As highlighted in our 1QFY18 results review, we see significant challenges in GRV’s 3W engine business due to the emergence and strong growth of e-rickshaws in many parts of the country. We think even the company’s pump-set business will see headwinds ahead as electric pumps are gaining traction, where GRV doesn’t have any offerings. We lower our growth assumptions for both 3W and pump-set volumes, leading to a 7%/9% reduction in our FY18/FY19E EPS. Due to growth uncertainties in the two large verticals which contribute ~50% of GRV’s sales, a multiple contraction is possible. We therefore cut our target TTM multiple from 18x to 16x and maintain REDUCE on the stock with a Dec’18 TP of Rs 125 (Sep’18 TP of Rs 147 earlier).
3W diesel engines up for challenges from e-rickshaws, BSIV-VI shift: E-rickshaws are growing at a rapid pace in many parts of the country, and replacing diesel 3Ws as a shared mode of transportation. While diesel 3Ws plying outside city limits will not be impacted by this, a shift to e-rickshaws within city limits would curb their growth. Our industry interaction on a shift from BS-IV to VI norms from Apr’20 indicates that diesel 3Ws would see volume declines as the gap between 3Ws and 4Ws narrows.
Pump-sets to see headwinds from electric pumps: Our interaction with an agri team member at GRV’s major competitor suggests that with the falling level of underground water tables, demand for electric pumps will increase; demand would also be supported by improving electrification in villages. GRV doesn’t have any offerings in the electric pump segment, and therefore will likely lag behind competition under this market shift.
Sales up 3% yoy but 7% below EE on volume decline across segments, except gen-sets: 3W volumes declined 5% yoy and came in line with EE. However, a 36% decline in agri pump-set volumes surprised negatively; management attributed the decline to floods in some parts of country, a delay in government subsidies, GST impact and tightening of credit to dealers. Even aftermarket sales growth was only 4-5% vs. double-digit growth last year due to similar reasons. Aftermarket sales are now reviving and should see better growth in 2H.
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EBITDA down 13% yoy on volume declines: EBITDA margin contracted 270bps yoy due to a 295bps decline in gross margins as commodity prices spiralled up over last year. Other expenses however were controlled well and declined 8% yoy and 5% qoq as company had been taking measures to cut cost under rising commodity prices.