Hold Swaraj Engines; target of Rs 2183: Centrum

Centrum's research report on Swaraj Engines

SWE’s volumes rose 11.6% YoY to 24,984 units, and net realizations increased 4.5% YoY/0.3% QoQ to Rs 83,517, which pushed up the company’s top-line by 16.6% YoY to Rs 2,087bn, below our estimates. The company’s EBITDA margin expanded by 51bps YoY. The company’s 2QFY18 EBITDA margin stood at 16.8% against our estimate of 16.6%. Interestingly, during this quarter the company reported it’s highest ever margin in the past 27 quarters. Consequently, 2QFY18 EBITDA/PAT grew by 20.3%/22.1% YoY.

Outlook

While our investment thesis remains intact, we would wait for a better risk reward before getting more constructive on the company. We value SWE on our differentiated AOCF/EV methodology and arrive at a TP of Rs 2,183 (25x FY19E EPS) which indicates a small upside from current levels. Hence we maintain our Hold rating on the stock. Key risks are a) dependence on a single client (i.e. Swaraj tractors) and b) lower-than-estimated growth in tractor volumes.