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SYNOPSIS

Swaraj Engines Ltd. (SEL) is a joint venture between erstwhile Punjab Tractors Ltd. (PTL), which has since been merged with Mahindra & Mahindra Ltd. (M&M) and Kirioskar Oil Engines Ltd. (KOEL).

The Company products include internal combustion diesel engines, diesel engine components and spare parts.

The Company supplies engines to Punjab Tractors Ltd and engine components to Swaraj Mazda Ltd.

In 2011, Mahindra acquired a majority stake in Korea’s Ssang Yong Motor Company.

The Company's principal activity is to manufacture and supply of engines and hi-tech engine components for tractors and other commercial vehicles.

Net Sales and PAT of the company are expected to grow at a CAGR of 24% and 19% over 2010 to 2013E respectively.

Years Net sales EBITDA Net Profit EPS P/E

FY 11 3606.30 630.80 439.10 35.35 11.63

FY 12E 4529.73 724.74 527.12 42.44 9.68

FY 13E 5345.08 857.22 631.50 50.85 8.08

Stock Data:

Sector: Automobile Ancillary

Face Value Rs. Rs.10.00

52 wk. High/Low (Rs.) 503.70/349.00

Volume (2 wk. Avg.) 1610.00

BSE Code 500407

Market Cap (Rs.In mn) 5104.62

Share Holding Pattern

1 Year Comparative Graph

BSE SENSEX Swaraj Engines Ltd

C.M.P : Rs.411.00 Target Price : Rs.465.00 Date : 14th March 2012 BUY

SWARAJ ENGINES LTD

Result Update: Q3 FY 12

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Peer Group Comparison

Name of the company CMP(Rs.) Market

Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%)

Swaraj Engines Ltd 411.00 5104.62 35.35 11.63 3.35 100.00

Lumax Auto Tech 146.25 1993.6 16.31 8.97 2.81 60.00

Motherson Sumi 180.80 70067.9 6.88 26.28 6.95 275.00

Hindustan Composites Limited 440.00 2166.1 37.98 11.59 0.45 20.00

Investment Highlights

Q3 FY12 Results Update

Swaraj Engines Ltd disclosed results for the quarter ended Dec 2011. Net sales for

the quarter moved up 27% to Rs.1175.80 million as compared to Rs.926.00

million during the corresponding quarter last year. During the quarter, the

company has reported Net Profit increased to Rs.140.80 million from Rs.113.30

million in previous year same quarter. The Basic EPS of the company stood at

Rs.11.34 for the quarter ended Dec 2011.

Quarterly Results - Standalone (Rs in mn)

As At Dec-11 Dec-10 %change

Net sales 1175.80 926.00 27

PAT 140.80 113.30 24

Basic EPS 11.34 9.12 24

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Basic EPS of the company stood at Rs.11.34

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Break up of Expenditure

Expenditure for the quarter stood at Rs.993.70mn, which is around 29.73%

higher than the corresponding period of the previous year. Consumption of Raw

Material cost of the company for the quarter accounts for 73% of the sales of the

company and stood at Rs.860.70mn from Rs.692.10mn of the corresponding

period of the previous year. Employees cost increased 12%YoY to Rs.47.8mn from

Rs.42.80mn and accounts for 4% of the revenue of the company for the quarter.

OPM and NPM for the quarter stood at 16% and 12% respectively from 18% and

12% respectively of the same period of the last year.

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Company Profile

Swaraj Engines Ltd. (SEL) is a joint venture between erstwhile Punjab Tractors Ltd.

(PTL), which has since been merged with Mahindra & Mahindra Ltd. (M&M) and

Kirioskar Oil Engines Ltd. (KOEL). Originally set up to manufacture engines for PTL, in

recent years, SEL has also been a supplier of hi-tech engine components to Swaraj

Mazda Ltd. (SML).

Since start of commercial operations in 1989-90, SEL has supplied around 3,57,000

engines for fitment into “Swaraj” tractors. SEL’s engine business currently constitutes

some 93% of Company’s product revenue. Balance 7% represents value of hitech

engine components being supplied to SML for assembly of commercial vehicle engines.

Financial Results

12 Months Ended Profit & Loss Account (Standalone)

Value(Rs.in million) FY10A FY11A FY12E FY13E

12m 12m 12m 12m

Description

Net Sales 2824.40 3606.30 4529.73 5345.08

Other Income 41.80 23.70 38.20 45.84

Total Income 2866.20 3630.00 4567.93 5390.92

Expenditure -2328.70 -2999.20 -3843.19 -4533.70

Operating Profit 537.50 630.80 724.74 857.22

Interest 58.00 57.30 83.08 108.00

Gross Profit 595.50 688.10 807.82 965.23

Depreciation -48.40 -44.60 -40.11 -43.32

Profit before Tax 547.10 643.50 767.71 921.90

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Tax -173.60 -204.40 -240.59 -290.40

Profit after Tax 373.50 439.10 527.12 631.50

Equity Capital 124.20 124.20 124.20 124.20

Reserves 1103.20 1398.00 1925.12 2556.62

Face Value(Rs.) 10.00 10.00 10.00 10.00

Total No. of Shares 12.42 12.42 12.42 12.42

EPS 30.07 35.35 42.44 50.85

*A=Actual, *E=Estimated

Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in million) 30-Jun-11 30-Sep-11 31-Dec-11 31-Mar-12

3m(A) 3m(A) 3m(A) 3m(E)

Description

Net Sales 1102.20 1028.90 1175.80 1222.83

Other Income 7.20 7.90 11.00 12.10

Total Income 1109.40 1036.80 1186.80 1234.93

Expenditure -924.00 -876.30 -993.70 -1049.19

Operating Profit 185.40 160.50 193.10 185.74

Interest 19.70 19.50 21.30 22.58

Gross Profit 205.10 180.00 214.40 208.32

Depreciation -9.30 -9.80 -10.20 -10.81

Profit before Tax 195.80 170.20 204.20 197.51

Tax -60.40 -52.40 -63.40 -64.39

Profit after Tax 135.40 117.80 140.80 133.12

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Equity Capital 124.20 124.20 124.20 124.20

Face Value(Rs.) 10.00 10.00 10.00 10.00

Total No. of Shares 12.42 12.42 12.42 12.42

EPS 10.90 9.48 11.34 10.72

*A=Actual, *E=Estimated

Key Ratio

Particulars FY10 FY11 FY12E FY13E

EPS (Rs.) 30.07 35.35 42.44 50.85

EBITDA Margin (%) 19.03% 17.49% 16.00% 16.04%

PAT Margin (%) 13.22% 12.18% 11.64% 11.81%

P/E Ratio (x) 14.37 11.63 9.68 8.08

ROE (%) 30.43% 28.85% 25.72% 23.56%

ROCE (%) 39.85% 38.51% 33.41% 30.36%

EV/EBITDA (x) 9.98 8.09 7.04 5.95

Book Value (Rs.) 98.82 122.56 165 215.85

P/BV 4.37 3.35 2.49 1.90

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Charts:

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Outlook and Conclusion

At the current market price of Rs.411.00, the stock is trading at 9.68 x FY12E

and 8.08 x FY13E respectively.

Price to Book Value of the stock is expected to be at 2.49 x and 1.90 x

respectively for FY12E and FY13E.

Earning per share (EPS) of the company for the earnings for FY12E and FY13E

is seen at Rs.42.44 and Rs.50.85 respectively.

The Company supplies engines to Punjab Tractors Ltd and engine components

to Swaraj Mazda Ltd.

In 2011, Mahindra acquired a majority stake in Korea’s Ssang Yong Motor

Company.

The Company's principal activity is to manufacture and supply of engines and

hi-tech engine components for tractors and other commercial vehicles.

Net Sales and PAT of the company are expected to grow at a CAGR of 24% and

19% over 2010 to 2013E respectively.

On the basis of EV/EBITDA, the stock trades at 7.04 x for FY12E and 5.95 x

for FY13E.

We expect that the company will keep its growth story in the coming quarters

also. We recommend ‘BUY’ in this particular scrip with a target price of

Rs.465.00 for Medium to Long term investment.

Industry Overview

Indian auto component industry is robustly driven by the growth in demand for

automobiles. The sector has become a lucrative business proposition for global

players, majorly owing to two factors. First, needless to say, the demand for

automobiles is increasing day by day in the country. India, a market with high

potential for the automobiles sector, is expected to witness a three-fold increase in

demand for automobiles by 2020. Secondly, all major global auto-makers are

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establishing their bases here due to highly positive business environment, favorable

policies and government support.

According to a study by UK-based global financial advisory firm-Rothschild, India

would become the third largest auto industry by volumes after China and the US by

2015. This would give immense support to the growth of ancillary sector as well.

Indian Auto Components Industry Profile

According to a recent study by the Automotive Component Manufacturers' Association

of India (ACMA), original equipment manufacturers (OEMs) account for 41 per cent of

the auto components consumed in the Indian aftermarket.

The study estimated current size of Indian components business at Rs 24,800 crore

(US$ 4.87 billion), 49.7 per cent of which is formed by two-wheeler segment.

Passenger vehicles, commercial vehicles and three-wheelers follow with 24.7 per cent,

23.1 per cent and 2.5 per cent of the share respectively.

According to Arvind Kapur, President, ACMA, a large market in Indian spares business

is dominated by organised, semi-organised and a number of small, unorganised

players. He thus acknowledged the need for a process of accreditation to ensure better

customer service.

The study further projected that OEM-authorised network of service stations would

account for 20-30 per cent of the Indian auto components market by 2017 while that

of multi-brand organised service chains would grow to 5-10 per cent from 1-2 per

cent. Similarly semi-organised service centres’ and unorganised garages’ market share

would be 20-30 per cent and 45-55 per cent, respectively, in 2017.

India – The Global Auto Hub

Canada is looking for substantial investment opportunities in Indian auto components

market through the comprehensive economic partnership agreement (CEPA) which is

being discussed and negotiated by the two Governments. The agreement is likely to get

finalised by 2013. If fructified, the agreement would facilitate an annual increase of

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economic output in two countries by almost US$ 6 billion and boost the two-way trade

by 50 per cent.

UK sees immense potential in the Indian auto ancillary sector, especially in the city of

Rajkot as it is known for auto components manufacturing. Peter Beckingham, British

Deputy High Commissioner for Western India, also indicated possible ventures

between UK and Rajkot companies in near future.

According to industry sources, Rajkot's auto component industry, with over 500

manufacturers aggregating a net turnover of around Rs 1,500 crore (US$ 294.5

million), grows at an annual rate of 15-20 per cent.

Furthermore, 60 French automobile component suppliers are contemplating on

business opportunities to set up a vendor park near Sanand in Ahmedabad district.

The proposed vendor park would accommodate tier-1 and tier-2 auto-component

suppliers who would supply spares to the recent auto entrants in the State and even

to others.

Sanand is already home to a number of global auto-makers, like Ford and Peugeot.

Indian Auto Components Industry: Key Developments and Investments

Global private equity (PE) firm Actis PE has bought 10-13 per cent stake in Indian

auto component manufacturer Endurance Technologies for about US$ 71 million.

Endurance Technologies is a part of the automotive component major Endurance

Group and caters to companies like Bajaj, Yamaha, Suzuki, Honda Motorcycles and

Scooters and Royal Enfield. Global car makers such as Daimler, Audi, Fiat and

Porsche are the company's customers in passenger car segment.

German auto component maker Schaeffler Group is on an expansion spree in India.

The company plans to invest over Rs 1,000 crore (US$ 196 million) during 2012-15 in

the country to set up a manufacturing facility and to expand its existing plants. To

support its growth, the company would also double the number of its engineers and

recruit 1, 200 employees in the country.

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Federal-Mogul's new facility in Chennai will commence its operations by March 2012.

The plant, being set up for producing braking and friction materials, will initially focus

on after market products like linings and brake pads. Federal Mogul is a global

automotive components manufacturer.

Government Initiatives

The Government of India is in the process of forming a National Automotive Board

(NAB) which would become a formal set-up to look into the issue of recall of vehicles

and hence improve manufacturing standards. The prospective body, to oversee

technical and safety aspects of vehicles, will have representatives from all the nodal

ministries and automotive bodies such as the Automotive Research Association of

India (ARAI).

The Government of Gujarat has always been on a high to promote its industrial space

especially it's the automobile sector. In order to boost the State Government's efforts

in this regard, Gujarat Government's Industrial Extension Bureau, along with

Automotive Components Manufacturers Association, French Vehicles Equipment

Industries (FIEV) and French auto-major Peugeot, organised a seminar and business

meeting on January 9, 2011 wherein 60 French automobile component makers were

briefed on opportunities to set up vendor park near Sanand (Gujarat's auto hub) in

Ahmedabad district.

Similarly, the Government of Gujarat has also announced its plan to disburse 240

acres of land at Sanand to the All India Plastic Manufacturers Association (AIPMA) to

set up a plastic park that could attract an investment of about Rs 5000 crore (US$

981.65 million). The Government's move marks its eye for detail as the measure has

come in the light of the fact that a finished car would require about 150 kgs of plastic.

Road Ahead

Ratings agency Fitch has maintained a stable outlook towards the Indian auto

components industry for the year 2012. The industry is expected to perform well owing

to OEM’s robust demand for localised spares.

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According to a report by ACMA, the Indian auto component industry would garner

US$ 113 billion of turnover by 2020-21, growing at a compounded annual growth rate

(CAGR) of 11 per cent through 2011-21. Not only domestic demand, India is poised to

scale new heights in terms of exports as well as the report estimates exports to be

worth US$ 29 billion by 2020-21, growing at a CAGR of 18.8 per cent through the

forecast period.

_____________ ____ _________________________ Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation

for the purchase or sale of any financial instrument or as an official confirmation of any

transaction. The information contained herein is from publicly available data or other

sources believed to be reliable but do not represent that it is accurate or complete and it

should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s

affiliates shall not be in any way responsible for any loss or damage that may arise to any

person from any inadvertent error in the information contained in this report. This document

is provide for assistance only and is not intended to be and must not alone be taken as the

basis for an investment decision.

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