SECTOR: AUTOMOBILES
Swaraj Engines Ltd.
STOCK INFO.
BLOOMBERG
BSE Sensex: 17,605
S&P CNX: 5,326
SWE.IN
REUTERS CODE
6 February 2012
Initiating Coverage
(Rs CRORES)
ACCUMULATE
Rs430
SWAR.BO
Y/E MARCH
FY11A
FY12E
FY13E
We recommend to ACCUMULATE Swaraj Engines Ltd. (SEL)
with a price target of
Rs
625- 13xFY13E EPS.
INVESTMENT ARGUMENTS:
Driving M&M's tractor business
Adding capacity to meet growth needs
Strong cash flow to fund capex & rising dividends
Debt-free with >25% of mcap in cash and cash equivalents
GROWTH DRIVERS
Driving M&M's tractor business:
Swaraj Engines's engines meet
the requirement of M&M's "Swaraj" branded tractor. There are more
than 4,50,000 tractors in India with SEL's engines. In FY11, SEL
supplied 47,413 engines - 22% share of M&M's engine requirements.
For the last three year's, SEL's share of M&M's engine requirement
has been between 22% and 24%.
Adding capacity to meet growth needs:
SEL's capacity at FY11
end stood at 42,000 engines on a double shift basis with production at
more than 48,000 engines. Debottlenecking of capacity to 60,000 by
FY12 end and to 75,000 by 2QFY13 will help meet M&M's
requirement for 2-3 years based on our growth estimates for M&M's
tractor business at 15% in FY12E and 10% in FY13E .
Strong cash flows to fund capex requirements:
SEL plans to raise
capacity to 75,000 units with an investment of
Rs94
cr. We estimates
combined operating cash flow for FY12 and FY13 at
Rs109
cr. This
coupled with
Rs22
cr of investment income overFY12-FY13 meets the
cash outgo for capex and dividend payout of 32-33% for FY 12 and
FY13 with total dividend payout (including tax) at
Rs36
cr.
Debt free with 25% of market-cap as cash and cash equivalents:
SEL has been debt free since FY06 and low capex and strong cash
flows have aided build-up of cash and cash equivalents in the balance
sheet to
Rs108
per share at FY11 end. Despite almost 25% of market-
cap as cash and equivalents, ROE for Swaraj engines is likely to be
remain close to the 30% range. A higher payout than assumed by us
or growth higher than our conservative growth will lead to higher ROE.
Valuations & View:
Swaraj Engines is available at a 20% discount to
historical valuations on a trailing twelve month basis despite ROE being
20% higher than the historical average of 25%. We attribute this to
weak market sentiments and lower growth in FY13E as compared to
the 45% earnings CAGR over the last 3 years. We expect valuations
to improve with the rise in dividends, given current yield of 3.0% for
FY13. Given limited valuations, we recommend to ACCUMULATE
for a target price of
Rs625
based on average valuations.
Net sales
EBITDA
RPAT
BV/Share (Rs)
Adj. EPS (Rs)
EPS growth (%)
P/E (x)
P/BV (x)
EV/EBITDA (x)
Div yld (x)
ROE (%)
RoCE (%)
282
60
37
98.8
35.3
20%
12.2
3.5
6.7
2.3%
32%
46%
445
81
52
150.3
41.8
18%
10.3
2.9
5.7
2.8%
31%
45%
511
93
57
181.2
46.0
10%
9.3
2.4
4.9
3.0%
28%
41%
STOCK DATA
52-W High/Low Range (Rs)
Major Shareholders (as of Dec 2011)
Promoter
Institutions
Public & Others
Average Daily Turnover(6 months)
Volume
Value (Rs cr)
1/6/12 Month Rel. Performance (%)
1/6/12 Month Abs. Performance (%)
Shares Outstanding (cr)
Market Cap. (Rs cr)
Market Cap. (US$ m)
Past 3 yrs Sales Growth (%)
Past 3 yrs NP Growth (%)
558/349
50.6
15.8
33.6
7000
0.32
-5/ -10 / 0
+5/ -8 /-2
1.2
534.1
10.9
30%
35%
Maximum Buy Price :
Rs
Rs450
Ravi Shenoy
(ravi.shenoy@MotilalOswal.com); Tel: +91 22 30896865