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VISIT NOTE 29 NOV 2017

Swaraj Engines NOT RATED

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Compounding engine! We recently interacted with management of Swaraj Engines Ltd (SEL). The company manufactures and supplies diesel engines in the range of 20 HP to 60 HP to Swaraj Tractors, owned by Mahindra & Mahindra (M&M). SEL is a joint holding of Kirloskar Industries (17.4% stake) and M&M (33.2% stake).

SEL has an installed capacity to manufacture 105k units (engines). The company is focussed on expanding its capacity to 120k units (to be commissioned by Q4FY18) and targets to expand up to 150k units by FY21E. Going forward, the government’s thrust on increasing farm yields by escalating the penetration of farm mechanisation and Swaraj Tractor foray into higher HP tractors augur well for SEL.

SEL has prospects of compounding riding on the captive business of M&M, a market leader in tractors engine business, clean and clear transfer pricing policies, negative working capital and the best RoIC make SEL an attractive investment. The recent buyback announcement puts an icing on the cake. We estimate 16/16% revenue/PAT CAGR respectively over FY17-FY20E. At CMP of Rs 1,966, SEL trades at 28.0/25.3/22.3x FY18/FY19/20E EPS. Our fair value for the stock is Rs 2,489 (30x Sept - 19E EPS).

Key highlights

Good monsoon supported tractor sales: The tractor industry had to overcome hurdles like demonetisation and the implementation of GST. This had impacted tractor sales. Despite all these hurdles, a good

monsoon in the previous and current year supported growth of tractor sales, which rose by 17.8% in FY17 to 582k units and 11.5% in 1HFY18 to 363k units. Along with a normal monsoon, better reservoir positions in most parts of the country, bodes well for the Rabi season. These dynamics will further strengthen tractor sales in the near term.

Focus on higher HP engines to drive growth: SEL is currently expanding its product range to >60HP engines. Swaraj Tractors - Swaraj 960 FE, 55-60HP category tractor has well accepted in the market. They are also expected to launch a new 65HP tractor in FY18, which will further strengthen SEL position in the higher HP tractor engine market.

Strong balance sheet and superior return ratios: SEL operates with a negative cash conversion cycle, debt free balance sheet with strong cash and cash equivalents of Rs 2.35bn in FY17. SEL has the ability to withstand unfavorable business cycles, witnessed in FY15 and FY16. We expect SEL to deliver RoE of 36% and RoIC of 128% in FY20E.

Financial Summary

(Rs mn) FY16 FY17 FY18E FY19E FY20E Net Sales 5,259 6,662 7,924 9,121 10,345 EBITDA 738 1,047 1,288 1,486 1,681 APAT 513 692 852 943 1,069 Diluted EPS (Rs) 42.3 57.1 70.3 77.8 88.1 P/E (x) 46.5 34.4 28.0 25.3 22.3 EV / EBITDA (x) 30.5 21.1 17.1 14.6 12.7 RoE (%) 19.5 25.3 32.9 37.3 36.2 Source: Company, HDFC sec Inst Research

INDUSTRY Auto Parts & Equipment

CMP (as on 29 Nov 2017) Rs 1,966

Fair Value Rs 2,489 Nifty 10,361

Sensex 33,603

KEY STOCK DATA

Bloomberg SWE IN

No. of Shares (mn) 12

MCap (Rs bn) / ($ mn) 24/380

6m avg traded value (Rs mn) 21

STOCK PERFORMANCE (%)

52 Week high / low Rs 2,518/1,266

3M 6M 12M

Absolute (%) 0.8 10.5 49.6

Relative (%) (6.3) 2.5 22.3

SHAREHOLDING PATTERN (%)

Promoters 50.62

FIs & Local MFs 13.29

FPIs 5.25

Public & Others 30.84 Source : BSE

Basanth Patil [email protected] +91-22-6171-7319

SWARAJ ENGINES: VISIT NOTE

Page | 2

Company background: Swaraj Engines Ltd (SEL) was promoted by Punjab Tractors Ltd in 1985. SEL is a joint holding of Kirloskar Industries (17.4% stake) and M&M (33.2% stake), with M&M being the main promoter consequent to its acquisition of Punjab Tractors in 2007-08. SEL is into the manufacturing and supply of diesel engines in the range of 20 HP to 60 HP for Swaraj Tractors. The company is also supplying high-technology engine components to SML Isuzu Ltd. for the assembly of commercial vehicle engines. The company's business activities relate to diesel engines, diesel engine components and spare parts. It has supplied ~0.85mn engines to Swaraj Tractors.

Revenue break-up: SEL derives ~97% of its revenues from engine sales and the balance 3% from spares and engine components.

In terms of volumes, SEL manufactures ~10% engines catering to the <=30 HP tractor segment, ~50% catering to the 31-40 HP tractor segment, and ~40% catering to the 41-60 HP tractor segment. SEL’s margins differ across the HP segment, with margins more rewarding in the higher segment.

Key features: The plant can manufacture any model from the Swaraj product mix. It is equipped with the latest hi-tech machines, ergonomically friendly material handling system like MMC etc, and is equipped with 66 KVA substations for preventing power interruptions.

Revenue Mix Engine Sale: HP Break-up

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

SEL was promoted by Punjab Tractors Ltd in 1985. Currently SEL is a joint holding of Kirloskar Industries (17.4% stake) and M&M (33.2% stake) SEL drives ~97% of revenues from engine sales and balance 3% from Spares and engine components. In terms of volumes, SEL manufactures ~10% engines to <=30 HP tractor segment, ~50% to 31-40 HP tractor segment and ~40% catering to the 41-60 HP tractor segment

Net Engine Revenues

96.8%

Spares2.1%

Engine Components

0.6%

Scrap & Others0.5%

<=30 HP10%

31-40 HP50%

41-50 HP40%


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Swaraj Engines: The Story So Far YEAR MILESTONE 1985 Incorporated as a JV between Punjab Tractors and Kirloskar Engines to manufacture engines for Punjab Tractors 1989 First engine rolled out with 6 models, operational profitability in maiden year 1990 Launch of 3 cylinder engine, RV–3 and a connecting rod 2000 Launch of RB series of engine RB-30 and introduction of cylinder head 2007 Became part of the M&M Group 2010 Launch of single cylinder engine S-15 and AVL series 2011 Launch of XM series of engines 2014 Launch of RV3 XT-38 HP & RV2-NT 2015 Launch of 54 HP engines 2017 Launch of 60 HP engines and Genset engines

Source: Company, HDFC sec Inst Research

Dynamics Of The Tractor Industry

Farmers Primary customers of this industry

Tractor are replacing traditional methods of farming, i.e. moving to farm mechanisation

Size of farms drives the farmers’ buying decision

Easily available credit facilities make buying tractors convenient

Construction Companies They use tractors for transportation of raw materials

like brick, cement and sand etc

Their need is shifting towards higher HP tractors, as they can carry more material by weight and ensure faster delivery

Higher HP tractors are also used as mounts for many types of accessories, such as front-end shovels, bulldozers and others



Page | 4

Investment argumentsMultiple triggers to support tractor sales

In the last one year, the tractor industry has overcome hurdles like demonetisation and implementation of GST, which impacted tractor sales. Despite these, a good monsoon in the current and previous year supported overall tractor sales’ growth, which increased by 17.8% in FY17 and 11.5% in 1HFY18. A healthy monsoon in the current year led to a better reservoir position in most parts of the country. This would bode well for a good Rabi crop output. These positive triggers will further drive the domestic tractor industry. Along with this, the government’s continued thrust towards rural development and agri-mechanisation with enhanced budget allocation for the Agri sector, our strong belief is that these will affect the tractor industry positively.

The Indian domestic tractor industry started picking up after declining for two consecutive years from its peak sales of 634k units in FY14. It witnessed a strong upswing in demand during FY17 and closed at 582k units, as compared to 493k units for FY16, reflecting a growth of 17.8% for FY17

Along with this, the waiver of farm loans in states such as Punjab, Uttar Pradesh and Maharashtra have also helped boost sales. As most tractors are purchased through official loans, waivers have helped farmers who had earlier been defaulters to now be eligible for loans. Besides this, the increase in the minimum support price for both Kharif and Rabi crops is likely to keep rural sentiment positive in the near term, which in turn will benefit SEL.

Trend In Tractor Sales From FY05


Constant capacity addition led to volume growth

SEL has consistently expanded its capacity to meet tractor demand in the country. In FY11, the company had a capacity of 42k units, which it expanded to 60k units in FY12, 75k units in FY13 and 105k units in FY16. Now, SEL is adding 15k units expected to be commissioned in Q4FY18. Post this addition, the total capacity will be 120k units. The total capex for this expansion is Rs 250-300mn, funded through internal accruals. Post this, SEL has plans to further add 15k units in the next two years, and targets to reach 150k units by FY21E. The capex for each addition of 15k units is ~Rs 300mn, which can be easily funded through internal accruals. We expect SEL to achieve capacity utilisation of 88/87/86% respectively by FY18/19/20E on increased capacity, which should result in better operating leverage.

Tractor industry had overcome hurdles like demonitisation and implementation of GST, which had impacted tractor sales. Despite these hurdles, a good monsoon in the current and previous year supported overall tractor sales growth, which increased by 17.8% in FY17 and 11.5% in 1HFY18 SEL has consistently expanded its capacity to meet tractor demand in the country. Now it adding 15k units expected to commission in Q4FY18. Post this; SEL has plans to further add 15k units for next two years and targets to reach up to 150k units by FY21E.

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

Domestic Tractor sales % YoY - RHS


Page | 5

Capacity And Utilisation

Source: Company, HDFC sec Inst Research Sales Volume And Realisation Trend


Focus on higher HP engines to drive growth SEL currently caters to the 20 HP to 60 HP engine

requirements of Swaraj Tractors. SEL is now expanding its product range, and has recently started manufacturing 60 HP engines. Also, on the Swaraj Tractors’ front, Swaraj 960 FE, a 55-60 HP category tractor has well accepted in the market. The company has plans to launch a new 65 HP tractor in FY18, which will further strengthen SEL position in the higher HP tractor engine market. We have estimated a 12.2% volume CAGR for SEL over FY17-20E.

We estimate that a bulk of the growth in the coming years will be from the higher HP segment i.e. 41-50 HP, 51-60 HP and 60-65 HP. The Swaraj brand of tractors is known for its performance in the higher HP segment. We believe that new launches in this segment will result in increasing its share in the domestic market. As on FY17, M&M has a market share of 45% in the 41-50 HP tractor and 28% in the 51 HP and above tractor segment. The overall domestic tractor sales of the 51 HP and above segments have increased from 5% in FY14 to 8% in FY17. The launch of new higher HP tractors from Swaraj Tractors will further boost SEL’s engine volume growth.

74,000

76,000

78,000

80,000

82,000

84,000

86,000

88,000

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

FY15

FY16

FY17

FY18

E

FY19

E

FY20

E

Sales volume Realisation (Rs ) - RHS

99.7%

85.3%

61.2%

78.1%88.0% 87.0%

86.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

FY14

FY15

FY16

FY17

FY18

E

FY19

E

FY20

E

Engine Production CapacityCapacity Utilisation - RHS

SEL is now expanding its product range to higher HP engines (>60HP engines), this will drive the volume growth We have estimated 12.2% volume CAGR for SEL over FY17-20E. We have assumed the realisation CAGR of 3.4% for FY17-20E Swaraj brand of tractors is known for their performance in the higher HP segment. We believe that, new launches in higher HP segment (65HP) will boost SEL engine volumes


Page | 6

Domestic Tractor Sales Break-up HP wise

Source: Company, HDFC sec Inst Research Market Share Of 51 HP And Above Tractors


Market Share Of 41-50 HP And Above Tractors


Higher HP tractors have strong growth opportunities in the construction industry

Tractors can be used in a variety of ways as construction equipment. While their primary purpose may be to pull or push loads, they are also used as mounts for many types of accessories, such as front-end shovels, bulldozers and others. With these types of applications, we strongly believe that higher HP tractors have strong opportunities in the road construction industry. The National Highways Authority of India (NHAI) plans to build 50k kms of roads, with an expense of USD 250bn by 2022 as part of a long-term goal of doubling the length of the national highway network to 200k kms. The five tractor manufacturers command a market share of ~96% in the 51HP and above segment. M&M continues to dominate the industry, with the highest market share of ~28% for FY17 in >51HP segment. The introduction of the new 65HP from the Swaraj brand will further boost engine volume growth in SEL.

0.0%

20.0%

40.0%

60.0%

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

Escorts HMTInternational Tractors Mahindra & MahindraNew Holland India TAFESAME DEUTZ-FAHR Johndeere

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

Force Motors Escorts HMT International Tractors Mahindra & Mahindra New Holland IndiaTAFE SAME DEUTZ-FAHRJohndeere

0%

10%

20%

30%

40%

50%

60%

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

Upto 30 HP 31-40 HP 41-50 HP 51 HP and above The overall domestic tractor sale of 51HP and above segment has increased from 5% in FY14 to 8% in FY17 As on FY17, M&M has a market share of 45% in 41-50HP tractor and 28% share in 51HP and above tractor segment The five tractor manufacturers command a market share of ~96% in the 51HP above segment. M&M continues to dominate the industry, with the highest market share of ~28% for FY17 in >51HP segment


Page | 7

Strong balance sheet and superior return ratios

SEL operates with a negative cash conversion cycle, and has a debt-free balance sheet with good free cash flow generation. With its debt-free status and strong cash and cash equivalents at Rs 2.35bn in FY17, SEL has the ability to withstand unfavourable business cycles, as witnessed in FY15 and FY16. SEL’s dividend payout had been strong, (exceeding 55% in the last four years), resulting in a good dividend yield of ~2%. The return ratios of SEL are very attractive. In FY17, RoE and RoIC were at 25% and 84% respectively. The new capacity will further drive volume growth, and with higher OPM from larger HP engine sales, helps to maintain overall OPM at current levels. This would further boost return ratios. We expect SEL to deliver RoE of 36% and a strong RoIC of 128% in FY20E.

Improvement In Return Ratios From FY17


Post acquisition by M&M, SEL prudent with regard to working capital

SEL, after being acquired by M&M, has drastically improved its working capital cycle. Cash conversion cycle days reduced from 42 days in FY08 to 4 days in FY09. Thereafter, the cash conversion cycle has fallen to negative 17 days in FY17, which reflects the efficiency in the management of capital. This has resulted in strong cash flow generation for the company, and we anticipate it will maintain the average operating cash flow to EBITDA at 0.8x in FY15-20E.

Particulars FY15 FY16 FY17 FY18E FY19E FY20E Inventories (Days) 22 19 14 16 16 16 Sundry Debtors (Days) 5 5 7 8 8 8

Current Liabilities (Days) 33 37 38 40 40 40

Cash Conversion Cycle (WC Days) -6 -13 -17 -16 -16 -16


Tractors to replace shortage of farm labour

The next leg of growth in the tractor industry is farm mechanisation. This will automatically arise from the shortage of farm labour, which has moved to other means of livelihood, a shift in labour from the rural to urban sector, along with the diversion of the workforce on account of MGNREGA. The first step in farm mechanisation is the purchase of tractors for cultivation, and also for other agriculture activities. Hence, we expect that going ahead, positive sentiments will continue for a lengthy period.

SEL has a debt-free balance sheet with strong cash and cash equivalents of Rs 2.35bn in FY17 We expect SEL to deliver RoE of 36% and strong RoIC of 128% in FY20E SEL, after being acquired by M&M, has drastically improved its working capital cycle. Cash conversion cycle days have reduced from 42 days in FY08 to negative 17 days in FY17 The next major leg of growth in the tractor industry is farm mechanisation. This will automatically arise from the shortage of farm labour

21.9% 19.5% 25.3%32.9% 37.3% 36.2%

63.0%47.6%

83.7%

117.7%122.0% 127.9%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

FY15

FY16

FY17

FY18

E

FY19

E

FY20

E

RoE RoIC


Page | 8

Buy-back at Rs 2,400 per share to boost investor sentiments

SEL has approved the buy-back proposal for not exceeding 294k shares (2.37% of equity capital) at Rs 2,400 per share, for an aggregate amount not exceeding Rs 707mn. It will be funded through internal accruals or cash and cash equivalents. As on March 2017, SEL has Rs 2.35bn as cash and cash equivalents, which can easily fund the buy-back after meeting the capex requirement. We view the buy-back decision is a positive move to company.

Outlook and valuation SEL is one of the largest tractor engine manufacturers

in the industry, enjoying a volume market share of ~14% in overall domestic tractor sales. The company’s capacity for engines stands at 105k in addressable tractor sales of 582k in FY17. The company plans to expand its capacity by 15k units every year for the next two years. In 4QFY18, the capacity is expected to be enhanced to 120k units, and 135k units in 4QFY19. Capex would be ~Rs 300mn each year for the next two years, which would be met though internal accruals.

SEL witnessed revenue CAGR of 11% in FY15-FY17, while the operating profit grew by 18% in the same period, supported by an uptick in volumes. With the focus on higher HP engines, which command superior profitability, augurs well for SEL. With this, we project SEL’s revenues to grow at a CAGR of 16% for FY17-20E, operating profit and PAT at a CAGR of 17% and 16% respectively for the same period.

At the CMP of Rs 1,966, SEL is trading at 28.0/25.3/22.3x FY18/FY19/20E EPS. Given its multiple growth triggers, coupled with huge opportunities in the agriculture industry, we argue for a P/E re-rating for SEL. Hence, our fair value for the stock is Rs 2,489 (30x Sep-19E EPS).

Risks to our investment thesis

SEL is a supplier to M&M’s Swaraj brand, which would be directly affected by factors impacting the tractor industry.

Our country’s agriculture is largely dependent on the monsoon. This, the government’s policy on procurement, and credit availability to farmers would impact the tractor industry.

SEL has approved buy back proposal for not exceeding 294k shares (2.37% of equity capital) at Rs 2400 per share for an aggregate amount not exceeding Rs 707mn SEL is one of the largest tractor engine manufacturers in the industry, enjoying a volume market share of ~14% of overall domestic tractor sales

Peer Valuations

Mcap

(Rs bn) CMP

(Rs/sh) Rating FV EPS (Rs) P/E (x) EV/EBITDA (x) RoE %

FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E Kirloskar Oil Engines 49.8 345 NR NA 11.1 14.0 16.4 31.0 24.6 21.0 15.5 12.7 11.1 11.7 13.6 14.4 Greaves Cotton 29.3 120 NR NA 7.8 8.8 8.5 15.5 13.7 14.1 10.5 9.3 9.0 19.6 20.7 21.0 Swaraj Engines 24.4 1,966 NR 2,489 70.3 77.8 88.1 28.0 25.3 22.3 17.1 14.6 12.7 32.9 37.3 36.2 VST Tillers 17.8 2,055 NR NA 102.8 116.9 134.4 20.0 17.6 15.3 12.9 10.8 9.0 16.7 16.7 16.8 Honda Siel 13.4 1,323 NR NA 63.5 69.9 - 20.9 18.9 - 9.8 9.0 - 13.2 12.7 - Source: Bloomberg, HDFC sec Inst Research


Page | 9

Yearly Performance

Net Revenue And Growth EBITDA And EBITDA Margin


EBITDA Per Engine Gross Profit Per Engine


-15.0%

-10.0%

-5.0%

0.0%

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10.0%

15.0%

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25.0%

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0

2,000

4,000

6,000

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12,000

FY14

FY15

FY16

FY17

FY18

E

FY19

E

FY20

E

Net Revenues (Rs mn) % YoY - RHS

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

15.5%

16.0%

16.5%

0

200

400

600

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1,000

1,200

1,400

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FY14

FY15

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E

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E

EBITDA (Rs mn) EBITDA % - RHS

11,951 11,567 11,51112,721

13,939 14,238 14,479

0

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FY14

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FY16

FY17

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E

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E

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EBITDA Per Engine (Rs)

19,716 20,221 20,314

20,731

22,125 22,366

22,633

18,00018,50019,00019,50020,00020,50021,00021,50022,00022,50023,000

FY14

FY15

FY16

FY17

FY18

E

FY19

E

FY20

E

Gross Profit Per Engine (Rs)

We estimate SEL’s revenues to grow at a CAGR of 16% for FY17-20E, and operating profit to grow at a CAGR of 17% for the same period respectively. EBITDA margin will sustain at 16.3% for FY18-20E EBITDA per engine will improve from Rs 12,721 in FY17 to Rs 14,479 in FY20E and gross profit per engine will improve from Rs 20,731 in FY17 to Rs 22,633 in FY20E


Page | 10

Strong Free Cash Flows EPS And BV On An Upward Trend

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Assumptions Assumptions (Rs mn) FY15 FY16 FY17 FY18E FY19E FY20E Engine - Sales Volumes 64,595 64,088 82,297 92,400 104,400 116,100 YoY Growth (%) (12.8) (0.8) 28.4 12.3 13.0 11.2 Avg Net Realisation per Engine (Rs) 81,139 79,164 78,372 83,309 84,975 86,675 YoY Growth (%) 2.3 (2.4) (1.0) 6.3 2.0 2.0 Engine - Revenues 5,241 5,073 6,450 7,698 8,871 10,063 YoY Growth (%) (10.8) (3.2) 27.1 19.3 15.2 13.4 Engine Components - Revenues 20 19 38 44 53 66 YoY Growth (%) (64.1) (6.3) 105.8 15.0 20.0 25.0 Spares - Revenues 99 140 140 147 159 174 YoY Growth (%) (5.3) 41.0 0.2 5.0 8.0 10.0 Scrap - Revenues 36.9 27.4 33.4 35.1 37.9 41.7 YoY Growth (%) (20.7) (25.9) 22.2 5.0 8.0 10.0 Consolidated Net Revenue Growth (11.3) (2.6) 26.7 19.0 15.1 13.4 Gross Margin (%) 24.2 24.8 25.6 25.8 25.6 25.4


We anticipate SEL’s average operating cash flow to EBITDA to remain at 0.8x for FY15-20E AEPS to grow from Rs 57 in FY17 to Rs 88 in FY20E and Book Value per share will grow from Rs 228 in FY17 to Rs 264 in FY20E

-1,500

-1,000

-500

0

500

1,000

1,500

FY15

FY16

FY17

FY18

E

FY19

E

FY20

E

Operating Cash Flow Free Cash FlowInvesting Cash Flow Financing Cash Flow

Rs mn

43 4257 70 78 88

211 212228

194224

264

0

50

100

150

200

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300

FY15

FY16

FY17

FY18

E

FY19

E

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E

EPS (Rs) BV (Rs)


Page | 11

Income Statement (Rs mn) FY16 FY17 FY18E FY19E FY20E Net Revenues 5,259 6,662 7,924 9,121 10,345 Growth (%) (2.6) 26.7 19.0 15.1 13.4 Raw Material Expenses 3,957 4,955 5,880 6,786 7,718 Power & Fuel Expenses 44 52 62 72 81 Employee Expenses 268 310 341 378 424 Other Operating Expenses 253 297 353 399 442 Operating Profits 738 1,047 1,288 1,486 1,681 Operating Profit Margin (%) 14.0 15.7 16.3 16.3 16.2 Other Operating Income EBITDA 738 1,047 1,288 1,486 1,681 EBITDA Margin (%) 14.0 15.7 16.3 16.3 16.2 EBIDTA Growth (%) (1.3) 41.9 23.0 15.4 13.1 Depreciation 138 163 171 180 200 EBIT 600 884 1,117 1,306 1,481 Other Income 163 172 188 138 155 Interest & Financial Charges 1 1 - - - PBT 762 1,055 1,305 1,444 1,637 Tax 249 366 453 501 568 RPAT 513 688 852 943 1,069 EO (Loss) / Profit (Net Of Tax) 1 (4) - - - APAT 513 692 852 943 1,069 APAT Growth (%) (0.8) 35.0 23.1 10.6 13.3 AEPS 42.3 57.1 70.3 77.8 88.1 EPS Growth (%) (0.8) 35.0 26.1 10.6 13.3 Source: Company, HDFC sec Inst Research

Balance Sheet (Rs mn) FY16 FY17 FY18E FY19E FY20E SOURCES OF FUNDS Share Capital 124 124 121 121 121 Reserves 2,510 2,709 2,230 2,589 3,074 Total Shareholders Funds 2,634 2,834 2,351 2,710 3,195 Long-term Debt - - - - - Short-term Debt - - - - - Total Debt - - - - - Other Liabilities 25 29 29 29 29 Net Deferred Tax Liability 76 63 63 63 63 TOTAL SOURCES OF FUNDS 2,736 2,925 2,443 2,802 3,287 APPLICATION OF FUNDS Net Block 1,014 909 750 870 970 CWIP 7 12 300 300 300 Other Non Current Assets 42 38 38 38 38 Total Non-current Assets 1,062 959 1,088 1,208 1,309 Inventories 277 261 347 400 453 Debtors 75 131 174 200 227 Cash & Equivalents 1,921 2,351 1,777 2,069 2,507 Other Current Assets 30 20 20 20 20 Total Current Assets 2,303 2,762 2,318 2,688 3,207 Creditors 540 701 868 1,000 1,134 Other Current Liabilities 90 95 95 95 95 Total Current Liabilities 630 796 963 1,095 1,229 Net Current Assets 1,673 1,966 1,354 1,594 1,978 TOTAL APPLICATION OF FUNDS 2,736 2,925 2,443 2,802 3,287 Source: Company, HDFC sec Inst Research


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Cash Flow (Rs mn) FY16 FY17 FY18E FY19E FY20E Reported PBT 762 1,055 1,305 1,444 1,637 Non-operating & EO Items (23) (8) - - - Interest Expenses (139) (161) - - - Depreciation 138 163 171 180 200 Working Capital Change 130 150 38 52 54 Tax Paid (238) (379) (453) (501) (568) Others (1) 5 - - - OPERATING CASH FLOW ( a ) 630 824 1,061 1,176 1,322 Capex (272) (62) (300) (300) (300) Free Cash Flow (FCF) 359 762 761 876 1,022 Investments 316 (384) - - - Non-operating Income 161 168 - - - Others (343) (41) - - - INVESTING CASH FLOW ( b ) (138) (319) (300) (300) (300) Debt Issuance/(Repaid) - - - - - Interest Expenses (1) (1) - - - FCFE 358 761 761 876 1,022 Share Capital Buy Back - - (707) - - Dividend (492) (491) (627) (584) (584) Others 102 417 - - - FINANCING CASH FLOW ( c ) (391) (75) (1,335) (584) (584) NET CASH FLOW (a+b+c) 102 430 (574) 292 438 Opening Cash & Equivalents 1,819 1,921 2,351 1,777 2,069 Closing Cash & Equivalents 1,921 2,351 1,777 2,069 2,507 Source: Company, HDFC sec Inst Research

Key Ratios FY16 FY17 FY18E FY19E FY20E PROFITABILITY (%) GPM 24.8 25.6 25.8 25.6 25.4 EBITDA Margin 14.0 15.7 16.3 16.3 16.2 EBIT Margin 11.4 13.3 14.1 14.3 14.3 APAT Margin 9.7 10.4 10.8 10.3 10.3 RoE 19.5 25.3 32.9 37.3 36.2 Core RoCE 47.6 83.7 117.7 122.0 127.9 RoCE 18.9 24.5 31.8 36.0 35.1 EFFICIENCY Tax Rate (%) 32.7 34.7 34.7 34.7 34.7 Asset Turnover (x) 1.9 2.4 3.0 3.5 3.4 Inventory (days) 19 14 16 16 16 Debtors (days) 5 7 8 8 8 Other Current Assets (days) 2 1 1 1 1 Payables (days) 37 38 40 40 40 Other Current Liab & Prov (days) 6 5 4 4 3 Working Capital (days) (17) (21) (19) (19) (19) Debt/EBITDA (x) - - - - - Net D/E (0.7) (0.8) (0.8) (0.8) (0.8) Interest Coverage 1,199.4 736.8 NA NA NA PER SHARE DATA AEPS (Rs/sh) 42.3 57.1 70.3 77.8 88.1 CEPS (Rs/sh) 52.4 68.8 84.4 92.6 104.6 DPS (Rs/sh) 33.0 33.0 43.0 40.0 40.0 BV (Rs/sh) 212.1 228.2 193.9 223.5 263.5 VALUATION P/E 46.5 34.4 28.0 25.3 22.3 P/BV 9.3 8.6 10.1 8.8 7.5 EV/EBITDA 30.5 21.1 17.1 14.6 12.7 OCF/EV (%) 2.8 3.7 4.8 5.4 6.2 FCF/EV (%) 1.6 3.5 3.4 4.0 4.8 FCFE/MCAP (%) 1.5 3.1 3.2 3.7 4.3 Dividend Yield (%) 1.7 1.7 2.2 2.0 2.0



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1YR PRICE MOVEMENT

Rating Definitions

BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

700

1,200

1,700

2,200

Nov

-16

Dec-

16

Jan-

17

Feb-

17

Mar

-17

Apr-

17

May

-17

Jun-

17

Jul-1

7

Aug-

17

Sep -

17

Oct

-17

Nov

- 17

Swaraj Engines


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Disclosure: I, Basanth Patil, MBA, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock –No HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475. Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. 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 not been independently verified and 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. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. 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