Volume offtake remains healthy, but margins disappoint
Swaraj Engines Ltd’s (SEL) Q1FY19 numbers were in-line with our estimates on the revenue front, while profit growth was marginally below our projections. Net revenue increased by 20.9% YoY, led by a combination of healthy volume growth (+14.8%) and better realizations. However, EBITDA & PAT grew by 13.4% & 7.3% respectively, while EBITDA & PAT margins contracted by 103bps & 125bps YoY respectively, impacted by input cost inflation, lower other income and higher effective tax rate. However, we remain positive on SEL’s long term growth prospects, given robust outlook of domestic tractor industry, company’s healthy relationship with M&M and its continued efforts towards new launches with increasing focus on higher HP engines. We maintain a BUY with target price of Rs 2,426.
Q4FY18 Result Update:
* Net Revenue increased by 20.9% YoY to Rs 234.5cr, driven by healthy volume growth of 14.8% in tractor engines (which stood at 26,742 units; highest in the last 5 quarters). Demand for tractor engines from the company’s key customer ‘Swaraj division of M&M’ remained healthy. The overall growth was also supported by higher realizations (+5.3% YoY mainly due to pass-through of input cost inflation and increased sales of higher HP engines).
* EBITDA grew by 13.4% YoY to Rs 36.6cr, while EBITDA margins declined by 103bps to 15.6%, impacted by higher input cost. The gross margins fell by 166bps YoY. However, lower employee cost & other expenses (down 8bps & 56bps YoY respectively as a % to net revenue) restricted further contraction in margins.
* Lower other income (down 20.1%) and higher effective tax rate (+70bps to 35.3%) impacted the PAT, which grew in single digits by 7.3% YoY to Rs 23.1cr. PAT margins declined by 125bps YoY to 9.8%.
Outlook & Valuation:
We estimate SEL’s Net Revenue & PAT to grow by 15% & 14.6% respectively over FY18-20E, led by new launches, capacity expansion and positive outlook of domestic tractor industry. Government’s continued thrust on rural and agriculture sector (through increased spends and higher MSPs) and increased usage of tractors in non-agricultural sectors augurs well for the tractor industry. However, notably as per IMD, the country-wide monsoon deficit stood at 5% till July end. Further, both Skymet and IMD have recently revised their monsoon forecast from normal to below normal. This could impact the tractor sales volumes in the coming quarters. Despite these concerns, we are maintaining our Revenue & PAT growth projections of SEL for FY19E & FY20E. With M&M’s renewed focus on Swaraj brand tractors and the company’s efforts towards new launches with increasing focus on higher HP engines, we expect SEL’s volume offtake to remain healthy. Further, any possible impact on volume growth due to subdued monsoon would largely be offset by better than expected realizations, supporting the overall revenue growth. The recent capacity expansion of 15,000 engines would enable SEL to meet the demand over the next 2 years without incurring any major CAPEX. Further, with better revenue mix, we expect margins and profit growth trajectory to improve in the coming quarters. We maintain a BUY on the stock with target price of Rs 2,426.
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