Microsec: Swaraj Engines Ltd - Q3FY14 Analysis

[Rajesh Desai]

Dear Sir/Madam,

We recommend Swaraj Engines Ltd (SEL) a “BUY”. Swaraj Engines was earlier a part of JV between Punjab Tractors and Kirloskar Engines to manufacture engines for Punjab Tractors. PTL had been taken over and merged with Mahindra and Mahindra Ltd. As a result, M&M now holds 33% of SEL's equity with 17% is held by Kirloskar Industries Ltd. SEL supplies engines from 20HP to 50HP to "Swaraj" branded tractors of M&M. It, also, manufactures engine components for the erstwhile Swaraj Maza Ltd i.e. SML Isuzu. The strong volume growth which is likely to be seen in FY16e from its capacity expansion to 1,05,000 engines p.a., increased demand from M&M, presence in all HP segments, softening of commodity prices and dependence on agriculture industry bodes well for the SEL’s fortune as not only will it witness higher sales growth, but the margin will also improve as higher capacities get increasingly utilized.

 We had recommended Swaraj Engines Ltd a “BUY” at INR430 in our report dated 23rd November, 2012 with a Target price of INR529. The stock had surpassed our target price of INR529, giving a return of 23% on 10th Dec, 2012.

 Also, we had recommended Swaraj Engines Ltd a “BUY” at INR465 in our report dated 14th December, 2013 with a Target price of INR541. The stock had surpassed our target price of INR529, giving a return of 16% on 12th Nov, 2013.

At the CMP of INR625, the stock is trading at P/E of 11.44x its FY14e EPS of INR54.63, P/E of 11.1x its FY15e EPS of INR56.78 and P/E of 8.34x its FY16e EPS of 74.93. Given such strong earnings, incremental production, leading supplier to M&M, we expect the company to outperform in future. We have assigned a P/E multiple of 10x on FY2016e EPS of INR74.93 per share and arrived at a target price of INR749 per share for the company i.e. an upside of 20%.

 

Regards,

 

Team Microsec Research

 

 

 

Microsec Capital Limited

Tel: 91 33 30512100

Fax: 91 33 30512020

 

 

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CA. Rajesh Desai