>GREAVES COTTON LIMITED (KOTAK SECURITIES)

Greaves Cotton is one of the largest makers of light diesel engines in the world. Over the years, the company's focus on R&D has resulted in an efficient product which is gaining acceptance with OEMs. GCL has been made the sole supplier of engines to Tata Motors' 4W LCV "Penguin", which is in the launch phase. The company's prime client, Piaggio (PVPL), has been a focused player in light transportation and has seen its 3W volumes grow 29% in 9M FY10. We believe higher demand from rural sector and increasing preference of light vehicles for intra-city transportation should drive growth in the 3-4W (sub 1 ton) auto segment. The company's infrastructure equipment division is expected to turnaround in FY11. We feel GCL is an ideal stock to play the development of light cargo transportation in the country. Valuations at 12x is not demanding. BUY

Key Investment Rationale
■ Three wheelers - Growth driven by need for low cost transportation. Passenger segment 3W continues to generate bulk of the volumes for GCL's automotive engines division. Given that three wheelers are the cheapest mode of transportation for passengers as well as goods, we see steady demand for this product from the urban as well as the rural areas. In the urban landscape, the emergence of "Hub and Spoke" model is resulting in LCVs being used for intra-city transportation.

■ Addition of new OEMs and variants to give impetus to growth. Diversifying from Piaggio, GCL has been making inroads into other OEMs including Tata Motors and M&M. It has been made the sole supplier of engines for Tata Motors' new 4W LCV model in the 0.5 ton segment named "Penguin". In addition to this, Piaggio is also sourcing engines from GCL for its 4W "Ape Truk Plus" which has been selectively launched in September 2009. The 4W segment has been gaining market share over 3W in the cargo segment. We believe these two models can generate significant volumes in the coming years. Simultaneously, we see the overall LCV cargo market expanding due to the availability of superior models.

■ Infrastructure equipment segment to turnaround in FY11. The infrastructure equipment segment bore the brunt of credit crisis in 2008 and posted a sharp decline of 59% in revenues in FY09. Segment margins turned negative due to lower volumes and higher material costs. However, due to the expansion in infrastructure sector and renewed thrust on road building
(targeting a quantum rise in road building to 20km/per day), we see demand responding positively. Profitability has been improving sequentially and we expect this division to turnaround in FY11 and contribute meaningfully to the profits in FY12 onwards.

■ Significant margin expansion in FY10 on soft material prices. GCL reported 500 bps expansion in EBITDA margins in 9M FY10 on the back of higher volumes coupled with softer material prices. Margin expansion was despite the Infrastructure equipment business continuing to report losses. Going ahead, we expect to see some benefits of softer material prices in FY10 to partially reverse as material prices have inched up in recent months. However, the impact on overall margins would be partially cushioned by improving profitability in Infrastructure equipment segment. Thus we have built in minor reduction in EBITDA margins in FY11.

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