We expect clarity on BS6 pricing towards the end of Q4 which is an upside risk for the stock. Successful completion of buyback in Q3 would exhaust 24.77% of net worth and reduce 5.6% of outstanding shares which is an earnings boost. However, higher CapEx for next two years, increasing working capital intensive and cash draining e-mobility business are other key factors to watch in a weak demand scenario. Hence, we maintain ‘HOLD’ rating and value Greaves at 15.5x two year forward earnings (13 year average of 1 yr forward P/E) for a target of Rs. 144. Key downside risk is further slowdown in core business impacting margins and upside risk is clarity on BS6 pricing
New product range of high speed E-2-W vehicles with the launch of ZEEL and expected launch of another two products at Ampere coupled with recent strategic alliance with WheelsEMI for E-2-W financing is expected to aid growth. New business initiatives (CNG engines, B2C business) along with aftermarket sales may provide much needed growth uptick. The 3-W, 4-W auto slowdown remains a cause for concern for the base business. We build in 2.7% revenue CAGR in FY19-21E. We value GCL at (base business at 15x FY21E EPS) Rs 135/share and revise our rating to HOLD.
Earnings estimates cut; Retain Hold with an unchanged PT of Rs. 150: GCL’s Q2FY2020 results missed estimates due to a subdued performanceacross segments. Revenue growth is expected to be flat for FY2020attributable to the apparent challenges across key segments of auto, aftermarket and agri space. Margins are also likely to dip sharply,reflecting a negative operating leverage and elevated costs in theelectric 2W business. GCL does not expect the electric 2wheeler business to achieve EBITDA break even in FY2020. We have cut our FY2020/ FY2021 estimates by 2% and 3% to factor in the concerns. At CMP, the stock is trading at 19x its FY2021 earnings, which is close to its long-term historical average of 17x-18x. We retain our Hold rating on the stock with an unchanged PT of Rs. 150.
GCL’s is focusing on becoming fuel agnostic through new business initiatives such as CNG engines and electric vehicles. These businesses are at still at an embryonic stage and developments in the e rickshaw and e 2 wheeler space are to be monitored. We expect revenues to grow at a CAGR of 9% over FY19-21E. At CMP, the stock is trading at P/E of 16.5X/13.8x on FY20E/FY21E EPS, respectively. We maintain a MARKET PERFORMER rating on GCL with a revised target price of INR 133, assigning a P/E of 15X on FY21 EPS. Risks: Downturn in the economy leading to lower auto engines volumes, a slowdown in infrastructure and industrial activities, lower than expected pick-up in new business.
GCL is currently trading at 14.5x and 13.2x FY20E and FY21E earnings respectively, which is at a discount to peers in the capital goods space.However, GCL’s growth outlook has remained subdued as it has 3W engine saleshave underperformed the Industry growth rate. We now value the stock at 14x FY21E EPS (earlier 15x FY21E), thus arriving at a price target of Rs 125 (Earlier Rs 156). In view of the modest upside, we maintain“ADD” rating. Key positive trigger going forward will be ramping up of its 200cc BSVI compliant CREST CNG engine volume (currently undergoing field trials).
New product range of high speed E-2-W vehicles with the launch of Zeal and expected launch of another two products at Ampere coupled with new business initiatives (CNG engines, and B2C business) would aid revenue growth and boost the share of non-auto segment. Also, aftermarket sales may provide the much needed growth uptick. We build in 8.7% revenue CAGR in FY19-21E. We value GCL base business at 16x FY21E EPS to arrive at | 145/share and revise our rating from HOLD to BUY.
At CMP of Rs 149, Greaves Cotton is trading at FY20E and FY21E, P/E multiples of 17.1x and 14.9x respectively. We have increased our target P/E slightly to 16.5x from 16x earlier and now value the stock at 16.5x FY21E earnings which yields a target price of Rs 165 per share. We have a Hold rating on the stock, with revised TP of Rs 165, giving an upside of 10.7%.
Valuations: Cut estimates on lower other income and margin pressures; retain Hold; Buyback to support stock price: GCL’s Q4FY2019 results were below estimates. We have lowered other income (on account of reduction in cash balance due to buy back) and also lowered our margin assumptions as GCL will be unable to entirely pass BS6 cost increases. Factoring in the above concerns, we have revised our estimates downwards by 6% and 7% for FY20/21 respectively. At CMP, the stock is trading at 19.8x and 19.1x FY2020 and FY2021 earnings respectively. Given the muted earnings growth, we retain our Hold rating on the stock with an unchanged PT of Rs 155. The Buyback offer would enhance GCL’s return ratios from 18.5% currently to 22% in FY2020. We expect the buyback programme to support company’s stock price in the near term.
New product range of high speed electric vehicles at Ampere coupled with new business initiatives (CNG engines, cleantech applications, and B2C business) to contribute incremental revenue growth and boost the share of non-auto segment. Segments like aftermarket sales (including multi brand spares and Greaves care business) may provide much needed growth uptick. We build in 10.2% revenue CAGR in FY19-21E. We believe Ampere will help GCL cater to the underserved bottom of the pyramid market. We introduce FY21E numbers and value the company at 16x FY21E EPS to Rs 150/share. We revise our rating from BUY to HOLD.
Introduce FY2021 estimates; Retain Hold with a revised PT of Rs 155: We have broadly retained our earnings estimates for FY2020. We have introduced FY2021 estimates in this note. At the CMP the stock trades at 18.3/17.3x its FY20/FY21E estimates, which is closer to the higher end of historical average multiple, thus leaving a limited upside potential. We retain our Hold recommendation on the stock with a revised PT of Rs 155 as we rollover our valuation multiple on FY2021 earnings. (Earlier PT of Rs 134).