Greaves Cotton Q1FY18 Concall Summary

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Financial Highlights:

  • PAT for Q1 FY2018 is Rs. 41.2 crores as against Rs. 38.5 crores in Q1 FY2017 resulting in a 7% increase.
  • Revenue for Q1 FY2018 is Rs. 454 crores as against Rs. 445 crores Q1 FY2017.
  • EBITDA for Q1 FY2018 is Rs. 55 crores as against Rs. 60 crores in Q1 FY2017.
  • Cash Reserves of the company is same as Q4 FY2017 i.e. Rs. 450 crores.
  • There has been a decline in gross margin by roughly 3-4% in the past two quarters.
  • The company expects to be back at 15-17% EBITDA margins in the future as it would pass on increase in commodity prices to the OEMs.

Performance Highlights:

  • Three – Wheeler volume sales are 63,000 in Q1 FY2018 as opposed to 65,000 in Q1 FY2017.
  • Pump volume sales are 21,000 in Q1 FY2018 as opposed to 23,000 in Q1 FY2017.
  • Tiller volume sales are 1,000 in Q1 FY2018 as opposed to 2,000 in Q1 FY2017.
  • Genset volume sales are 1,100 in Q1 FY2018 as opposed to 900 in Q1 FY2017.
  • Four Wheeler volumes volume sales are 6,000 in Q1 FY2018 as opposed to 6,500 in Q1 FY2017.
  • There has been a 6% decline in volumes while revenues are up by 1%.
  • On BS-IV there has been an 8-10% price hike.
  • Sales in current quarter in spare sales has been impacted heavily due to GST. The retail part of the system has been affected due to GST transition. But it will recover back to normal.
  • Capital goods industry was severely impacted in India in the last few years. Yet, Greaves has maintained its bottom line

Growth Drivers:

  • The company plans to strengthen their network in the Aftermarket space.
  • An expected good monsoon followed by government’s focus on farm mechanization, new infrastructure and industrial projects is supposed to drive demand for the company.
  • The company is investing in strengthening their R&D and their global distribution networks.
  • The company is trying to develop a fuel agnostic portfolio (comprising of a competitive petrol, CNG option with R&D in advance technologies) as a part of their strategy in response to Diesel ban in major cities.
  • The company’s focus has been primarily on cost control, maintaining operational efficiencies and the top line. The y-o-y growth in revenue and PAT can be attributed to that.
  • The company believes that there is a shift from Diesel to Petrol to CNG to Electric. However, in electric, in term of cost of the battery (per KWH) though declining, is not yet at a tipping point. Till such point in future there is growth opportunities in Petrol and CNG (as CNG network grows in the country).
  • There exists a lot of opportunities for Greaves to serve the small and marginal farmers. They plan to expand in this segment with more product offerings.
  • Water conservation being an important facet in face of water scarcity, Pumpsets is an area the company is exploring.
  • The company is working now not only through dealers but also farmer producer organizations now. The company is closely monitoring the effect of direct subsidy scheme, recently introduced by the government, on the overall market dynamics.
  • The company expects the economy to perform well. The Farm business is expected to do well while the auto sector is set to recover. In the Aftermarket segment, they are still going through GST transition.
  • Greaves has equal focus on both the Indian market and the exports market for selling gasoline engine owing to petrol exports being a good market.
  • The initial reaction from the market on seeding 2 Power Tillers has been quite positive.
  • The company promised incremental new products in the Farm Mechanization market over the next 12 to 24 months.
  • The company is expanding its geography – expanding from one state to the next. Their focus on service has helped them grow much.
  • OEM partners of the company handle front end of the business. In the scenario of new permits being given by the states, the company hopes the OEM partners to capitalize on the opportunity. The company would ramp up production to support their partners and to maintain market share in case of new permits.
  • The company has leadership in the pump segment and intends to continue that.
  • In Farm, Genset and Automobile, the company expects growth – around which they have a lot of initiatives.
  • Greaves has ventured into CNG and Petrol space while they have a lot of new initiatives around Aftermarket business.
  • Micro economic data that is coming up is promising and inflation is very low. Thus the company anticipates growth prospects.
  • Gensets are growing at a double digit.
  • There are atleast three new initiatives in pipeline in Aftermarket.
  • In International Business Greaves in focusing on growing other infrastructure – like their dealer network to drive growth.
  • The company’s five-year strategy has been to move from a Diesel Engine manufacturer to a Fuel Agnostic multi strategy player in multiple businesses.

Pinnacle Agreement:

  • Two important announcements were made by the company in Q1 FY2018:
    • The company’s strategy to make a transition from a Diesel Engine to a Fuel Agnostic Powertrain Solutions provider. The company signed a technology partnership agreement with Pinnacle Engines to introduce their Opposed Piston Petrol / CNG Lean Burn BS-VI Complaint Engines. These engines would be market-ready ahead of the BS-VI launch.
    •  The company introduced 2 Power Tillers which they seeded in select parts of India to increase their portfolio in Agri Space.  
  • The company has high confidence in the opposed Piston concept of Pinnacle. This technology is highly competitive and is best in class in terms of performance, economy and emissions. It is a leap frog technology that allows Greaves the entry into Petrol and CNG. The possible customers of this could be existing players (OEMs) or new ones who would rely on the partnership with Greaves to play in that market.

Cost Increase:

  • For all components where cost has gone up, prices have gone up as well.
  • There has been steady increase in Raw Material costs to Sales ratio over the past 3 quarters due to the commodity cycle, demonetization, BS-IV and GST. The company believes that there would be no long term impact though.
  • If commodity prices go up, it would be passed on to the OEM at the schedule time as per contract.
  • Different OEMs (50-55 of them) have different dates as per contracts and thus commodity inflation would be passed on to them post that.
  • All agreements with OEMs are due from quarter 2 onwards. Over the next 2-3 quarters margins are supposed to get reset.

BS-VI Emission norms:

  • Leap is currently at BS-V levels and the company has it protected for BS-VI.
  • The company plans to take it up to BS-VI and remain a player in that segment due to possible growth in rural and semi-urban segments.
  • The company though eyeing for BS-VI can have an Engine available even sooner if required.
  • Leap is a family of engines – currently Three Cylinder, it can go upto Two and Four. It has both Automotive and Non-Automotive applications. The company is also using it for global applications where BS-VI is not required.
  • 1st April 2020 is the deadline for BS-
  • The management does believe in being ahead of the technology curve and assures that it will be ready by 2020 to take care of the new norms. However, it design validation will take time and so there are two teams that are working feverishly so that they are ready well in time.

GST implications:

  • GST implementation is supposed to benefit the industry in the long run.  However, the company along with other players in the industry have to work out some short term challenges.
  • Power Tiller sales are down by almost 50%. This can be attributed to 2 reasons:
    • The new launch
    • he GST scenario and DBT. The channel wanted more credit and more exposures which the company is not willing to to give

Electric Vehicle Engines:

  •  Taking into account the movement towards Electric Pump and a decline in share of Diesel, petrol and kerosene, the company is working on the electric segment (from an overall Fuel Agnostic portfolio) and looking at several offerings in that space.
  • The company is not ready to announce anything on the Electronic Vehicle space as of now.

Multi Brand Spares and Aftermarket Business:

  • The company has presently about 500 parts in the multi-brand spares. They estimate that it would take 4 – 6 quarters before they can build a full bouquet of multi brand parts for their dealer network to offer.
  • The multi-brand spare market estimated at Rs. 1,500 – 1,600 cores are the focus for the company. While Three – Wheelers remain the focus are of the company, they are also exploring the Two – Wheeler market.
  • Greaves also does white label and represens other brands in the after market.
  • The company is targeting growth in Aftermarket sales in FY 2018 to be in double – digits. Apart from present spares business, multiple initiatives in the Aftermarket and in Greaves Autocare are supposed to drive growth.
  • In multi-brand, the company continues to grow smaller base as they need to keep additional parts coverage, while they focus on getting the right validation