Diesel Headwinds And EV Expansion Will Reshape Industry Prospects

Key Takeaways

• Optimism around sustained growth and margin expansion may be misplaced due to long-term risks in core combustion segments and slowing electric mobility momentum.
  
• Market may be underestimating challenges from rising costs, automation trends, and exposure to cyclical sectors, making future earnings and cash flows vulnerable.
  
• Strategic diversification, strong EV expansion, export growth, and disciplined management position Greaves Cotton for long-term earnings stability and resilience amid regulatory and market shifts.

Catalysts

Operates engineering and mobility retail business in India, the Middle East, Africa, Southeast Asia, and internationally.

• The market appears to be pricing in continued high growth and margin expansion in the core engineering and export businesses, driven by robust demand for Euro 5+ auto engines and CPCB IV+ gensets. However, given the global trend towards electrification and regulatory pressure on internal combustion engines, this may overstate the sustainability of current revenue and margin levels, especially as secular demand for diesel/petrol engines is likely to moderate over the next several years.
  
• Investors seem to expect the company's electric mobility (EV) segment to rapidly scale up and drive significant long-term revenue and earnings growth-reflected in plans for an IPO and retail market share gains. However, overall EV industry volume growth is already decelerating from prior hyper-growth to "teens" YOY, and government incentives are volatile. If adoption slows or pricing pressure intensifies, future profit estimates may be too optimistic.
  
• Valuations may be embedding the belief that Greaves Cotton will maintain or gain market share due to technological upgrades (e.g., emission-compliant, fuel-agnostic engines), but ongoing advancement in automation and digitalization across the sector could quickly make existing core offerings less differentiated, putting pressure on future top-line growth and net margins.
  
• The market could be underestimating the risk that global supply chain realignments and rising input costs (commodities, rare earths) will compress margins going forward, as the company's margin gains in recent quarters have been aided by one-off procurement and product mix optimizations that may not persist over the long term.
  
• Investors may be overly optimistic about recurring revenue streams from branded aftermarket services and diversified industrial segments, but a high structural exposure to cyclical sectors-like Indian auto and infra/agriculture-means future earnings and cash flows could be more volatile than currently reflected in valuations, especially in the face of any macro or policy shocks.

Greaves Cotton Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Greaves Cotton's revenue will grow by 9.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.7% today to 9.4% in 3 years time.
• Analysts expect earnings to reach ₹3.7 billion (and earnings per share of ₹16.05) by about August 2028, up from ₹811.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.2x on those 2028 earnings, down from 61.4x today. This future PE is lower than the current PE for the IN Machinery industry at 32.2x.
• Analysts expect the number of shares outstanding to decline by 0.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.6%, as per the Simply Wall St company report.

Greaves Cotton Future Earnings Per Share Growth

Risks

• Continued robust revenue growth in core businesses (engineering, exports, gensets, Excel Controlinkage, and retail), supported by improved product mix, operating leverage, and disciplined cost management, has consistently expanded EBITDA margins and delivered higher earnings-contradicting expectations of sustained financial decline.
  
• Rapid expansion and leadership in electric mobility (notably in electric two
• and three-wheelers), with strong year-on-year retail sales growth (84%) and rising market share in key states, positions Greaves Cotton to benefit from long-term EV adoption and decarbonization trends, supporting long-term top-line and margin growth.
  
• Significant traction in export markets (exports reached 14% of revenue), underpinned by new-generation Euro 5+ engines and compliance with global emission standards, enables Greaves Cotton to capitalize on global demand shifts, thereby ensuring greater revenue diversification and potential margin expansion.
  
• Strategic investments in product and fuel diversification (CNG, EV, gensets, hybrid powertrains, and after-market services) reduce dependence on diesel, lower cyclicality, and boost recurring revenue streams-providing a buffer against regulatory shifts and sector-specific slowdowns, supporting long-term earnings stability.
  
• Balance sheet strength, operational excellence initiatives, ongoing capability building (including capacity expansion and technological partnerships like Chara Technologies), and supportive, long-term-oriented shareholder backing (Greaves, ALJ Group) equip the company to invest in growth and innovation, maintaining steady profitability and return on capital employed.

Valuation

• The analysts have a consensus price target of ₹154.0 for Greaves Cotton based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹39.7 billion, earnings will come to ₹3.7 billion, and it would be trading on a PE ratio of 14.2x, assuming you use a discount rate of 14.6%.
• Given the current share price of ₹214.0, the analyst price target of ₹154.0 is 39.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.