

May 02, 2019 6

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