Buy Swaraj Engines; target of Rs 1540: ICICI Direct

ICICI Direct's research report on Swaraj Engines

Monsoon 2016 ended on a positive note with rainfall for the season at 97% of LPA against interim fears of below normal monsoons. Rainfall was muted at the start of the season with rainfall in June at 89% of LPA but gained pace during the crucial period with rainfall in July at 107% of LPA. Rainfall was muted in August at 91% and finally ended with September at 97% of LPA. Normal monsoon 2016 amid good rainfall at the fag end of the monsoon season (good moisture content for Rabi crop) bodes well for the domestic agriculture sector and should boost farm income, going forward. It should be noted that the current normal monsoon season came post two consecutive deficient monsoon seasons (2014 at 88% of LPA; 2015 at 86% of LPA) and, hence, can be a key trigger in the revival of rural demand. It is expected to benefit all agri input companies including farm mechanisation players like SEL.

SEL has a lean balance sheet with net cash of Rs 185 crore (FY16). Average RoCEs and RoEs in the last five years (FY12-16) at SEL were at 33% and 28%, respectively. On the back of healthy tractor demand domestically in H1FY17 amid normal monsoon 2016, we expect SEL to clock engine sales volume CAGR of 15.0% in FY16-18E to 84321 units in FY18E (64088 units in FY16). We expect sales and PAT to grow at a CAGR of 14.7% and 22.2%, respectively, in FY16-18E. We have valued SEL at Rs 1540 i.e. 25x P/E (1.1x PEG) on FY18E EPS of Rs 61.6. We continue to assign a BUY rating on the stock.