Greaves Cotton stock rises on long-term supply agreement with Atul Auto

The automotive and industrial engine manufacturer – Greaves Cotton's announcement of entering into a long-term supply agreement for diesel engines of three-wheelers with Atul Auto has boosted the company's stock price by 2% so far in the day today.

This is a big positive for this scrip, which had otherwise been on a declining spree – having lost more than 31% in value over the past one year amidst concerns pertaining to severe slowdown in both the industrial and the automobile sectors.

Trading at over Rs 64, Greaves Cotton's scrip currently commands a twelve-month trailing price-earning (P/E) multiple of 8.3 against 14.5 a year ago, making it an attractive buy at the these levels.

With a number of long-term supply contracts in its kitty, including those with Mahindra & Mahindra, Tata Motors and now with Atul Auto – for 7 years, Greaves Cotton ensures of a reasonable revenue visibility over medium term.

The company, as such, also boasts of strong fundamentals with zero debt in its books, reasonable level of cash, positive operating cash flows and an improving working capital position with reduced number of debtor and inventory days for the year ended Mar '12.

A turnover growth of over 40% in FY '12 amidst slump in the economy was also impressive though the company did falter as far as the margins are concerned.

The operating margins of the company slid from 14.8% in FY '11 to 13.5% in FY '12 that has raised some concerns amongst the analysts. But with lack of orders in the industry, pricing pressures have been mounting across companies in this sector, including Greaves Cotton.