ICICI Direct's research report on Swaraj Engines
Swaraj Engines (SEL) reported a steady Q2FY18 performance with the company reporting new high EBITDA margins of 16.8% Engine sales for the quarter came in at 24984 units, up 11.6% YoY with consequent net sales at | 208.9 crore, up 16.7% YoY , Engine sales for the quarter, as a percentage of tractor sales at parent i.e. M&M, were at a normalised level of 32.4% EBITDA in Q2FY18 was at | 35.1 crore (EBITDA margins at 16.8%, up 50 bps YoY) with consequent PAT at | 23.5 crore, up 21.9% YoY The expansion in EBITDA margins was primarily tracking lower other expenses, partly compensated by higher employee costs.
SEL has a superlative business model wherein it realises core return ratios in excess of 200% largely on account of negative working capital cycle, steady margin trajectory and high dividend payout (~75%). We believe this will continue to drive premium valuations for SEL. Going forward, incorporating the H1FY18 results and tweaking our estimates, we now expect SEL to clock engine sales volume CAGR of 15.3% in FY17-19E. We expect sales and PAT to grow at a CAGR of 17.5% and 20.3%, respectively, in FY17-19E. We continue to value SEL at | 2570 i.e. 32x P/E on FY19E EPS of | 80.2 and assign BUY rating on the stock.
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