Swaraj Engines ltd – Driving Agri Sector

Swaraj Engines major business is to provide engines to Mahindra & Mahindra – Swaraj Division which is used by Mahindra & Mahindra for the manufacture of tractors. M&M is the leading manufacturer of tractors in India and has sustained its market leadership in the Indian tractor market for over 30 years. Swaraj manufactures engines catering to tractors in the 20- 50 hp segment and cater to ~85% of the total engine requirement at M&M’s Swaraj tractor division.

Swaraj Engines also manufactures hi-tech engine components for commercial vehicles for SML Isuzu (erstwhile Swaraj Mazda).

Swaraj Engines ltd is one of the Multibagger Shares, identified by Dynamic Research based on technical and fundamental research.

 

Swaraj Engines share price has touched a 52 week high of Rs. 1294.80 on 26 -Jul -2016 and a 52 week low of Rs.763.15on 12 -Feb -2016, and is currently trading at Rs. 1128.

 

 

Share Holding 

The promoters holding in the company stood at 50.62%, while Institutions and Non-Institutions held 15.31% and 34.08% respectively.

 

Some of the NonPromoters holding securities more than 1% of total number of shares are 

• Bodies Corporate:4.61%
• DSP BlackRock micro cap fund:3.15%
• Pinebrdige investments Gf Mauritius limited:2.74%
• Foreign Individuals or NRI:1.65%
• Reeta Keyur Parikh:1.42%

 

Financial Analysis

Quarterly Results

For the quarter ended June 2016, the total income from operations of Swaraj Engines ltd has reported a growth of 50.61 % on Y-o-Y basis to Rs. 171.69 cr as against Rs. 113.99 cr during the same quarter last year. A boost up in total income from operations shows strong development in business.

The operating profit of Swaraj Engines ltd on standalone has shown a growth of 97.89% Y-o-Y to Rs. 24.44 cr as against Rs. 12.35 cr during the same quarter last year, This is mainly due to rise in topline of the company.

The net profit of Swaraj Engines has registered a growth of 63.09% Y-o-Y to Rs.19 cr as against Rs 11.65 cr during the same quarter previous year.

The earnings per share of the company have showed a growth of 63.11% Q-o-Q to Rs. 15.30 as against Rs. 9.38 during last quarter.

 

Annual Results 

For the year ended March 31, 2016   Swaraj Engines ltd on Standalone basis reported net sales of Rs. 525.91 cr compared to Rs. 539.70 cr FY2015.

For the year ended March 31, 2016 Swaraj Engines on Standalone basis reported net profit of Rs. 51.20 cr compared to profit of Rs. 51.84 cr FY2015.

The above ratio suggests that the company is operating with a zero of debt which is a very positive factor for the company. The company is generating good returns with the money the share holders have invested; the above ratio also suggests that the management is very efficiently using its assets to generate earnings.

 

Manufacturing Capacity

The company has a current installed capacity to manufacture 75,000 units of engines. Swaraj Engines is in the midst of expanding its capacity to 105,000 units.

 

Segmental Sales

Swaraj Engines manufactures engines catering to

• <=30 hp tractor segment: 10%
• 31-40 hp tractor segment: 50%
• 41-50 hp tractor segment: 40%

 

Investment Rationale 

• Against the industry’s declining trends, Swaraj Engines was able to sustain its engines sale volume for the year under 2016 by posting a sale of 64,088 units which were almost at par with last year’s 64,595 units.
• Swaraj Engines is completely debt-free. This is a very positive factor for the company.
• Swaraj Engines enjoys a Return on Equity of 23.92% which is certainly very attractive.
• The capacity enhancement project announced in January 2014 to increase the annual capacity to 1,05,000 units, has been completed during the financial year 2016 With this, the Company is now geared up to meet any future upswing in the demand.
• On the basis of current positive market trends witnessed during last quarter of fiscal 2016 where tractor industry, after posting de-growth in 5 consecutive quarters, had registered a growth of 8%, it is expected that the domestic tractor industry will register growth in near term
• High government focus on agri and rural sectors with enhanced budget allocation backed up by above normal monsoon prediction and other related favorable factors such as scope to increase current tractor penetration level, agri-mechanization, generating rural employment opportunities through various schemes, scarcity of farm labour especially during the sowing season, shortened replacement cycle, healthy credit availability, momentum in infrastructural projects etc. would be the positive drivers for tractor industry in long term.
• The long term prospects of the tractor and commercial vehicle industry are rated good and it is projected that the Indian tractor industry will maintain the growth trend in the long term. Further, with massive investments planned by the Government for urban and rural infrastructure including roads, ports, power etc the demand for commercial vehicles is expected to be robust. As an OEM supplier, Swaraj Engines business prospects also appear robust.Swaraj Engines is headed for further growth in coming years.

 

Investment Opinion 

At CMP of Rs.1128 the stock is trading at a P/E of 25.49, the market cap of the company is 1388.54 crore. Dynamic Levels recommends a buy on Swaraj Engines at correction at around 1102 levels which is a good monthly support (previous month low) for the stock, with a price target of Rs. 1295.The recommended entry price is below current market price, as 1102 is important monthly support and to keep a good Risk to Reward ratio.