**[investwise]** Swaraj Engines-BUY, Tgt Rs 500

 

Swaraj Engines Ltd. (SEL) is now part of the M&M group (33.2% stake). SEL's principal activity is to manufacture and supply of engines and hitech engine components for tractors and other commercial vehicles. The products include internal combustion diesel engines, diesel engine components and spare parts.   Though SEL was originally set up to manufacture engines for PTL, in recent years SEL has also been a supplier of hi-tech engine components to Swaraj Mazda Ltd. (SML). Since start of commercial operations in 1989-90, SEL has supplied around ~320,000 engines for fitment into "Swaraj" tractors.   SEL has only two customers; (i) PTL to whom they supply tractor engines (supplies 5 types of engines from 20 horse power (HP) to 50 HP) and (ii) SML to whom they supply hi-tech engine components for their commercial vehicles. The resultant positive outcome is low levels of marketing expenses which otherwise the company would have to incur. The management also benefits from lower inventory costs.   SEL's engine business currently constitutes ~93% of company's product revenue and balance ~7% represents value of hi-tech engine components being supplied to SML for assembly of commercial vehicle engines.   'Swaraj Division' of M&M helped SEL to record its highest ever despatches of 28,539 engines in FY'09 as compared to 16,408 engines despatched in FY'08. We expect the company to sell ~38000 units this fiscal. By undergoing debottlenecking, rebalancing and capital infusion, SEL can increase its installed capacity which is currently at 36000 engines (on double shift basis) to achieve the projected volume targets.   SEL is a zero debt company with cash and investments of about Rs.61 per share as on March'09. We expect the debt-free status quo likely to be maintained as capital expenditure to be funded through internal accruals.   Investors with a long-term perspective can BUY the stock as the prospects of both tractor and commercial vehicle industry are upgraded. The improving economic outlook and rising farm income is a positive for the tractor industry. Most agricultural crops have seen substantial hike in support and market prices over the last two years which will boost agricultural incomes.   The government is also focused on improving credit supplies to the rural sector at reasonable rates. We expect the company to register a CAGR of 28.4% in sales and 45.4% in profits for FY'09-11e.    At the CMP Rs.314, the scrip trades at 10x FY'2010e EPS of Rs.30.2 and 8.5x FY'2011e EPS of Rs.36.3.   Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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