Swaraj Engines Expect a good quarter; Buy :: Anand Rathi

Swaraj Engines
Expect a good quarter; Buy
Key takeaways
Tractors do well. Mahindra & Mahindra’s (M&M) tractor volumes were
robust in 3QFY14 (as in 1HFY14), up 21% yoy. Being a key supplier to
Swaraj Tractors, Swaraj Engines would also benefit by this robust
performance by M&M. In the previous two quarters, Swaraj Engines’ volume
growth has comfortably outpaced that of M&M. We expect this trajectory to
sustain in 3Q as well.
Expect good growth in 3Q. Swaraj Engines’ 3Q tractor engine sales are
expected to be good. This would result in ~32.5% yoy engine volume growth.
We expect 33.8% revenue growth yoy, to `1.7bn (realisation growth of 1%).
Our EBITDA margin expectation is 15.5% (60bps higher qoq, 70bps yoy).
We expect EBITDA per engine to be 6% higher yoy, while profit per engine
is expected to be 3.2% lower yoy. Our EBITDA growth expectation is 40.4%
yoy.
Robust profit growth. Being debt free, and with steady depreciation and
non-operating income and a constant tax rate of 31.5%, we expect 36.7% yoy
profit growth, to `188m (up 9.5% qoq).
Our take. Growth would be boosted by sustained recovery in tractor
demand. We expect tractors to do well in the long run, led by more scope for
productivity, low penetration, need for mechanization and shortage of labour.
Higher capacity could be a huge fillip. We are positive on the stock and
maintain Buy on it, with a price target of `697. At the ruling price, it trades at
a PE of 9.2x FY15e earnings. At our target price, it would trade at ~10x
FY15e EPS (on par with its past five-year average).
Risks. Commodity price rises, loss of market share by M&M.

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