Brokers put Reduce rating on Swaraj Mazda

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Brokers put Reduce rating on Swaraj Mazda

Broking houses are bearish on Swaraj Mazda. Kotak Securities has recommended a reduce rating on the company.

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Broking houses are bearish on Swaraj Mazda , SML. Kotak Securities has recommended a reduce rating on the company.

About the company's itself and its first quarter results review, the report says,

"Swaraj Mazda, SML has declared encouraging Q1FY06 results, which were in line with market expectations in terms of topline and EBIDTA growth. On a yoy basis, net sales during Q1 FY06 improved by 10% to Rs 1.48 billion, with an EBIDTA of Rs 121 million and a profit after tax of Rs 67 million. The growth in profit after tax was higher at 17% yoy as tax outgo was controlled in this quarter. Volume growth in Q1 FY06 was 10% on a yoy basis with 2,899 vehicles sold as compared to 2,644 nos sold in Q1 last year with average realisations remaining flat."

"SML was able to improve its EBIDTA margins in this quarter despite a higher raw material to net sales ratio of 82% as compared to 79% in the same quarter last year. The EBIDTA margins improved largely due to a 2% increase in sales realizations, which to a considerable extent offset the increase in input prices."

"We continue to expect EBIDTA margins to remain stable and improve marginally as steel prices are expected to show a softening trend going ahead."

About the company's future prospects, the report says, "For FY06E, we expect SML to generate net revenues of Rs 7.02 billion and an EBIDTA of Rs 578.4 million. Our EPS estimate for FY06E is Rs 28."

About the company's valuations, the report says, "The SML stock trades at 14x FY06E, which looks fairly valued despite the company's excellent track record, management quality and its future prospects. Exposure only to the LCV segment makes it theoretically more risky in a cyclical downturn. Therefore, the fact that SML is entirely dependent on the LCV segment should ideally make it trade at a discount to its peer group."

"With valuations looking expensive on a relative basis as compared to market leader Tata Motors and comparable peer like Eicher Motors, which currently enjoy discounting of 15x and 12x on FY06E respectively, we suggest a REDUCE on the SML stock."

"In the short term, the stock direction is likely to be driven by continued interest by Sumitomo Japan in SML, as the former has acquired a 15% equity stake in SML from Punjab Tractors. This is a welcome move for the company's long-term prospects as this would open new export opportunities for the company over the long term with the backing of Sumitomo Japan."