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The engineering sector in India is the country's largest industrial sector. It creates a whole variety of end-user products for a host of industries including agricultural, chemical, and automobile. India has made great progress in strengthening its engineering industry as part of its goal to become a worldwide superpower. In the fiscal year 2022 upto October, India’s engineering exports stood at 4.8 lakh crore rupees, and the Research and Development sector stood at 3.1 lakh crore rupees.
Greaves Cotton is a multi-faceted engineering firm. It is a manufacturer of Cleantech Powertrain solutions, farm equipment, and generator sets. Currently, it has over 500 retail centers and 6300 plus spare parts retail locations. Producing nearly 4 lakh engines a year or roughly one per minute in the mobility industry, the company conveys over 5 lakh tons of freight daily.
Greaves Cotton is undergoing a metamorphosis from a 3-wheel diesel engine producer to a last-mile mobility ecosystem. After acquiring Ampere (e-2W player), it is set to greatly benefit from the growth in the industry. Ampere sold 9155 units in 2021 up till November, taking the number 5 spot in the market.
Greaves Electric Mobility, a division of Greaves Cotton, is off to a promising start in 2022. It sold over 10,000 Electric 3-wheeler in December 2021. According to Greaves Electric, Ampere scooters recorded an almost six-fold increase in revenue in December 2021 compared to the same month last year, while the Electric 3-wheeler company witnessed a 101% increase in volume.
Greaves Cotton is practically debt-free with a net cash position of 280 crores rupees. With future development in mind, Greaves Cotton has reinforced the leadership team of the e-mobility business in order to expedite business expansion. Company is constructing a new electric vehicle manufacturing factory in Tamil Nadu, at an anticipated investment of 700 crore rupees. Apart from building its own online platform, the firm has co-operated with major e-commerce platforms such as Paytm, Flipkart, and Amazon to attract young buyers.
But the management has not been stable - company has had three CFOs in the last 4 years.
So, what is our view on company valuation?
Greaves Cotton currently trades at an EV/EBITDA (TTM) ratio of ~60 times on the back of the EV story. Cummins India in comparison trades at an EV/EBITDA (TTM) ratio of ~20 times. Overall, the Company appears to be an interesting opportunity for the long-term and should be investigated further by investors. It has joined the EV area, which is hot right now, and as a result the stock has climbed, therefore, it is worth investing in only after a significant correction.
As for the risks to this analysis, Continuous investor interest in EV companies and ancillary providers can keep the stock price high for a long time. Stake of institutional investors has fallen from 30% in March 2019 to 13% in December 2019 - this doesn’t augur well.
So, would you invest in Greaves Cotton?
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