Company Update | Auto Ancillary

December 27, 2012

Greaves Cotton
Management meet takeaways
We met the management of Greaves Cotton (GRV) to get an update on its business. GRV is a focused engineering company with core competencies in manufacturing small engines (single and twin cylinder) that find application in automotive, farm equipment, industrial and auxiliary power segments. The engine business accounts for 91% of the companys revenue while the balance comes from the sale of construction equipments. GRV is a leading player in the outsourced small engine space and a major supplier to threewheeler (3W) and small commercial vehicle (SCV, ie sub onetonne) original equipment manufacturers (OEM). Over the years, GRV has been a key supplier to Piaggio (accounts for 42-45% of GRVs total engine volumes); however, the recent long term contracts with Mahindra and Mahindra (MM) and Tata Motors (TTMT) have reinforced its positioning as a niche supplier of small engines to OEMs. Leading supplier of small engines to 3W and SCV OEMs: GRV is the key supplier of small engines to 3W OEMs and commands a market share of ~58% in the domestic 3W engine market (~37% including exports). The company has been a supplier of choice to leading 3W OEMs (excl. market leader Bajaj Auto and Force Motors which do it in-house) like Piaggio, MM, Atul Auto (ATA) and Scooters India (SCTR). A matter of concern for the company is that it is highly dependent on Piaggio currently, which accounts for 42-45% of its total engine volumes. The demand for 3Ws is witnessing a threat of late due to a shift towards SCVs where new models are now providing better dynamics compared to 3Ws. But on a positive note, GRV has successfully ventured into the SCV space with it entering into a long term partnership with TTMT to supply engines for Ace Zip (goods segment) and Magic Iris (passenger segment). While the shift from 3W to SCV is an unfavorable one for GRV, a ramp-up in volumes at TTMT (~6,500 units/month currently as against ~4,500 units/month in 2QFY2013) would be a positive for GRV. With proven and successful technology that is well accepted in the market and long term contracts with TTMT (10 years), Piaggio (8 years) and MM (5 years); GRV is likely to maintain its dominance in the outsourced 3W and SCV engine market. Focus on non-automotive segment: GRV has been able to widen its product portfolio (offers engines in the range of 10-10,000HP) with continuous investments in R&D (~1% of sales) which has enabled it to diversify its end user base successfully. The companys non-automotive business, consisting of farm equipment, industrial, auxiliary power and construction equipment segments, accounted for ~45% of total revenues in FY2012. GRV is the market leader in portable petrol/kerosene engines and pumps (for the farm sector) with ~55% market share. According to the management, the outlook for farm equipment segment remains positive over the long term due to continuous support from the government and increasing farm mechanization. In the auxiliary power and industrial segments, GRV is facing intense competition (mainly from Cummins India and Kirloskar Oil Engine). The company intends to increase its presence in these segments going ahead through new product launches and focus on after sales service. GRVs construction equipment segment has been facing difficult times due to economic slowdown and higher interest rates. It posted a loss of `5cr in 1HFY2013. Recently, GRV has tied-up with Bomag, Mitsibushi and Samil to enhance its presence in the construction equipment segment.
Please refer to important disclosures at the end of this report

NOT RATED
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Auto Ancillary 1,932 (132) 0.4 100/60 69,844 2 19,324 5,870 GRVL.BO GRV@IN

`79 -

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 51.6 30.6 8.7 9.1

Abs. (%) Sensex Greaves Cotton

3m 4.0 6.3

1yr 21.7 2.0

3yr 11.3 40.9

Yaresh Kothari
+91 22 39357800 Ext: 6844 yareshb.kothari@angelbroking.com

Greaves Cotton | Company Update

Outlook: According to the management, OEMs will continue to prefer sourcing small engines from specialized manufactures going ahead as relatively low volumes restrict OEMs from setting up engine facilities. Further the management stated that the proven success of GRVs engines enabled it to enter into a strategic partnership with TTMT (who could have rather manufactured the engines inhouse). The management expressed optimism about the long term growth prospects of its automotive business; however it expects near-term growth to remain under pressure due to macro-economic factors. On the non-automotive front, the management believes that easing of interest rates will revive growth going ahead. Despite the challenging environment, the management hopes its operating margins will remain in the range of 12.5-14% over the next two years. On the back of slowdown in demand, the company has lowered its capex guidance to `100cr for FY2013 from `150cr earlier. GRV enjoys strong return ratios (in excess of 20%) and has a healthy balance sheet with a net debt - equity ratio of (0.2). Additionally, limited competition in the single cylinder automotive engine space augurs well for the company. At `79, the stock is trading at 13.3x FY2012 earnings. Currently, we do not have a rating on the stock.

Exhibit 1: Peer comparison

P/E M-cap CMP (`) (` cr) Greaves Cotton* Cummins India Kirloskar Oil Engines 79 1,932 514 14,332 204 2,963 FY12 13.3 26.4 15.5 FY13E 13.5 22.6 15.1 FY14E 11.5 19.7 12.4 FY12 3.1 7.0 2.9 P/B FY13E 2.7 6.2 2.6 FY14E 2.4 5.4 2.3 EV/EBITDA FY12 8.3 18.5 7.4 FY13E 7.5 16.9 7.8 FY14E 6.5 14.3 6.5 FY12 23.0 30.7 20.0 RoE FY13E 21.2 28.6 18.1 FY14E 21.7 28.7 19.5

Source: Company, Bloomberg estimates, Angel Research; Note: * Consolidated

December 27, 2012

Greaves Cotton | Company Update

Company Background
Greaves Cotton (GRV), established in 1859 is a part of the B. M. Thapar Group. It is a focused engineering company with core competencies in manufacturing small engines (single and twin cylinder) that find application in automotive, farm equipment, industrial and auxiliary power segments. The engine business accounts for 91% of the companys revenue while the balance comes from the sale of construction equipments. The key focus area of the company is small engines, used mainly in 3Ws and SCVs. It supplies engines to major 3W and SCV manufacturers such as Piaggio, Tata Motors, Mahindra and Mahindra, Atul Auto and Scooters India through long term purchase agreements. Apart from sales to major OEMs, the company also caters to the regional players (~10% of revenues) and has an extensive distribution network (~1,200 dealers across 410 districts) for various products.

Exhibit 2: Long term purchase agreements with OEMs

Customer Mahindra and Mahindra Atul Auto Piaggio Tata Motors
Source: Company, Angel Research

Duration of agreement 5 7 8 10

Effective from 2011 2012 2008 2011

Exhibit 3: Total 3W industry FY2012 market share

2.0 4.5 23.4 3.1

Exhibit 4: 3W Goods industry FY2012 market share

8.4 12.0 7.2 0.0

17.8 8.1 0.1 58.8 54.6

Atul Auto Piaggio

Bajaj Auto Scooters India

Force Motors TVS Motor

MM

Atul Auto Mahindra & Mahindra

Bajaj Auto Piaggio

Force Motors Scooters

Source: Company, Angel Research

Source: Company, Angel Research

Exhibit 5: Industry volumes

(units) 3W (total) 3W passenger 3W goods SCV (< 2T, Goods)
Source: Company, Angel Research

FY2011 795,992 693,793 102,199 212,501

FY2012 876,127 766,972 109,155 282,044

1HFY2012 446,296 392,809 53,487 130,036

1HFY2013 386,790 339,761 47,029 131,099

December 27, 2012

Greaves Cotton | Company Update

The companys operations are divided into five segments, namely automotive, farm equipment, auxiliary power, and industrial and construction equipment. GRV has eleven manufacturing units in India and one in Germany. The manufacturing facilities are equipped with state-of-the-art production facilities, backed by in-house R&D.

Exhibit 6: Business segments and plant location

Business segment Automotive Farm equipment Auxiliary power Construction equipment Industrial Product Light Petrol/diesel engine Engines, Pumps, Power Tillers and other Farming equipments Gensets Concrete pumps, Transit mixers, Batching plants Engines - Diesel, CNG, LPG Plant location Aurangabad (MH), Ranipet (TN) Gummidipoondi (TN) Pune Gummidipoondi (TN) Pune

Source: Company, Angel Research

The companys construction equipment segment has been facing difficult times due to economic slowdown and higher interest rates. It posted a loss of `5cr in 1HFY2013. GRV is the second largest player in the concrete cement and fourth largest in road construction equipment segment. The company has entered into the earth moving segment with the launch of its wheeled loader and has also tied up with Mitsubishi Heavy Industries Limited, Japan, to market its range of motor graders in India. Further, GRV has also tied up with Bomag, Germany and Samil, Korea, for manufacturing compactors (used in road construction) and S-Valve concrete pumps & boom pumps respectively. The management expects the demand to pick up in 2HFY2013 led by easing of interest rates; however the segment is not expected to break-even in FY2013 GRV also exports (~5% of sales) its products to the Middle East, Africa, South Asia and South East Asia. GRV is in the process of establishing its footprint overseas and has established its offices in UK and China and two subsidiary companies in Germany and Middle East.

Exhibit 7: FY2012 revenue-mix

12.0 7.0

Exhibit 8: FY2012 geography-mix

5.2 14.0 52.0

15.0 94.8 Automotive Construction equipment Farm equipment Industrial Auxilary power Domestic Exports

Source: Company, Angel Research

Source: Company, Angel Research

December 27, 2012

Greaves Cotton | Company Update

Profit and loss statement (Consolidated)

Y/E March (` cr) Total operating income % chg Total expenditure Net raw material costs Other mfg costs Employee expenses Other EBITDA % chg (% of total op. income) Depreciation & amortization EBIT % chg (% of total op. income) Interest and other charges Other income Extraordinary expense/ (income) PBT (reported) Tax (% of PBT) PAT (reported) ADJ. PAT % chg (% of total op. income) Basic EPS (`) Adj. EPS (`) % chg FY2008 1,190 9.5 1,031 800 33 100 97 159 (4.8) 13.3 24 135 (9.4) 11.4 24 22 9 124 29 23.2 96 104 (14.3) 8.8 3.9 4.3 (14.4) FY2009 1,065 (10.5) 957 730 31 109 87 108 (32.2) 10.1 28 79 (41.4) 7.4 24 13 1 68 24 35.9 43 44 (57.3) 4.2 1.8 1.8 (57.3) FY2010 1,392 30.7 1,182 945 30 116 90 210 95.2 15.1 31 180 126.7 12.9 14 7 1 172 56 32.3 117 117 164.1 8.4 4.8 4.8 164.1 FY2011* 1,281 (8.0) 1,086 883 27 93 83 195 (7.3) 15.2 24 171 (4.7) 13.4 1 7 6 183 57 31.0 126 120 2.0 9.4 5.2 4.9 2.0 FY2012 1,789 39.7 1,573 1,250 38 143 143 216 11.2 12.1 42 175 2.2 9.8 4 40 44 255 66 25.9 189 145 21.3 8.1 7.7 6.0 21.3

Note: *FY2011 financials are for 9 month period due to change in financial year from June to March

December 27, 2012

Greaves Cotton | Company Update

Balance sheet statement (Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity share capital Reserves & surplus Shareholders Funds Total loans Other long term liabilities Long term provisions Deferred tax liability Total Liabilities APPLICATION OF FUNDS Gross block Less: Acc. depreciation Net Block Capital work-in-progress Investments Long term loans and advances Other noncurrent assets Current assets Cash Loans & advances Other Current liabilities Net current assets Total Assets 364 120 244 37 80 371 30 76 265 288 82 443 409 143 266 17 34 401 19 77 305 246 155 472 423 171 252 28 98 491 23 100 369 410 82 460 465 188 277 9 53 22 1 614 61 94 459 403 212 575 552 222 331 20 94 22 1 624 71 114 439 374 251 718 49 319 368 65 10 443 49 340 389 57 26 472 49 372 421 15 25 460 49 456 505 16 26 3 25 575 49 582 631 33 30 3 21 718 FY2008 FY2009 FY2010 FY2011* FY2012

Note: *FY2011 financials are for 9 month period due to change in financial year from June to March

December 27, 2012

Greaves Cotton | Company Update

Cash flow statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation Change in working capital Others Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec. in fixed assets (Inc.)/Dec. in investments Other income Cash Flow from Investing Issue of equity Inc./(Dec.) in loans Dividend paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in cash Opening Cash balances Closing Cash balances FY2008 124 24 (33) 48 (22) (29) 113 59 22 22 (37) 18 40 (22) (10) 39 30 FY2009 68 28 (86) 41 (13) (24) 14 29 (47) 13 44 (8) 17 (68) (11) 30 19 FY2010 172 31 11 28 (7) (56) 179 27 64 7 (76) (42) 31 (99) 3 19 23 FY2011* 183 24 (29) (4) (7) (57) 110 36 (47) 7 24 2 82 (95) 39 23 61 FY2012 255 42 (39) (38) (40) (66) 113 (25) (40) 40 (25) 17 54 (78) 10 61 71

Note: *FY2011 financials are for 9 month period due to change in financial year from June to March

December 27, 2012

Greaves Cotton | Company Update

Key ratios
Y/E March (` cr) Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Int.) (0.1) (0.3) 5.7 0.0 0.0 3.4 (0.3) (0.5) 13.2 (0.2) (0.5) 127.7 (0.2) (0.6) 46.7 3.5 41 32 78 11 2.8 52 46 79 32 3.3 41 48 65 25 2.9 56 67 85 30 3.5 37 53 61 34 34.1 32.7 28.3 17.3 17.5 11.4 38.5 41.0 27.9 33.0 33.3 23.7 27.0 27.0 23.0 11.4 0.8 3.3 28.7 32.5 (0.1) 29.3 7.4 0.6 2.5 11.7 24.7 (0.1) 12.4 12.9 0.7 3.1 27.3 25.8 (0.1) 27.1 13.4 0.7 2.7 24.8 6.0 (0.2) 20.7 9.8 0.7 3.1 22.3 11.2 (0.2) 20.1 4.3 4.3 5.2 1.2 15.1 1.8 1.8 3.0 0.8 15.9 4.8 4.8 6.0 3.0 17.2 4.9 4.9 5.9 1.5 20.7 6.0 6.0 7.7 2.2 25.8 18.5 15.1 5.3 1.5 1.4 11.9 4.3 43.4 26.5 5.0 1.0 1.6 18.0 4.1 16.6 13.1 4.6 3.8 1.2 8.7 4.0 16.1 13.5 3.8 1.9 1.3 9.4 3.2 13.3 10.3 3.1 2.8 0.9 8.3 2.5 FY2008 FY2009 FY2010 FY2011* FY2012

Note: *FY2011 financials are for 9 month period due to change in financial year from June to March

December 27, 2012

Greaves Cotton | Company Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Greaves Cotton No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

December 27, 2012

Greaves Cotton | Company Update

6th Floor, Ackruti Star, Central Road, MIDC, Andheri (E), Mumbai- 400 093. Tel: (022) 39357800
Research Team Fundamental: Sarabjit Kour Nangra Vaibhav Agrawal Bhavesh Chauhan Viral Shah Sharan Lillaney V Srinivasan Yaresh Kothari Ankita Somani Sourabh Taparia Bhupali Gursale Vinay Rachh Amit Patil Shareen Batatawala Twinkle Gosar Tejashwini Kumari Technicals: Shardul Kulkarni Sameet Chavan Sacchitanand Uttekar Derivatives: Siddarth Bhamre Institutional Sales Team: Mayuresh Joshi Hiten Sampat Meenakshi Chavan Gaurang Tisani Akshay Shah Production Team: Tejas Vahalia Dilip Patel Research Editor Production tejas.vahalia@angelbroking.com dilipm.patel@angelbroking.com VP - Institutional Sales Sr. A.V.P- Institution sales Dealer Dealer Sr. Executive mayuresh.joshi@angelbroking.com hiten.sampat@angelbroking.com meenakshis.chavan@angelbroking.com gaurangp.tisani@angelbroking.com akshayr.shah@angelbroking.com Head - Derivatives siddarth.bhamre@angelbroking.com Sr. Technical Analyst Technical Analyst Technical Analyst shardul.kulkarni@angelbroking.com sameet.chavan@angelbroking.com sacchitanand.uttekar@angelbroking.com VP-Research, Pharmaceutical VP-Research, Banking Sr. Analyst (Metals & Mining) Sr. Analyst (Infrastructure) Analyst (Mid-cap) Analyst (Cement, FMCG) Analyst (Automobile) Analyst (IT, Telecom) Analyst (Banking) Economist Research Associate Research Associate Research Associate Research Associate Research Associate sarabjit@angelbroking.com vaibhav.agrawal@angelbroking.com bhaveshu.chauhan@angelbroking.com viralk.shah@angelbroking.com sharanb.lillaney@angelbroking.com v.srinivasan@angelbroking.com yareshb.kothari@angelbroking.com ankita.somani@angelbroking.com sourabh.taparia@angelbroking.com bhupali.gursale@angelbroking.com vinay.rachh@angelbroking.com amit.patil@angelbroking.com shareen.batatawala@angelbroking.com gosar.twinkle@angelbroking.com tejashwini.kumari@angelbroking.com

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December 27, 2012

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