Greaves Cotton

DSP Merrill Lynch, Q3FY07 revenues are inline with their expectation. DSP ML has recommended buy rating on the stock.

Topline growth in line, margins suffer…

Greaves’ Q3FY07 revenues, at Rs.3.25bn (36.6% Y-o-Y), were in line with our expectations of Rs.3.24bn. EBITDA margins for the quarter, however, suffered by 58bps to 14.7%, as against our expectation of 16% due to higher than expected increase in raw material costs & other expenses. EBITDA for the quarter was thus at Rs.478mn (31.4% Y-o-Y). PAT at Rs.339mn, was more than our expectation of Rs.301mn, due to MAT credit of Rs.60mn received which reduced tax outgo.

Upgrading our full year estimates

Based on nine-months numbers for FY07E, we are upgrading our revenue estimates by around 9% to Rs.12.58bn, mainly on account of higher growth in the infrastructure division, and by around 8.6% in PAT to Rs.1.1bn as against Rs.984mn earlier. We are maintaining our earnings estimates for FY08E and FY09E at Rs.1.3bn and Rs.1.65bn respectively.

Maintain Buy

The stock trades at 12x FY08E and 9.6x FY09E EPS; we expect a CAGR of 22.3% in revenue and 25% earnings CAGR over FY06-09E. Greaves compares favorably to peers comprising other engine manufacturers and major auto ancillaries, both on earnings growth and return ratios.