Outlook: With a normal monsoon expected this year too, we think that low reservoir levels in Northern and Eastern India should not pose a challenge thus, keeping the rural water supply in check. While all the auto segments are facing a semiconductor shortage, we feel that tractors should not be affected by this much. With a high base of FY21, we...

Better sales mix to aid earnings; upgrade to ADD

We maintain our positive stance on SEL amid a highly capital efficient business model, robust cash flow generation and overall positive farm sentiments domestically. Building in ~13/10% sales/PAT CAGR in FY21-23E...

Swaraj Engines' (SWE) Q4FY21 revenue was below estimates on lower volumes.

Outlook: As per our previous update, the MSP hike for FY2021 has continued with key crops' price being raised by an average of ~4%. With most regional reservoirs consistently clocking healthy water level (> 10-year average) and the normal monsoon that we have recently witnessed; we stick to our view of low rural water woes for the coming year. Based on lockdown led pent-up production and sales surge in FY21, we...

Margins for FY21E are expected to dip to ~13%, largely tracking a subdued performance in Q1FY21. However, from FY22E onwards, SEL is seen climbing back to erstwhile 14-15% trajectory amid operating leverage benefits. On the B/S front, SEL remains a debt-free, cash rich company with cash & liquid investments worth ~| 182 crore on books as of FY20 (~10% of current market cap). Negative working capital cycle demonstrates the strength of the business model. It has a track record of robust capital efficiency (30% RoE, 34% RoCE, 163% RoIC as of FY20), while cash...

Outlook: With most regional reservoirs consistently clocking healthy water level (> 10year average) and the healthy monsoon that we have witnessed; we stick to our view of low rural water woes for at least two years. The MSP hike for FY2021 has continued with key crops' price being raised by an average of ~4%. Thus, favourable tractor drivers bolster our existing conviction in SEL's cash-rich and debt-free business. Valuation & Risks: We continue to value SEL using the DCF methodology to arrive at a fair value of Rs 1,305 and maintain REDUCE. We have slightly revised our earnings estimates accounting for the current high capacity utilisation. While SEL's business and industry fundamentals are intact, we feel that COVID-19 related uncertainty still...

Buy rating on the stock with target price to Rs 1,676 (22xFY22e EPS). Strong growth in tractor industry led to strong operational performance Improvement in margins despite sales decline...

INDIA l Institutional Research l Automobile l 22 July 2020 Swaraj Engines l REDUCE l TP: 1,302 Revving dark horse has galloped, awaiting a fresh race Swaraj Engine's (SEL) 1QFY21 result seems dull mainly on the account of no production in April 2020 owing to the lockdown. Post the opening of plant on 5 th May, SEL has been nearing ~100% capacity utilisation. Factors like India's reservoirs' level breaching the 10-year average, on-going healthy monsoon and recent kharif MSP hikes are buoying the domestic tractor demand. While a lower...

Revenues declined by 13% yoy, higher than our estimates, while realization increased by Lockdown hit overall performance 6.9% YoY & 1.4% QoQ. Total volumes degrew by 18.5% YoY in Q2FY20....

Why should you invest your time in this report? Hodrick-Prescott analysis of Indian tractor cycle How is SEL better placed than key tractor OEM Should M&M; merge SEL within itself A scenario...

Swaraj has negative working capital cycle of around 30-40 days (~10% of sales), leading the company to hold liquid cash & investment to the tune of | 130 crore (~10% of MCap) as on FY20. Going ahead, the company's capex is limited to around | 15-20 crore (~2-3% of sales), which we expect to be funded through internal accruals. This leaves aside incremental cash of at least 4% of sales every year. This bodes well for healthy dividend payout in years to come. The company announced a dividend of | 40/share, providing dividend yield of ~4%. Going ahead, we expect strong balance sheet along...

At the current price of Rs 978, the stock is trading at 13.4x FY22E EPS, much lower than the last six year's average of 1-year forward P/E of 21.7x. By looking at the present uncertain situation and intensifying competition in tractor industry, we have lower down our multiple to 18x FY22E (~17% discount to its six-year average) to arrive at a target price of Rs 1,313 per share, which indicates 34% upside from the current levels....

Domestic tractor industry staring at de-growth in FY20E The tractor industry registered record sales volume of 785,409 units (up 10.4% YoY) in FY19 after ending FY18 at 711,478 units (up 22.1% YoY). However, the growth momentum was reversed with the industry seeing degrowth in Q1FY20. Industry volumes declined 13.8% YoY in Q1FY20 to 191,305 units. We expect this weakness to continue in the near to medium term. SEL's parent has also struggled in the same period. However, it maintains its leadership position with market share in excess of 40%. Long term trends intact despite near term uncertainty...

Maintain BUY with a reduced TP of Rs 1828 (20x Dec-20E EPS). Swaraj Engines Ltd (SEL)s 3QFY19 revenue was in line with estimate (Rs 1.99bn, +8% YoY) while operating margin saw a dip of 17bps YoY/-241bps QoQ to 13.8% owing to 104bps contraction in gross margin. APAT stood at Rs 173mn (flat YoY). Engine volumes grew by 2.7% YoY to 22.569k units while tractor sales at the parent level (M&M;) were at 90.72k units (+11% YoY). During 9MFY19, M&M;s tractor production grew by 9% YoY and sales grew 8.5%, inventory is at normal level.

Engine sales volumes grew 2.7% YoY to 22,569 units vs. 13.3% tractor growth witnessed at the parent company Consequent net sales in Q3FY19 were at | 198.7 crore (up 8.4% YoY) EBITDA in Q2FY19 came in at | 27.5 crore with corresponding EBITDA margins at 13.8%, down 18 bps YoY. Margins for the quarter were lower tracking marginally higher raw material costs as well as employee costs partly compensated by lower other expenses PAT in Q3FY19 was at | 17.3 crore, up 0.5% YoY...

Swaraj Engines Ltd (SEL) reported mixed set of numbers for Q2FY19. Its net revenue grew by 18.4% YoY, which was largely in line, driven by healthy volume growth of 14.3%. However, the profit growth was muted and below our projections. EBITDA grew by 14.4%, while EBITDA margins contracted 57bps YoY to 16.2%.

Maintain BUY with a TP of Rs 2,027 (21x Sept-20E EPS). Swaraj Engines Ltd (SEL) delivered strong performance in 2Q. Revenue jumped by 18.4% at Rs 2.47bn led by 14.3% increase in Engine volumes (28.56k units )and 3.6% at net ASP. EBITDA rose by 14.4% YoY to Rs 401mn with margin at 16.2% (-56bps YoY/+63bps), hit by 40bps drop in gross margin, partially offset by operating leverage. APAT grew by 8% YoY to Rs 254mn impacted by lower other income (-24% YoY).

Monsoon 2018 ended the season with rainfall deficiency at ~9% of LPA pan India. It lagged the monthly numbers with each month witnessing rainfall deficiency. In terms of spatial distribution, it was normal in the southern (98% of LPA) as well as north west belt (98% of LPA) while it was near normal in Central India (93% of LPA) and deficient in eastern India (76% of LPA). In terms of coverage, it was normal to positive in 69% of geographical area while deficient in 31% of area. However, on the flip side, water level at key reservoirs is ahead of last year (4% higher). while...

Maintain BUY with a TP of Rs 2,476 (27x FY20E EPS). Swaraj Engines Ltd (SEL) 1Q results were largely in line estimates. Revenue at Rs 2.34bn (+21% YoY) driven by 15% increase in Engine volumes (26.72k) and 5% at net ASP. EBITDA rose by 14% YoY to Rs 366mn with margin at 15.6% (-103bps YoY/+20bps QoQ), hit by 166bps drop in gross margin, partially offset by operating leverage.