Latin Manharlal Securities Pvt Ltd

Weekender JANUARY 09, 2015

Index Closing Chg Chg %

Sensex 27458.38

(429.52) -1.54%

Nifty 8284.5

(110.95) -1.32%

Auto 18835.27

(1.88) -0.01%

Bankex 21346.24

(483.86) -2.22%

Cap Goods 15462.17

(298.20) -1.89%

Cons

Durables 9708.57

(50.24) -0.51%

FMCG 7835.36

58.44 0.75%

Healthcare 14691.08

(29.13) -0.20%

IT 10752.26

31.14 0.29%

Metal 10487.43

(478.72) -4.37%

Oil & Gas 9839.76

(77.29) -0.78%

PSU 8144.93

(167.10) -2.01%

TOP GAINERS Closing Chg Chg %

HUL 864.6

108.65 14.37%

Kotak

Mahindra

Bank 1360.95

89.40 7.03%

BPCL 679.35

34.95 5.42%

Asian Paints 812.5

37.45 4.83%

Maruti Suzuki 3468.2

108.60 3.23%

TOP LOSERS Closing Chg Chg %

NMDC 135.35

(11.60) -7.89%

BHEL 254.75

(20.55) -7.46%

Sesa Sterlite 207.8

(14.50) -6.52%

PNB 206.6

(13.20) -6.01%

ICICI Bank 341.85

(20.45) -5.64%

Currency Expiry Closing Chg%

USDINR 28/01/15 62.5475 -1.63%

GBPINR 28/01/15 94.75 -3.49%

EURINR 28/01/15 73.915 -3.53%

JPYINR 28/01/15 52.5075 -0.60%

Outlook This Week: Greek woes + oil price tumbling+ high valuation triggered massive sell off on 6th Jan. The Sensex posted its seventh biggest single-day fall in history, amid weak global cues, after the sharp fall in global crude oil prices raised worries over global growth slowdown and the political uncertainty in Greece also weighed on market sentiment. The price of Brent crude oil has fallen below $50 a barrel for the first time since May 2009.Slowing global growth and increased supply of oil and gas have pushed prices sharply lower in recent weeks. Many observers expect the price of oil to fall further as North American shale producers continue to supply increasing quantities of oil and gas, and the oil-producing group Opec resists calls for cuts in production to support prices. A senior oil executive thinks Brent crude will drop to $45 per barrel.

An ordinance to amend the Motor Vehicles Act on Wednesday got the President's assent, paving the way for plying of e-rickshaws on roads of national capital region, sources said. The new rules provide that e-rickshaws will be allowed to carry 4 passengers and 40 kg luggage while e-carts would transport goods up to 310 kg.

Date Nifty Sensex

5-Jan 8378.4 27842.32

6-Jan 8122.95 26974.2

7-Jan 8117.15 26939.71

8-Jan 8231.8 27271.04

9-Jan 8284.5 27458.38

Stock Specific news:

Infosys reported Profit After Tax of Rs 3,250 crore for the third quarter of the current financial year. This is 5% rise QoQ for the IT major. Revenues grew 2.6% over the July-September period, aided by good performance across all service lines.

Three domestic firms, Aurobindo Pharma, Lupin and Jubilant Life

Sciences, have received final approval from US health regulator to sell generic copies of Valsartan tablets used for treatment of hypertension.

Coal India unions called off their strike late on 7th Jan after marathon talks with Coal, Power and Renewable Energy Minister Piyush Goyal,

Research Desk Latin Manharlal Securities Pvt Ltd

2

Commodity Expiry Closing

Castor seed

/100kg 20-Jan-15 4,814.00

Chana

/100kg 20-Jan-15 3,487.00

Coriander

/100kg 20-Jan-15 11,825.00

Jeera /30kg 20-Jan-15 14,620.00

Mustardsee

d /100kg 20-Jan-15 4,110.00

Soy bean

/100kg 20-Jan-15 3,333.00

Turmeric

/50kg 20-Apr-15 9,020.00

Economic Data

Date Event Forecast Previous

12 JAN India

Inflation

rate YOY 5.72% 4.38%

12 JAN

India

Industrial

Production

YOY -5.60% -4.20%

12 JAN

Manufacturing

Production YOY

-1.02% -7.6%

14 JAN WPI

Inflation YOY

1.55% 0%

who assured the trade unions that the government would protect the interests of the stateowned behemoth and its employees. Employees went on 5 day strike starting 6th Jan in order to protest against the enabling clause in the coal block allocation ordinance that may allow coal extraction and its sale by private companies.

Pantaloons Fashion & Retail will raise Rs 1,000 crore through issue of non-convertible debentures on a private placement basis

Maruti Suzuki had hiked prices of its vehicles upto Rs 31600/- after the expiry of excise concession, which was applicable from 1st jan 2015 across all models.Consumer durable firms like Whirlpool, Panasonic

and Godrej appliances are also increasing prices of their products by 5% for the same reason. Fertilizer to salt manufacturer, Tata Chemicals plans to enter the essential need products segment of Indian household from spices to staples in the year ahead. It is, however, not looking at ready-to-eat segments like snacks. Healthcare major Apollo Hospitals acquired Nova Speciality Hospitals in a deal pegged at up to Rs 145 crore. Nova has 11 centers in eight cities, while AHLL has close to 100 operational centers in India and West Asia. This acquisition will also mark the entry of Apollo in Mumbai, Jaipur and Kanpur.

Government plans to divest 5% each in PFC & REC in 3rd week of January 2015, where it will raise about approx. Rs. 3000 crores. Crude Oil Periodic Chart:

Outlook Next Week :

Indian market likely to feel jitters owing to the global market volatilities.

Energy traders say the decline in oil relates to worries that the market

will remain oversupplied over the next few quarters. Oil industry

insiders think it will be a year or two until prices return to around $80 -

$90 per barrel.

Research Desk Latin Manharlal Securities Pvt Ltd

3

SWARAJ ENGINES Giving engineered growth to the agricultural path

Current Price 901

Target

Price 1130

Upside 25.42% Duration 12 months

STOCK DATA

BSE Code 500407

NSE Code INE277A01016

Market Cap (Crores) 1119.04

Face value 10

Sector Engines

52 week H/L 585 / 1080

Industry Overview

The Indian tractor industry has 13 national and a few regional participants. The market share is, however,

concentrated amongst the top-five manufacturers, who account for over 90% of total volumes. India s current tractor penetration is estimated at tractors per , hectares of agricultural land. While this is close to the averages in some countries, the statistic belies the fact most of the land holdings in India are smaller than those in foreign countries. Also penetration numbers vary widely across states, with states like Punjab, Haryana or Western UP enjoying significantly higher penetration compared to the rest of the country. Some regions like Eastern Uttar Pradesh, West Bengal, Orissa, Madhya Pradesh, Karnataka and Andhra Pradesh have relatively low penetration levels.

Also, there exists headroom for growth of smaller horsepower tractors among small and marginal farmers. Further, even if tractor density was to remain constant, demand in the industry is expected to remain sound on account of shortening tractor replacement cycle.

Company Overview Mahindra and Mahindra Tractors (M&M) is the market leader, having a share of 40% and has only one supplier for its Swaraj brand of tractors – Swaraj Engines Ltd. Swaraj Engines was earlier a part of JV between Punjab Tractors Ltd (PTL) and Kirloskar Engines to manufacture engines for Punjab Tractors. PTL had been taken over and merged with Mahindra and Mahindra Ltd. As a result, M&M now holds 33% of Swaraj Engine s equity with 17% is held by Kirloskar Industries Ltd. The Company supplies engines from 20HP to 50HP to "Swaraj" branded tractors of M&M. SEL also, manufactures engine components for the erstwhile Swaraj Maza Ltd i.e. SML Isuzu. The company s engine business constitutes approximately 9 % of its product revenue. The remaining % represents value of hi-tech engine components being supplied to SML for assembly of commercial vehicle engines. The company has only one customer in the form of M&M. So SEL s growth and shareholder returns depend entirely on the plans M&M has for the Swaraj brand of tractors. The Company has had a consistent history of dividend payments over the past 10 years (except FY07) and that bodes well for shareholders.

Research Desk Latin Manharlal Securities Pvt Ltd

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* Mahindra & Mahindra holds 33.22% and Kirloskar Industries holds 17.39% making total 50.62% under

Promoters category

**Mutual funds holding

Name % holding by Mutual fund

Franklin India Smaller companies fund

1.62%

SBI Magnum Midcap fund 1.28%

DSP Blackrock Micro cap fund

1.83%

L&T Mutual fund Trustee ltd – Special Situations

1.60%

Others 3.68%

Total 10.01%

Management saying

In the backdrop of current scenario, it is expected that while the industry may register moderate growth in near term, but having regard to modest tractor penetration, government's continuous thrust towards rural development, agri-mechanization, generating rural employment opportunities through various schemes, scarcity of farm labour especially during the sowing season, shortened replacement cycle, healthy credit availability, etc., continue to be the positive drivers for the industry growth. As the industry outlook for the Company's prime customer seems promising, Swaraj Engines business prospects appear to remain positive

Opportunity

Huge business scalability -: Indian tractor industry on a growth trajectory following the

structural reforms in the rural income and improving credit to the farm sector. We believe, the tractor industry to register an 10% CAGR over FY2015-18E, improving credit to the farm sector, shortage of labour, increasing usage of tractors in agriculture and non-agriculture activities. Increased mechanization in the Agri sector + Availability of Credit +Non agriculture use of tractor=Higher Incremental demand for tractors

Strong ROCE, consistent Cash flows and debt fee company : Strong return on capital employed,

averaging 24% over the past 10 years, and a debt free status and good operating margins bodes well for strong business model. Company has been generating Free Cash Flow (FCF) more than its net profit over a ten-year period, which again is the legacy of a well-run business

Shareholding Pattern (30/09/2014)

Category % of equity

Mutual Funds** 10.01%

Financial institutions/ Banks 0.09% FII s 5.45%

Promoters * 50.62%

Others 33.83%

Research Desk Latin Manharlal Securities Pvt Ltd

5

Increased Demand over the next few years : The strong volume growth which is likely to be seen in FY16E from its capacity expansion to 1,05,000 engines p.a. from current 75,000 engines p.a., increased demand from M&M, over capacity utilization in FY15E to enhance margins, presence in all HP segments, softening of commodity prices and dependence on agriculture industry bodes well for the company s fortune.This expansion will help the company improve productivity.

Concerns and Risks

Dependent on single customer : The company is dependent on only one customer i.e. M&M who is also a major shareholder. Any adverse effects from M&M can severely effect the sales of the company

Weak Monsoon: Tractors can be affected from weak monsoons

Auto sector Regulations : Government regulations on auto sector which includes tractor sector could also dampen the company sales

Financials For quarter ended September , net sales of the company was up approx at Rs 166.19 crores from Rs 150.45 crores same period last year. For half year ended September , net sales of the company up at Rs 331.40 crores approx from Rs 296.63 crores same period last year. PAT for September quarter stood at Rs 17.73 crores, up by 3.26 % YoY and For half year ended September ,PAT stood at Rs 35.31 crores up 3.88% YOY.

VALUATION

For FY 2015, we expect the company to register net sales and PAT of Rs 681 crore and Rs 72 . 39 crore. This gives an

EPS of Rs. 58. . 29 Current market price of Rs 901 discounts FY 2015 projected earnings by 15.46 times.

Buy with 12 months target price of Rs 1130 which discounts our FY 2015 projected EPS by 19 . 39 times.

Research Desk Latin Manharlal Securities Pvt Ltd

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BALANCE SHEET (Crores.)

201403 201303 201203 201103 201003

SOURCES OF FUNDS :

Share Capital 12.42 12.42 12.42 12.42 12.42

Reserves Total 197.46 181.31 173.86 139.8 110.32

Equity Share Warrants 0 0 0 0 0

Equity Application Money 0 0 0 0 0

Total Shareholders Funds 209.88 193.73 186.28 152.22 122.74

Secured Loans 0 0 0 0 0

Unsecured Loans 0 0 0 0 0

Total Debt 0 0 0 0 0

Other Liabilities 1.78 1.26 1.26 1.46 0

Total Liabilities 211.66 194.99 187.54 153.68 122.74

APPLICATION OF FUNDS :

Gross Block 152.92 141.54 96.04 77.63 71.94

Less : Accumulated Depreciation 68.86 60.82 54.24 53.67 49.22

Less:Impairment of Assets 0 0 0 0 0

Net Block 84.06 80.72 41.8 23.96 22.72

Lease Adjustment 0 0 0 0 0

Capital Work in Progress 1.73 2.46 8.72 0.49 0.95

Producing Properties 0 0 0 0 0

Investments 72.19 74.15 81.12 57.79 57.71

Current Assets, Loans & Advances

Inventories 46.41 39.35 33.44 35.11 19.91

Sundry Debtors 7.85 9.25 11.91 8.05 4.06

Cash and Bank 109.53 80.72 69.7 76.2 56.39

Loans and Advances 9.27 10.23 8.26 4.45 6

Total Current Assets 173.06 139.54 123.31 123.81 86.36

Less : Current Liabilities and Provisions

Current Liabilities 63.02 50.02 52.53 40.96 28.61

Provisions 52.5 49.56 20.1 15.44 13.71

Total Current Liabilities 115.52 99.58 72.63 56.4 42.32

Net Current Assets 57.54 39.96 50.68 67.41 44.04

Miscellaneous Expenses not written off 0 0 0 0 0

Deferred Tax Assets 0.68 0.55 0.68 1.34 0.98

Deferred Tax Liability 7.62 6.88 3.88 3.26 3.66

Net Deferred Tax -6.94 -6.33 -3.2 -1.92 -2.68

Other Assets 3.07 4.03 8.42 5.95 0

Total Assets 211.66 194.99 187.54 153.68 122.74

Contingent Liabilities 0 0 5.83 5.98 5.74

Research Desk Latin Manharlal Securities Pvt Ltd

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PROFIT & LOSS (Crores.)

201403 (12) 201303 (12) 201203 (12) 201103 (12) 201003 (12)

INCOME :

Sales Turnover 682 538.3 495.61 398.04 306.44

Excise Duty 73.72 59.26 47.03 37.01 24

Net Sales 608.28 479.04 448.58 361.03 282.44

Other Income 18.47 15.31 12.24 8.18 10.01

Stock Adjustments 3.43 2.65 -1.78 4.71 2.61

Total Income 630.18 497 459.04 373.92 295.06

EXPENDITURE :

Raw Materials 465.69 367.05 338.71 273.24 208.41

Power & Fuel Cost 5.02 3.78 3.32 2.5 2.34

Employee Cost 27.69 22.13 19.17 16.96 13.84

Other Manufacturing Expenses 14.57 10.41 10.57 6.77 6.42

Selling and Administration Expenses 8.1 6.82 3.97 3.66 3.6

Miscellaneous Expenses 2.14 0 1.69 1.94 0.87

Less: Pre-operative Expenses Capitalised 0 0 0 0 0

Total Expenditure 523.2 410.19 377.43 305.07 235.48

Operating Profit 106.97 86.81 81.61 68.85 59.58

Interest 0.04 0.15 0.08 0.04 0.03

Gross Profit 106.93 86.66 81.53 68.81 59.55

Depreciation 9.12 7.16 4.26 4.46 4.84

Profit Before Tax 97.81 79.5 77.27 64.35 54.71

Tax 30.2 20.97 23.17 21.2 18.54

Fringe Benefit tax 0 0 0 0 0

Deferred Tax 0.61 3.13 1.28 -0.76 -1.18

Reported Net Profit 67 55.4 52.82 43.91 37.35

Extraordinary Items 0.67 3.96 0.64 0.05 0.83

Adjusted Net Profit 66.33 51.44 52.18 43.86 36.52

P & L Balance brought forward 28.15 26.7 23.64 20.16 16.39

Statutory Appropriations 0 0 0 0 0

Appropriations 57.86 53.95 49.76 40.43 33.58

P & L Balance carried down 37.3 28.15 26.7 23.64 20.16

Dividend 43.47 40.99 16.14 12.42 9.93

Equity Dividend % 350 330 130 100 80

Dividend Per Share(Rs) 35 33 13 10 8

Earnings Per Share(Adj)-Unit Curr 48 39 40.42 33.74 28.74

Book Value(Adj)-Unit Curr 168.98 155.98 149.98 122.56 98.82

Dividend Per Share Adj.(Rs) 35 33 13 10 8

Research Desk Latin Manharlal Securities Pvt Ltd

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CASH FLOW (Crores.)

201403 201303 201203 201103 201003

Cash Flow Summary :-

Cash and Cash Equivalents at Beginning of the year 3.09 2.86 76.19 56.38 55.88

Net Cash from Operating Activities 68.98 47.46 49.87 30.56 37.1

Net Cash Used in Investing Activities -18.02 -28.37 -41.92 0.85 -29.28

Net Cash Used in Financing Activities -47.82 -18.86 -14.45 -11.6 -7.32

Net Inc/(Dec) in Cash and Cash Equivalent 3.14 0.23 -6.5 19.81 0.5

Cash and Cash Equivalents at End of the year 6.23 3.09 69.69 76.19 56.38

Research Desk Latin Manharlal Securities Pvt Ltd

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PEER COMPARISON:-

All figures in Crores Swaraj Engines Cummins Greaves Cotton

Kirlosakar Oil

Engines

Kirlosakar

Industries

Market Price 901 877 154 262 617

Net Sales 'Mar 2014 608.28 3976.67 1735.94 2320 1246.48

Debt (secured + unsecured +

other) 1.78 137.28 16.98 37.71 201.22

Equity 12.42 55.44 48.84 28.92 9.71

Reserves 197.46 2509.71 770.74 1238.31 702.8

Total Equity 209.88 2565.15 819.58 1267.23 712.51

Debt/Equity 0.01 0.05 0.02 0.03 0.28

Market Cap 1119.04 24310.44 3760.68 3788.52 599.11

Book Value per share 168.98 92.54 33.4 87.64 733.89

Price / BV per share 5.33 9.48 4.61 2.99 0.84

Operating Cash Flows 'Mar

2014 68.98 362.37 156.65 338.01 -12.96

Capital Expenditure 11.38 470.51 14.23 45.39 469.56

Free cash Flows 'Mar 2014 57.60 -108.14 142.42 292.62 -482.52

FCF per share 46.38 -3.90 5.83 20.24 -496.93

Price / FCF per share 19.43 -224.81 26.41 12.95 -1.24

FCF/Net Sales 0.09 -0.03 0.08 0.13 -0.39

5 years avg OP margin %

(lesser of avg n current) 14.35% 19.00% 9.32% 9.72% 8.88%

5 years avg Adjusted NP

margin % (lesser of avg n

current) 9.82% 13.86% 6.39% 6.99% 4.52%

Industry Avg NP margin % 8.38% 8.38% 8.38% 8.38% 8.38%

TTM EPS 55.01 25.38 5.96 12.27 43.71

Company P/E 16.38 34.55 25.84 21.35 14.12

Industry P/E 33.76 33.76 33.76 33.76 33.76

Face Value 10 2 2 2 10

Stock runup since last 3

months -9.63% 33.69% 21.26% 4.38% 8.82%

Stock runup since last 6

months -6.92% 31.48% 25.20% 0.00% 59.43%

Stock runup since last 12

months 41.67% 91.07% 136.92% 73.51% 137.31%

52 week low 585 423 57 151 226

52 week high 1080.00 960.00 156.00 300.00 656.00

Interest Coverage ratio 2446.25 196.58 36.52 580.62 8.22

5 years avg ROE (lesser of avg

n current) 31.90% 24.23% 14.57% 14.74% 6.51%

5 years avg RONW (lesser of

avg n current) 31.90% 24.23% 15.98% 14.74% 5.71%

5 years avg ROCE (lesser of avg

n current) 46.30% 31.38% 22.57% 19.43% 6.74%

Industry Avg ROCE 22.99% 22.99% 22.99% 22.99% 22.99%

ROA 168.98% 86.10% 33.56% 87.63% 733.89%

5 years avg EV/EBIDTA (higher

of avg n current) 7.01 18.79 8.64 8.27 35.19

Dividend Yield 3.88% 2.05% 1.56% 1.91% 0.65%

Research Desk Latin Manharlal Securities Pvt Ltd

10

CHART :

Terms used :

FCF : Free cash flow TTM : Trailing twelve months RONW : Return on net worth ROE : Return on Equity ROCE : Return on Capital Employed EV/EBIDTA = Enterprise value / Earnings before interest, depreciation, tax and amortization P/E = Price to earnings ratio EPS = Earnings per share BV = Book value PBT = Profit before tax PAT = Profit after tax OPM = Operating profit margin

Research Desk Latin Manharlal Securities Pvt Ltd

11

Disclosures:

(a) The research analyst or research entity or his/their associates or his/their relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company or any financial interest in the subject company

(b) The research analyst or research entity or his/their associates or his/their relatives do not have any other material conflict of interest at the time of publication of the research report or at the time of public appearance

(c) The research analyst or research entity or its associates have not received any compensation for investment banking or merchant banking or brokerage services nor received any compensation for products or services from the subject company in the past twelve months

(d) The research analyst or research entity or its associates have not received any other benefits from the subject company or third party in connection with the research report

(e) The subject company is not or was not a client during twelve months preceding the date of distribution of the research report and the types of services provided by the research analyst or research entity or his/their associates or his/their relatives

(f) The research analyst has not served as an officer, director or employee of the subject company

(g) The research analyst or research entity has not been engaged in market making activity for the subject

company

Research Desk Latin Manharlal Securities Pvt Ltd

12

THANK YOU

Disclaimer:-

This report has been prepared by Latin Manharlal Securities Pvt Ltd . The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Latin Manharlal Securities Pvt Ltd. may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments. Latin Manharlal Securities Pvt Ltd., its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. Neither Latin manharlal Securities Pvt Ltd. nor any of its employees shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material.

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