The Hindu Business Line : Greaves Cotton: Buy

The Greaves Cotton (GC) stock offers a dual play on the automotive and infrastructure equipment sectors. Strong numbers, focussed capex plans, robust demand in the user segments - light commercial vehicles and the infrastructure sector, are positives.

Concerns about the company's relationship with Piaggio have been allayed, as the company's alternative strategy to combat loss of volumes appears to hold promise. At the current market price, the share trades at 10 times its likely earnings for year ending June 2008. Investments can be considered with a 2-3 year perspective.

GC is one of the engineering companies that recovered from the slump of 1999-2003. The company's light diesel engine business, which contributed over 60 per cent of the total revenue, is likely to drive earnings visibility on the back of accelerated growth in the low-end transport vehicle segment. Given the improved road infrastructure, we expect increased vehicle tonnage on the highways. With the mini-commercial vehicles (sub-one tonne category) typically providing the final link to transport goods to rural areas, GC is well placed to capitalise on the growth in the diesel three-wheeler segment. Piaggio, a major player in the above segment, has been GC's biggest customer. While Piaggio will continue to source engines from GC until 2010, it has plans to start its own diesel engine plant. It appears to be working towards diversifying its customer base, increasing exports and focusing more on the infrastructure equipment segment. The company has already forayed into West Asia and is also eyeing other international markets. The infrastructure equipment segment has received a boost with the recent opening of another plant in Chennai. While the engine segment is likely to continue as the revenue driver, we expect the infrastructure equipment space to see massive growth, given the current spending in the road sector. This strategy to prevent volume loss over the long-term inspires confidence. GC's third-quarter profits jumped by 66 per cent and accompanied an improvement in profit margins. Any tapering off of volume growth in the automotive sector remains a risk.