Buy Swaraj Engines; target of Rs 2570: ICICI Direct

ICICI Direct's research report on Swaraj Engines

Swaraj Engines (SEL) reported a steady Q1FY18 performance with key surprise being sustenance of EBITDA margins at 16%+ levels Engine sales for the quarter came in at 23287, up 11.4% YoY with consequent net sales at Rs 194 crore, up 13.0% YoY Engine sales for the quarter lagged tractor sales at parent company i.e. M&M due to build-up of inventory in the previous quarter EBITDA in Q1FY18 was at Rs 32.3 crore (EBITDA margins at 16.6%, up 15 bps YoY) with consequent PAT at Rs 21.5 crore, up 13% YoY.

Outlook

SEL has one of the most capital efficient business models in our coverage universe with RoICs in excess of 200% largely due to negative working capital cycle, cash rich balance sheet and high dividend payout ratio (~75%). We believe this will result in SEL commanding premium valuations. Average RoCE & RoE in FY17-19E is expected at 28% & 36%, respectively. We expect SEL to clock engine sales volume CAGR of 16% over FY17-19E to 110638 units in FY19E (82297 units in FY17). We expect sales and PAT to grow at a CAGR of 17.2% and 20.3%, respectively, in FY17-19E. We value SEL at Rs 2570 i.e. 32x P/E on FY19E EPS of Rs 80.2 and retain our BUY rating on the stock.