Narayana Murthy, the legendary Tech Titan and founder of Infosys, appears to have taken complete advantage of the crash that the stock markets witnessed in August 2015 and gone on a shopping spree. He has scooped up a number of top-quality stocks at bargain-basement prices.
Swaraj Engines is the latest to have won Narayana Murthy’s trust. In the July-September 2015 quarter, Catamaran bought 1,66,300 shares of Swaraj Engines. The investment is worth Rs. 15.39 crore at the CMP of Rs. 926.
One can say, without even the slightest fear of being proved wrong, that Swaraj Engines is a no-brainer stock pick. It belongs to the venerable Mahindra-Kirloskar group, has high ROE (24%), high dividend yield (~4%), is debt-free and has a captive customer base in the form of Swaraj Tractors.
In June 2010, when Swaraj Engines was available at Rs. 317, Sanjoy Bhattacharyya called the company a “diamond in the rough” owing to its “compounded annual revenue and earning growth in excess of 15 percent for the last decade, average return on capital employed in excess of 35 percent during the same period and a pristine balance with zero debt trading at a trailing PER of 10”.
Later, in October 2013, when the stock had surged to Rs. 479, Sanjoy Bhattacharyya gave Swaraj Engines pride of place in his famous Model Portfolio.
Sanjoy is in fact so smitten by Swaraj Engines that he even got the Ocean Dial Gateway To India Fund, to which he is an adviser, to buy a truckload of the stock (Ocean Dial held 160000 shares of Swaraj Engines as of 30.06.2015 though its name does not appear in the list of major shareholders as of 30.09.2015).
“Swaraj Engines caters to the 20HP-50HP engine requirement of fastest-growing Swaraj brand of tractors from Swaraj Tractors, which is owned by Mahindra & Mahindra or M&M. Swaraj Engines’ sales over the past several years outperformed as it supplies engines to Swaraj Tractors which has grown faster than the industry and nearly doubled its market share post acquisition by M&M in FY08. Swaraj Engines is expanding its product portfolio and has recently introduced a 54HP engine, while 60HP and 65HP engines along with diesel genset are in development mode. Also, Swaraj Tractors is likely to launch a new 60HP tractor in FY16, which coupled with new higher HP engines from Swaraj Engines, is likely to result in further industry-wide outperformance for Swaraj Engines over FY16- FY18E. Despite near-term headwinds in tractor demand, we believe the tractor industry has structural drivers in place and offers significant room for growth, given the lower penetration of tractors and increased focus on farm mechanisation. We have estimated a 10% CAGR in domestic tractor industry’s volume over FY15-FY20E, albeit on a low base of FY15/FY16. We expect a 32% earnings CAGR for Swaraj Engines over FY16-FY18E backed by strong volume growth and margin expansion. With excellent financials i.e. robust return ratios, debt-free balance sheet, robust cash balance and a 4% dividend yield, we believe Swaraj Engines is a quality stock. We have assigned Buy rating to the stock with a target price of Rs1,168 (17x September 2017 earnings), up 38% from the current market price”.
One interesting point worth noting is that over the last one year, Swaraj Engines has under-performed the Nifty. On a YOY basis, the stock has lost 5% while the Nifty has gained 3.50%. There is no apparent reason for the under-performance because there is no adverse change in fundamentals. The stock is probably like a “coiled spring” waiting for the right moment to surge.
Whether Narayana Murthy will bring the stock good luck and lead to it making up for lost time requires to be seen!