SwarajEngines ICICI Q2FY17

Result Update
October 25, 2016

Rating matrix
Rating
Target
Target Period
Potential Upside
:
:
:
:
Swaraj Engines (SWAENG)
Buy
| 1540
12-18 months
14%
Best placed to play agri theme...
Whats changed?
Target
EPS FY17E
EPS FY18E
Rating
Changed from | 1320 to | 1540

Changed from | 49.3 to | 54.2
Changed from | 60.3 to | 61.6
Unchanged
Quarterly performance
Revenue
EBITDA
EBITDA (%)
PAT
Q2FY17
178.9
29.2
16.3
19.3
Q2FY16 YoY (%)

153.2
16.8
22.7
28.3
14.8 147 bps
15.5
24.2
Q1FY17 QoQ (%)

171.7
4.2
28.3
3.1
16.5 -17 bps
19.0
1.4
Key financials
| Crore
Net Sales
EBITDA
Net Profit
EPS (|)
FY15
539.7
74.7
51.8
41.7
FY16
525.9
73.6
51.2
41.2
FY17E
619.2
99.8
67.3
54.2
FY18E
691.8
114.1
76.4
61.6
FY15
32.4
36.9
20.0
7.9
24.4
29.0
FY16
32.8
37.4
20.3
7.8
23.9
27.9
FY17E
24.9
28.4
15.0
7.6
30.3
37.7
FY18E
21.9
25.0
13.0
7.3
33.1
42.2
Valuation summary
P/E
Target P/E
EV / EBITDA
P/BV
RoNW
RoCE
Stock data
Stock Data
Market Capitalization
Total Debt (FY16)
Cash & Investments (FY16)
EV
52 week H/L
Equity capital
Face value
MF Holding (%)
FII Holding (%)
| crore
1,676.7
0.0
184.7
1,492.0
1425 / 763
| 12.4 crore
| 10
10.5
5.0
Price performance
Return %
Swaraj Engines
M&M
Kirloskar Oil Engines
1M
13.4
(5.7)
7.4
3M
19.6
(7.5)
31.2
6M
20.4
1.4
46.4
| 1350
12M
46.3
5.5
27.3
Research Analyst
Chirag J Shah
shah.chirag@icicisecurities.com
Shashank Kanodia, CFA
shashank.kanodia@icicisecurities.com
ICICI Securities Ltd | Retail Equity Research
Swaraj Engines (SEL) reported a robust Q2FY17 performance with

engine sales volume growing 18.6% YoY to 22395 units.
Realisations, however, came in tepid and were down 1.5% YoY
Consequent net sales were at | 178.9 crore, up 16.8% YoY
EBITDA for the quarter came in at | 29.2 crore with corresponding
EBITDA margins at 16.3%, up 147 bps YoY
PAT in Q2FY17 was at | 19.3 crore, up 24.2% YoY
Monsoon 2016 at 97% of LPA; normal monsoon post two deficient years
Monsoon 2016 ended on a positive note with rainfall for the season at
97% of LPA against interim fears of below normal monsoons. Rainfall was
muted at the start of the season with rainfall in June at 89% of LPA but
gained pace during the crucial period with rainfall in July at 107% of LPA.
Rainfall was muted in August at 91% and finally ended with September at
97% of LPA. Normal monsoon 2016 amid good rainfall at the fag end of
the monsoon season (good moisture content for Rabi crop) bodes well
for the domestic agriculture sector and should boost farm income, going
forward. It should be noted that the current normal monsoon season
came post two consecutive deficient monsoon seasons (2014 at 88% of
LPA; 2015 at 86% of LPA) and, hence, can be a key trigger in the revival
of rural demand. It is expected to benefit all agri input companies
including farm mechanisation players like SEL.
Robust grain production amid normal acreages to boost farm income
Total acreages in the current Kharif season 2016 were at 106.8 million
hectares, up 4% YoY. The acreage was robust in case of pulses (up 30%),
flat in case of rice and muted in case of cotton & sugarcane. The
consequent food grain production, however, is expected to be robust
primarily due to good spatial distribution of rainfall across the country.
According to the first advance estimate released by the Ministry of
Agriculture, total food grain production is expected at a record 135 million
tonne (MT), up 9% YoY. Rice production is expected at 93.9 MT, up 3%
YoY while pulses production is expected at 8.7 MT, up 58% YoY. Robust
food grain production is likely to boost farm income and result in
consequent demand for quality agri machinery thereby benefiting SEL.
Domestic tractor industry already encashing on upbeat farm sentiment
The domestic tractor industry has been at the forefront of farm
mechanisation in India and is already encashing on upbeat farm
sentiments. As against initial industry estimates of ~10% volume growth
over FY17E, the industry has already witnessed volume growth of 20.3%
over April-September 2016. Tractor sales in the aforesaid period were at
~3 lakh units vs. ~2.5 lakh units in the corresponding period last year.
Tractor sales at the market leader i.e. M&M in the aforesaid period stood
at ~1.3 lakh units, up 30% YoY, vs. ~1 lakh units in last year.
Healthy financials; strong return ratios; portfolio stock; retain BUY
SEL has a lean balance sheet with net cash of | 185 crore (FY16). Average
RoCEs and RoEs in the last five years (FY12-16) at SEL were at 33% and
28%, respectively. On the back of healthy tractor demand domestically in
H1FY17 amid normal monsoon 2016, we expect SEL to clock engine sales
volume CAGR of 15.0% in FY16-18E to 84321 units in FY18E (64088 units
in FY16). We expect sales and PAT to grow at a CAGR of 14.7% and
22.2%, respectively, in FY16-18E. We have valued SEL at | 1540 i.e. 25x
P/E (1.1x PEG) on FY18E EPS of | 61.6. We continue to assign a BUY
rating on the stock.
Variance analysis
Standalone Numbers
Sales
Q2FY17
178.1
Q2FY17E
170.6
Other Operating Income

Total Operating Income
0.8
178.9
0.7
171.2
0.7
153.2
15.1
16.8
0.7
171.7
15.1
4.2
Total Raw Material Expenses

Employee Cost
132.8
7.6
128.4
9.4
115.0
8.4
15.5
-10.0
128.0
7.3
3.7
3.6
Other operating expense

Total Expenditure
9.4
149.7
7.7
145.5
7.1
130.5
33.0
14.8
8.1
143.4
15.8
4.4
EBITDA
29.2
25.7
22.7
28.3
28.3
3.1
EBITDA Margin (%)
16.3
15.0
14.8 147 bps
4.2
0.0
0.0
4.5
3.9
0.0
0.0
3.6
3.7
0.0
0.0
4.1
13.5
29.5
10.2
19.3
25.4
8.4
17.0
Key Metrics
Engine Sales Volume (units)
22,395
Engine Realizations (|/unit)
79,513
Depreciation
Interest
Non Operating Expenses
Other Income
PBT
Taxes
PAT
Q2FY16 YoY (%)

152.5
16.8
Q1FY17 QoQ (%)

171.0
4.2
16.5 -17 bps
9.0
4.0
0.0
0.0
4.7
-3.6
23.1
7.6
15.5
27.4
33.9
24.2
29.0
10.0
19.0
1.6
2.0
1.4
20,779
18,890
18.6
20,910
7.1
82,082
80,704
-1.5
81,760
-2.7
Comments
Sales in Q2FY17 came in higher than estimates largely tracking robust
tractor sales at the parent group i.e. M&M
RM as a percentage of sales came in at 74.2%

Employee costs as a percentage of sales came in lower at 4.2%
Other operating expense as a percentage of sales came in at 5.2%
Margins came in higher-than-expected largely on account of lower raw

material & employee costs, which was partially compensated by higher
other operating expense
6.3
Other income came in at a tad higher than expectation. The company

continued to realise ~10% yield on its cash & investments
Tax rate came in 34.6%
Sales volume came in robust at 22395 units and was ahead of our
estimates
Engine realisations came in a lower at | 79513/unit vs. our expectation of |
82082/unit
Source: Company, ICICIdirect.com Research
Change in estimates
(| Crore)
Revenues
EBITDA
EBITDA Margin (%)
Old
608.3
92.5
15.2
FY17E
New % Change
619.2
1.8
99.8
7.9
16.1
91 bps
Old
708.9
113.4
16.0
FY18E
New % Change
691.8
-2.4
114.1
0.7
16.5
50 bps
PAT
61.3
67.3
9.7
74.8
76.4
2.2
EPS (|)
49.3
54.2
9.7
60.3
61.6
2.2
Comments
We have largely maintained our revenue estimates for FY17E & FY18E
Sustained 16.0%+ EBITDA margins in H1FY17 leads to upgrade our margin
estimates for FY17E & FY18E
Up gradation in EBITDA margins has led to upward revision in PAT estimates for
FY17E & FY18E
Assumptions
FY15
64595
FY16
64088
Current
FY17E
FY18E
76655
84321
Engine Net Sales

79636
81344
Realisation (|/unit)
79157
80040
Engine Sales Volume

(units)
FY14
74062
81641
Earlier
FY17E
FY18E
Comments
73599
84738 Largely maintained the engine sales volume CAGR of 15% in FY16-18E.
However, robust tractor sales domestically in H1FY17 (up 20% YoY), lets up
front load the growth. Expect sales volume growth of 20.0% in FY17E & 10.0%
in FY18E
82490
83315 Revised downward the realisations largely tracking the muted realisations in
H1FY17
Page 2
Monsoon 2016 Update: Normal at 97% of LPA

Monsoon 2016 was normal in nature with rainfall at 97% of LPA. Onset of
monsoons took place over Kerala on June 8, 2016 (seven days behind
schedule) while covering the entire country by July 13, 2016 (two days
ahead of schedule). In terms of spatial distribution, it was normal to
positive in north west (95% of LPA) & Central India (106%) and deficient in
the southern peninsula (92% of LPA) and eastern India (89% of LPA).
Out of the total 36 meteorological subdivisions, 23 subdivisions constituting 72% of the total area of the country
received normal rainfall while four sub-divisions received
excess rainfall (13% of the total area) during the season.
However, nine sub-divisions constituting 15% of the total area
of the country, received deficient seasonal rainfall
Exhibit 1: India Map Monsoon 2016 distribution
Rainfall was muted at the start of the season with rainfall in

June at 89% of LPA. However, it gained pace during the crucial
period with rainfall in July at 107% of LPA. Rainfall was muted
in August a 91% and finally ended with September at 97% of
LPA
Source: IMD, ICICIdirect.com Research
Domestic tractor industry to benefit!!

Exhibit 2: Impact of monsoon on domestic tractor sales & engine sales at SEL
Fiscal
Year
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Rainfall (%)
of LPA
100
106
98
78
102
101
92
106
88
86
Domestic Tractor
Sales Volume
(Units)
313941
302948
304622
402586
482286
536891
527768
634151
551463
493764
YoY
Growth
(%)
19
-4
1
32
20
11
-2
20
-13
-10
Engine Sales
Volume
(Units)
17702
16408
28539
39143
47413
55239
57377
74062
64595
64088
YoY
Growth
(%)
-7
74
37
21
17
4
29
-13
-1
Net sales
| crore
129
125
208
282
361
449
479
608
540
526
YoY
Growth
(%)
-3
66
36
28
24
7
27
-11
-3
Source: IMD, Company, ICICIdirect.com Research

We need to exclude FY10 from our study, which took
place consequent to the farm loan waiver executed by
the central government leading to abnormally higher
industry sales volume growth
Analysing the rainfall pattern and its associated impact on domestic

tractor industry and consequent engine sales at SEL, it has been observed
that in every normal to above normal monsoon year (FY11, FY14)
following a deficient monsoon year (FY10, FY13), tractor sales have been
close to 20%. Going forward, therefore, given FY15 & FY16 were
monsoon deficient years and FY17E a normal monsoon year, we have
built in engine sales volume growth of 15% CAGR in FY16-18E.
Page 3
Company Analysis
SEL is a joint holding of Kirloskar Industries (17.4% stake) and M&M
(33.2% stake) with M&M 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 Kirloskar Industries (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 up gradation
of its products.
SEL serves the engine requirements of the Swaraj brand of tractors,
owned by M&M. The company manufactures engines catering to tractors
in the 20-50 hp segment and caters to ~85% of the total engine
requirement at M&Ms Swaraj tractor division. SEL has a current installed
capacity to manufacture 75,000 units of engines. The company is in the
midst of expanding its capacity to 105,000 units (to be commissioned by
Q2FY16). The company also manufactures hi-tech engine components for
commercial vehicles for SML Isuzu (erstwhile Swaraj Mazda). The
contribution to the topline, however, remains limited (<3%).
Exhibit 3: Engine sales; HP break-up
<=30 hp
10%
41-50 hp
40%
31-40 hp
50%
As far as segmental sales are concerned, SEL manufactures ~10%

engines catering to the <=30 hp tractor segment, ~50% engines catering
to the 31-40 hp tractor segment and ~40% engines catering to the 41-50
hp tractor segment. SELs margins vary across the hp segment with
margins more accretive in the higher hp segment.
Exhibit 4: Sales segmentation (FY16)
Net sales
| 523 crore in FY16
Engines
| 507 crore in FY16
(96.9%)
Engine components
| 2 crore in FY16
(0.4%)
Spare and others

| 14 crore in FY16
(2.7%)
Page 4
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 a CAGR of 6.3% in
FY07-16 to ~4.9 lakh units in FY16 (3.0 lakh units in FY08). Within
segments, main growth was witnessed in the segment of 41-50 hp, which
has grown at a CAGR of 15.2% to 2.3 lakh units over FY08-16 (73
thousand units in FY08). 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.
<= 30 hp & 31-40 hp, which are primarily meant for agricultural activities,
have grown at a CAGR of 0.0% & 2.1%, respectively, in FY08-16.
Exhibit 5: Domestic tractor sales
Category
<= 30 hp
31-40 hp
41-50 hp
>=50 hp
Total
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
53208 51214 68477 71721 82224 54506 70811 59866 53136
153338 152941 194488 214348 244431 233397 223302 202497 180972
73004 71414 94183 137180 143102 199130 308810 256270 226818
23398 29053 45438 59037 67134 40735 31228 32830 32838
302948 304622 402586 482286 536891 527768 634151 551463 493764
FY 08-16
CAGR
0.0
2.1
15.2
4.3
6.3
Source: Crisil, ICICIdirect.com Research
Exhibit 6: Domestic tractor sales (segmental share)

100
80
7.7
9.5
11.3
24.1
23.4
23.4
12.2
12.5
7.7
4.9
6.0
6.7
28.4
26.7
37.7
48.7
46.5
45.9
44.4
45.5
35.2
36.7
36.7
10.3
11.2
10.9
10.8
FY13
FY14
FY15
FY16
60
40
50.6
50.2
48.3
44.2
20
17.6
16.8
17.0
FY08
FY09
FY10
15.3
14.9
FY11
<= 30 hp
FY12
31-40 hp
41-50 hp
>=50 hp
In terms of composition, robust growth was seen in the 41-50 hp segment

leading to significant market share gains of 2200 bps to 45.9% in FY16
from 24.1% in FY08. On the other hand, a maximum drop in market share
was observed in the 31-40 hp segment wherein the percentage share
dropped 1400 bps to 36.7% in FY16 from 50.6% in FY08.
Going forward, on the back of favourable climatic activity over 2016 and
2017 we expect the domestic tractor industry to rebound with robust
sales, going forward. Long term growth of the domestic tractor industry
is, however, pegged at 8-10% (as per industry estimates) till FY19E
primarily on the back of the governments thrust on increasing crop yields
through greater farm mechanisation, increasing penetration of tractors in
low tractor density states mainly southern & western regions,
replacement demand from high tractor density states (mainly the
northern region) and a pick-up expected in domestic construction
industry. This will increase tractor demand for haulage/commercial
usages (non-farm usage comprises ~30% of tractor demand
domestically).
Page 5
Domestic tractor penetration; lower than global peers

The penetration of tractors is low in India in comparison to other
developed and developing countries with domestic penetration at a mere
0.8 hp/hectare vs. 9.8 hp per hectare in West Germany and 4.1 hp per
hectare in China. This, however, provides an opportunity for growth for
the domestic tractor industry, which has miles to go before it reaches its
summit. This bodes well for all tractor manufacturers domestically.
Exhibit 7: Tractor penetration across the globe (2011)
12
9.8
7.6
4.5
4.1
4.1
3.7
2
1.9
1.8
1.6
1.6
Vietnam
8.2
Thailand
hp/hectare
10
0.8
India
Korea
Turkey
USA
Poland
China
South Korea
France
Japan
UK
Italy
West
Germany
Mahindra & Mahindra leader domestically with dominant market share

Mahindra & Mahindra (M&M) is the market leader in the domestic tractor
market with a market share in excess of 40% in FY16, way above its
nearest competitor that has a market share of ~23% (TAFE). M&M has
grown its domestic tractor portfolio both organically as well as
inorganically with market share gains of ~1000 bps from 29.7% in FY08
to 41.3% in FY16. As far as segmental market share is concerned, M&M is
also the market leader in all segments (<= 30 hp, 31-40 hp, 41-50 hp &
>= hp segment).
Exhibit 8: Domestic tractor market share - Players
100
80
3.6
2.4
2.7
2.5
2.5
2.4
2.2
2.4
2.8
23.4
22.2
22.1
20.4
23.4
25.0
24.8
24.4
23.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
41.6
41.6
42.2
41.8
40.6
41.0
40.3
41.3
4.4
9.8
6.0
8.9
7.0
8.7
8.0
8.6
7.4
8.3
5.7
9.6
5.9
10.3
5.3
12.0
6.1
11.9
14.6
13.5
13.2
13.2
11.4
11.6
10.7
10.4
10.3
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
9.2
%
60
40
20
0
29.7
Escorts Ltd
International Tractors Ltd
Johndeere
Mahindra & Mahindra Ltd
New Holland India
Punjab Tractors Ltd.
TAFE
others
On the inorganic front, M&M had acquired Punjab Tractors (PTL) way
back in FY08. The erstwhile PTL owned the Swaraj brand, which was
ultimately acquired by M&M. M&M has over the years capitalised on the
brand recall of Swaraj and grown its portfolio.
Page 6
Swaraj - Trusted tractor brand; out performance warranted!

Exhibit 9: Domestic tractor sales- total and Swaraj
Sales growth of Swaraj Tractors has also exceeded the

industry growth rate in all previous years i.e. FY08-16. Even
in the years of negative volume growth rates for the
industry i.e. FY08, FY13 & FY16, volumes of Swaraj
Tractors recorded positive relative sales volume growth. In
FY16, on the back of a subdued demand scenario amid
subdued purchasing power of domestic farmers, volumes at
Swaraj brand de-grew 0.8% vs. industry de-growth of
10.5%
Particulars
Total Tractor Sales
YoY Growth
Units
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
unit 302948 304622 402586 482286 536891 527768 634151 551463 493764
%
-3.5
0.6
32.2
19.8
11.3
-1.7
20.2
-13.0
-10.5
Swaraj Engine Sales

Market Share
YoY Growth
unit
%
%
16408
5.4
-7.3
28539
9.4
73.9
39143
9.7
37.2
47413
9.8
21.1
55239
10.3
16.5
57377
10.9
3.9
74062
11.7
29.1
64595
11.7
-12.8
Total Swaraj Tractor

Sales*
Market Share
YoY Growth
unit
%
%
27871
9.2
11.0
33575
11.0
20.5
46051
11.4
37.2
55780
11.6
21.1
64987
12.1
16.5
67502
12.8
3.9
87132
13.7
29.1
75994 75397.6
13.8
15.3
-12.8
-0.8
64088
13.0
-0.8
Source: Crisil Research, Company, ICICIdirect.com Research

*Total Swaraj volume calculated by keeping share of SEL engines for Swaraj Tractors constant at 85% (Post FY08)
The market share of the Swaraj brand of tractors has increased from 9.2%
in FY08 to 15.3% in FY16 implying a gain in market share of ~600 bps
over an eight period. SEL i.e. Swaraj Engines is the supplier of engines
(meets ~85% of engine requirements) for the Swaraj brand of tractors.
Exhibit 10: SEL: Capacity, production & capacity utilisation trend

120000
105000
76655
75000
74786
42000
48015
40000
FY12
FY13
FY14
FY15
FY16
FY17E
60
40
20
0
0
FY11
Capacity
Production
FY18E
Capacity Utilization
Going forward, we expect sales volumes at SEL to grow

15.0% in FY16-18E to 84321 units in FY18E vs. 64088 units
company has commissioned the incremental capacity
capacity at 105000 units, which is sufficient to meet the
requirement over FY16-20E.
80.3 80
%
105000
64256
73.0
61.2
105000
84321
85.3
76.5
60000
20000
100
99.7
91.8
75000
57348
units
80000
In FY14, the company achieved 100% capacity utilisation
level (capacity: 75,000 units, production: 74,786 units) and
may sense the greater demand for the Swaraj brand of
tractors. Hence, SEL undertook an expansion plan wherein
the company is expanding its capacity from 75,000 units to
105,000 units at a cost of | 38 crore (to be completed by
Q2FY16). SEL also undertakes continuous innovation and
technology up gradation to meet the changing engine
requirements at the Swaraj division at M&M. 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.
120
114.3
75000
63994
100000
140
60000
55099
As per media sources, M&M plans to launch six new tractor

variants in the next three years in the domestic market, with
the launch equally spread between M&M and Swaraj Tractors.
New product launches in the Swaraj division bode well for SEL
with incremental engine requirements at the Swaraj Tractor
division to be met by SEL
Thus, on the back of a trusted promoter group that has a dominant

market share in the domestic tractor industry market, renewed focus on
increasing the market share of the Swaraj brand of tractors (with SEL
supplying ~85% of engine requirements at Swaraj Tractors), SEL is on a
strong footing. Hence, it is poised for a robust growth journey ahead.
SEL: expanding capacity; sales & profitability to follow
Post acquisition by M&M (i.e. post FY08), SEL has always operated at
optimal capacity utilisation levels with utilisation levels at 96.2% (average)
in FY10-15. During the aforesaid period, the company has undertaken
three expansion programmes wherein it first increased its capacity from
36,000 units to 42,000 units in FY11, then to 60,000 units in FY12 and then
finally to 75,000 units in FY13. All capacity additions were undertaken
under the supervision of the main promoter group i.e. M&M as and when
M&M sensed the greater demand for the Swaraj brand of tractors.
at a CAGR of
in FY16E. The
with current
sales volume
Page 7
Working capital - key hallmark of SEL!

SEL, after being acquired by M&M, 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 at SEL. This has resulted in strong cash flow generation for
the company with five year average CFO: EBITDA at 1.0x in FY12-16.
Exhibit 11: SEL: Net working capital days (break-up)
Exhibit 12: SEL: Net working capital days

50
60
30 25
22
27 26
27
38
42
38
30
36
30
28
22
10
30
35
30
19
20
10
35
20
10
-10
Debtor Days
Creditor Days
Exhibit 14: EPS, DPS & dividend payout
RoCE
RoE
RoIC
20
50
10
73.1
80
60
FY14
FY15
FY16
61.6
45.0
FY18E
30
73.9
54.2
40.0
FY17E
100
64.9
40
41.2
33.0
FY14
150
80.1
79.2
74.0
41.7
33.0
FY16
192
0
FY13
50
200
100
53.9
27.9
23.9
FY15
252 250
60
42.2
33.1
29.0
24.4
38.8
31.9
33.2
28.6
165
37.7
30.3
203
70
249
300
35.0
50
204
-18
Going forward, we assume nil net working capital days in FY16-18E.

Superior return ratios; excellent dividend yield!
The return ratio profile for SEL has been superior with five year average
RoCEs and RoEs at 33% and 28%, respectively in FY12-16. 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 at SEL, we expect return ratios to inch up in FY17E, FY18E.
The core return ratio i.e. RoICs has, however, been above 100% post
acquisition by M&M with five year average RoICs at 201% in FY12-16.
Exhibit 13: RoIC, RoCE & RoE trend
-1 FY14 FY15 FY16 FY17EFY18E

FY08 FY09 FY10 FY11 FY12 FY13
-5
-6
-6
-9
40
-30
|/share
Inventory Days
10
-20
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E
20
30
FY17E
FY18E
32
43
42
44.6
33.0
days
40
37 36
42
40
no of days
50
49
40
20
0
FY13
EPS
DPS
Payout Ratio
Dividend payout at SEL has been excellent with the companys average
dividend payout in the last five years (FY12-16) at ~65.8%. Since FY13,
SEL has been paying dividend per share in the range of | 33-35/share
primarily on the back of a debt free, cash rich balance sheet and absence
of any major capex plans. We expect this healthy dividend to continue,
going forward. This is primarily on the back of no major need for cash as
the ongoing capex programme is on the verge of completion, with
dividend/share expected at | 40/share & | 45/share in FY17E & FY18E,
respectively, thereby offering an remunerative dividend yield of ~3%.
Page 8
Revenues to grow at 14.7% CAGR in FY16-18E

We expect SEL to clock modest revenue growth at 14.7% CAGR in FY1618E to | 691.8 crore in FY18E (| 525.9 crore in FY16). We expect sales
volumes of engines at SEL to grow at a CAGR of 15.0% in FY16-18E to
84321 units in FY18E (64088 units in FY16). On the realisations front, we
expect realisations to be largely flat over FY16-18E.
80000
60000
units
| crore
500
400
300
40000
20000
200
100
80040
79636
78481
79157
64088
525.9
64595
539.7
82000
81500
81000
80500
80000
79500
79000
78500
78000
77500
77000
76500
FY15
FY16
84321
619.2
608.3
600
81641
81344
57377
700
100000
691.8
76655
800
FY14
FY15
FY16E
FY17E
FY13
FY18E
FY14
FY17E
Sales Volume
|/unit
Exhibit 16: Sales volume and realisation trend
74062
Exhibit 15: Sales trend
FY18E
Realization
For full year FY16, SEL reported volume de-growth at ~1% at 64088
units. Going forward, on a lower base amid positive monsoon
expectations, we expect sales volume growth of 15% CAGR in FY16-18E.
This would primarily be on the back of increasing sales of Swaraj Tractor
in low tractor density regions domestically and new product launches by
parent (M&M) under the Swaraj brand. The consequent engine demand
would flow down to SEL.
EBITDA, PAT to grow 24.6%, 22.2% CAGR, respectively, in FY16-18E
We expect EBITDA to grow at a CAGR of 24.6% in FY16-18E to | 114.1
crore in FY18E (| 73.6 crore in FY16), primarily on the back of sales
growth (15.0% CAGR) and improvement in EBITDA margins to the tune of
250 bps to 16.5% in FY18E (14.0% in FY16). On the PAT front, we expect
PAT to grow at a CAGR of 22.2% in FY16-18E to | 76.4 crore in FY18E
(| 51.1 crore in FY16). We expect EPS at | 54.2/share & | 61.6/share in
FY17E & FY18E, respectively.
Exhibit 18: PAT & EPS trend
FY14
FY15
FY16E
EBITDA (| crore)
FY17E
FY18E
EBITDA Margin (%)
41.7
50
30
20
50
41.2
40
67.3
60
40
61.6 60
54.2
53.9
76.4
70
51.2
20
80
51.8
14.0
70
90
67.0
13.8
99.8
40
73.6
60
74.7
14.9
90.6
| crore
80
114.1
16.1
17
17
16
16
15
15
14
14
13
13
12
| crore
100
16.5
120
30
20
10
10
FY14
FY15
FY16E
Net Profit (| crore)
FY17E
FY18E
EPS (|)
Page 9
|/share
Exhibit 17: EBITDA & EBITDA margins
Outlook and valuation

With timely expansion programmes (FY11; capacity increased from
36,000 units to 42,000 units; then to 60,000 units in FY12 and then finally
to 75,000 units in FY13) coupled with increasing market share of the
Swaraj brand of tractors (increased from 9.2% in FY08 to 13.8% in FY15)
and SEL being present in all major tractor hp segments, SEL is on a
strong footing. The company played a prominent role in expansion in
farm mechanisation domestically. Consequently, sales have grown at an
impressive CAGR of 23.2% in FY08-15 to | 539.7 crore in FY15 (| 125.4
crore in FY08) wherein its sales volume (engines) have grown at a CAGR
of 21.6% in FY08-15. However, FY16 was a subdued year for SEL
primarily on the back of the low purchasing power of domestic farmers
due to abnormal rains.
Analysing the rainfall pattern and its associated impact on domestic
tractor industry and consequent engine sales at SEL, it has been observed
that in every normal to above normal monsoon year (FY11, FY14)
following a deficient monsoon year (FY10, FY13), tractor sales have been
close to 20%. Going forward, therefore, given FY15 & FY16 were
monsoon deficient years and FY17E a normal monsoon year, we have
built in engine sales volume growth of 15% CAGR in FY16-18E.
SEL has a lean balance sheet with net cash of | 185 crore (FY16). Average
RoCEs and RoEs in the last five years (FY12-16) at SEL were at 33% and
28%, respectively. On the back of healthy tractor demand domestically in
H1FY17 amid normal monsoon 2016, we expect SEL to clock engine sales
volume CAGR of 15.0% over FY16-18E to 84321 units in FY18E (64088
units in FY16). We expect sales and PAT to grow at a CAGR of 14.7% and
22.2%, respectively, in FY16-18E. We have valued SEL at | 1540 i.e. 25x
P/E (1.1x PEG) on FY18E EPS of | 61.6. We continue to assign a BUY
rating on the stock.
Exhibit 19: Two year forward P/E (SEL currently trading at 21.9x)
1600
1400
1200
(|)
1000
800
600
400
200
Price
23x
21x
17x
15x
11x
9x
Jul-16
Jan-16
Jul-15
Jan-15
Jul-14
Jan-14
Jul-13
Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
6x
Source: Reuters, ICICIdirect.com Research
Page 10
Recommendation history vs. Consensus

1,400
100.0
1,200
80.0
60.0
800
(%)
(|)
1,000
40.0
600
20.0
400
200
0.0
Oct-14
Dec-14
Price
Mar-15
May-15
Idirect target
Aug-15
Oct-15
Consensus Target Mean
Dec-15
Mar-16
May-16
Aug-16
Oct-16
% Consensus with BUY
Source: Bloomberg, Company, ICICIdirect.com Research
Key events
Date/Year
2008
Event
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%
SEL undertakes and commissions a capacity expansion programme. Capacity increased from 36000 units annually to 42000 units. Engine production in FY11 was at
2011
~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
Top 10 Shareholders
Rank
1
2
3
4
5
6
7
8
9
10
Shareholding Pattern
Investor Name
Latest Filing Date % O/S
Mahindra Group
30-Jun-16
33.2
Kirloskar Group of Companies
30-Jun-16
17.4
DSP BlackRock Investment Managers Pvt.
30-Jun-16
3.2
PineBridge Investments Asset Manageme
30-Jun-16
2.7
Parikh (Reeta Keyur)
30-Jun-16
1.4
Jupiter Asset Management Ltd.
30-Jun-16
1.4
Shah (Vikram Chinubhai)
30-Jun-16
1.4
Catamaran Management Services Pvt. Ltd
30-Jun-16
1.3
Franklin Templeton Asset Management (In
30-Jun-16
1.3
SBI Funds Management Pvt. Ltd.
30-Jun-16
1.3
Position (mn)
4.1
2.2
0.4
0.3
0.2
0.2
0.2
0.2
0.2
0.2
Position Change (%)

0.0
0.0
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
(in %)
Promoter
FII
DII
Others
Sep-15 Dec-15 Mar-16 Jun-16 Sep-16

50.6
50.6
50.6
50.6
50.6
5.1
5.0
5.0
5.0
5.0
9.6
9.7
9.5
10.0
10.5
34.7
34.7
35.0
34.4
33.9
Recent Activity
Buys
Investor Name
DSP BlackRock Invt. Managers
L&T Investment Management Limited
Birla Sun Life Asset Mgmt Company Ltd.
Value (US$ million)

+1.2M
+0.9M
+0.0M
Sells
Shares (million) Investor Name
+0.1M Franklin Templeton Asset Mgmt (India)
+0.1M Goldman Sachs Asset Management (India)
+0.0M
Value (US$ million)

-0.7M
-0.0M
Shares (million)
-0.0M
-0.0M
Page 11
Financial summary
Profit and loss statement
(Year-end March)
Net Sales
Other Operating Income
Total Operating Income
Growth (%)
Raw Material Expenses
Employee Expenses
Power & Fuel Expense
Other Operating Expense
Total Operating Expenditure
EBITDA
Growth (%)
Depreciation
Interest
Other Income
PBT
Exceptional Item
Total Tax
PAT
Growth (%)
EPS (|)
| Crore
FY15
539.7
0.0
539.7
-11.3
409.1
30.8
0.0
25.1
465.0
74.7
-17.6
13.2
0.0
16.3
77.8
0.0
26.0
51.8
-22.7
41.7
FY16
525.9
0.0
525.9
-2.6
395.7
31.9
0.0
24.7
452.3
73.6
-1.5
13.8
0.0
16.3
76.0
0.0
24.9
51.2
-1.2
41.2
FY17E
619.2
0.0
619.2
17.7
459.6
28.3
0.0
31.5
519.4
99.8
35.7
16.2
0.0
18.1
101.8
0.0
34.5
67.3
31.5
54.2
FY18E
691.8
0.0
691.8
11.7
515.4
31.1
0.0
31.1
577.7
114.1
14.4
16.7
0.0
16.7
114.1
0.0
37.7
76.4
13.6
61.6
Cash flow statement

(Year-end March)
Profit after Tax
Add: Depreciation
(Inc)/dec in Current Assets
Inc/(dec) in CL and Provisions
Others
CF from operating activities
(Inc)/dec in Investments
(Inc)/dec in Fixed Assets
Others
CF from investing activities
Issue/(Buy back) of Equity
Inc/(dec) in loan funds
Dividend paid & dividend tax
Inc/(dec) in Share Cap
Others
CF from financing activities
Net Cash flow
Opening Cash
Closing Cash
| Crore
FY15
51.8
13.2
16.5
-10.4
0.0
71.1
30.2
-16.1
-0.6
13.5
0.0
0.0
-49.3
-0.2
0.0
-49.6
35.0
104.9
139.9
FY16
51.2
13.8
5.0
8.1
0.0
78.0
31.6
-27.3
1.3
5.7
0.0
0.0
-49.3
0.1
0.0
-49.3
34.4
139.9
174.3
FY17E
67.3
16.2
-26.2
0.8
0.0
58.0
-5.0
-5.0
0.0
-10.0
0.0
0.0
-59.6
0.0
0.0
-59.6
-11.6
174.3
162.7
FY18E
76.4
16.7
-9.3
7.6
0.0
91.5
-10.0
-10.0
0.0
-20.0
0.0
0.0
-67.1
0.0
0.0
-67.1
4.4
162.7
167.1
FY15
FY16
FY17E
FY18E
41.7
52.3
170.8
33.0
146.5
41.2
52.3
172.4
33.0
148.7
54.2
67.2
178.5
40.0
143.4
61.6
75.0
186.1
45.0
155.0
13.8
9.6
22.4
4.6
35.8
14.0
9.7
19.3
5.2
42.3
16.1
10.9
30.0
5.0
35.0
16.5
11.1
30.0
5.0
35.0
24.4
29.0
247.4
23.9
27.9
250.2
30.3
37.7
228.7
33.1
42.2
295.8
32.4
20.0
2.8
3.1
7.9
32.8
20.3
2.8
3.2
7.8
24.9
15.0
2.4
2.7
7.6
21.9
13.0
2.1
2.4
7.3
0.0
0.0
0.5
0.2
0.0
0.0
0.4
0.2
0.0
0.0
0.7
0.2
0.0
0.0
0.7
0.2
Balance sheet
| Crore
(Year-end March)
Liabilities
Equity Capital
Reserve and Surplus
Total Shareholders funds
Total Debt
Deferred Tax Liability
Minority Interest / Others
Total Liabilities
FY15
FY16
FY17E
FY18E
12.4
199.7
212.1
0.0
6.3
0.0
218.4
12.4
201.6
214.1
0.0
7.6
0.0
221.7
12.4
209.3
221.7
0.0
7.6
0.0
229.3
12.4
218.7
231.1
0.0
7.6
0.0
238.7
Assets
Gross Block
Less: Acc Depreciation
Net Block
Capital WIP
Total Fixed Assets
Investments
Inventory
Debtors
Loans and Advances
Other Current Assets
Cash
Total Current Assets
Current Liabilities
Provisions
Current Liabilities & Prov
Net Current Assets
Others Assets
Application of Funds
163.4
79.6
83.8
4.8
88.6
42.0
33.1
6.9
9.2
5.6
139.9
194.7
53.0
53.9
106.9
87.7
0.0
218.4
193.6
91.8
101.8
0.3
102.1
10.4
27.8
7.5
7.5
7.1
174.3
224.1
60.9
54.1
115.0
109.1
0.0
221.7
198.9
108.0
90.9
0.0
90.9
15.4
50.9
8.5
9.3
7.4
162.7
238.8
59.4
56.4
115.8
123.0
0.0
229.3
208.9
124.8
84.2
0.0
84.2
25.4
56.9
9.5
10.0
9.0
167.1
252.5
66.3
57.1
123.4
129.1
0.0
238.7
Key ratios
(Year-end March)
Per share data (|)
EPS
Cash EPS
BV
DPS
Cash Per Share (Incl Invst)
Operating Ratios (%)
EBITDA Margin
PAT Margin
Inventory days
Debtor days
Creditor days
Return Ratios (%)
RoE
RoCE
RoIC
Valuation Ratios (x)
P/E
EV / EBITDA
EV / Net Sales
Market Cap / Sales
Price to Book Value
Solvency Ratios
Debt/EBITDA
Debt / Equity
Current Ratio
Quick Ratio
Page 12
RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com 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;
Head Research
Pankaj Pandey
pankaj.pandey@icicisecurities.com
ICICIdirect.com Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai 400 093
research@icicidirect.com
Page 13
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research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific
recommendation(s) or view(s) in this report.
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SwarajEngines ICICI Q2FY17

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SwarajEngines ICICI Q2FY17

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Result Update

October 25, 2016

Swaraj Engines (SWAENG)

Best placed to play agri theme...

Changed from | 1320 to | 1540

Q2FY16 YoY (%)

Q1FY17 QoQ (%)

ICICI Securities Ltd | Retail Equity Research

Swaraj Engines (SEL) reported a robust Q2FY17 performance with

Other Operating Income

Total Raw Material Expenses

Other operating expense

EBITDA Margin (%)

14.8 147 bps

Engine Realizations (|/unit)

Q2FY16 YoY (%)

Q1FY17 QoQ (%)

16.5 -17 bps

RM as a percentage of sales came in at 74.2%

Margins came in higher-than-expected largely on account of lower raw

Other income came in at a tad higher than expectation. The company

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

Engine Net Sales

Engine Sales Volume

ICICI Securities Ltd | Retail Equity Research

Monsoon 2016 Update: Normal at 97% of LPA

Exhibit 1: India Map Monsoon 2016 distribution

Rainfall was muted at the start of the season with rainfall in

Source: IMD, ICICIdirect.com Research

Domestic tractor industry to benefit!!

Source: IMD, Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Analysing the rainfall pattern and its associated impact on domestic

Exhibit 3: Engine sales; HP break-up

Source: Company, ICICIdirect.com Research

As far as segmental sales are concerned, SEL manufactures ~10%

Spare and others

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Domestic tractor market on strong footing; penetration set to increase

Source: Crisil, ICICIdirect.com Research

Exhibit 6: Domestic tractor sales (segmental share)

Source: Crisil, ICICIdirect.com Research

In terms of composition, robust growth was seen in the 41-50 hp segment

ICICI Securities Ltd | Retail Equity Research

Domestic tractor penetration; lower than global peers

Source: Crisil, ICICIdirect.com Research

Mahindra & Mahindra leader domestically with dominant market share

International Tractors Ltd

Mahindra & Mahindra Ltd

New Holland India

Punjab Tractors Ltd.

Source: Crisil, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Swaraj - Trusted tractor brand; out performance warranted!

Sales growth of Swaraj Tractors has also exceeded the

Swaraj Engine Sales

Total Swaraj Tractor

Source: Crisil Research, Company, ICICIdirect.com Research

Exhibit 10: SEL: Capacity, production & capacity utilisation trend

Source: Company, ICICIdirect.com Research

Going forward, we expect sales volumes at SEL to grow