CMP 486.00

Target Price 544.00

ISIN: INE277A01016

Jan 23rd

, 2013

SWARAJ ENGINES LTD Result Update: Q3 FY13

BUYBUYBUYBUY

Stock Data

Sector Auto Equipment

BSE Code 500407

Face Value 10.00

52wk. High / Low (Rs.) 528.50 / 382.50

Volume (2wk. Avg ) 3640

Market Cap ( Rs in mn ) 6036.12

Annual Estimated Results (A*: Actual / E*: Estimated)

Years FY12A FY13E FY14E

Net Sales 4485.80 4990.26 5389.48

EBITDA 816.10 895.82 971.42

Net Profit 528.20 568.49 611.69

EPS 42.53 45.77 49.25

P/E 11.43 10.62 9.87

Shareholding Pattern (%)

1 Year Comparative Graph

BSE SENSEX SWARAJ ENGINES LTD

Source: Company Data, Firstcall Research

SYNOPSIS

Swaraj Engines Ltd is primarily engaged in

the manufacturing of diesel engines, diesel

engines components as well as its spare

parts.

During the third quarter, Revenue for the

quarter rose 5.94% to Rs. 1245.70 million

from Rs.1175.80 million, when compared

with the prior year period

Swaraj Engines Ltd is in development of the

50 HP+ engine.

The company undertaken an expansion

project to increase annual capacity to

75,000 engines in 2 phases while 1st phase

of expansion to increase to 60,000 engines

per annum.

The engine sales volume posted a growth of

17% during the year under review &

reached 55,239 units as compared to

previous year sale of 47,413 units.

Net Sales and PAT of the company are

expected to grow at a CAGR of 14% and

12% over 2011 to 2014E respectively.

Peer Groups CMP Market Cap EPS P/E (x) P/BV(x) Dividend

Company Name (Rs.) Rs. in mn. (Rs.) Ratio Ratio (%)

Swaraj Engines Ltd 486.00 6036.12 42.53 11.43 3.24 130.00

Bosch 9075.00 285730.00 339.90 26.77 6.04 1350.00

UCAL Fuel Systems 67.10 1483.80 7.26 9.24 0.51 40.00

Lumax Auto Technologies Ltd 150.00 2044.70 17.63 8.51 2.41 60.00

Investment Highlights

Results updates- Q3 FY13

Swaraj Engines Ltd is in business of supplying

engines to swaraj division of Mahindra & Mahindra

Ltd & supply of hi-tech engine components in India,

reported its financial results for the quarter ended

31st Dec, 2012. The Third quarter witnesses a

healthy increase in overall sales of the company.

The company’s net profit decline to Rs.137.60 million against Rs.140.80 million in the corresponding quarter

ending of previous year, an decrease of 2.27%. Revenue for the quarter rose 5.94% to Rs. 1245.70 million from

Rs.1175.80 million, when compared with the prior year period. Reported earnings per share of the company

stood at Rs.11.08 a share during the quarter, registering 2.27% decrease over previous year period. Profit before

interest, depreciation and tax is Rs.219.90 millions as against Rs.193.10 millions in the corresponding period of

the previous year.

Expenditure :

During the quarter Total Expenditure rose by 8 per

cent mainly on account of Increase in Depreciation

along with consideration of Employee Benefit and

other expenses. Total expenditure in Q3 FY13 was at

1083.10 million as against Rs.1003.90 million in Q3

FY12. Other Expenses Rs. 53.20 against Rs. 30.00

millions in the corresponding period of the previous

year. Employee Benefit Expenses Rs. 931.30 million

and Depreciation is Rs 21.2 million in Q3 FY13 is the

primarily attributable to growth of expenditure.

• Future Plan

Swaraj Engines Ltd is in development of 50 HP+ engine.

Months Dec-12 Dec-11 % Change

Net Sales 1245.70 1175.80 5.94%

PAT 137.60 140.80 -2.27%

EPS 11.08 11.34 -2.27%

EBITDA 219.90 193.10 13.88%

Company Profile

Swaraj Engines (SEL) was started in 1986 in technical and financial collaboration with Kirloskar Oil Engines

(KOEL) for manufacture of Diesel Engines.

SEL is a joint venture between erstwhile Punjab Tractors (PTL), which has merged with Mahindra & Mahindra

(M&M) and Kirloskar Oil Engines. (KOEL) which is originally set up to manufacture engines for PTL, in recent

years and also supplier of hi-tech engine components to Swaraj Mazda (SML).

It started commercial operations in the year 1989-90, has supplied around 3,18,000 engines for fitment into

“Swaraj” tractors. The engine business currently constitutes some 93% of the company’s product revenue. The

balance 7% represents value of hitech engine components being supplied to SML for assembly of commercial

vehicle engines.

SEL supplies 5 types of Engines from 20HP range to 50HP range to PTL. It also manufactures high-tech engine

components for Swaraj Mazda. As on date more than 200,000 Swaraj Tractors fitted with engines produced at in

the field.

� Research & Development

• Development of the new 23 HP single cylinder engine.

• Benefits derived from improvement in the fuel efficiency along with expansion of the product range.

� Products

Domestic

• Swaraj 735 FE New

• Swaraj 978 FE New

• Swaraj 855

• Swaraj 744 FE

• Swaraj 939 FE

• Swaraj 735 FE

• Swaraj 834 FE

• Swaraj 733FE

• Swaraj 724FE

• Swaraj 722 SUPER

• FORKLIFT: FD 15

• FORKLIFT: FD 20

• FORKLIFT: FD 30

• EL. FORKLIFT 15.

• COMBINE

Overseas

• Swaraj 978FE 4WD

• Swaraj 978FE 2WD

• Swaraj 855 4WD

• Swaraj 744 FE

• Swaraj 939FE 4WD

• Swaraj 939FE 2WD

• Swaraj 735 FE

• Swaraj 733 FE

• Swaraj 724 FE

• Swaraj 722 SUPER

• FORKLIFT 15

• FORKLIFT 20

• FORKLIFT 30

• EL. FORKLIFT 15

• COMBINE

Financial Highlight

Balance sheet as at March31st, 2012

(A*- Actual, E* -Estimations & Rs. In Millions)

Particulars March (Rs.in.mn) FY12A FY13E FY14E

1.Shareholder’s Funds

a) Capital 124.20 124.20 124.20

b) Reserves & Surplus 1783.60 2121.09 2524.10

Total Net worth 1907.80 2245.29 2648.30

2.Loan Fund

a) Deferred Tax liability 32.03 35.23 37.35

Total Liabilities (1+2) 1939.83 2280.52 2685.65

1.Fixed Assets

a) Gross block 960.40 1085.25 1204.63

b) Depreciation 542.40 574.94 586.44

c) Net Block 418.00 510.31 618.19

d) Capital Work in Progress 134.60 181.71 227.14

Total Fixed Assets 552.60 692.02 845.32

2. Investments 811.20 940.99 1082.14

3.Current Assets, Loans & Advances

a) Inventories 334.40 384.56 430.71

b) Sundry Debtor 119.14 142.97 164.41

c) Cash & Bank Balance 696.96 753.27 798.47

d) Loans & Advances 166.81 208.51 254.55

Total Current Assets 1317.31 1489.31 1648.14

Less: Current Liabilities & Provisions

a) Liabilities 527.78 606.95 643.36

b) Provisions 213.50 234.85 246.59

Net Current Assets 576.03 647.51 758.18

Total Assets( 1+2+3)

1939.83 2280.52 2685.65

Annual Profit & Loss Statement for the period of 2011 to 2014E

Value(Rs.in.mn) FY11 FY12 FY13E FY14E

Description 12m 12m 12m 12m

Net Sales 3606.30 4485.80 4990.26 5389.48

Other Income 23.70 122.40 140.73 157.61

Total Income 3630.00 4608.20 5130.98 5547.09

Expenditure -2999.20 -3792.10 -4235.16 -4575.67

Operating Profit 630.80 816.10 895.82 971.42

Interest 57.30 -0.80 -2.56 -2.81

Gross profit 688.10 815.30 893.26 968.61

Depreciation -44.60 -42.60 -74.64 -82.10

Profit Before Tax 643.50 772.70 818.62 886.51

Tax -204.40 -244.50 -250.14 -274.82

Net Profit 439.10 528.20 568.49 611.69

Equity capital 124.20 124.20 124.20 124.20

Reserves 1398.00 1738.60 2121.09 2524.10

Face value 10.00 10.00 10.00 10.00

EPS 35.35 42.53 45.77 49.25

Quarterly Profit & Loss Statement for the period of 30th Jun, 2012 to 31st Mar, 2013E

Value(Rs.in.mn) 30-Jun-12 30-Sep-12 31-Dec-12 31-Mar-13E

Description 3m 3m 3m 3m

Net sales 1183.90 1181.60 1245.70 1345.36

Other income 33.90 30.80 36.10 45.13

Total Income 1217.80 1212.40 1281.80 1390.48

Expenditure -1002.00 -1001.30 -1061.90 -1140.86

Operating profit 215.80 211.10 219.90 249.62

Interest 0.00 -0.10 -1.10 -1.16

Gross profit 215.80 211.00 218.80 248.46

Depreciation -13.30 -14.00 -21.20 -25.44

Profit Before Tax 202.50 197.00 197.60 223.02

Tax -68.30 -60.00 -60.00 -69.14

Net Profit 134.20 137.00 137.60 153.89

Equity capital 124.20 124.20 124.20 124.20

Face value 10.00 10.00 10.00 10.00

EPS 10.81 11.03 11.08 12.39

Ratio Analysis

Particulars FY11 FY12 FY13E FY14E

EPS (Rs.) 35.35 42.53 45.77 49.25

EBITDA Margin (%) 17.49% 18.19% 17.95% 18.02%

PBT Margin (%) 17.84% 17.23% 16.40% 16.45%

PAT Margin (%) 12.18% 11.77% 11.39% 11.35%

P/E Ratio (x) 13.75 11.43 10.62 9.87

ROE (%) 28.85% 28.36% 25.32% 23.10%

ROCE (%) 44.37% 46.10% 43.22% 39.78%

EV/EBITDA (x) 8.36 6.54 5.90 5.39

Book Value (Rs.) 122.56 149.98 180.78 213.23

P/BV 3.97 3.24 2.69 2.28

Charts

Outlook and Conclusion

The company performance for the financial year 2011-12 yet achieving new highs by taking the full advantage of

enhanced engine demand from Mahindra & Mahindra Ltd - Swaraj Division for the first time has crossed the

50,000 mark both for production and sale of engines. The timely increase of production capacities coupled with

productivity improvement initiatives enabled to achieve the milestone.

� At the current market price of Rs.486.00, the stock P/E ratio is at 10.62 x FY13E and 9.87 x FY14E

respectively.

� Earning per share (EPS) of the company for the earnings for FY13E and FY14E is seen at Rs.45.77 and

Rs.49.25 respectively.

� Net Sales and PAT of the company are expected to grow at a CAGR of 14% and 12% over 2011 to 2014E

respectively.

� On the basis of EV/EBITDA, the stock trades at 5.90 x for FY13E and 5.39 x for FY14E.

� Price to Book Value of the stock is expected to be at 2.69 x and 2.28 x respectively for FY13E and FY14E.

� We expect that the company surplus scenario is likely to continue for the next years, will keep its growth

story in the coming quarters also. We recommend ‘BUY’ in this particular scrip with a target price of

Rs.544.00 for Medium to Long term investment.

Industry Overview

The Indian auto component industry, which is currently valued at US$ 30 billion, will touch US$ 100 billion by

2020, according to Rajkot-based Ikon Marketing Consultants. The industry is growing at a steady pace of 15 - 18

per cent annually. The retail market (generally called as after-sales or after-market) for auto components is

valued at Rs 600 crore (US$ 111.11 million) and is expected to witness a quantum jump on the back of robust

domestic demand.

An analysis of medium to heavy-duty Hybrid and Electric Commercial Vehicle Market in China and India

estimated that the component revenues from India will reach US$ 212 million by 2020, which would account for

11 per cent of the global component market, as per Frost and Sullivan.

Market Structure

The auto component industry has been growing at a compound annual growth rate (CAGR) of 14.6 per cent

during 2007-11 and is expected to be a US$ 113 billion by 2020, as per data provided by Automotive Component

Manufacturers Association of India (ACMA).

The small and medium enterprise (SME) dominated automotive sector is among the top three sectors attracting

heavy online traffic on the site, IndiaMART.com, in terms of the number of buyers who visited from other

countries, both developed and developing, as per a report by IndiaMART.com. Asian countries are also key

buyers for auto products from India. Among the Indian suppliers registered on IndiaMART.com, the auto

component sector features in the top five categories, contributing 11.8 per cent to the whole pie. Product

categories such as pumps and pumping equipments took the top slot with 8.1 per cent buy leads posted on them,

followed by products such as nuts and bolts in second place and lights and accessories in third position.

Polaris Industries, maker of All Terrain Vehicles (ATVs), snowmobiles and motorcycles, is set to give a fillip to the

nascent motorsports market with its entry this year.

Global Auto Hub

Supportive Government policies, positive business environment, availability of reasonably priced talented

workforce and stable outlook for the industry have made India a global hub for the international manufacturers

to set up their facilities in the country. The auto components manufacturers are also reaping the benefits.

• Automotive components maker Piolax India, a subsidiary of Piolax of Japan, has inaugurated its first Indian

facility at the Sri City multi-product Special Economic Zone (SEZ) in Andhra Pradesh (AP)

• Bosch Automotive Aftermarkets has launched 100 service centres in North India. These centres will provide

service to multi-brand vehicles across different segments of unit repair (fuel injection systems, auto electrical

units) and entire vehicular repair

• The joint venture (JV) between global gearing expert David Brown and Bharat Forge, manufacturer of

automotive and non-automotive components, David Brown-Bharat Forge, has opened its first industrial

gearbox service and assembly facility in Hosur, Tamil Nadu

• Panasonic Carbon India Co Ltd intends to enter the lead acid battery market for the industrial and

automotive sector. The Rs 13,000 crore (US$ 2.41 billion) lead acid battery market has been growing in

double digits, on back of the rapidly growing automobile sector. While, industrial batteries is a Rs 4,800 crore

(US$ 888.89 million) market and automotive batteries constitute a Rs 8,200 crore (US$ 1.52 billion) market

annually.

Key Developments and Investments

• Hero MotoCorp plans to set up Global Parts Centre (GPC) at Neemrana, Rajasthan. With an investment of Rs

160 crore (US$ 29.63 million), the GPC will be spread across 35 acres

• TVS and Sons Ltd plans to take its multi-brand car service solutions business to the UK, the US and Thailand.

The company plans to add 65 to 70 owned outlets in India by 2013-14

• Sandhar Technologies Ltd has acquired 100 per cent stake in Bengaluru-based Mag Engineering Pvt Ltd, one

of the largest driver cabin manufacturer in India, for Rs 70 crore (US$ 12.96 million) - Rs 90 crore (US$ 16.67

million).

• Skoda is increasing localization levels and rationalizing prices across the range of products it offers in the

country, in order to increase its volume in the Indian market

Government Initiatives

Gujarat has been one of the most proactive states in terms of investor-friendly policies and environment. Maruti

Suzuki India Ltd (MSIL) has signed a state support agreement (SSA) with the State Government. MSIL plans to

infuse about Rs 4,000 crore (US$ 740.74 million) in the initial phase of the project and equivalent amount would

be invested by the company's ancillary suppliers to set up a vendor park near the facility. The new unit is

expected to commence operations by 2015-16.

In a bid to improve safety features of vehicles, the Government has asked automobile manufacturers to develop a

gadget which would be similar to the 'black box' installed in planes. The owner would not be able to turn the

instrument off or on and the snapshot could be viewed by legal bodies, insurance companies and automakers. Mr

C P Joshi, Minister of Road Transport and Highways, has also asked manufacturers to contemplate on the option

of fixing such IT-enabled instrument to improve safety and security of the vehicles.

Meanwhile, the Government of Odisha has also prepared a draft of its proposed auto component policy to attract

investment in the state. Meticulously prepared, the draft policy envisages a concession of up to 50 per cent on

land to be made available to auto component manufacturers and electricity duty waiver for ten years. The policy

also delineates various fiscal incentives, increased reimbursements capital grants to attract manufacturers to set

up their factories in the state.

Road Ahead

The rapid improvement in infrastructure, huge domestic market, increasing purchasing power, established

financial market etc have made India a favorable destination for investment by global majors in the auto

industry, according to Automotive Mission Plan (AMP - 2006-16).

The vision of AMP 2006-2016 aims India "to emerge as the destination of choice in the world for design and

manufacture of automobiles and auto components with output reaching a level of US$ 145 billion accounting for

more than 10 per cent of the GDP and providing additional employment to 25 million people by 2016."

In addition, the hybrid and electronic vehicles are new developments on the automobile canvas and India is one

of the key markets for them. Global and Indian manufacturers are focusing their efforts to develop innovative

products, technologies and supply chains.

Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale

of any financial instrument or as an official confirmation of any transaction. The information contained herein is

from publicly available data or other sources believed to be reliable but do not represent that it is accurate or

complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s affiliates shall

not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the

information contained in this report. This document is provide for assistance only and is not intended to be and must

not alone be taken as the basis for an investment decision.

Firstcall India Equity Research: Email – info@firstcallindia.com

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