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Robust performance, attractive dividend yield at play...

Swaraj Engines (SEL) reported a robust performance in Q4FY21, primarily tracking healthy wholesale tractors volume and likely inventory restocking at its key client M&M. Engine sales volume for Q4FY21 came in at 33,831 units, up 62% YoY, 8% QoQ. Sales volume for FY21 came in at an all-time high of 113,269 units, up 26% YoY amid ~20% volume growth in the tractor segment for FY21.

Net sales in Q4FY21 were at | 305 crore with EBITDA at | 46.2 crore and corresponding EBITDA margins at 15.1%, up 170 bps QoQ. Margins for the quarter were supported by improvement in gross margins as well as operating leverage benefits. PAT in Q4FY21 was at | 32.6 crore, up 106% YoY, 30% QoQ. SEL announced a total dividend of | 69/share for FY21, implying dividend payout of ~90%, with EPS for FY21 at | 76.2/share

Normal monsoon outlook bodes well for Indian tractor industry

The tractor industry has been at the forefront of farm mechanisation in India. The segment was the clear outlier in FY21 with industry volume growing ~20% YoY vs. a decline for the rest of the segments in the automobile space amid Covid-19. It was primarily driven by robust farm sentiments and cash flows, amid healthy food grain production as well as procurement by government agencies, above normal monsoon (109% of LPA in 2020) as well as less incidence of Covid in the rural belt.

With expectations of normal rainfall in the upcoming monsoon season 2021 (IMD forecast pegged at 98% of LPA), we believe the tractor industry is well poised to grow in FY22E, albeit in high single digits amid an elevated base. This bodes well for engine manufacturers like SEL. Gauging long term sustainable demand prospects, SEL is also expanding its manufacturing capacity from 1.35 lakh units to 1.5 lakh units, through internal accruals. We build in engine sales volume of 1.21 lakh units for FY22E and 1.31 lakh units for FY23E, implying sales volume CAGR of 7.4% in FY21-23E.

Increase in dividend payout to further boost return ratios

Return ratios of SEL have been industry leading with RoE, RoCE in excess of 30% by virtue of its high asset turnovers, stable margin profile, near zero to negative working capital cycle and high dividend payouts. It has further increased the dividend payout, with FY21 ratio pegged at ~90% vs. ~70- 80% in the past. SEL announced a dividend of | 69/share with an EPS of | 76.2/share for FY21. This will further provide a leg-up to return ratios (RoCE inching to ~45% in FY22E) with surplus cash on its balance sheet. Building in similar payouts for FY22, FY23E, SEL offers an impressive dividend yield of ~5% thereby providing high margin of safety to our investment thesis.

Valuation & Outlook

We maintain our positive stance on SEL amid a highly capital efficient business model, robust cash flow generation and overall positive farm sentiments domestically. Building in ~13/10% sales/PAT CAGR in FY21-23E we retain BUY valuing it at | 1650 i.e. 18x P/E on FY23E (earlier TP | 1710)

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