Buy This Stock, Company To Ride High From Electrical Vehicle Wave

Sharekhan has suggested buying the stock of Greaves Cotton as the stock could surge, as the company increasingly benefits from the electrical vehicle wave.

Electrical Vehicle adoption to provide benefits to the company

According to Sharekhan, on investor's day, Greaves Cotton Limited (Greaves) continued to emphasise on its new revenue streams, led by its Electrical Vehicle (EV) business, which is well poised to be a significant beneficiary of EV adoption in India. Along with its strong product portfolio in e-2W and e-3W, the company is lately focusing on developing EV retail brand, Auto EV Mart arm, which is focusing on retailing multiple brands in e-2Ws.

Strategic investment in the electric mobility business

The company's EV arm, Greaves Electric Mobility Limited (GEML) has received a strategic investment of Rs. 1,171 crores for a 35.8% stake in GEML by Abdul Latif Jameel, a well-known family-owned global investor. Post the deal, the company has consolidated net cash of Rs 1,350 crore (Rs 56/share), which will be utilised for new product and technology (35%), new opportunities (25%), capacity expansion (20%) and brand building (10%). The management remains positive on its diversification strategy and expects to normalize its sales and profitability going forward.

Strong growth despite chip constraints

The e-mobility is showing strong growth, despite the supply constraints due to chips and parts shortages. The company's diversification strategy is reaping benefits with new businesses contribution increasing to 56% of total revenue in Q1FY23 versus 22% in Q1FY22. The company is expected to deliver a 22.3% revenue CAGR during FY2021-FY2024E and see a sharp rise in margins, leading to an earnings CAGR of 113.8%.

Buy with a price target of Rs 212

Sharekhan has reiterated a Buy on the stock with a revised price target (PT) of Rs 212. "We have fine-tuned our estimates to build faster-than-expected growth in the e-mobility business,"the brokerage has said. "Greaves continues to grow strongly, aided by its timely investments and expansion in e-mobility and non-auto businesses. We expect the 3W industry to gain demand, as the economy moves towards normalcy. The opening of schools, educational institutions, corporates, and local/metro trains will be key demand catalysts," the brokerage has added.

Key beneficiary of recovery in 3W demand

According to Sharekhan, Greaves will be the key beneficiary of recovery in 3W demand. Additionally, the company's focus on new businesses, especially e-2Ws and e-3Ws, provides strong room for strong growth. In the e-2W segment, the company maintains its market share, despite rising competition. Investments in the company's EV arm, GEML, by Abdul Latif Jameel, would provide the necessary funds to expand business and brand value at the right time, when the EV industry is at the verge of an inflection point for growth.

Financial performance of the company to strengthen

"We expect the financial performance of the e-mobility business to strengthen going forward, driven by the increasing contribution of high-speed e-2Ws, increasing retail penetration, and new launches. The stock is trading at P/E multiple of 25.5x and EV/EBITDA multiple of 12.1x its FY2024E estimates. Thus, we maintain our Buy rating on the stock with a revised price target of Rs. 212," the brokerage has said.

About the author

Sunil Fernandes, the author of this article has spent 28-years covering business and finance, particularly stock markets. Sunil has worked with Deccan Herald, Hindustan Times, Dalal Street Investment Journal. He has also worked with leading English newspapers and investment magazines in the Middle East.