Swaraj engines- buy

Company Profile - 

Swaraj Engines Limited (SEL) is a Mohali based company originally established to manufacture engines for the erstwhile Punjab Tractors Ltd(PTL). 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 SEL's equity with ~17% is held by Kirloskar Industries Ltd. SEL manufactures diesel engines, diesel engine components and spare parts. It supplies 5 types of Engines from 20HP range to 50HP range.It also manufactures high-tech engine components for Swaraj Mazda.The Company’s engine business constitutes approximately 93% of its product revenue. The remaining 7% represents value of hi-tech engine components being supplied to SML for assembly of commercial vehicle engines.

Why to buy?

• India is still largely an Agrarian Economy and will continue to be so for a long time so the long term demand looks good.
• Low Penetration of Tractors in India compared to the global average
• Majority stake owned by M&M which is the leading tractor Manufacturer in the country for 26 years and now commands above 40% market share. SEL enjoys the access to the India’s largest tractor manufacturer “M&M” (~41% market share in Domestic tractor industry), 
• Capacity expansion from current 75,000 engines p.a. to 1,05,000 engines p.a. over next quarter to improve productivity and help meet the demand from M&M: SEL has undertaken an expansion plan to increase its annual capacity to ~1,05,000 engines per annum from ~75,000 engines over the next 2 quarters. 
• Though growth had been flat till FY2008 since the Mahindra stake, Swaraj engines have been growing Sales and Net Profits for the last 3 years at a CAGR of ~45% and ~60% respectively
• Pristine Debt Free balance sheet, good cash flows with a decent amount of cash on books and negative cash conversion cycle. Further Capital Expenditure will probably get funded from internal accruals
•  SEL’s presence in high HP segment and its growth directly dependent on Indian agriculture – An added advantage: Firstly, SEL manufactures engines in the 20‐50HP range. Around 10% of sales comes from lower than 30 HP engine,50% from 30‐40 HP and 40% from 40‐50 HP. Secondly, SEL’s growth has been directly comparable to Indian agriculture. We expect tractor industry to grow in long term on back of more productivity, low penetration, need for mechanization, higher MSPs and policies (NREGA).

The strong volume growth which is likely to be seen in FY16e from its capacity expansion to ~1,05,000 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 SEL’s fortune. Hence, we advise long term investor to take position in this counter.