Greaves Cotton: Sharekhan maintains Buy rating with the revised price target of Rs 150

Sharekhan continues to maintain a positive stance on Greaves Cotton on the back of its timely investments in the e-mobility business. Greaves acquired Ampere in 2018 and now holds 81.2% stake. Through its subsidiary Ampere, Greaves has signed an MOU with the Tamil Nadu Government to set up an e-mobility manufacturing facility at Ranipet, with a proposed investment plan of Rs 700 crore, which it plans to invest in a phased manner over a period of 10 years. The plant is expected to be operational in FY21 with an initial installed capacity of 1,00,000 units of e-2Ws. Greaves Cotton Share price today is Rs 133.5, up Rs 11 or 9%.

Greaves Cotton has ramped up its e-mobility business at a much faster pace than we had anticipated earlier. The e-mobility business contributes 12% of Greaves Cotton consolidated revenues in 9M FY21, which Sharekhan expects to grow to 20% of consolidated revenues in FY23E. Sharekhan believes Greaves Cotton is positioned well to benefit from the Government’s push towards fast adoption of Electric Vehicles (EVs). Besides, the incentives under FAME-II (Faster Adoption and Manufacturing of EVs) scheme, and the government’s “Go Electric” media campaign to spread awareness of the benefits of e-mobility and EV charging infrastructure.

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In addition, the FAME-II scheme is focussed on E-2Ws and E-3Ws, with 52% subsidies provided under the scheme. Over the last few years, the company has transformed its businesses to expand its markets from 3W diesel engines to last mile mobility, move beyond one product/application/fuel with focus on clean tech, increasing value to customers through B2C, expand products to solutions and leverage the company’s brand and penetration. The refocus strategy has played out well for the company, as Greaves Cotton has managed to display a strong quarterly revenue run-rate in Q3 FY21 despite lacklustre sales in 3W engines.

Given the improved new businesses outlook and expectations of improving three wheeler sales, Sharekhan have raised estimates by 8% and 10% for FY22E and FY23E respectively. Sharekhan expects Greaves Cotton earnings to grow robust 70.3% CAGR during FY2021E-FY2023E, driven by 22% revenue CAGR and a 510 bps improvement in EBITDA margin. Greaves Cotton also has a history of a strong dividend pay-out ratio of 40-60%, which implies a dividend yield of 3-3.5% at the current price. Hence, Sharekhan maintains Buy rating on Greaves Cotton with the revised price target of Rs 150.