swaraj engines (swaeng) | 1820 - icici...

July 31, 2018

ICICI Securities Ltd | Retail Equity Research

Result Update

Muted growth to weigh on premium valuation

Swaraj Engines (SEL) reported a steady Q1FY19 performance with

engine sales volume coming in at 26,742 units, up 14.8% YoY

This lags the tractor volume growth of ~19% at its parent in the

corresponding period, signalling some loss of market share by

Swaraj brand of tractors in the domestic market

Consequent sales in Q1FY19 were at | 264.5 crore, up 20.9% YoY

EBITDA in Q1FY19 was at | 36.6 crore with corresponding EBITDA

margins at 15.6%, down 100 bps YoY. Higher raw material costs and

other expenses were key contributors to the lower margin profile

PAT for the quarter was at | 23.1 crore, up 7.5% YoY

Monsoon progress loses steam, sowing activity yet up pick up pace

As per the latest release by IMD, cumulative rainfall activity in the ongoing

monsoon season 2018 as of July 30, 2018 was at -6% of long period

average (LPA). Cumulatively, rainfall activity was healthy in the southern

(+2% of LPA), central (+6% of LPA) and northwest (-1% of LPA) region

while it is muted in the eastern region (-28% of LPA). A pick-up in

monsoon activity around mid-July has led to smart repletion of water

levels in national reservoirs, with water levels above last year as well as

10-year average levels. Sowing activity is, however, muted and yet to pick

up pace with cumulative sowing in the ongoing Kharif season 2018 as on

July 27 at 73.4 million hectare (MH), down 7.5% YoY. Swaraj brand of

tractor that uses engines manufactured at SEL is a leading tractor player

domestically with market share of ~14-15%. It will be a key beneficiary of

increase in farm mechanisation domestically amid government’s thrust on

increasing farm income through higher MSPs and irrigation penetration.

Domestic tractor industry to lose pace post stellar growth in FY17 & FY18

The domestic tractor industry has been at the forefront of farm

mechanisation in India. The tractor industry posted record sales volume

of 711,478 units (up 22.1% YoY) in FY18 after ending FY17 at 582,853

units (up 18% YoY). We expect the growth momentum to slip a bit

tracking high base. As per industry sources, domestic tractor industry

growth rate in FY19E is estimated at ~12-14% while in FY20E it is

expected in single digits. SEL’s parent, however, is growing strong and

maintained its leadership position with market share in excess of 40%. In

the long term, tractor industry is expected to grow at ~8-10% CAGR.

Healthy balance sheet, robust return ratios, assign HOLD

Swaraj Engines has a healthy balance sheet with cash surplus of ~| 180

crore as of FY18. It has one of the most capital efficient business models

in the listed space, with RoICs in excess of 200% largely due to negative

working capital cycle and high dividend payout ratio (~75%). Average

RoCE & RoE in FY18-20E are expected at 49% & 37%, respectively. SEL

also generates healthy CFO, with average CFO of ~| 112 crore over FY18-

20E thereby offering a healthy CFO yield of 5%. At the CMP, it also offers

a healthy dividend yield of ~3%. Going forward, however, with limited

growth prospects in the tractor segment in FY18-20E post stupendous run

in FY17-19E, we downgrade our valuation multiple (23x now vs. 30x in

the past) and consequent rating on SEL to HOLD. We expect SEL to clock

engine sales volume CAGR of 10.3% in FY18-20E to 112,033 units in

FY20E (92,022 units in FY18). We expect sales, PAT to grow at a CAGR of

13.2%, 12.0%, respectively, in FY18-20E. Conservatively, we keep EBITDA

margins largely flat in the aforesaid period. We value SEL at | 1900 i.e.

23x P/E on FY20E EPS of | 82.8.

Swaraj Engines (SWAENG) | 1820

Rating matrix

Rating : Hold

Target : | 1900

Target Period : 12-18 months

Potential Upside : 4%

What’s changed?

Target Changed from | 2500 to | 1900

EPS FY19E Changed from | 74.4 to | 74.0

EPS FY20E Unchanged at | 82.8

Rating Changed from Buy to Hold

Quarterly performance

(| crore) Q1FY19 Q1FY18 YoY (%) Q4FY18 QoQ (%)

Revenue 234.5 194.0 20.9 185.3 26.6

EBITDA 36.6 32.3 13.5 28.6 28.2

EBITDA (%) 15.6 16.6 -102 bps 15.4 19 bps

PAT 23.1 21.5 7.5 17.9 29.2

Key financials

| Crore FY17 FY18 FY19E FY20E

Net Sales 666.2 771.2 901.3 988.3

EBITDA 104.6 121.7 140.2 156.6

Net Profit 68.8 80.1 89.7 100.4

EPS (|) 55.4 66.1 74.0 82.8

Valuation summary

FY17 FY18 FY19E FY20E

P/E 32.9 27.5 24.6 22.0

Target P/E 34.3 28.8 25.7 22.9

EV / EBITDA 18.8 16.6 14.3 12.6

P/BV 8.0 9.7 9.0 8.3

RoNW 24.3 35.1 36.6 37.8

RoCE 31.2 45.9 50.2 52.1

Stock data

Stock Data | crore

Market Capitalization 2,206.8

Total Debt (FY18) 0.0

Cash & Investments (FY18) 182.9

EV 2,023.9

52 week H/L 2208 / 1650

Equity capital | 12.1 crore

Face value | 10

MF Holding (%) 13.0

FII Holding (%) 2.6

Price performance

Return % 1M 3M 6M 12M

Swaraj Engines -2.5 -13.3 -8.4 -12.8

Kirloskar Oil Engines -0.5 -22.6 -35.3 -35.4

Research Analyst

Chirag J Shah

[email protected]

Shashank Kanodia, CFA

[email protected]


Variance analysis

Standalone Numbers Q1FY19 Q1FY19E Q1FY18 YoY (%) Q4FY18 QoQ (%) Comments

Sales 234.5 232.6 194.0 20.9 185.3 26.6 Net sales in Q1FY19 came in a tad higher than our estimates primarily

tracking increase in engine realisations amid muted volume growth

Other Operating Income 0.0 0.0 0.0 0.0

Total Operating Income 234.5 232.6 194.0 20.9 185.3 26.6

Total Raw Material Expenses 176.6 173.3 142.9 23.6 138.4 27.6 RM as a percentage of sales came in on a higher side at 75.3%

Employee Cost 9.6 9.5 8.1 18.5 8.9 7.4 Employee costs came in at their usual run rate (~4% of sales)

Other operating expense 11.7 10.7 10.7 8.8 9.4 24.7 Other operating expense came in higher at 5% of sales

Total Expenditure 197.9 193.5 161.7 22.4 156.7 26.3

EBITDA 36.6 39.1 32.3 13.5 28.6 28.2

EBITDA Margin (%) 15.6 16.8 16.6 -102 bps 15.4 19 bps Margins for the quarter were lower 100 bps primarily tracking higher raw

material as well as higher other expenses

Depreciation 4.7 4.3 4.2 12.9 4.2 13.7

Interest 0.1 0.0 0.0 1.0

Non Operating Expenses 0.0 0.0 0.0 0.0

Other Income 3.9 3.8 4.8 -19.1 4.1 -5.8 Other income came in on expected lines

PBT 35.7 38.6 32.9 8.5 27.5 29.7

Taxes 12.6 13.4 11.4 10.4 9.7 30.5 Tax rate came in a tad higher at 35.3%

PAT 23.1 25.2 21.5 7.5 17.9 29.2

Key Metrics

Engine Sales Volume (units) 26,742 27,309 23,287 14.8 21,780 22.8 Sales volume for the quarter came in lower than our estimates at 26,742

units (up 14.8% YoY). It primarily indicated loss in some market share as

the parent company reported 19.3% volume growth in the tractor segment

for the quarter

Engine Realizations (|/unit) 87,697 85,172 83,300 5.3 85,060 3.1 Realisations, however, improved both QoQ & YoY largely depicting pass

through of increase in metal prices and higher hp engine sales

Source: Company, ICICI Direct Research

Change in estimates

(| Crore) Old New % Change Old New % Change Comments

Revenues 878.9 901.3 2.5 967.2 988.3 2.2 Largely maintained our sales estimates over FY19E & FY20E

EBITDA 140.4 140.2 -0.2 156.4 156.6 0.1

EBITDA Margin (%) 16.0 15.6 -42 bps 16.2 15.8 -32 bps Lowered our margin estimates largely factoring in continuous margin pressure at

the company

PAT 90.2 89.7 -0.6 100.4 100.4 0.0

EPS (|) 74.4 74.0 -0.6 82.8 82.8 0.0 Lower margin coupled with higher other income due to lower dividend payout

estimates leads to no change in PAT estimates for FY19E, FY20E

FY19E FY20E


Assumptions

FY16 FY17 FY18 FY19E FY20E FY19E FY20E Comments

Engine Sales Volume

(units)

64088 82297 92022 103734 112033 103065 111310 Largely maintain our estimates for engine sales volume in FY19E & FY20E. We

continue to expect engine sales volume CAGR of ~10% over FY18-20E.

Engine Net Sales

Realization (|/unit)

79157 78363 81235 84484 86174 83367 85034 Increase in metal price and penetration into higher hp segment leads to upward

revision in realisation estimates

EarlierCurrent



Monsoon progress loses pace, at -6% of LPA as on July 30

The South West Monsoon, which accounts for ~70% of annual rainfall

domestically, has been forecast to be normal in nature. The initial onset

with a flourish was followed by a prolonged dull period (mid-June).

Currently, as we stand today, total cumulative rainfall in the ongoing

monsoon season as of July 30 was at -6% of LPA. The rainfall is in the

normal range in the southern, central as well as northern region while is

muted in the eastern region.

Exhibit 1: Cumulative rainfall activity until July 30, 2018

Regions Actual Rainfall (mm) Normal Rainfall (mm) % Departure form LPA

Country as a whole 419 444 -6

Northwest India 277 280 -1

East & northeast India 555 776 -28

Central India 508 479 6

South Peninsula 379 372 2

Source: IMD, ICICI Direct Research

Exhibit 2: India - Cumulative monsoon activity till July 30, 2018

Source: IMD, ICICI Direct Research

On the state wide distribution, it is deficient in Bihar, Jharkhand as well as

the entire eastern belt. In the recent past, it has recovered sharply in Uttar

Pradesh.


Company Analysis

SEL is a joint holding of Kirloskar Industries (KIL) (17.4% stake) and a

leading tractor player (33.2% stake) with the latter the main promoter

consequent to its acquisition of Punjab Tractors in 2007-08. The

Government of India originally set up the company in 1985 for

manufacturing diesel engines for Punjab Tractors, which marketed their

products under the Swaraj brand. SEL commenced production at its

facility in Mohali in 1988 and has been a profitable entity since then. Since

inception, the company also had a technical collaboration with KIL that

also bought ~17% stake in SEL, thereby partnering with SEL in all its

technical, designing and functional needs. However, from 2005-06, the

company ended its technical collaboration with KIL and developed in-

house capability and facilities for modernisation and technological

upgradation of its products.

SEL serves the engine requirements of the Swaraj brand of tractors. The

company manufactures engines catering to tractors in the 20-50 hp

segment and caters to ~85-88% of the total engine requirement at

parent’s Swaraj tractor division. SEL has a current installed capacity to

manufacture 120,000 units of engines. The company also manufactures

hi-tech engine components for commercial vehicles for SML Isuzu

(erstwhile Swaraj Mazda). The contribution to the topline, however,

remains limited (<3%).

Exhibit 3: Engine sales; hp break-up

<=30 hp

10%

31-40 hp

50%

41-50 hp

40%


As far as segmental sales are concerned, SEL manufactures ~10%

engines catering to the <=30 hp tractor segment, ~50% engines catering

to the 31-40 hp tractor segment and ~40% engines catering to the 41-50

hp tractor segment. SEL’s margins vary across the hp segment with

margins more accretive in the higher hp segment.

Exhibit 4: Sales segmentation (FY18)


Net sales

| 771 crore in FY18

Engines

| 748 crore in FY18

(97%)

Spare and others

| 21.0 crore in FY18

(2.5%)

Engine components

| 3.5 crore in FY18

(0.5%)


Domestic tractor market on strong footing; penetration set to increase

The domestic tractor industry has been at the forefront of farm

mechanisation in India with tractor sales increasing at a CAGR of 7.4% in

FY10-18 to ~7.1 lakh units in FY18 (~4.0 lakh units in FY10). Within

segments, main growth was witnessed in the segment of 41-50 hp, which

has grown at a CAGR of 17.2% to 3.4 lakh units over FY10-18 (94

thousand units in FY10). This reflects the preference towards tractors for

farming as well as other allied services like haulage of construction

material and personnel. On the other hand, sales of small hp tractors i.e.

<= 30 hp & 31-40 hp, which are primarily meant for agricultural activities,

have grown at a CAGR of -0.2% & 3.4%, respectively, in FY10-18.

Exhibit 5: Domestic tractor sales

Category FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

FY 10-18

CAGR

<= 30 hp 68477 71721 82224 54506 70811 59866 53136 54114 67617 -0.2

31-40 hp 194488 214348 244431 233397 223302 202497 180972 201856 254768 3.4

41-50 hp 94183 137180 143102 199130 308810 256270 226818 285261 335607 17.2

>=50 hp 45438 59037 67134 40735 31228 32830 32838 41613 53486 2.1

Total 402586 482286 536891 527768 634151 551463 493764 582844 711478 7.4

Source: Crisil, ICICI Direct Research

Exhibit 6: Domestic tractor sales (segmental share)

17.0 14.9 15.310.3 11.2 10.9 10.8 9.3 9.5

48.344.4 45.5

44.235.2 36.7 36.7

34.6 35.8

23.428.4 26.7 37.7

48.7 46.5 45.948.9 47.2

11.3 12.2 12.57.7 4.9 6.0 6.7 7.1 7.5

0

20

40

60

80

100

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

%

<= 30 hp 31-40 hp 41-50 hp >=50 hp

Source: Crisil, ICICI Direct Research

In terms of composition, robust growth was seen in the 41-50 hp segment

leading to significant market share gains of 2380 bps to 47.2% in FY18

from 23.4% in FY10. On the other hand, a maximum drop in market share

was observed in the 31-40 hp segment wherein the percentage share

dropped 1250 bps to 35.8% in FY18 from 48.3% in FY10.

Going forward, on the back of the central government’s thrust on

augmenting the farm income through both increases in productivity and

better farm realisations, we expect the domestic tractor industry to

witness healthy double digit growth in FY19E. Long term growth of the

domestic tractor industry is, however, pegged at 8-10% (as per industry

estimates) primarily on the back of the government’s thrust on increasing

crop yields through greater farm mechanisation, increasing penetration of

tractors in low tractor density states mainly southern & western regions,

replacement demand from high tractor density states (mainly the

northern region) and a pick-up expected in domestic construction

industry. This will increase tractor demand for haulage/commercial

usages (non-farm usage comprises ~30% of tractor demand

domestically).


SEL: Expanding capacity; sales & profitability to follow

Post acquisition by parent (i.e. post FY08), SEL has always operated at

optimal capacity utilisation levels with utilisation levels at 88% (average)

in FY10-18. During the aforesaid period, the company has consistently

undertaken five expansion programmes from its first increase in capacity

from 36,000 units to 42,000 units in FY11, to finally augment its capacity

to 120,000 units in FY19E.

Exhibit 7: SEL: Capacity, production & capacity utilisation trend

60000

75000

75000

75000

105000

105000

105000

120000

135000

55099

57348

74786

63994

64256

81989

92475

103734

112033

91.8

76.5

99.7

85.3

61.2

78.1

88.1 86.483.0

0

20

40

60

80

100

120

0

20000

40000

60000

80000

100000

120000

140000

160000

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E

%

units

Capacity Production Capacity Utilization


Going forward, we expect sales volumes to grow at a CAGR of 10.3% in

FY18-20E to 112,033 units in FY20E vs. 92,022 units in FY18. The

company is expected to augment its capacity to 120,000 units in FY19E

incurring a capex of ~| 25 crore, funded through internal accruals.

Working capital - key hallmark of SEL!

SEL, after being acquired, has drastically improved its working capital

cycle with net working capital days reducing from 42 days in FY08 to four

days in FY09. Thereafter, the net working capital has either been

marginally negative or zero, thereby implying prudent capital

management. This has resulted in strong cash flow generation for the

company with five-year average CFO: EBITDA at 1.1x in FY14-18.

Exhibit 8: SEL: Net working capital days (break-up)

2730

28

22

19

14 15 15 15

107

5 5 57 7

10 10

43

38 3836

42 42

50

45 45

0

10

20

30

40

50

60


days

Inventory Days Debtor Days Creditor Days


Exhibit 9: SEL: Net working capital days

-6

-1

-5

-9

-18

-21

-28

-20 -20

-30

-25

-20

-15

-10

-5

0


no o

f days


Going forward, we conservatively build in a negative working capital cycle

of 20 days over FY19-20E. NWC days further improved to negative 28

days in FY18 from negative 21 days in FY17.

SEL also undertakes continuous innovation and technology

upgradation to meet the changing engine requirements at

the Swaraj division. The company is also developing

engines in the >50 hp segment that will further help

augment sales at SEL. All expenses for the aforesaid

expansion were undertaken from internal accruals

All capacity additions were undertaken under the

supervision of the main promoter group as and when the

parent sensed the greater demand for the Swaraj brand of

tractors


Superior return ratios; high dividend payouts!

The return ratio profile of SEL has been superior with five-year average

RoCEs and RoEs at 34% and 27%, respectively, in FY14-18. Going

forward, post the blip in FY16 (volume de-growth of 1%) on the back of a

pick-up in tractor (Swaraj) demand/capacity expansion and consequent

engine sales, we expect return ratios to inch up in FY18-20E. The core

return ratio i.e. RoICs has, however, been above 100% post acquisition

with five-year average RoICs at 194% in FY14-18.

Exhibit 10: RoIC, RoCE & RoE trend

29.0

22.7 31.2

45.9

50.2

52.1

24.4

19.4

24.3 3

5.1

36.6

37.8

204

84

183

230

264 412

0

50

100

150

200

250

300

350

400

450

0

10

20

30

40

50

FY15 FY16 FY17 FY18 FY19E FY20E

%%

RoCE RoE RoIC


Exhibit 11: EPS, DPS & dividend payout

41.7

41.2 55.4

66.1

74.0

82.8

33.0

33.0

43.0

50.0

55.0

60.0

79.280.1

77.6 75.7 74.3 72.4

0

20

40

60

80

100

0

10

20

30

40

50

60

70

80

90


%

|/share

EPS DPS Payout Ratio


Dividend payout has been excellent with the company’s average dividend

payout in the last five years (FY14-18) at ~75%. SEL has increased its

dividend per share from | 33/share in FY14 to | 50/share in FY18. We

expect this healthy dividend to continue, going forward. Dividend/share is

expected at | 55/share in FY19E, | 60/share in FY20E, thereby offering an

attractive dividend yield of ~3%.

Revenues to grow at 13.2% CAGR in FY18-20E

We expect SEL to clock modest revenue growth at 13.2% CAGR in FY18-

20E to | 988.3 crore in FY20E (| 771.2 crore in FY18). We expect sales

volumes of engines at SEL to grow at a CAGR of 10.3% in FY18-20E to

112,033 units in FY20E (92,022 units in FY18). On the realisations front,

we expect realisations to grow at a CAGR of 3.0% over FY18-20E.

Exhibit 12: Sales trend

539.7 525.9

666.2

771.2

901.3

988.3

-

200

400

600

800

1,000

1,200

FY15 FY16E FY17 FY18 FY19E FY20E

| crore


Exhibit 13: Sales volume and realisation trend

64595

64088

82297

92022

103734

112033

81344

79157

78363

81235

84484 86174

74000

76000

78000

80000

82000

84000

86000

88000

0

20000

40000

60000

80000

100000


|/unit

units

Sales Volume Realization


For full year FY18, SEL reported volume growth of 12% at 92,022 units.

Going forward, amid the government’s thrust to augment farm income;

we expect sales volume growth of 10.3% CAGR in FY18-20E.


This would primarily be on the back of good brand recall of Swaraj

Tractors, increasing sales of Swaraj Tractor in low tractor density regions

domestically and new product launches by parent under the Swaraj

brand. SEL in the recent past has developed and started supply of 54 hp

engine to Swaraj tractors thereby upgrading its capabilities. Hence, it is

well poised to encash the underlying growth in the tractor industry

domestically.

EBITDA, PAT to grow at 13.5%, 12.0% CAGR, respectively, in FY18-20E

We expect EBITDA to grow at a CAGR of 13.5% in FY18-20E to | 156.6

crore in FY20E (| 121.7 crore in FY18), primarily on the back of sales

growth (13.2% CAGR) and nearly flat EBITDA margin profile at ~15.8%.

On the PAT front, we expect PAT to grow at a CAGR of 12.0% in FY18-

20E to | 100.4 crore in FY20E (| 80.1 crore in FY18).

Exhibit 14: EBITDA & EBITDA margins trend

74.7

73.6

104.6

121.7

140.2

156.6

13.8

14.0

15.7 15.8 15.6

15.8

13

13

14

14

15

15

16

16

17

-

20

40

60

80

100

120

140

160

180


%| crore

EBITDA (| crore) EBITDA Margin (%)


Exhibit 15: PAT & EPS trend

51.8

51.2

68.8

80.1

89.7

100.4

41.7 41.2

55.4

66.1

74.0

82.8

-

10

20

30

40

50

60

70

80

90

-

20

40

60

80

100

120


|/share

| crore

Net Profit (| crore) EPS (|)


Consequent EPS is expected at | 74.0/share in FY19E & | 82.8/share in

FY20E vs. | 66.1/share in FY18


Outlook and valuation

Swaraj Engines has a healthy balance sheet with cash surplus of ~| 180

crore as of FY18. It has one of the most capital efficient business models

in the listed space, with RoICs in excess of 200% largely due to negative

working capital cycle and high dividend payout ratio (~75%). Average

RoCE & RoE in FY18-20E are expected at 49% & 37%, respectively. SEL

also generates healthy CFO, with average CFO of ~| 112 crore over the

FY18-20E thereby offering a healthy CFO yield of 5%. At the CMP, it also

offers a healthy dividend yield of ~3%. Going forward, however, with

limited growth prospects in the tractor segment in FY18-20E post a

stupendous run in FY17-19E, we downgrade our valuation multiple (23x

now vs. 30x in the past) and consequent rating on SEL to HOLD. We

expect SEL to clock engine sales volume CAGR of 10.3% in FY18-20E to

112,033 units in FY20E (92,022 units in FY18). We expect sales, PAT to

grow at a CAGR of 13.2%, 12.0%, respectively, in FY18-20E.

Conservatively, we keep EBITDA margins largely flat over the aforesaid

period. We value SEL at | 1900 i.e. 23x P/E on FY20E EPS of | 82.8.

Exhibit 16: Two year forward P/E (SEL currently trading at 22.0x)

0

500

1000

1500

2000

2500

3000

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

Jul-14

Jan-15

Jul-15

Jan-16

Jul-16

Jan-17

Jul-17

Jan-18

Jul-18

(|)

Price 29x 23x 21x 18x 12x 9x 6x

Source: Reuters, ICICIdirect.com Research


Recommendation history vs. Consensus

0

10

20

30

40

50

60

70

80

90

100

0

500

1,000

1,500

2,000

2,500

3,000

Jul-18

Jun-18

May-18

Mar-18

Jan-18

Dec-17

Oct-17

Sep-1

7

Jul-17

Jun-17

Apr-17

Mar-17

Jan-17

Nov-16

Oct-16

Aug-16

Jul-16

May-16

Apr-16

Feb-16

Dec-15

Nov-15

Sep-1

5

Aug-15

(%

)

(|)

Price 1311.66667 Consensus Target Mean % Consensus with BUY

Source: Bloomberg, Company, ICICI Direct Research

Key events

Date/Year Event

2008 The company got indirectly acquired by Mahindra & Mahindra (M&M) on account of its acquisition of Punjab Tractors (erstwhile promoters of Swaraj Engines). M&M

also launches an open offer for minority shareholders as per the rules prescribed by Sebi

2009 Working capital drastically improves at SEL, net working capital days reduced from 42 days in FY08 to four days in FY09

2010 SEL operates at >100% capacity utilisation levels. Production in FY10 at 39254 units on a capacity of 36000 units, implying utilisation levels of 109%

2011 SEL undertakes and commissions a capacity expansion programme. Capacity increased from 36000 units annually to 42000 units. Engine production in FY11 was at

~48000 units, implying a capacity utilisation of ~114%

2012 Company further increases its capacity from 42000 units in FY11 to 60000 units in FY12. Production in FY12 was at 55099 units

2013 SEL further increases its capacity from 60000 units in FY12 to 75000 units in FY13. Production in FY13 stood at 57348 units. Judging the surplus cash on books and

good cash flow generating ability of SEL, the SEL management increases the dividend payout (75%) with absolute dividend at | 33/share

2014 Maintains higher dividend payout ratio at 65% with absolute dividend per share at | 35/share. Production in FY14 stood at 74786 units, implying capacity utilisation

levels of ~100%

2015 SEL to implement capacity expansion programme wherein the company intends to increase its current capacity from 75000 units annually to 105000 units annually.

The total capex spend would be ~ | 38 crore (to be met by internal accruals) while it is expected to be commissioned by Q2FY16

2016 SEL ends the year with 64088 units of engine sales (down 1% YoY). Monsoon 2016 season ends with rainfall at 97% of LPA thereby being normal in nature. Tractor

industry witnesses robust volume growth of 20% in H1FY17

2017 SEL outpaces industry growth rate with engine sales in FY17 at 82297, up 28% YoY vs. industry growth rate of 18%. The company is further augmenting its capacity

from 105,000 units to 120,000 units at an incremental capex of ~| 50 crore

2018 SEL ends the year with robust growth. Net sales in FY18 stood at | 771.2 crore, up 15.8% YoY. EBITDA for the quarter came in at | 121.7 crore with corresponding

EBITDA margins at 15.8%, up 10 bps. PAT in FY18 stood at | 80.5 crore, up 16.5% YoY


Top 10 Shareholders Shareholding Pattern

Rank Name Latest Filing Date % O/S Position (m) Change (m)

1 Mahindra Group 30-Jun-18 33.3 4.0 0.0

2 Kirloskar Group of Companies 30-Jun-18 17.4 2.1 0.0

3 L&T Investment Management Limited 30-Jun-18 4.7 0.6 0.2

4 DSP BlackRock Investment Managers Pvt. Ltd. 30-Jun-18 3.4 0.4 0.0

5 HDFC Asset Management Co., Ltd. 30-Jun-18 2.1 0.3 0.1

6 Jupiter Asset Management Ltd. 30-Jun-18 1.5 0.2 0.0

7 Shah (Vikram Chinubhai) 30-Jun-18 1.5 0.2 0.0

8 Parikh (Reeta Keyur) 30-Jun-18 1.4 0.2 0.0

9 SBI Funds Management Pvt. Ltd. 30-Jun-18 1.3 0.2 0.0

10 Tata Asset Management Limited 30-Jun-18 0.8 0.1 0.0

(in %) Jun-17 Sep-17 Dec-17 Mar-18 Jun-18

Promoter 50.6 50.6 50.6 50.7 50.7

FII 5.2 5.3 2.7 2.5 2.6

DII 12.2 12.5 12.3 13.1 13.0

Others 32.0 31.6 34.4 33.7 33.7

Source: Reuters, ICICI Direct Research

Recent Activity

Investor name Value (US$ M) Shares (M) Investor name Value (US$ M) Shares (M)

L&T Investment Management Limited 4.4 0.2 Franklin Templeton Asset Management (India) Pvt. Ltd. -4.0 -0.1

HDFC Asset Management Co., Ltd. 2.9 0.1 DHFL Pramerica Asset Managers Private Limited -0.3 0.0

Tata Asset Management Limited 1.3 0.0 Edelweiss Asset Management Ltd. -0.2 0.0

Jupiter Asset Management Ltd. 0.1 0.0 Aditya Birla Sun Life AMC Limited 0.0 0.0

Bessemer Trust Company, N.A. (US) 0.0 0.0

Buys Sells

Source: Reuters, ICICI Direct Research


Financial summary

Profit and loss statement | Crore

(Year-end March) FY17 FY18 FY19E FY20E

Net Sales 666.2 771.2 901.3 988.3

Other Operating Income 0.0 0.0 0.0 0.0

Total Operating Income 666.2 771.2 901.3 988.3

Growth (%) 26.7 15.8 16.9 9.6

Raw Material Expenses 495.6 574.3 677.2 741.2

Employee Expenses 31.0 34.8 38.5 42.5

Other Operating Expense 35.0 40.5 45.5 48.0

Total Operating Expenditure 561.6 649.6 761.1 831.7

EBITDA 104.6 121.7 140.2 156.6

Growth (%) 42.2 16.3 15.2 11.7

Depreciation 16.3 16.8 17.2 18.2

Interest 0.1 1.0 0.1 0.0

Other Income 17.2 19.0 15.3 16.1

PBT 105.4 122.8 138.2 154.5

Exceptional Item 0.0 0.0 0.0 0.0

Total Tax 36.6 42.7 48.5 54.1

PAT 68.8 80.1 89.7 100.4

Growth (%) 34.5 16.5 11.9 12.0

EPS (|) 55.4 66.1 74.0 82.8


Cash flow statement | Crore


Profit after Tax 68.8 80.1 89.7 100.4

Add: Depreciation 16.3 16.8 17.2 18.2

(Inc)/dec in Current Assets -2.9 -14.7 -15.0 -6.8

Inc/(dec) in CL and Provisions 16.9 30.7 6.8 11.6

Others 0.1 1.0 0.1 0.0

CF from operating activities 99.2 113.9 98.8 123.4

(Inc)/dec in Investments -38.5 -27.2 -10.0 -20.0

(Inc)/dec in Fixed Assets -6.4 -22.6 -10.0 -10.0

Others -1.0 -7.5 0.0 0.0

CF from investing activities -45.9 -57.3 -20.0 -30.0

Issue/(Buy back) of Equity 0.0 -0.3 0.0 0.0

Inc/(dec) in loan funds 0.0 0.0 0.0 0.0

Dividend paid & dividend tax -64.1 -72.8 -80.0 -87.3

Inc/(dec) in Share Cap 0.0 0.0 0.0 0.0

Others 15.0 -62.9 6.8 7.3

CF from financing activities -49.0 -135.9 -73.2 -80.0

Net Cash flow 4.3 -79.3 5.7 13.4

Opening Cash 181.8 186.1 106.8 112.4

Closing Cash 186.1 106.8 112.4 125.8


Balance sheet | Crore


Liabilities

Equity Capital 12.4 12.1 12.1 12.1

Reserve and Surplus 270.9 216.4 233.0 253.4

Total Shareholders funds 283.3 228.5 245.1 265.5

Total Debt 0.0 0.0 0.0 0.0

Deferred Tax Liability 6.3 5.8 5.8 5.8

Minority Interest / Others 0.0 0.0 0.0 0.0

Total Liabilities 289.6 234.3 250.9 271.3

Assets

Gross Block 196.2 206.9 222.9 232.9

Less: Acc Depreciation 104.9 115.0 132.2 150.4

Net Block 91.3 91.9 90.7 82.5

Capital WIP 0.8 6.0 0.0 0.0

Total Fixed Assets 92.1 97.9 90.7 82.5

Investments 48.9 76.1 86.1 106.1

Inventory 26.1 31.9 37.0 40.6

Debtors 13.1 15.3 24.7 27.1

Loans and Advances 0.0 0.0 0.0 0.0

Other Current Assets 2.0 8.6 9.0 9.9

Cash 186.1 106.8 112.4 125.8

Total Current Assets 227.2 162.6 183.2 203.4

Current Liabilities 77.4 105.5 111.1 121.8

Provisions 5.2 7.7 8.9 9.7

Current Liabilities & Prov 82.5 113.2 120.0 131.6

Net Current Assets 144.7 49.4 63.2 71.8

Others Assets 3.8 10.9 10.9 10.9

Application of Funds 289.6 234.3 250.9 271.4


Key ratios


Per share data (|)

EPS 55.4 66.1 74.0 82.8

Cash EPS 68.5 79.9 88.2 97.9

BV 228.1 188.5 202.2 219.0

DPS 43.0 48.8 53.7 58.6

Cash Per Share (Incl Invst) 189.2 150.8 163.7 191.3

Operating Ratios (%)

EBITDA Margin 15.7 15.8 15.6 15.8

PAT Margin 10.3 10.4 10.0 10.2

Inventory days 14.3 15.1 15.0 15.0

Debtor days 7.2 7.2 10.0 10.0

Creditor days 42.4 49.9 45.0 45.0

Return Ratios (%)

RoE 24.3 35.1 36.6 37.8

RoCE 31.2 45.9 50.2 52.1

RoIC 216.3 264.4 300.7 466.1

Valuation Ratios (x)

P/E 32.9 27.5 24.6 22.0

EV / EBITDA 18.8 16.6 14.3 12.6

EV / Net Sales 3.0 2.6 2.2 2.0

Market Cap / Sales 3.3 2.9 2.4 2.2

Price to Book Value 8.0 9.7 9.0 8.3

Solvency Ratios

Debt/EBITDA 0.0 0.0 0.0 0.0

Debt / Equity 0.0 0.0 0.0 0.0

Current Ratio 0.5 0.5 0.6 0.6

Quick Ratio 0.2 0.2 0.3 0.3



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Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is

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Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

Buy: >10%/15% for large caps/midcaps, respectively;

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Sell: -10% or more;

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[email protected]


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