SWARAJ
ENGINE
Company Introduction: Swaraj Engines Ltd is in the business of supplying engines to the swaraj division of Mahindra & Mahindra Ltd and supply of hi-tech engine components in India. Swaraj Engines (SWE), manufactures engines for 20 HP to 50 HP tractors and its growth has been directly proportional to India’s agriculture story. Investment Arguments Its manufacturing plant is located at Mohali (Punjab) where it plans to raise capacity to 75,000 engines (existing 60000) by Dec’12, for Rs. 58 crore. Management has indicated its intent to increase production to 100,000 engines at its present location when the need arises. SWE manufactures engines in the 20-50 HP range; of its sales, 10% are engines of lower than 30 HP, 45% of 30-40 HP and 45% of 40-50 HP. We expect its aggressive capex plans to aid growth, catering to further demand for Swaraj tractors.
Expected Value: 527 Sector: Auto
SWE’s growth has been directly proportional to India’s agriculture story. We expect tractors to do well in the long term, led by more scope for productivity, low penetration, need for mechanization, higher MSPs and policies (NREGA). The Company expects to cater to 90% requirement (now ~80%) of Swaraj brand tractors through its ongoing expansion. After this, we expect it to cater not only to the Swaraj brand but to supply engines for other Mahindra brands as well since it is one of the lowest-cost engines.
Valuation With additional capacity expected to be on-stream by Dec’12, and on expectations of a tractor-cycle recovery in FY14, Swaraj stands to benefit. It operates at a near negative working-capital cycle, is debt free, and would see good earnings growth in the next 2-3 years. Our price target of the stock is Rs. 527 based on 8.5x FY15e EPS of 62 (in line with the last five-year median).
No comments:
Post a Comment