Capacity expansion to drive growth and profitability

STOCK POINTER Swaraj Engines Ltd. BUY Target Price `656 CMP `41 FY14 PE 6.9x Index Details Sensex 17,853 Nifty 5,39 BSE 1 5,367 Industry Auto parts Scrip Details Mkt Cap (` cr) 59 BVPS (`) 161 O/s Shares (Cr) 1.2 Av Vol (Lacs).1 52 Week H/L 496/349 Div Yield (%) 3.2 FVPS (`) 1. Shareholding Pattern Shareholders % Promoters 5.6 DIIs 13.3 FIIs 1.8 Public 34.3 Total 1 Swaraj Engines. vs. Sensex We initiate coverage on Swaraj Engines Ltd (SEL) as a BUY with a Price Objective of `656 (target 11x FY14 P/E). At a CMP of `41 the stock is trading at 8.7x and 6.9x its estimated earnings for FY13 and FY14 respectively representing a potential upside of 6% over a period of 18 months. Although, the tractor industry in India is witnessing a cyclical downturn, SEL caters solely to the captive requirements of the Swaraj division of Mahindra & Mahindra (M&M) and hence is well insulated. SEL currently meets ~8% of the demand for Swaraj and with the ongoing capacity expansion its share will increase to ~9% by FY14. Led by the capacity expansion we expect revenues and earnings to post a CAGR of 21.9% and 18.4% over FY12-14 to `666.2 crore and `73.9 crore respectively. SEL has over the past few years followed a policy of high dividend payout ratio which, in our view, is likely to sustain going forward. Currently the stock is available at an attractive dividend yield of 3.2% and there exists a strong possibility of management increasing this going forward. Capacity expansion to drive growth and profitability Since, the takeover of Swaraj Engines by M&M, SEL has been the primary supplier of engines to the Swaraj division of M&M (catering to ~8% of the demand). To meet the increasing requirements of Swaraj, SEL embarked on an ambitious capacity expansion plan in FY11 to increase its total capacity to 75, units. SEL has increased its capacity from 42, to 6, units in FY12 with the balance expected to come by the end of FY13. We believe that the increased capacity will aid SEL to meet ~9% of the demand requirement of Swaraj. On the back of this increased capacity and captive demand from the Swaraj division, we expect the SEL s revenues to post a CAGR of 21.9% over FY12-14 to `666.2 crore. Consequently, earnings are expected to post a CAGR of 18.4% over FY12-14 to `73.9 crore. Key Financials (` in Cr) Y/E Mar Net EPS Growth RONW ROCE P/E EV/EBITDA EBITDA PAT EPS Revenue (%) (%) (%) (x) (x) 211 361. 6.6 43.9 35.4 17.6 28.8 44.8 11.6 7.3 212 448.6 69.4 52.7 42.5 2. 28.3 43.5 9.6 6.3 213E 537.7 79.8 58.5 47.1 1.9 25.9 41.4 8.7 5.5 214E 666.2 99.5 73.9 59.6 26.5 26.3 41.8 6.9 4.4-1 of 8 - Tuesday 11 th September, 212

Rs.Crore Rs.Crore Capacity expansion to drive growth Volume Trend 8, 7, 6, 5, 4, 3, 36, 36, 42, 6, 75, 9 8 7 6 5 4 3 2, 2 1, 1 FY9 FY1 FY11 FY12 FY13E FY 8 FY 9 FY 1 FY 11 FY 12 FY 13E FY 14E Revenue Growth PAT Trend 7 4% 8 6 5 4 3 2 1 21 211 212 213E 214E 35% 3% 25% 2% 15% 1% 7 6 5 4 3 2 1 21 211 212 213E 214E Revenue Revenue Growth (RHS) Estimates Estimates Unleveraged balance sheet, expansion to be done with internal accruals SEL boasts of a strong balance sheet with zero debt and healthy operating cash flows. As on 31st March 12, the company had cash and investments aggregating `16 crore which is sufficient to meet the ~`95 crore capex requirement needed for capacity expansion. With the idle cash being put to work, we expect the RoE to continue to remain in excess of ~25% levels which has been the case over the past 11 years. Accordingly, we expect the market to rerate this stock; however, we have not built the same in our valuation model. - 2 of 8 - Tuesday 11 th September, 212

(%) (%) ROE & ROCE Peer Comparison 6% 5% 4% 3% 2% 1% % FY 8 FY 9 FY 1 FY 11 FY 12 FY 13E FY 14E 5 45 4 35 3 25 2 15 1 5 Swaraj Engines Cummins Honda Siel Power Product Kirloskar ROE (%) ROCE (%) ROA ROE ROCE Attractive dividend yield with consistent dividend payment track record Barring for FY7, SEL has consistently maintained a dividend pay out ratio in excess of 25% for the last 15 years. The stock is available at an attractive dividend yield of 3.2% and there exists a strong possibility of management increasing the dividend per share going forward. Strong dividend history 5% 4% 3% 2% 1% 6% 5% 4% 3% 2% 1% % FY 8 FY 9 FY 1 FY 11 FY 12 % Dividend payout ratio Dividend Yield (RHS) - 3 of 8 - Tuesday 11 th September, 212

Valuation At the CMP of `41, the stock is trading at 8.7x and 6.9x estimated earnings for FY13 and FY14 respectively. We initiate coverage on Swaraj Engines Ltd as a BUY with a price objective of `656 (11x FY14 P/E) representing a potential upside of 6% over the next 18 months. Although, the tractor demand is expected to remain subdued in the near term, the long term growth story for the sector remains intact, given the pace of mechanization of agriculture and the under penetration in the industry. Further, the increasing usage of tractors in non agricultural activities will also aid demand. Thus, given the impending capacity expansion, we believe that SEL is best placed to take advantage of the long term growth story in the sector. Peer Comparison Company Name Sales PAT OPM (%) EPS ROE P/E FY 13E FY 14E FY 13E FY 14E FY 13E FY 14E FY 13E FY 14E FY 13E FY 14E FY13E FY14E Swaraj Engines Ltd* 537.7 666.2 58.5 73.9 14.8 14.9 47.1 59.6 25.9 26.3 8.7 6.9 Kirloskar Oil Engines Ltd. 2496.5 2829.2 187.4 22.6 13.7 13.8 12.9 15.1 17.1 17.7 11.9 1.1 Cummins India Ltd. 471 5464.5 539.8 726.5 18. 18.2 22.6 26.2 29.1 28.3 2.4 17.6 Source: SEL, Bloomberg, *Ventura Research Estimates - 4 of 8 - Tuesday 11 th September, 212

P/E 1 9 8 7 6 5 4 3 2 1 Mar-2 Mar-4 Mar-6 Mar-8 Mar-1 Mar-12 CMP 6X 8.83X 11.66X 14.49X 17.32X 8 7 6 5 4 3 2 1 P/B Mar-2 Mar-4 Mar-6 Mar-8 Mar-1 Mar-12 CMP 1.5X 2.125X 2.75X 3.375X 4X EV/EBITDA 9 8 7 6 5 4 3 2 1 Mar-2 Mar-4 Mar-6 Mar-8 Mar-1 Mar-12 EV 3X 4.56X 6.12X 7.68X 9.24X - 5 of 8 - Tuesday 11 th September, 212

Company Background Swaraj Engines Ltd (SEL) is the largest supplier of tractor engines to the Swaraj division of M&M and enjoys a market share of ~9%. Until 29, SEL was a part of Punjab Tractor Ltd (PTL), post which it was taken over by M&M in 29 and formed a part of the group. The company is primarily engaged in the manufacturing of diesel engines and spare parts and caters to ~8% of the demand of the Swaraj division. Company Profile Kirloskar Industries Ltd. Mahindra & Mahindra Ltd. Swaraj Engines Ltd Engines (Rs.458 Cr.) 95% of revenue Others ( Rs37.6 Cr.) 5% of revenue - 6 of 8 - Tuesday 11 th September, 212

Financial performance Swaraj Engines posted a marginal 7.7% rise in net sales to `118.2 crore led by a marginal increase in volume and average realization. Volumes were higher by a subdued 1.4% yoy to 14,14 units whereas average realizations grew by 6% yoy. Although, operating profits remained flat at `18.1 crore, margins witnessed a compression of 9 bps on account of higher raw material costs. Higher depreciation of `1.4 crore due to capacity expansion as compared to `.9 crore in Q1FY12 resulted in profits remaining flat at `13.8 crore. Quarterly Financial Performance Particulars Q1FY13 Q1FY12 FY12 FY11 Net Sales 118.2 19.8 448.6 361. Growth % 7.7 24.3 Total Expenditure 1.1 92 379.2 3.4 EBIDTA 18.1 17.8 69.4 6.6 EBDITA Margin % 15.3 16.2 15.5 16.8 Depreciation 1.4.9 4.3 4.5 EBIT (EX OI) 16.7 16.9 65.1 56.1 Other Income 3.1 2.7 12.2 5.2 EBIT 19.8 19.6 77.3 61.3 Margin % 16.8 17.9 17.2 17. Interest..1. Exceptional items.. PBT 19.8 19.6 77.2 61.3 Margin % 16.8 17.9 17.2 17. Provision for Tax 6 6.. PAT 13.8 13.6 77.2 61.3-7 of 8 - Tuesday 11 th September, 212

Financial and Projections Y/E March, Fig in Rs. Cr FY 211 FY 212 FY 213e FY 214e Y/E March, Fig in Rs. Cr FY 211 FY 212 FY 213e FY 214e Profit & Loss Statement Per Share Data (Rs) Net Sales 361. 448.6 537.7 666.2 EPS 35.4 42.5 47.1 59.6 % Chg. 24.3 19.9 23.9 Cash EPS 39. 46. 52.4 65.6 Total Expenditure 3.4 379.2 458. 566.6 DPS 1. 13. 13. 13. % Chg. 26.2 2.8 23.7 Book Value 122.8 15.2 182.3 226.8 EBITDA 6.6 69.4 79.8 99.5 Capital, Liquidity, Returns Ratio EBITDA Margin % 16.8 15.5 14.8 14.9 Debt / Equity (x).... Other Income 8.2 12.2 14.2 18.5 Current Ratio (x).1.1.1.1 Exceptional items.... ROE (%) 28.8 28.3 25.9 26.3 PBDIT 68.8 81.6 94. 118. ROCE (%) 44.8 43.5 41.4 41.8 Depreciation 4.5 4.3 6.6 7.5 Dividend Yield (%) 2.4 3.2 3.2 3.2 Interest..1.2.2 Valuation Ratio (x) PBT 64.3 77.2 87.2 11.3 P/E 11.6 9.6 8.7 6.9 Tax Provisions 2.4 24.5 28.8 36.4 P/BV 3.3 2.7 2.2 1.8 Reported PAT 43.9 52.7 58.5 73.9 EV/Sales 1.2 1..8.7 PAT Margin (%) 12.2 11.7 1.9 11.1 EV/EBIDTA 7.3 6.3 5.5 4.4 Efficiency Ratio (x) Manpower cost / Sales (%) 4.7 4.3 4.3 4. Inventory (days) 35.8 27.4 27.5 27.5 Other Exp / Sales (%) 4.2 4.4 4.4 4.4 Debtors (days) 8.2 9.8 1. 1. Tax Rate (%) 31.7 31.7 33. 33. Creditors (days) 41.7 43.1 43. 43. Balance Sheet Cash Flow statement Share Capital 12.4 12.4 12.4 12.4 Profit After Tax 43.9 52.8 58.5 73.9 Reserves & Surplus 139.8 173.9 213.6 268.8 Depreciation 4.5 4.3 6.6 7.5 Minority Interest & Others.... Working Capital Changes -2.8 8.9 2.9 5.2 Total Loans 1.5 1.3 1.3 1.3 Others -4.4-5.5.. Deferred Tax Iiability.... Operating Cash Flow 41.2 6.5 67.9 86.6 Total Liabilities 153.7 187.5 227.3 282.5 Capital Expenditure -5.7-18.4-5. -2. Goodwill.... Change in Investment -5.6-34. -.7. Gross Block 77.6 96. 146. 166. Cash Flow from Investing -11.3-52.4-5.7-2. Less: Acc. Depreciation 53.7 54.2 6.8 68.3 Proceeds from equity issue.... Net Block 24. 41.8 85.2 97.8 Inc/ Dec in Debt 1.5 -.2.. Capital Work in Progress.5 8.7 9. 9. Dividend and DDT -11.6-14.4-18.7-18.7 Investments 63.7 89.5 9. 9. Cash Flow from Financing -1.1-14.6-18.7-18.7 Net Current Assets 67.4 5.7 46.3 89. Net Change in Cash 19.8-6.5-1.5 47.9 Deferred Tax Assets -1.9-3.2-3.2-3.2 Opening Cash Balance 56.4 76.2 69.7 68.2 Total Assets 153.7 187.5 227.3 282.5 Closing Cash Balance 76.2 69.7 68.2 116.1 Ventura Securities Limited Corporate Office: C-112/116, Bldg No. 1, Kailash Industrial Complex, Park Site, Vikhroli (W), Mumbai 479 This report is neither an offer nor a solicitation to purchase or sell securities. The information and views expressed herein are believed to be reliable, but no responsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in or have positions in the securities mentioned in their articles. Neither Ventura Securities Limited nor any of the contributors accepts any liability arising out of the above information/articles. Reproduction in whole or in part without written permission is prohibited. This report is for private circulation. - 8 of 8 - Tuesday 11 th September, 212