Swaraj Engines Research Report By Nirmal Bang

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

Swaraj Engines-Initiating Coverage-13 October 2015