Saturday, February 4, 2012

>GREAVES COTTON: Supply to Tata Motors ramps-up

Hit by one-offs; Retain BUY

■ Engines division – Benefits from supply to Tata, but margins decline
Engines division posted healthy revenue growth at 17% yoy to Rs4.1 bn – led by pickup in engine supplies to Tata Motors and commissioning of new facility. EBIT margins declined by 360 bps yoy to 16.7% (in line with estimates) - due to rising OEM sales, high input costs and one-off expenditure.

■ Infrastructure division – EBIT loss rises sequentially to Rs28 mn
Infrastructure division performance was impacted by low offtake amidst high interest costs scenario and continued delay in implementing emission norms. GCL highlighted slowdown in both roads and concrete equipment segments Consequently revenues declined for second consecutive quarter by 25% yoy to Rs363 mn (revenue below estimates and break even level increases) while EBIT loss increased sequentially to Rs28 mn.

Tata Motors supply ramps up to 5,500 units per month
GCL showed ramp-up in supplies to Tata Motors (for Ace-Zip and Ace-Magic) à it supplied 5,500 units per month (or about 200 units per day) in Q3FY12 Vs 4,000 units supplied in Sep’ 11. GCL expects to ramp-up supplies to about 8,000 units per month (or 300 units per day) in FY13E. GCL reiterated strong acceptance of the new launches by Tata Motors – hinting at robust growth momentum in FY13E.

■ Reduce FY12E earnings by 13% and FY13E earnings by 9%
We have reduced our FY12E earnings estimates by 13% to Rs6.0 per share to factor (1) lower gross margins in 9MFY12 (2) expected one-offs in Q4FY12E (3) slow revival in infrastructure sector and (4) muted performance in industrials and auxiliary power business. We have also revised our FY13E earnings by -9% to Rs7.0 per share to factor (1) higher revenue contribution from auto OEMs (Tata) – which has lower gross margins than traditional business (2) lower growth expectations in engines business (barring Auto) and (3) slower turnaround of infrastructure business.

■ Retain BUY with price target of Rs90 per share
Adjusting for one-offs, GCL posted strong performance despite tough business conditions. We expect GCL to post healthy earnings growth at 21% in FY13E period alongside strong cash generation and return ratios (ROCE at +35% and ROE at +25%), despite the current earnings downgrades. At CMP, the stock is trading attractively at 11.4X FY13E earnings. Retain our BUY rating with revised price target of Rs90.