Swaraj Engines - Diwali Picks 2012 - IIFL

Strong parentage in the form of M&M

Swaraj Engines Ltd (SEL) manufactures five types of engines from 20HP to 50HP for tractors manufactured by Punjab Tractors under the brand Swaraj Tractors. In July 2007 M&M acquired 63. 33% stake in Punjab Tractors which had 33.2% stake in SEL. M&M being the largest tractor manufacturer in the country provides strong parentage for SEL's long term growth. M&M's construction equipment business and powerol businesses provide additional opportunities for SEL.

Dependent on tractor business but unfazed in current slowdown

Despite a 4.7% yoy fall in tractor industry volumes in H1 FY13, SEL engine sales during the same period increased 6.4% yoy. The growth would have been higher but capacity constraints (100% + utilization levels) did not allow it to meet requirements of Swaraj Tractors. Going ahead, tractor industry volumes are expected to recover in H2 FY13 on pick up in monsoons towards the end of the season. Under mechanization, lower availability of labour, higher MSPs and robust rural income will continue to support tractor demand in FY14 providing further opportunities for SEL.

Expanding capacity at opportune time

SEL is expanding its engine manufacturing capacity from 42,000 units per annum in FY12 to 75,000 units in two phases. During Phase I, the capacity has been raised to 60,000 units, which has commenced operations. In phase II, the capacity will be raised by additional 15,000 units. Total investments will be to the tune of Rs940mn, which will be met through internal accruals. This expansion will enable the company to meet the latent demand of Swaraj Tractors and also allow it to capture the other aforementioned opportunities.

Robust earnings, strong cash flows, debt free, attractive valuations

Following 29% revenue CAGR during FY09-12, we expect SEL to witness 15.4% CAGR during FY12-14E. Stable margins will ensure a 13% PAT CAGR during FY12-14E. Despite the capex spend, we expect the company to generate Rs828mn worth of free cash-flow during FY12-14E. Furthermore, the company is debt free and is likely to earn RoE in excess of 27% during FY13E and FY14E. Given such robust earnings profile, we find the valuations attractive at P/E of 7.9x FY14E EPS of Rs53.8. With Rs13 per share of dividend in FY12, the stock offers dividend yield of 3.1%.

Source : Equity Bulls

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