-
April 24, 2018
ICICI Securities Ltd | Retail Equity Research
Result Update
Volumes normalise , well poised to grow…
Swaraj Engines (SEL) reported a muted Q4FY18 performance
despite
robust tractor sales volumes at the industry as well as parent
level
This can be attributed to normalisation of inventory at the
parent
level in FY18. From a two-year perspective, Swaraj has grown
in
tandem with industry growth rate with market share intact at
~17%
SEL recorded engine sales of 21,780 units in Q4FY18, up 9.8%
YoY
Consequently, total operating income in Q4FY18 came in at |
185.2
crore (up 15.2% YoY). EBITDA for the quarter came in at | 28.6
crore
with corresponding EBITDA margins at 15.4% (up 41 bps YoY)
PAT in Q4FY18 was at | 17.9 crore, up 17.0% YoY
SEL announced a dividend of | 50/share for FY18, implying a
healthy
dividend yield of ~2.5%
Normal monsoon forecast to aid farm mechanisation play; SEL to
benefit
South West Monsoon, which accounts for ~70% of annual
rainfall
domestically, has been forecast to be normal in nature (IMD at
97% of
LPA & Skymet at 100% of LPA). Normal monsoon is likely to
result in an
increase in food grain production. This coupled with
government
directive to ensure minimum support price (MSP) at 1.5x the cost
of
production for key crops domestically and a wider e-NAM network
is
likely to result in healthy farm income. It is positive for all
farm
mechanisation companies, including SEL. Interestingly, it has
been
observed that SEL realises greater proportion of sales in the
Kharif season
(~55% of sales) which makes next six months truly crucial for
SEL.
Domestic tractor industry on growth trajectory post stellar
sales in FY18
The domestic tractor industry has been at the forefront of
farm
mechanisation in India. The tractor industry registered record
sales
volume of 711,478 units (up 22.1% YoY) after ending FY17 at
582,853
units (up 18% YoY). Tractor sales at the parent level in FY18
were at
~304,019 units (up 21.8% YoY) after rising 23% YoY in FY17 to
249,683
units thereby maintaining is commanding market share of ~43%.
Going
forward, with renewed focus on the agriculture sector and
pick-up in
infrastructure activities, we expect the domestic tractor
industry to
witness healthy double digit volume growth (10-12% CAGR) in
FY18-20E.
Strong brand image, capital efficient business model; retain
BUY!
“Swaraj” tractors enjoy a strong brand image with a market share
in
excess of 15%. Back-t-back normal monsoons and supportive
government measures aimed at augmenting farm income bode well
for
farm mechanisation players, including SEL. The company has one
of the
most capital efficient business models 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
52% &
39%, respectively. SEL is a debt free company with surplus cash
on its
balance sheet (| 183 crore as of FY18). Incorporating the
normalisation of
inventory at the parent level, we expect SEL to clock engine
sales volume
CAGR of 10% in FY18-20E to 111,310 units in FY20E (92,022 units
in
FY18). We expect sales, PAT to grow at a CAGR of 12.0%,
11.9%,
respectively, in FY18-20E. Conservatively, we build in 40
bps
improvement in EBITDA margins. We expect SEL to generate an
average
CFO of ~| 112 crore over FY18-20E thereby offering a healthy CFO
yield
of 4.5%. We maintain our positive stance on SEL and value it at
| 2500 i.e.
30x P/E on FY20E EPS of | 82.8. We retain our BUY rating on the
stock.
We also incorporate the recently concluded buyback amounting to
~| 71
crore (2.95 lakh shares @ buyback price of | 2400).
Swaraj Engines (SWAENG) | 2070 Rating matrix
Rating : Buy
Target : | 2500
Target Period : 12-18 months
Potential Upside : 21%
What’s changed?
Target Unchanged
EPS FY19E Changed from | 79.6 to | 74.4
EPS FY20E Changed from | 88.2 to | 82.8
Rating Unchanged
Quarterly performance
Q4FY18 Q4FY17 YoY (%) Q3FY18 QoQ (%)
Revenue 185.3 160.8 15.2 183.3 1.1
EBITDA 28.6 24.1 18.4 25.7 11.0
EBITDA (%) 15.4 15.0 41 bps 14.0 138 bps
PAT 17.9 15.3 17.0 17.3 3.4
Key financials
| Crore FY17 FY18 FY19E FY20E
Net Sales 666.2 771.2 878.9 967.2
EBITDA 104.6 121.7 140.4 156.4
Net Profit 68.8 80.1 90.2 100.4
EPS (|) 55.4 66.1 74.4 82.8
Valuation summary
FY17 FY18 FY19E FY20E
P/E 37.4 31.3 27.8 25.0
Target P/E 45.1 37.8 33.6 30.2
EV / EBITDA 21.7 19.1 16.5 14.7
P/BV 9.1 11.0 10.8 10.6
RoNW 24.3 35.1 39.0 42.3
RoCE 31.2 45.9 53.1 58.3
Stock data
Stock Data | crore
Market Capitalization 2,509.9
Total Debt (FY18) 0.0
Cash & Investments (FY18) 182.8
EV 2,327.1
52 week H/L 2545 / 1551
Equity capital | 12.1 crore
Face value | 10
MF Holding (%) 13.1
FII Holding (%) 2.5
Price performance
Return % 1M 3M 6M 12M
Swaraj Engines 3.2 -0.4 0.7 37.5
Kirloskar Oil Engines -1.3 -12.3 -6.8 -13.2
Research Analyst
Chirag J Shah
[email protected]
Shashank Kanodia, CFA
[email protected]
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ICICI Securities Ltd | Retail Equity Research Page 2
Variance analysis
Standalone Numbers Q4FY18 Q4FY18E Q4FY17 YoY (%) Q3FY18 QoQ (%)
Comments
Sales 185.3 247.8 160.8 15.2 183.3 1.1 Net sales for the quarter
came in significantly lower largely tracking lower-
than-expected engines sales volume
Other Operating Income 0.0 0.0 0.0 0.0
Total Operating Income 185.3 247.8 160.8 15.2 183.3 1.1
Total Raw Material Expenses 138.4 184.6 120.4 14.9 137.2 0.8 RM
as a percentage of sales were largely in line at ~75% of sales
Employee Cost 8.9 9.3 8.1 10.8 8.9 0.7 Employee costs came in at
their usual run rate (~5% of sales)
Other operating expense 9.4 11.9 8.2 14.7 11.5 -18.2 Other
operating expense came in at its usual run rate (~5% of sales)
Total Expenditure 156.7 205.8 136.6 14.7 157.6 -0.6
EBITDA 28.6 42.0 24.1 18.4 25.7 11.0
EBITDA Margin (%) 15.4 17.0 15.0 41 bps 14.0 138 bps The
operating leverage benefits did not pan out as envisaged due to
muted
engine sales volume growth for the quarter
Depreciation 4.2 4.2 4.2 -0.7 4.2 -0.7
Interest 1.0 0.0 0.0 0.0
Non Operating Expenses 0.0 0.0 0.0 0.0
Other Income 4.1 1.0 3.6 16.0 4.9 -15.5 Other income was
higher-than-expected
PBT 27.5 38.8 23.5 17.3 26.4 4.1
Taxes 9.7 13.5 8.2 17.7 9.1 5.6 Tax rate came in at 35%
PAT 17.9 25.3 15.3 17.0 17.3 3.4
Key Metrics
Engine Sales Volume (units) 21,780 30,115 19,842 9.8 21,971 -0.9
Sales volume for the quarter came in much lower than our estimates
at
21,780 units (up 9.8% YoY)
Engine Realizations (|/unit) 85,060 82,268 81,025 5.0 83,428 2.0
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 940.5 878.9 -6.6 1,025.1 967.2 -5.7 Lowered estimates
factoring in muted Q4FY18. Going forward, we expect the
industry to witness moderate growth on high base
EBITDA 154.2 140.4 -9.0 169.1 156.4 -7.6
EBITDA Margin (%) 16.4 16.0 -43 bps 16.5 16.2 -33 bps Marginally
toned down operating leverage benefits to moderation of engine
sales
growth (lower capacity utilisation levels)
PAT 96.5 90.2 -6.5 107.0 100.4 -6.2
EPS (|) 79.6 74.4 -6.5 88.2 82.8 -6.2 Decline in sales and
margin estimates lead to decline in PAT and EPS estimates
FY19E FY20E
Source: Company, ICICI Direct Research
Assumptions
FY16 FY17 FY18 FY19E FY20E FY19E FY20E Comments
Engine Sales Volume
(units)
64088 82297 92022 103065 111310 112400 121392 Lowered our engine
sales volume estimates. We now expect SEL to witness
sales volume growth of 10% CAGR in FY18-20E to 1.1 lakh units in
FY20E vs.
0.9 lakh units in FY18
Engine Net Sales
Realization (|/unit)
79157 78363 81732 83367 85034 81924 82743 Increase in metal
price and penetration into higher hp segment leads to upward
revision in realisation estimates
EarlierCurrent
Source: Company, ICICI Direct Research
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ICICI Securities Ltd | Retail Equity Research Page 3
Normal monsoon forecast at 97% of LPA
South West Monsoon, which accounts for ~70% of annual
rainfall
domestically, has been forecast to be normal in nature. It is
forecast at
97% of the long period average (LPA) by the Indian
Meteorological
Department (IMD) and 100% of LPA by private weather
monitoring
agency Skymet. Absence of El Niño conditions and fading away of
La
Niña over the Pacific Ocean amid neutral dipole movement in the
Indian
Ocean have contributed to this normal rainfall forecast.
Exhibit 1: Skymet vs. IMD forecast
95
103
91
10295
10099 98 95 9396 97
92
106
88 86
97 95
105106
0
20
40
60
80
100
120
2012 2013 2014 2015 2016 2017 2018
% o
f LP
A
Skymet Forecast IMD Forecast Actual Rain
Source: Company, ICICI Direct Research
This bodes well for all agri-input companies and rural demand
focused
consumer industries viz. FMCG & consumer durables. In the
past, it has
been observed that majority of agri input companies,
particularly in the
farm mechanisation segment (tractors, tillers, pumps) witness
volume
growth of ~20% during years of normal monsoons.
Exhibit 2: Rainfall probability range
IMD (97% of LPA) Skymet (100% of LPA)
Forecast Probability (%) Forecast Probability (%)
Deficient 110 2 5
Monsoon Categorization
Rainfall Range
(% of LPA)
Source: Company, ICICI Direct Research
IMD has forecast monsoon 2018 to be normal to positive in nature
with a
probability of 56% while the probability assigned to below
normal
monsoon 2018 is pegged at 30%. Skymet forecast is more
aggressive,
with 80% probability of normal to positive monsoon while
probability
assigned to below normal monsoon at 20%. Interestingly, Skymet
has
assigned a zero probability to monsoon 2018 being deficient in
nature.
Currently, the national focus as well as political mandate is
on
augmenting farm income and minimising farm distress. It is being
done
through various measures like robust allocation in key
government
schemes (Union Budget 2018) focusing on augmenting farm
productivity.
It is also being targeted through farm loan waiver in key states
like Uttar
Pradesh, Maharashtra, Punjab, etc. The most notable and
effective,
however, would be the increase in MSP for key agriculture crops
that is
being targeted at 1.5x the cost of production. Therefore, amid
such
measures, normal to positive monsoon will act as a shot in the
arm for
the domestic agriculture sector with agri GDP expected to
surpass its
long period average growth rate of ~4%.
Skymet expects monsoons to start at a very robust pace with
June forecast to receive rainfall at 111% of LPA, followed
by
July at 97% of LPA, August at 96% of LPA and September at
101% of LPA
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ICICI Securities Ltd | Retail Equity Research Page 4
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. SEL also manufactures
hi-tech
engine components for commercial vehicles for SML Isuzu
(erstwhile
Swaraj Mazda). The contribution to the topline, however, remains
limited
(
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ICICI Securities Ltd | Retail Equity Research Page 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 7.4%
CAGR 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 17.2% CAGR to 3.4 lakh units in FY10-18 (94,000
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.
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ICICI Securities Ltd | Retail Equity Research Page 6
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 FY18.
Exhibit 7: SEL: Capacity, production & capacity utilisation
trend
60000
75000
75000
75000
105000
105000
120000
120000
120000
55099
57348
74786
63994
64256
81989
92022
103065
111310
91.8
76.5
99.7
85.3
61.2
78.1 76.7
85.9
92.8
0
20000
40000
60000
80000
100000
120000
140000
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
unit
s
0
20
40
60
80
100
120
%
Capacity Production Capacity Utilization
Source: Company, ICICI Direct Research
Going forward, we expect sales volumes to grow at a CAGR of
10.0% in
FY18-20E to 111,310 units in FY20E vs. 92,022 units in FY18.
The
company has successfully augmented its capacity to 120,000 units
in
FY18 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)
36
27
3028
22
19
14 15 15 15
810
75 5 5
7 7
10 10
43
38 3836
42 42
50
45 45
0
10
20
30
40
50
60
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
days
Inventory Days Debtor Days Creditor Days
Source: Company, ICICI Direct Research
Exhibit 9: SEL: Net working capital days
-6
-1
-5
-9
-18
-21
-28
-20 -20
-30
-25
-20
-15
-10
-5
0
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
no o
f days
Source: Company, ICICI Direct Research
Going forward, we conservatively build in a negative working
capital cycle
of 20 days in 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
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ICICI Securities Ltd | Retail Equity Research Page 7
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 3
1.2
45.9 53.1
58.3
24.4
19.4
24.3
35.1
39.0
42.3
289
229183
84204
563
0
10
20
30
40
50
FY15 FY16 FY17 FY18 FY19E FY20E
%
0
100
200
300
400
500
600
%
RoCE RoE RoIC
Source: Company, ICICI Direct Research
Exhibit 11: EPS, DPS & dividend payout
41.7
41.2 5
5.4 66.1
74.4
82.8
33.0
33.0 43.0
50.0 60.0
65.0
78.580.7
75.777.6
80.179.2
0
10
20
30
40
50
60
70
80
90
FY15 FY16 FY17 FY18 FY19E FY20E|
/share
0
20
40
60
80
100
%
EPS DPS Payout Ratio
Source: Company, ICICI Direct Research
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 | 60/share in FY19E, | 65/share in FY20E, thereby
offering an
attractive dividend yield of ~3%.
Revenues to grow at 12.0% CAGR in FY18-20E
We expect SEL to clock modest revenue growth at 12.0% CAGR in
FY18-
20E to | 967.2 crore in FY20E (| 771.2 crore in FY18). We expect
sales
volumes of engines to grow at a CAGR of 10.0% in FY18-20E to
111,130
units in FY20E (92,022 units in FY18). On the realisations
front, we expect
realisations to grow at a CAGR of 2.0% over FY18-20E.
Exhibit 12: Sales trend
539.7 525.9
666.2
771.2
878.9
967.2
-
200
400
600
800
1,000
1,200
FY15 FY16E FY17 FY18 FY19E FY20E
| c
rore
Source: Company, ICICI Direct Research
Exhibit 13: Sales volume and realisation trend
64595
64088
82297
92022
103065
111310
8134479157
78363
81732 83367 85034
0
20000
40000
60000
80000
100000
FY15 FY16 FY17 FY18 FY19E FY20E
unit
s
74000
76000
78000
80000
82000
84000
86000
|/unit
Sales Volume Realization
Source: Company, ICICI Direct Research
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 12.0% CAGR in FY18-20E.
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ICICI Securities Ltd | Retail Equity Research Page 8
This would primarily be on the back of the 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.
EBITDA, PAT to grow at 13.4%, 11.9% CAGR, respectively, in
FY18-20E
We expect EBITDA to grow at a CAGR of 13.4% in FY18-20E to |
156.4
crore in FY20E (| 121.7 crore in FY18), primarily on the back of
sales
growth (12.0% CAGR) and improvement in EBITDA margins to the
tune of
40 bps to 16.2% in FY20E (15.8% in FY18). On the PAT front, we
expect
PAT to grow at a CAGR of 11.9% 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
140.4
156.4
13.8
14.0
15.7 15.8
16.0
16.2
-
20
40
60
80
100
120
140
160
180
FY15 FY16E FY17 FY18 FY19E FY20E
| c
rore
13
13
14
14
15
15
16
16
17
%
EBITDA (| crore) EBITDA Margin (%)
Source: Company, ICICI Direct Research
Exhibit 15: PAT & EPS trend
51.8
51.2 6
8.8
80.1
90.2
100.4
41.741.2
55.4
66.1
74.4 82.8
-
20
40
60
80
100
120
FY15 FY16E FY17 FY18 FY19E FY20E
| c
rore
-
10
20
30
40
50
60
70
80
90
|/share
Net Profit (| crore) EPS (|)
Source: Company, ICICI Direct Research
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ICICI Securities Ltd | Retail Equity Research Page 9
Outlook and valuation
“Swaraj” tractors enjoy a strong brand image with a market share
in
excess of 15%. Back-to-back normal monsoon and supportive
government measures targeted towards augmenting farm income
bodes
well for farm mechanisation players including SEL. Swaraj
Engines has
one of the most capital efficient business models 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
52% & 39%, respectively. SEL is a debt free company with
surplus cash
on its balance sheet (| 183 crore as of FY18). Incorporating
the
normalisation of inventory at the parent level, we expect SEL to
clock
engine sales volume CAGR of 10% in FY18-20E to 111,310 units in
FY20E
(92,022 units in FY18). We expect sales, PAT to grow at a CAGR
of 12.0%,
11.9%, respectively, in FY18-20E. Conservatively, we build in 40
bps
improvement in EBITDA margins. We expect SEL to generate an
average
CFO of ~| 112 crore over FY18-20E thereby offering a healthy CFO
yield
of 4.5%. We maintain our positive stance on SEL and value it at
| 2500 i.e.
30x P/E on FY20E EPS of | 82.8. We retain our BUY recommendation
on
the stock. We also incorporate the recently concluded
buyback
amounting to ~| 71 crore (2.95 lakh shares @ buyback price of |
2400).
Exhibit 16: Two year forward P/E (SEL currently trading at
25.0x)
0
500
1000
1500
2000
2500
3000
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-16
May-16
Sep-16
Jan-17
May-17
Sep-17
Jan-18
(|
)
Price 29x 26x 20x 17x 12x 9x 6x
Source: Reuters, ICICI Direct Research
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ICICI Securities Ltd | Retail Equity Research Page 10
Recommendation history vs. Consensus
0
500
1,000
1,500
2,000
2,500
3,000
Apr-18
Mar-18
Jan-18
Dec-17
Oct-17
Aug-17
Jul-17
May-17
Apr-17
Feb-17
Jan-17
Nov-16
Oct-16
Aug-16
Jun-16
May-16
Mar-16
Feb-16
Dec-15
Nov-15
Sep-15
Aug-15
Jun-15
May-15
(|
)
0
10
20
30
40
50
60
70
80
90
100
(%
)
Price Idirect target 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 out beats the industry growth rate with Engine sales in
FY17 at 82297, up 28% YoY vs. the 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
Source: Company, ICICI Direct Research
Top 10 Shareholders Shareholding Pattern
Rank Name Latest Filing Date % O/S Position (m) Change (m)
1 Mahindra Group 31-Dec-17 34.0 4.1 0.0
2 Kirloskar Group of Companies 31-Dec-17 17.8 2.2 0.0
3 L&T Investment Management Limited 28-Feb-18 3.9 0.5
0.0
4 DSP BlackRock Investment Managers Pvt. Ltd. 31-Dec-17 3.4 0.4
0.0
5 HDFC Asset Management Co., Ltd. 31-Mar-18 2.1 0.3 0.0
6 Jupiter Asset Management Ltd. 31-Dec-17 1.5 0.2 0.0
7 Parikh (Reeta Keyur) 31-Dec-17 1.5 0.2 0.0
8 Shah (Vikram Chinubhai) 31-Dec-17 1.5 0.2 0.0
9 SBI Funds Management Pvt. Ltd. 31-Dec-17 1.3 0.2 0.0
10 Morgan Stanley Investment Management (India) Pvt. Ltd.
30-Sep-16 1.2 0.2 0.0
(in %) Mar-17 Jun-17 Sep-17 Dec-17 Mar-18
Promoter 50.6 50.6 50.6 50.6 50.7
FII 5.0 5.2 5.3 2.7 2.5
DII 12.1 12.2 12.5 12.3 13.1
Others 32.3 32.0 31.6 34.4 33.7
Source: Reuters, ICICI Direct Research
Recent Activity
Investor name Value (US$ M) Shares (M) Investor name Value (US$
M) Shares (M)
DHFL Pramerica Asset Managers Private Limited 0.1 0.0 Franklin
Templeton Asset Management (India) Pvt. Ltd. -4.0 -0.1
HDFC Asset Management Co., Ltd. 0.1 0.0 L&T Investment
Management Limited -0.8 0.0
Edelweiss Asset Management Ltd. -0.2 0.0
Dimensional Fund Advisors, L.P. -0.2 0.0
Buys Sells
Source: Reuters, ICICI Direct Research
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ICICI Securities Ltd | Retail Equity Research Page 11
Financial summary
Profit and loss statement | Crore
(Year-end March) FY17 FY18 FY19E FY20E
Net Sales 666.2 771.2 878.9 967.2
Other Operating Income 0.0 0.0 0.0 0.0
Total Operating Income 666.2 771.2 878.9 967.2
Growth (%) 26.7 15.8 14.0 10.0
Raw Material Expenses 495.6 574.3 656.9 722.8
Employee Expenses 31.0 34.8 37.8 40.6
Other Operating Expense 35.0 40.5 43.9 47.3
Total Operating Expenditure 561.6 649.6 738.5 810.8
EBITDA 104.6 121.7 140.4 156.4
Growth (%) 42.2 16.3 15.4 11.4
Depreciation 16.3 16.8 17.5 18.2
Interest 0.1 1.0 0.0 0.0
Other Income 17.2 19.0 14.9 15.1
PBT 105.4 122.8 137.7 153.2
Exceptional Item 0.0 0.0 0.0 0.0
Total Tax 36.6 42.7 47.5 52.9
PAT 68.8 80.1 90.2 100.4
Growth (%) 34.5 16.5 12.6 11.3
EPS (|) 55.4 66.1 74.4 82.8
Source: Company, ICICI Direct Research
Cash flow statement | Crore
(Year-end March) FY17 FY18 FY19E FY20E
Profit after Tax 68.8 80.1 90.2 100.4
Add: Depreciation 16.3 16.8 17.5 18.2
(Inc)/dec in Current Assets -2.9 -14.7 -13.2 -6.9
Inc/(dec) in CL and Provisions 16.9 30.7 3.8 11.8
Others 0.1 1.0 0.0 0.0
CF from operating activities 99.2 113.9 98.4 123.4
(Inc)/dec in Investments -38.5 -27.2 -10.0 -20.0
(Inc)/dec in Fixed Assets -6.4 -22.7 -5.0 -5.0
Others -1.0 -7.5 0.0 0.0
CF from investing activities -45.9 -57.4 -15.0 -25.0
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 -87.3 -94.6
Inc/(dec) in Share Cap 0.0 0.0 0.0 0.0
Others 15.0 -62.9 0.0 0.0
CF from financing activities -49.0 -135.9 -87.3 -94.6
Net Cash flow 4.3 -79.4 -3.9 3.8
Opening Cash 181.8 186.1 106.7 102.8
Closing Cash 186.1 106.7 102.8 106.6
Source: Company, ICICI Direct Research
Balance sheet | Crore
(Year-end March) FY17 FY18 FY19E FY20E
Liabilities
Equity Capital 12.4 12.1 12.1 12.1
Reserve and Surplus 270.9 216.4 219.3 225.1
Total Shareholders funds 283.3 228.5 231.4 237.2
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 289.6 234.3 237.2 243.0
Assets
Gross Block 196.2 213.7 224.7 229.7
Less: Acc Depreciation 104.9 121.7 139.2 157.4
Net Block 91.3 92.0 85.4 72.3
Capital WIP 0.8 6.0 0.0 0.0
Total Fixed Assets 92.1 98.0 85.4 72.3
Investments 48.9 76.1 86.1 106.1
Inventory 26.1 31.9 36.1 39.7
Debtors 13.1 15.3 24.1 26.5
Loans and Advances 0.0 0.0 0.0 0.0
Other Current Assets 2.0 8.6 8.8 9.7
Cash 186.1 106.7 102.8 106.6
Total Current Assets 227.2 162.5 171.8 182.5
Current Liabilities 77.4 105.5 108.4 119.2
Provisions 5.2 7.7 8.7 9.5
Current Liabilities & Prov 82.5 113.2 117.0 128.8
Net Current Assets 144.7 49.3 54.7 53.7
Others Assets 3.8 10.9 10.9 10.9
Application of Funds 289.6 234.3 237.2 243.0
Source: Company, ICICI Direct Research
Key ratios
(Year-end March) FY17 FY18 FY19E FY20E
Per share data (|)
EPS 55.4 66.1 74.4 82.8
Cash EPS 68.5 79.9 88.9 97.8
BV 228.1 188.5 190.9 195.6
DPS 43.0 48.8 58.6 63.5
Cash Per Share (Incl Invst) 189.2 150.8 155.8 175.4
Operating Ratios (%)
EBITDA Margin 15.7 15.8 16.0 16.2
PAT Margin 10.3 10.4 10.3 10.4
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 39.0 42.3
RoCE 31.2 45.9 53.1 58.3
RoIC 216.3 263.9 330.0 637.1
Valuation Ratios (x)
P/E 37.4 31.3 27.8 25.0
EV / EBITDA 21.7 19.1 16.5 14.7
EV / Net Sales 3.4 3.0 2.6 2.4
Market Cap / Sales 3.8 3.3 2.9 2.6
Price to Book Value 9.1 11.0 10.8 10.6
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
Source: Company, ICICI Direct Research
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ICICI Securities Ltd | Retail Equity Research Page 12
RATING RATIONALE
ICICI Direct Research endeavours to provide objective opinions
and recommendations. ICICI Direct Research
assigns ratings to its stocks according to their notional target
price vs. current market price and then
categorises them as Strong Buy, Buy, Hold and Sell. The
performance horizon is two years unless specified and
the notional target price is defined as the analysts' valuation
for a stock.
Strong Buy: >15%/20% for large caps/midcaps, respectively,
with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;
Pankaj Pandey Head – Research
[email protected]
ICICI Direct Research Desk,
ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
[email protected]
-
ICICI Securities Ltd | Retail Equity Research Page 13
ICICIdirect.com Research Desk,
ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
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