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In this post, we will look at Greaves Cotton.
The Company
Greaves Cotton is a small-cap Indian engineering conglomerate that manufactures automotive engines, farming equipment (tractors engines and tillers), and gensets. The company is also into aftermarket spares & services.
The company was founded in 1859 by James Greaves and George Cotton. It runs six manufacturing units – five in Maharashtra and one in Tamil Nadu. It has two wholly-owned subsidiaries – Greaves Leasing Finance Ltd. and Dee Greaves Ltd. but they aren’t showing any substantial business activity.
Greaves Cotton Business Segments
Key Metrics
Current market capitalization: Rs. 3414.01 crores.
Current price to Earnings (P/E) ratio: 20.17
Chart – Financial performance in FY18 and FY19
The company has reported net consolidated operational revenue of Rs. 1988 crore in FY19, compared to Rs. 1792.10 crore in FY18, an increase of 10.9%. Q4 FY19 revenues stand at Rs. 528.12 crores, against Q4 FY18 revenues of Rs. 486.15 crores, an increase of 8.6%. EBITDA margin for FY19 is 14.2%, compared to 13.8% in FY18.
Chart: Net Profit (Consolidated) Over 9 years
Automotive engines
Greaves Cotton manufactures ‘fuel-agnostic’ (diesel, petrol, CNG, electric) engines for three-wheeler passenger/cargo vehicles, and four-wheeled mini trucks. It claims to have a 75% market share in the 3-wheeler diesel engine segment. The company’s major competitor in the 3W engine segment is Bajaj Auto.
Greaves Cotton supplies 3W and micro 4W diesel engines to 30 OEMs in India. Recently, the company bagged an Indonesian OEM manufacturer as a customer. It also makes engines for non-automotive uses, including large engines from 4HP to 700HP. The company has its own research, development and testing facilities.
The main risks in the automotive engine business are uncertainties associated with adoption of Bharat Stage-VI emission standards in April 2020, rising use of alternative fuels like CNG/electric, rising commodity prices, and changes in interest rates. However, the company has embarked on a multi-year diversification strategy to cope with downturns in the automotive engine business.
Farm equipment
In India, the demand for mechanized agricultural equipment mostly lies in the low-cost segment. It is because close to 70% of agricultural landholdings in India are held by marginal farmers (owning 1 hectare or less), with the average size of landholding pegged at 1.15 hectares (Agricultural Census 2015-16).
Greaves Cotton has a small but growing presence in the farm equipment business. The company manufactures power tillers, pump sets and other light agri-equipment (petrol and kerosene portable engines in the 1-4 HP range and reapers).
The company has developed and launched a 14 HP tiller, called ‘Bahubali’, the first indigenously designed tiller in this range. The company also came out with a series of heavy-duty electric pumps in Q2 FY2018-19. By Q3 2018-19, more than 14,000 of these electric pumps had been sold.
Likely risks in the farm equipment division are price sensitivity among buyers, high indebtedness in the farming sector, low discretionary income and farm distress (falling prices for produce, natural calamities).
Auxiliary power
The auxiliary power business (power generator) is very competitive and is dominated by diesel gensets. This market can be divided into four segments – 5kVa to 75 kVa, 75kVa to 375 kVa, 375 kVa to 750 kVa, and 750 kVa and above.
Greaves Cotton manufactures portable gensets in the 2.5 to 7.5 kVa range, and larger gensets in the 100 kVa to 500 kVa range. It is currently working on increasing its range in the above 500 kVa segment.
The major risk in this business is the increasing use of renewable energy. This is a slow moving business. Moreover, players have to contend with stiff competition. Only companies that can deliver the entire gamut of services (sales, services, and spares) can play the long game.
After-market spares and services
Greaves Cotton has launched a retail network called Greaves Care, which it claims is India’s largest multi-brand spares and services network for 3Ws and micro 4Ws. There are currently 300 of these centres across India and they also retail third-party products. For instance, customers in north and east India can purchase third-party electric rickshaws through Greaves Care. The company also has a retail network of more than 5000 spare parts vendors.
When Greaves Cotton entered the after-market spares business, it was manufacturing only 3W parts, but now it also makes 2W parts. The company added 700 parts in Q3FY2019 alone. Today, Greaves Care centres also sell 3W and 2W batteries and tyres. The company has tied up AMSOIL and Fuchs for machine oils. Other partners include Japan’s Mikasa and Italy’s Roxar, for light construction equipment.
Unorganized players are the biggest risk in the after-market sales/services division. Counterfeiting of parts is another major issue. Moreover, diesel is slowly losing market share because of rising commodity prices and increasing awareness of environmental pollution due to diesel use.
Clean energy strategy
Greaves Cotton is attempting to diversify into alternative fuel categories like electric and CNG. To develop capability in electric technology, Greaves Cotton has tied up with Altigreen Solutions, a Bengaluru-based company. It enabled Greaves Cotton to showcase an electric vehicle powertrain at Auto Expo 2018.
Greaves Cotton has also acquired a 67% stake in a Bengaluru-based electric scooter maker called Ampere, which gives it access to electric scooter technology, including the latter’s 75 existing sales/service centres.
Ampere’s major competitors in the electric vehicle segment are Hero Electric and Okinawa. Ampere currently holds second position in this market and has the capacity to ramp up production to three times existing sales.
On the CNG front, the company’s partnership with U.S based Pinnacle Engines has given it access to a 400 cc CNG engine, which it claims is 30% more fuel efficient than existing CNG engines. This CNG engine is currently undergoing tests with Greaves Cottons’ partners. Plans are also afoot to develop a 200 cc CNG engine.
Negatives
Despite the company’s diversification plans, the company remains heavily dependent on the engine segment for operational revenues. Engine sales contributed 93.9% (Rs. 1866.38 crores) of the company’s revenues from operations (Rs. 1988 crores) in FY19 (it was 96% in FY18). Clearly, any downturn in this sector will affect the company negatively.
The company has suffered a loss of Rs. 15.5 crores due to an IL&FS exposure and has made an allocation for the same in the Q4FY19 results.
The company recently announced a Rs. 240 Crore repurchase of up to 1.37 crore shares at Rs. 175 per share, subject to shareholder approval (at the time of writing this article, the company’s stock was trading at Rs. 140.45). If approved, the buyback will reduce the company’s cash on hand and may affect its future capex plans.
Meanwhile, a rise in commodity prices, especially fuel, may reduce the demand for automobiles. A faster than anticipated switch to alternative fuels may affect the company’s margins. Finally, a quick expansion can deteriorate the company’s financial standing.
Positives
The company has embarked on a long-term strategic plan to diversify its income and de-risk the existing businesses. The company hopes this will reduce its dependency on the engine business.
The company’s scale of operations is also rapidly expanding, with a renewed focus on verticals such as Greaves Care, electric/CNG vehicles, tractors, auto spares and servicing, and more). The company claims that revenues from new businesses have grown to 10% of total operational revenues, from 2% in 2017.
The company has announced a capex of Rs. 85 crores during FY19, which will be funded through internal accruals. This is a good sign, because it shows that the company is trying to grow. The company is not taking on any debt for this. In fact, the company has zero debt.
The CSO estimates that capacity utilization in India is on an upward trend, especially from Q3 FY2017-18 (we actually wrote a post on this some time back – https://capitalmind.in/2019/04/macronomics-high-capacity-utilization-a-new-capex-cycle/)
If this strategy plays out, Greaves Cotton will benefit, especially the company’s auxiliary power generation business.
Final thoughts
Greaves Cotton’s fortunes are tied to that of major auto makers. Any upswing or downswing in the auto industry will impact Greaves Cotton likewise. Currently, the auto sector is not doing so well, and investors are looking at greener pastures.
A long-capex cycle, unpredictable nature of investments (especially electric), and slim growth in net sales and EBITDA margins may act as a damper on investor sentiment.
However, the company is working on becoming future ready and has made inroads into many new sectors. If these play out as planned, they will hold the company in good stead in the coming years.
Note: Not a recommendation. This is just a quick analysis of a stock that seems to be showing strong price movements in the short term. Don’t just buy or sell based on this analysis – consult with a financial advisor before taking action. All market investments involve risk of losing money. Authors at Capitalmind may have positions in securities mentioned in the article.
Disclosure: The authors at Capitalmind may have positions in the stocks mentioned, please assume our bias exists. This is not a recommendation to buy or sell securities. This is purely information about the company mentioned.
