Swaraj Engines - Ahead of street expectations - IndiaNivesh

Swaraj Engines (SEL) reported its Q2 FY13 numbers ahead of street expectations. The company witnessed 18% YoY increase in the revenue to Rs 1.21 bn against street expectation of Rs 1.14 bn led by increase in volume and Average realization. The company's engines sales increased by 2.67% to 14,389 units. Average realization stood at Rs.83,877 in Q2FY13 vs. Rs. 83,409 in Q1FY13 and Rs 79,492 in Q2FY12. Net profit increased by 19% YoY and 2% Q-o-Q to Rs 140 mn vs. consensus of Rs.132 mn.

Decrease in Raw material prices helped EBITDA margin to remain at comfortable level at 15.3% (up by 49 bps y-o-y). Other expenses have increased (as a percentage of revenue) from 3% in Q2 FY12 to 4.6% in Q2FY13. However staff cost remained flat.

The PBT margin decreased marginally by 3 bps y-o-y to 16.5% due to rise in depreciation cost. The depreciation grew by 43% to Rs 14 mn. PAT increased 19% YoY and 2% Q-o-Q to Rs 140 mn aided by rise in other income to Rs 29 mn.

Valuation

Domestic tractor market is showing some signs of weakness over the last couple of months on the back of slowdown in the rural sector. However, long term structural story remains intact with acceleration in the pace of mechanization of Indian agriculture. In addition to this, the increasing usage of tractors in non-agri related activities like passenger transportation and carrying material for industrial/construction purposes would enhance the owner's capital efficiency in non-farming seasons thereby increasing demand. Hence, we believe SEL is best poised to take the advantage of robust growth in tractor industry.

At the CMP of Rs 420 SEL is trading at 9.3x FY13E EPS. We believe current valuation is too low for a company that has large cash on its book, zero debt, has consistently paid high dividend (dividend yield 2.5%). We maintain our buy rating on the stock with target price of Rs. 612.

Source : Equity Bulls

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