Greaves Cotton is the largest domestic manufacturer of light diesel engines for the three wheeler automotive industry. Greaves enjoys an enviable position in the three wheeler engine market thanks to its exclusive tie-up with Piaggio and M&M (together control 36% market share in three wheelers).
Tie-up with Tata Motors provides a meaningful entry into the SCV opportunity: Recent 10-year tie-up with Tata Motors to supply engines for its 0.5 tonne SCVs — Ace Zip and Magic Iris, provides an opportunity to tap the increasing demand for 4-wheeler small commercial vehicles.
Comparable RoEs and earnings growth profile v/s Cummins but trades at significant discount
Launch of Tata Nano Diesel can be a big catalyst for Greaves:Given that Greaves is a sole supplier to Tata Ace Zip and Magic Iris, there is a high probability of it being offered a contract to be a sole supplier for Tata Nano diesel engines.
Based on our DCF model we value Greaves at `99 implying FY12 P/E of 14.6x. On an FY14 basis, Greaves trades at a 50% discount to Cummins. The discount should get narrower. BUY with a Target Price of Rs 100.
