Greaves Cotton Ltd is a Rs 1,800 crore multi product, multi locational company, and one of the leading engineering companies in the country, with core competencies in diesel/petrol engines, farm equipments and gensets. Last year has been quite good for the automobile industry, with the passenger vehicle segment recording significant improvement in demand due to new product launches and lower interest rates on consumer loans. While sales were flat in the medium and heavy commercial vehicles segment, the light commercial vehicle segment recorded a decent increase in volumes. In case of three wheelers, demonetisation affected the demand somewhat negatively. This was more so in cash sensitive areas. The commercial vehicle segment is expected to register an increase in the next few quarters, as they are a popular choice for the freight and logistics sector. Notwithstanding the moderation in growth in the last few quarters, the demand for light commercial vehicles is expected to remain buoyant over the long term, as these vehicles are a preferred mode due to stringent restrictions on entry of heavy duty trucks and expanding city limits. Modern power systems and large gensets are a much needed back-up for large corporates in the telecom, IT, medical, retail and the hospitality sectors. Higher government spending on infrastructure, especially in roadways and railways, has accelerated the need for diesel generators. Greaves Cotton has over five-decade-long experience in the auxiliary power business, serving retail and commercial complexes, hotels, hospitals, defence and many government departments. While the power industry has been going through a transformation, the outlook seems quite bright in the foreseeable future. Facing multiple growth challenges, Greaves Cotton posted a weak set of numbers, missing the revenue and profit estimate figures of most analysts. This made the stock correct by nearly 20% in the last 2-3 months, but it has stabilised somewhat currently. There does not seem any downward risk from the present level, as the valuations command a tax free dividend yield of nearly 4% for the stock. As many fund managers and analysts feel, when the economy picks up, demand for the company’s products will start to pick up in the near future.
The Greaves Cotton stock currently quoting at Rs 135 can potentially climb by nearly 30% to arrive at a price target of Rs 175 in a one-year time horizon.
Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.