Buy Swaraj Engines; target of Rs 1710: ICICI Direct

ICICI Direct's research report on Swaraj Engines

Swaraj Engines (SEL) reported healthy Q2FY21 numbers amid record quarterly volumes (34,489 engines, up 31.3% YoY). Net revenues rose 31.2% YoY (entirely volume led, ASPs flat) to Rs 292 crore, tracking a strong quarter for the domestic tractor industry. Margins rose 20 bps YoY to 13.7% courtesy savings in employee & other expenses with consequent PAT up 7% YoY to Rs 27 crore. SEL would be expanding capacities by 15,000 units per annum to 1.5 lakh units per annum, to be funded by internal accruals.

Outlook

We expect FY20-23E sales, PAT CAGR at 8.2%, 9.0%, respectively. SEL provides an auxiliary play on domestic tractor industry (rural economy) as well as M&M. Its strong B/S, ~70%+ dividend payout & healthy capital efficiency merit continued premium valuations, in our view. We value SEL at Rs 1,710 i.e. 24x P/E on FY22E & FY23E average EPS (Rs 71.2) & retain BUY.