In hindsight, when Sanjoy Bhattacharyya, the doyen amongst value investors, declared Swaraj Engines to be a “truly a diamond in the rough”, we should have dived in without a second’s thought. Today, about five years later, gains of 182% are on the table. While this may not appear impressive to the young-gen investors, it must be remembered that the stock also offers a hefty dividend yield of nearly 4%.
Billionaire Narayana Murthy, the co-founder of Infosys, the blue-chip software behemoth, is a conservative investor. One can see from his previous stock picks that he is looking for capital protection and reasonable gains from his stocks.
Swaraj Engines is the ideal sort of stock for such a conservative investor. It has management pedigree with impeccable credentials (Mahindra-Kirloskar), high RoE (24%), debt-free and high dividend yield (4%).
Narayana Murthy’s investment arm, Catamaran Management Services Pvt. Ltd, presently holds 166,300 shares of Swaraj Engines.
The only reason the stock is a bit in the doldrums at present is because of the poor monsoon outlook in the Country. However, if the monsoon outlook improves and there is a demand for tractors, you can be certain that Swaraj Engines will be among the first to take off.
Rahul Arora of Nirmal Bang has heaped rich praise on Swaraj Engines by calling it a “great investment opportunity”. His words of wisdom are worth noting:
“Swaraj Tractors used to have an 8 percent market share in FY08, which has gone up to 16 percent now. So it has been one of the biggest market share gainers …. we are factoring in about a 17-18 percent volume growth over the next two years. Even the worst of times, this company is giving you 25 percent ROEs, ROCs which we are expecting to go to about 35 percent in two years, 330 bps expansion in margin and very strong management pedigree … this is a growth stock with very strong return ratios coming to about 11-12 times FY18 P/E ….. it is a great investment to be made. The most important thing is coming to you at more than 4 percent dividend yield. So I would definitely buy in Swaraj Engines every time it goes to Rs 820-830. Even at these prices I am not too fussed about it because it is a very steady state long-term story …”
ICICI-Direct has also recommended a buy of Swaraj Engines on sound logic:
“SEL has a lean balance sheet with net cash of | 182 crore (FY15). Average RoCEs and RoEs in the last five years (FY11-15) were at 35% and 28%, respectively. SEL also has good payout ratios with average payout in the last three years at 72.7% with FY15 dividend at Rs. 33/share (dividend yield ~4%) … We have valued SEL at Rs. 1110 i.e. 22x P/E on FY17E and FY18E average EPS of Rs. 50.4 with a BUY recommendation on the stock. The company is essentially a quality play and should be held in one’s portfolio with a long term investment horizon”.
If ICICI-Direct’s prediction of a target price of Rs. 1,110 comes true, we are talking of gains of nearly 25% (plus dividend yield) which is excellent for a stock which is safe as a house!