Jun 15, 2017 02:59 PM IST | Source:

Swaraj Engines hits all-time high after ICICIdirect upgrades on robust earnings, B/S

ICICIdirect expects Swaraj brand to continue outperforming the domestic tractor industry with consequent benefits flowing down to SEL.

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Swaraj Engines shares jumped to fresh record high at Rs 2,401.90, up nearly 5 percent intraday Thursday after ICICIdirect upgraded the stock to buy on outstanding balance sheet and robust earnings growth.

"The tractor engine manufacturer has a superlative balance sheet with nil debt, negative working capital cycle and robust return ratios. Average return on capital employed, return on equity & return on invested capital over FY17-19 is expected at 36 percent, 28 percent & 206 percent, respectively," the research house explained.

It feels recently accounted farm loan waivers by key agrarian states will certainly aid tractor growth, however it is not the optimum solution to address farm distress. Incorporating the same and positive monsoon momentum, the brokerage house upgraded its estimates and valuation multiple.

ICICIdirect believes that Swaraj Engines will command premium valuations given high certainty of double digit earnings growth coupled with prominent presence in government focussed farm segment.

It expects the company to clock engine sales volume CAGR of 16 percent over FY17-19 to 1,10,682 units in FY19. It also expects sales and PAT to grow at a CAGR of 17 percent and 20 percent, respectively, in FY17-19.

Swaraj Engines is a leading manufacturer of engines supplying to Swaraj Brand of tractors under parent group Mahindra & Mahindra. Swaraj brand of tractors has made strong inroads into the tractor industry domestically over the last 10 years, with a market share increase from around 8 percent in FY07 to around 16-18 percent in FY17. It has a strong presence in key states namely Madhya Pradesh, Western UP, Punjab, Rajasthan, Maharashtra and Andhra Pradesh.

Sensing the robust tractor demand, the company is expanding its capacity from 105,000 units to 120,000 units with due commissioning in Q4FY18 which will fuel the next leg of growth at SEL.

ICICIdirect said recently declared 28 percent GST rate on tractor engines is expected to be revenue neutral for the company given it was paying 12 percent as excise duty and 12 percent as sales tax coupled with limitation over input credit-purchases.

It expects Swaraj brand to continue outperforming the domestic tractor industry with consequent benefits flowing down to SEL.

At 14:38 hours IST, the stock price was quoting at Rs 2,357.40, up Rs 65.90, or 2.88 percent on the BSE.

Posted by Sunil Shankar Matkar
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