Greaves Cotton: Low Debt, High ROE, Good Dividend Yield & Capacity Expansion

Also, though Greaves Cotton offers a reasonable dividend yield of 3.2% at the CMP of Rs. 93, this is based on a dividend of 150% that it paid in June 2010. This is much higher than the 40% that it paid in the earlier year so one is not sure whether the 150% rate will be maintained in the future.

Greaves Cotton Limited manufactures a wide range of industrial products though its core competencies are in Diesel / Petrol Engines, Gensets, Pumpsets and Construction Equipment.

Greaves Cotton is one of the largest makers of light diesel engines in the world. Greaves Cotton supplies engines to OEMs like Tata Motors and Piaggio.

In January 2011, Greaves Cotton announced that it had won a 10-year contract from Tata Motors to supply small diesel engines for its new half-tonne truck – Ace Zip – which is expected to be launched in the first quarter of this fiscal. It was stated that Greaves Cotton has developed a 600cc engine for Tata Motors‘ new truck and that it will also supply CNG engines for the truck.

Greaves Cotton is already supplying engines to Piaggio for its four-wheeler truck Ape as part of an eight-year contract. Greaves Cotton also meets the diesel engine needs of three-wheeler makers including Piaggio, Mahindra & Mahindra, Atul Auto and Scooters India.

Greaves Cotton plans to build a new engine manufacturing plant at Aurangabad in Maharashtra at an investment of Rs 100-crore to meet the growing demand for engines. This will take Greaves Cotton‘s total automotive engine manufacturing capacity to 4 lakh units per annum.

While the initial investment in the plant will be Rs 60 crore, it will go up to Rs 100 crore in stages and the plant will have a capacity of 80,000 engines per annum which will eventually be scaled-up to meet industry demands. The plant is expected to go on stream by end of FY 2011.

Greaves Cotton announced robust results in the Quarter ended December 2010. While the Net Profit rose 35.67% to Rs 44.35 crore in the quarter ended December 2010 as against Rs 32.69 crore in the previous quarter ended December 2009, the sales rose 21.82% to Rs 419.00 crores in the quarter ended December 2010 as against Rs 343.94 crores during the previous quarter ended December 2009.

In the six months ended 31st December 2010, Greaves Cotton reported an EPS of Rs. 3.30 as compared to Rs. 2.32 in the corresponding period last year. Assuming Greaves Cotton is able to keep the same pace in the next six months, it will end up with an EPS of Rs. 6.60 in the FY 2011.

At the CMP of Rs. 93, the price is discounted 14 times assuming the EPS is Rs. 6.60 for the whole year. This is not unreasonable for a company with good growth prospects.