Greaves Cotton stock is a compelling buy

Greaves Cotton stock is a compelling buy

By Rajiv Kapoor | 28 May, 2017

At The Indian automotive industry has been witnessing mixed fortunes recently, with sales looking up in the last few months as demand in the passenger vehicle (PV) segment was driven largely by new model launches and heavy discounts. The commercial vehicle (CV) segment witnessed a moderate uptick, led primarily by growth in the medium and heavy commercial vehicles (MHCV) segment. Replacement demand, improving financing viability and rollout of BS-IV emission norms provided the necessary impetus to this segment. However, the pace of growth in the light and small commercial vehicles (LCV) segment remained muted, with the three-wheeler segment recording a flattish year. Going ahead, both the MHCV and the LCV goods segment are expected to benefit from replacement of an ageing fleet and pre-buying before the nationwide implementation of BS-IV. The LCV goods segment is also expected to benefit from the gradual improvement in viability and pick up in consumption-driven sectors. Demand across these segments is expected to further pick up from infrastructure and industrial sectors as reforms initiated by the government get underway. The government is determined to make the Indian automotive industry a frontrunner in the Make in India programme and the industry is expected to contribute over 12% to India’s GDP over the next decade. The Automotive Mission Plan 2016-26 highlights the vision, plan and progress envisaged and the need to reduce the time lag between the complete implementation of Bharat Stage emission norms in India and international emission standards. The government has set an ambitious target of implementing BS-VI standards by April 2020. While unexpected glitches like the ban on diesel vehicles by the Supreme Court in the National Capital Region (NCR) could create impediments, timely measures by the government and a good monsoon will be the key to sustaining the positive growth trend in future.

Greaves Cotton Limited is a Rs 1,700 crore multi-product and multi-locational company in the country. It is one of the leading engineering companies, with core competencies in diesel and petrol engines, farm equipment and generator sets. The company sustains its leadership through seven manufacturing units that produce world class products, backed by comprehensive marketing and wide service network. It manufactures customised industrial engines, making them perfect for numerous machine and equipment applications in a variety of industries. The company’s products serve a vast spectrum of industries, including construction, mining, agriculture, marine, rail cars, fire control and material handling. Though its Q4FY2017 financial results were mixed, coming on the back of demonetisation, most analysts expect non auto segments like farm equipment and auxiliary power to drive growth of over 15% CAGR going forward in the next few years . Further, the bounce-back in the auto segment revenue led by a price hike of the new BS IV engines can lead the company to grow 15% YoY. Other positives like robust cash flow generation and a cash rich balance-sheet make Greaves Cotton stock a compelling buy for medium term investment. From the present level of Rs 155 the stock can give a 40% price appreciation in the next one year.

Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.

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