Greaves Cotton is opting for an electric vehicle over a car engine. Will this high-stakes wager pay off?
Greaves Cotton is opting for an electric vehicle over a car engine. Will this high-stakes wager pay off?
Synopsis
Due to positive news and outcomes, Greaves Cotton rose about 73 percent in eight days.
However, the stock is currently down about 32% from its high. Investors believe the company’s rapid concentration on electric vehicles is hurting engine profitability. Nagesh Basavanhalli, the company’s new CEO, feels confident in his decisions.
Will Greaves Cotton make a profit for its shareholders?
Blow hot, blow cold.
That’s how investors feel about Greaves Cotton, a British engine producer.
The stock price soared when the business announced in December 2021 that its e-mobility branch, Greaves Electric Mobility, had sold 10,000 electric cars (two- and three-wheelers).
In fact, before January 11, 2022, it had already increased by 73 percent in just eight days. The stock surged about 20% (INR238) on January 10 and proceeded to rise in the following days on the back of favorable news of bulk deals, which attracted retail investors.
Nagesh Basavanhalli, managing director and group CEO, received appreciation and skepticism. Institutional investors needed more time to believe in the new management’s story, backed up by numbers and conviction. However, the stock has dropped 32% in the last year, raising concerns.
The company reported a 30 percent increase in sales — INR486 crore — in the third quarter of fiscal year 22 compared to the previous quarter of fiscal year 22.
Due to the strong performance of the electric vehicle (EV) industry, which contributed 37 percent of overall sales during the quarter. Retail investors piled into the stock in large numbers.
While regular investors have confidence in the company’s prospects, institutional investors, such as mutual funds have taken a wait-and-see attitude toward the stock. As of December 2021, they owned only 3.9 percent of the corporation, compared to a 23 percent stake held by the retail sector. Is it possible that fund managers are being overly cautious?
A new management team and a fresh vision are in place
There is a common consensus that the company’s profitability on the engine side has suffered due to the increased emphasis on electric vehicles.
In December 2021, EV sales increased by a factor of one hundred percent as compared to the previous quarter. However, due to the company’s declining revenue share from the engine sector, it has declared losses for the quarter ending in December.
The company did not experience a loss for more than a decade until fiscal year 21. It had a consolidated total income of INR150 crore and a total loss of INR19 crore in fiscal year 21. Greaves Cotton had a total turnover of INR1,088 crore for the nine-month period that ended in December 2021, but it also had a net loss of INR52 crore.
Greaves Cotton rose at a compound annual growth rate (CAGR) of 4 percent before 2021. Around this period, the company tried to diversify its operations and began to declare financial losses.
In addition, the corporation is dealing with some labor concerns. It has been forced to lay off 400 employees in the previous two years as part of cost-cutting efforts, resulting in an altercation with the company’s former employees.
According to the SEC filing, Banyan Capital Advisors, a Sebi-registered portfolio-management firm, had acquired a stake in the company three years prior but sold it in early 2020 due to poor performance.
“We had hoped that the company’s diversification would accelerate under the new management led by Nagesh (Basavanhalli), but that did not materialize.
” Their three-wheeler engine business is now in jeopardy, which was once their most profitable division. According to VP Rajesh, managing partner at Banyan Capital, “the competition is fierce, and we will know who the winner is in two to three years.”
Basavanhalli became a member in September of 2016. He formerly worked for Fiat Chrysler Automobiles and has extensive expertise working with global original equipment manufacturers (OEMs). Investors place their faith in him to get the business up and running, but they recognize that it will take time.
Greaves Cotton had been primarily a diesel-engine producer until four years ago, focusing on serving the last-mile mobility needs of the three-wheeler and small commercial vehicle markets.
Due to the dip in profitability experienced by the automotive industry during the pandemic, the company decided to aggressively diversify into the non-auto engine segment, concentrate on Greaves Retail, and capitalize on the growing interest in electric vehicles (EVs) as a result of the government’s Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME II) program.
The company’s diversification program attracted a large number of investors; however, some loopholes need to be closed.
“Our primary focus was diesel, and our diesel engines were found in over 70% of the three-wheelers on the road in the country.”
“We’ve also gotten into compressed natural gas (CNG) in the recent year,” Basavanhalli tells ET Prime. “Our profitability was hurt as a result of the lack of engine requests from clients.”
He believes that diversification into the non-automotive engine area will be financially viable. At the same time, the automotive-engine market is likely to rebound to 400,000-500,000 units in the next fiscal year, according to his estimates.
After reaching 600,000 units (petrol, diesel, and CNG) before Covid-19 — of which diesel accounted for 300,000 units — the automotive-engine market shrank to 200,000 units during the pandemic, according to the World Health Organization.
Basavanhalli believes that the non-automotive engine business is enormous since engines are employed in a wide range of different applications. He estimates that the Indian Genset market alone is worth INR7,000 crore. Even in the sea environment, the technology is doing effectively.
The company Greaves Cotton sold 29,000 units of non-auto engines in the first nine months of fiscal year 22 compared to 26,000 units of auto engines. The new CPCB (Central Pollution Control Board) norm engines for the non-automotive sector will be available by the end of next year.
As Basavanhalli explains, “we have sufficient capacity on the engine side between the two Aurangabad plants.” According to industry sources, the plant’s capacity is underutilized due to the reduction in the auto-engine portfolio. On the other hand, the corporation claims to be operating at 60 percent of its capacity. As the market’s condition improves, it will meet the increased demand.
Greaves Cotton announced in August 2018 that it had acquired Ampere Vehicles, a Coimbatore-based company that manufactures electric two-wheelers. Ampere said in February that it would invest INR700 crore over ten years in electric vehicle manufacturing at Ranipet, near Chennai.
Based on the information provided by Basavanhalli, the project is a brownfield extension of Greaves Cotton’s petrol-engine facility for farm equipment. Because of the projected development of EV assembly operations and the limited capacity available in Coimbatore, engine manufacture was phased out to make room for EV assembly activities.
Although the farm-equipment industry was booming in the past, it is now restricted to trading operations.
Profitability is slipping, which is causing concern
“In the last two-three years, we have invested approximately INR330 crore on the electric-mobility side and approximately INR300 crore or more on the side of the engine to prepare for the shift to the new emission standards,” adds Basavanhalli. So far, all of the investments have been funded from internal accruals.
The company’s engine business generates approximately 40% of sales, Greaves Retail adds about 22%, and electric mobility, which accounted for INR181 crore out of the INR486 crore in revenue in Q3 FY22, generates another 37%. The remainder is derived from other segments.
Ravi Damodaran, a former chief technology officer at Greaves Cotton, has a different point of view on the matter. Greaves Cotton, he feels, has suffered a financial setback in the previous two years as a result of poor management and an unprepared entry into the electric vehicle market. Before acquiring Ampere Vehicles, it was a lucrative corporation with revenues above INR1,800 crore and a profit margin of over 11 percent (profit after tax).
Because the company was purchased with an eye toward the future, there was little development for nearly a year after it was purchased. Meanwhile, a large number of resources were relocated. Cost-cutting was also necessary because revenues were restricted due to the pandemic. The majority of the cost-cutting took place on the auto-engine side of the business. According to Damodaran, this was a mistake because, at the time, auto engines were their most profitable business, generating between 18 percent and 24 percent Ebitda and between 60 percent and 70 percent of revenue on the Greaves portfolio while electric vehicles (EVs) were incurring significant losses.
Last year, the company’s declaration that it would concentrate on electric vehicles (EVs) and the non-automotive industry added to the anxiety of automotive clients, resulting in the suspension of all new development programs with Greaves. Automobile volumes are not expanding at the moment since only older programs are being continued, and “they will just die off in two to three years.”
Profits from non-automotive engines range between 6 and 8 percent, while automotive engines (original equipment manufacturers) make 18 percent profit, and the auto aftermarket generates between 23 and 25 percent profit (profits). “The issue is that there is a restricted market for non-automotive engines,” Damodaran explains.
In August of this year, Ampere, the e-mobility subsidiary of Greaves Cotton, acquired a 26 percent share in MLR Auto, which is based in Hyderabad. This was followed by the acquisition of Bestway Agencies, which sells e-rickshaws under the ELE brand, by Greaves Electric Mobility (the consolidated electric vehicle business).
The future of mobility will be in a perfect monetary position due to the work we’re doing now. The corporation still has approximately INR250 crore in cash on hand.
And we have integrated our plants and decreased our fixed overhead by INR45 crore over the previous two years,” says Basavanhalli, who maintains that the company is debt-free. The final sale procedure for the Pune factory is expected to be completed by the end of the current fiscal year.
“All three electric vehicle investments are opportunistic, and they come together to form the e-mobility industry, which is significantly loss-making even after the government subsidy,” says the author.
The likelihood of them making a payment shortly is extremely low. There was a chance that Ampere would pay off, but it was poorly managed. “With subsidies set to expire in April 2024, it looks that they have left it too late to turn around this enterprise,” Damodaran says.
He believes that Ampere must invest more in full-fledged research and development and sourcing capabilities to make low-cost parts and develop testing and validation knowledge to create the correct product ahead of the competition.
The company clarifies that it is working hard to improve its capabilities and provide high-quality items.
Experts believe that for EV manufacturing to expand, an annual investment of INR150 crore-INR200 crore is required, which is not the current situation. With Greaves Cotton’s profit before tax (profit after tax) falling from INR169 crore in FY19 to INR10 crore in FY21, significant investments may be put under strain.
A high-speed scooter and an electric three-wheeler are on the horizon for Greaves Electric Mobility, which hopes to introduce them later this year. “In terms of addressing the belly of the market, Ampere is designed to cater to inexpensive mobility by tackling the INR75,000 to INR80,000 region of the price spectrum.
“Our goal is to introduce a scooter that is faster and more powerful while remaining in the sub-INR1 lakh pricing category,” says Basavanhalli.
Ampere released its Magnus EX long-range scooter in October of last year, and it has since become the company’s most profitable product. However, the e-scooter will have difficulty transporting a pillion passengers up a grade or over a flyover, according to insiders.
It claims that it has received no performance-related complaints from Ampere customers in response to this claim.
So, what about the issue of valuation?
What financial analysts and investors believe
Based on its price-to-sales ratio, the company is valued at 2.45 times its sales, which is still a high level for a corporation that is still incurring losses. As of right present, the price-to-sales ratio of EV companies such as Olectra Greentech is 11.15 times higher than that of Hero MotoCorp, which is 1.58 times higher.
Using the sum of the parts (SoTP) model, ICICI Securities had evaluated the EV component at 63 percent of the stock price and assigned the remaining portion to the core business, arriving at the target price of INR220 per share in February 2022. The engines business is the company’s primary focus.
In terms of SoTP, we place a value of INR220 on Greaves Cotton. According to the analysis, revenue and Ebitda are expected to expand at a compound annual growth rate (CAGR) of 13.6 and 76.8 percent, respectively, in FY22-24E.
Despite the numerous obstacles in this industry, investors optimistic about electric vehicles are placing their bets on this stock.
Aamara Capital, a principal investment firm, became interested in this company approximately a year and a half ago, after becoming interested in the retail electric vehicle ecosystem in general. It is highly optimistic about the future of electric vehicles.
I believe in the sector, and I think it is essential to pick a few horses to ride. Greaves Cotton is undoubtedly one of those horses.” Specifically, the entire concept of a full-stack electric vehicle ecosystem, mainly as expressed by the Greaves Care outlets, drew our interest.
Thus, according to Mridul Shah, director, and co-founder of Aamara Capital, they now have the correct products in place, a cohesive ecosystem in the area, and the necessary experience in the services sector. “In the following days, people should be able to interact with a variety of ecosystem participants and reap the benefits of their efforts.”
Greaves Cotton is a typical gamble on the management’s decision-making process. Basavanhalli’s decision to focus on electric vehicles at the expense of internal combustion engines may turn out to be a wise decision. In addition, it is his most significant wager in a very competitive market. As the stock’s price lowers, more institutional investors may begin to consider the stock as an exciting investment.
edited and proofread by nikita sharma
