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Four wheelers propel growth for Greaves Cotton

Through the “hub & spoke” model, which involves transporting goods through highways by heavy vehicles, the company supplied SCV engines to Tata Motors.

, ET Bureau|
Updated: Mar 28, 2014, 09.37 AM IST
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(This story originally appeared in on Mar 28, 2014)
Four wheelers propel growth for Greaves CottonFor Greaves Cotton, sliding sales volumes of three-wheelers since the quarter to March FY12 was a major worry, since it was a major supplier of engines to three-wheelers. Three-wheeler sales volumes were severely impacted as freight operators moved to lower horse power, or HP, four-wheeler vehicles such as Tata Motors Ace and M&M Gio, which are classified as small commercial vehicles, or SCVs.

The Greaves Cotton management then decided to shift focus from the three-wheeler companies to the SCV segment, hoping this would deliver revenue growth higher than its core business catering to three-wheelers. Through the “hub & spoke” model, which involves transporting goods through highways by heavy vehicles and then using small vehicles for city roads, the company supplied SCV engines to Tata Motors for Ace Zip and the Magic Iris model.

The company’s SCV engine volumes now account for 14 per cent of its total engine volumes, compared with a negligible contribution three years ago. Says Sunil Pahilajani, MD & CEO, Greaves Cotton, “Our focus has changed to auto original equipment manufacturers’ (OEM) side, from being a threewheeler supplier to a complete solution provider to the SCV segment. In trying times, our focus has been on adding to the product range, adding more customers and to enter various categories.”

After Pahilajani took charge of the company two years ago, he ensured there was a CEO for each segment and spun off the after-sales segment as a separate division. Revenue from the after-sales segment now accounts for 15% of the company’s total revenue and it enjoys a high margin compared to the other segments. Given the economic slowdown, which impacted volumes of power gensets and the industrial engines segment, the company targeted augmenting revenues from the after-sales segment and to increase its exports.

“We are able to maintain revenue growth from the after-sales segment, when industry players have seen a significant dip in revenues from this vertical. Revenue from after-sales has partially offset pressures emanating from other verticals,” said Pahilajani. He said the company is planning to increase revenue contribution from the export market to 10% in the next three years from 3% now. The company’s plant now works at 70 per cent capacity utilisation.

In the next few quarters, Greaves Cotton’s farm equipment segment is expected to do well and its contribution to the company’s total revenues is expected to rise as the company is making inroads into the electric pump-set market, which has a market size of.`3,000 crore. Besides, the company has a 50% market share in the petrol and kerosene market and has 1,000 retail touch points in India. It also plans to grab market share in the highly fragmented electric pump market.

But what could be a big threat to the company in the next few quarters is the possibility of revenue growth being affected if auto companies start manufacturing engines themselves. Besides, a heavy monsoon, drought or floods can also impact its revenue growth. More importantly, the company’s revenue growth is linked to the revival of the road sector, which has been struggling owing to a fall in traffic, high interest rates and policy paralysis.

According to Bloomberg data, the company’s revenues and profits are expected to grow at a compounded annual growth rate of 11% and 23 per cent, respectively, in the FY09-15 period. Greaves Cotton has attracted considerable interest from domestic mutual funds, based on its high earnings potential in the coming years. Fund houses such as Reliance and IDFC hold 8 per cent and 5 per cent stake, respectively, in the company.
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