01-01-1970 12:00 AM | Source: ICICI Direct
Buy Swaraj Engines Ltd For Target Rs. 2,135 - ICICI Direct
News By Tags | #872 #3961 #1302 #187

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Superior financial strength set to persist

About the stock: Swaraj Engines (SEL) is involved in manufacturing diesel engines for M&M’s Swaraj brand of tractors.

* Steady ~13% compounding of revenues, EBITDA, PAT over past five years

* Net cash positive b/s; consistent cash flow generation; highly capital efficient player with history of >30% return ratios & high dividend payouts

 

Q1FY22 Results: SEL reported healthy Q1FY22 results

* Diesel engine volumes were flattish QoQ at 33,747 units

* Net sales rose 3.2% QoQ to | 315 crore tracking 3.5% ASP increase

* Margins dipped minimally to 15%; PAT up 3.3% QoQ to | 33.7 crore

 

What should investors do? The stock appreciated at ~9% CAGR from ~| 1,150 in July 2016 over the past five years, outperforming the broader Nifty Auto index.

* We retain BUY on expectation of continued industry-leading financials

 

Target Price and Valuation: We value SEL at 19x P/E on FY23E EPS to arrive at revised target price of | 2,135 per share (earlier target price | 1,650).

 

Key triggers for future price performance:

* Play on farm mechanisation courtesy ~30-33% volume share of M&M’s tractor sales via Swaraj brand of tractors

* Consistent >30% return ratios along with positive CFO, FCF generation

* Attractive dividend play, with present dividend yield at ~4%

* Sales, PAT to grow at 13.1%, 21.4% CAGR respectively over FY21-23E, building in 8.5% volume CAGR & 120 bps improvement in EBITDA margins

 

Alternate Stock Idea: Apart from SEL in our ancillary coverage we also like JK Tyre.

* Walking the talk on B/S deleveraging, sweating of assets & capital efficiency.

* BUY with target price of

*180

 

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