Swaraj Engines caught our attention after master stock-picker Sanjoy Bhattacharyya paid it a glowing tribute in the Forbes magazine in June 2010. Sanjoy Bhattacharyya called Swaraj Engines “truly a diamond in the rough“. Sanjoy Bhattacharyya pointed out that Swaraj Engines had a compounded annual revenue and earning growth in excess of 15 percent for the last decade and that its average return on capital employed was in excess of 35 percent during the same period. Sanjoy Bhattacharyya also emphasized that Swaraj Engines had a pristine balance with zero debt and that it was (at that time) trading at a trailing Price Equity Ratio of 10.
Swaraj Engines’ Quaterly Results
| (Rs cr) | Sep 2010 | Sep 2009 | YOY |
|---|---|---|---|
| Operating Income | 86.20 | 69.76 | 23.57 |
| Total Expenses | 71.19 | 56.90 | 25.11 |
| Operating Profit | 15.01 | 12.86 | 16.72 |
| Other Income | 0.51 | 1.04 | -50.96 |
| PBDIT | 15.52 | 13.90 | 11.65 |
| PBT | 15.80 | 14.51 | 8.89 |
| Adjusted Net Profit | 10.82 | 9.56 | 13.18 |
At the time of Sanjoy Bhattacharyya‘s recommendation (June 2010), Swaraj Engines was trading at Rs. 319. It is presently Rs. 461. That’s a spectacular gain of Rs. 142 or 44% in just 6 months!
We check to see whether any more juice is left in Swaraj Engines for latecomers.
Swaraj Engines‘ financials are really quite spectacular. Swaraj Engines 3 year CAGR sales have grown at 29% while its 3 year CAGR profit has grown at 35%. Swaraj Engines enjoys a Return on Equity of 34% which is certainly very attractive. Swaraj Engines Return on Net Worth (10 year CAGR) is 13% which is also quite high.
Swaraj Engines is totally debt-free. This is a very positive factor at a time when other companies are running for cover fearing an imminent rise in the interest rates.
| 3 Yr CAGR Sales (%) | : 29.85 | 3 Yr CAGR Profit (%) | : 35.53 |
| Debt to Equity Ratio (x) | : 0.00 | Net Profit Margin (%) | : 13.22 |
| Promoter Shareholding (%) | : 50.62 | Promoter Shg. Pledged (%) | : 0.00 |
| Return on Equity (%) | : 34.00 | EV to EBITDA (x) | : 8.62 |
Swaraj Engines‘ net worth on 31st March, 2010 stood at Rs. 122.74 crores comprising of an Equity component of Rs. 12.42 crores and Reserves of Rs. 110.32 crores – a book value of Rs. 98.83 per share (last year Rs. 78.08). Out of the total equity of Rs. 12.42 crores, some 83% (Rs.10.35 crores) represents 2 Bonus Issues made in 1997 (1:1) and 2005 (2:1).
Swaraj Engines‘ principal business is to supply engines to Mahindra & Mahindra – Swaraj Division which are used by M&M for the manufacture of tractors. M&M is the largest manufacturer of tractors in India and has sustained its market leadership in the Indian tractor market for over 27 years. The consolidated market share of the Farm Equipment Sector of M&M is now 41.1% of the domestic market.
From all indications, the long term prospects of the tractor and commercial vehicle industry are rated good and it is expected that the Indian tractor industry will maintain the growth trend in the long term. Further, with massive investments planned by the Government for urban and rural infrastructure including roads, ports, power etc the demand for commercial vehicles is expected to be robust. As an OEM supplier, Swaraj Engines‘ business prospects also appear robust.
Of course, Swaraj Engines is exposed to the usual risks arising from being in the agriculture sector.
The other positive factor is that Swaraj Engines is on an expansion spree. In October 2010, Swaraj Engines announced that it was undertaking an expansion program to increase its installed capacity from 36,000 engines to 60,000 engines p.a. It was stated that besides, capacity augmentation, there would be additional investment towards sharpening the company’s engineering, research and quality edges. The expansion project will entail total capex of around Rs 400 million, which will be fully financed from internal resources. This means Swaraj Engines‘ will rise with no equity dilution.
Swaraj Engines‘ valuations are also quite reasonable. As at 31.3.2010, Swaraj Engines had an EPS of Rs. 30.1. The CMP of Rs. 461 discounts that 15 times. In H1 FY 2011, Swaraj Engines had an EPS of Rs. 17.32 (corresponding to Rs. 15.51). Assuming the same pace of earnings is mainatined, the EPS for FY 2011 should be Rs. 34.64 which will discount the price 13.30 times. This is not at all unreasonable for a company with the kind of growth opportunities as Swaraj Engines. Swaraj Engines‘ peers Cummins India and Greaves Cotton are quoting at a TTM EPS of 25 & 21 respectively.
So from all perspectives, it does look like Swaraj Engines is headed for further growth in coming years and one must compliment Sanjoy Bhattacharya for his stock pick.
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