• Revenues at Rs4.2bn higher by 2.5% yoy; lower than our estimates, the growth was driven by robust sales in Engines segment which was offset by sharp fall in the infrastructure segment revenues

• OPM at 11.1% was lower by 92bps yoy but higher by 44bps qoq, EBIT margins of the engines segment saw 52bps yoy increase

• PAT at Rs287mn was lower by 7.5% yoy and was below expectations

• Maintain our rating to BUY with a 2-year price target of Rs232  

Infrastructure segment drives down revenues

Greaves Cotton (GCL) reported lower than expected revenues wherein it reported a modest rise of 2.5% yoy but a fall of 2.9% qoq. Engine segment revenues were higher by 11.2% yoy and were flat on qoq basis. This strong performance was offset by 22.9% yoy fall in infrastructure segment revenues. Sequentially too revenues for the segment plummeted 29.8%. Others segment also saw an abysmal performance with revenues falling 85.5% yoy and 24.2% qoq. Engines segment reported a healthy volume growth whereby 3-W diesel engines increased 6% yoy and gensets grew 20% yoy. 4-W Petrol engine volumes were lower by 20% yoy while pumps along with tillers reported 10% decline volumes.

GCL reported OPM of 11.1% compared to our expectations of 11.5% and were lower by 92bps yoy. Sequentially margins improved 44bps. Operating profit was lower by 5.4% yoy but rose 1.1% qoq. Yoy fall in margins was driven by 56bps yoy and 65bps yoy increase in employee costs and overheads as a percentage of sales. This was partially offset by 29bps improvement in gross margins. Sequential increase was led by 29bps improvement in gross margins and 107bps decline in overheads as a percentage of sales. In terms of segments, the company reported 52bps yoy improvement in Engines segment EBIT margins. Infrastructure segment however reported an EBIT loss of Rs117mn as compared to an EBIT loss of Rs31mn in Q1 FY14 and an EBIT loss of Rs99mn in Q4 FY14.

Maintain BUY

GCL over the past three years, when the CV sales and industrial activity in India witnessed a sharp slowdown, saw a valuation de-rating. It was justified then given the decline in revenue growth. However, in the years to come, we expect strong upsurge in CV sales, industrial activity and development of irrigation infrastructure. This should translate into large business opportunities for GCL. We expect 16% revenue CAGR for GCL during FY14-17E. With benefits of operating leverage, we see strong recovery in margins and resultantly a PAT CAGR of 29% during FY14-17E. In the previous bull cycle GCL had traded at an average P/E multiple range of 12-25x. We believe given the strong cash flow generation and RoCE of above 20%, we expect a re-rating in the stock. Maintain BUY.