Hold Swaraj Engines; target of Rs 1450: ICICI Direct

ICICI Direct's research report on Swaraj Engines

Engine sales volumes grew 2.7% YoY to 22,569 units vs. 13.3% tractor growth witnessed at the parent company Consequent net sales in Q3FY19 were at Rs 198.7 crore (up 8.4% YoY) EBITDA in Q2FY19 came in at Rs 27.5 crore with corresponding EBITDA margins at 13.8%, down 18 bps YoY. Margins for the quarter were lower tracking marginally higher raw material costs as well as employee costs partly compensated by lower other expenses PAT in Q3FY19 was at Rs 17.3 crore, up 0.5% YoY SEL reported a muted Q3FY19 amid likely higher sales at the parent level to procure engines in the previous quarter i.e. festive period. However, underlying tractor sales at the parent continued to stay healthy and provides comfort in near to medium term.

Outlook

Revising estimates, we expect engine sales to grow at 9.4% CAGR in FY18-20E to 1.10 lakh units in FY20E (0.9 lakh units in FY18). Consequently, we expect sales, EBITDA & PAT to grow at a CAGR of 12.0%, 12.8% & 10.4%, respectively, in FY18-20E. We value SEL at Rs 1450 i.e. 18x P/E on FY20E EPS of Rs 80.5 with HOLD rating on SEL.