India Equity Value investor, Trivikram Consultants

Prashant Vaishampayan

India Equity Value investor

Picking Long Term Multi-bagger stocks

Trivikram Consultants

Trivikram Consultants is an equity research service founded by Prashant Vaishampayan, a registered Research Analyst with SEBI in India. Prashant has done equity research since 1992.  He worked with Jardine Fleming, SG Securities, UBS and Kotak Securities. Since 2010, he is managing his portfolio and doing outsourced equity research for institutional clients. A team of six professionals helps him in equity research. We focus on pharma, agro-chemicals, auto and auto components, banks and financial services, specialty chemicals and niche manufacturing sectors.   

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/13219" target="_blank" data-smartkarma-citation="entities:13219:1">Swaraj Engines (SWE IN)</a> (SEL)is primarily manufacturing diesel engines for fitment into Swaraj tractors manufactured by Mahindra &amp; Mahindra Ltd. (M&amp;M). The Company is also supplying engine components to SML Isuzu Ltd used in the assembly of commercial vehicle engines. SEL was started as a joint venture between Punjab Tractor Ltd (now acquired by M&amp;M Ltd) and Kirloskar Oil Engines Ltd. M&amp;M holds 33.3% stake in SEL and is its key client.  
We are positive about the business because:
<ul class="">
<li>SEL's growth is correlated with M&amp;M's tractor business growth. SEL supplies engines to the Swaraj division of M&amp;M. M&amp;M expects tractor growth to be around 12% YoY in FY19E. We forecast SEL's tractor engine volumes will grow at a CAGR of 12% for FY18-21E.</li>
<li>The growth of the company is dependent on the monsoon and rural sentiments. We expect the profitability to improve with normal rainfall and government initiatives towards the rural sector. We expect the revenue/ EBITDA/ PAT CAGR for FY18-21E to be 14%/ 15%/ 14% respectively.</li>
<li>SEL is debt free and a cash generating company. It has a healthy and stable ROCE and ROE. SEL has increased its capacity from 75,000 engines in FY16 to 120,000 engines in FY18. We expect the capacity utilisation to reach 97% by FY20E from 90% in 1HFY19. SEL funds its capex through internal accruals. We forecast a capex of Rs 600 mn for FY19E to FY21E considering the requirement of the additional capacity, R&amp;D and testing costs for new and higher HP engines &amp; for upgradation of engines according to the TREM IV emission norms for &gt;50 HP engines.</li>
</ul>
We initiate coverage on SEL with a fair value objective of Rs 1,655/- over the next 12 months. This represents a potential upside of 15% from the closing price of Rs 1,435/- (as on 26-12-2018). We arrive at the fair value by applying PE multiple of 18x to EPS of Rs 87/- to the year ending December-20E and add cash of Rs 82/- per share. While the business outlook is good, we think the upside in the share price is limited due to rich valuation. 
<table class="table table-striped">
<tbody>
<tr>
<td>
Particulars (Rs mn) (Y/E March)
</td>
<td style="text-align: right;">
FY18
</td>
<td style="text-align: right;">
FY19E
</td>
<td style="text-align: right;">
FY20E
</td>
<td style="text-align: right;">
FY21E
</td>
</tr>
<tr>
<td>
Revenue
</td>
<td style="text-align: right;">
 7,712 
</td>
<td style="text-align: right;">
 9,210 
</td>
<td style="text-align: right;">
 10,478 
</td>
<td style="text-align: right;">
 11,525 
</td>
</tr>
<tr>
<td>
PAT
</td>
<td style="text-align: right;">
 801 
</td>
<td style="text-align: right;">
 906 
</td>
<td style="text-align: right;">
 1,063 
</td>
<td style="text-align: right;">
 1,190 
</td>
</tr>
<tr>
<td>
EPS (Rs)
</td>
<td style="text-align: right;">
 64.5 
</td>
<td style="text-align: right;">
 74.8 
</td>
<td style="text-align: right;">
 87.6 
</td>
<td style="text-align: right;">
 98.1 
</td>
</tr>
<tr>
<td>
PE (x)
</td>
<td style="text-align: right;">
 22.3
</td>
<td style="text-align: right;">
 19.2
</td>
<td style="text-align: right;">
 16.4
</td>
<td style="text-align: right;">
 14.6
</td>
</tr>
</tbody>
</table>
<div class="content-caption">Source: SEL Annual Report FY18, Trivikram Consultants Research as on 26-12-2018</div>
<div class="content-remarks">
Note: E= Estimates
</div>

Swaraj Engines (SWE IN) (SEL)is primarily manufacturing diesel engines for fitment into Swaraj tractors manufactured by Mahindra &amp; Mahindra Ltd. (M&amp;M). The Company is also supplying engine components to SML Isuzu Ltd used in the assembly of commercial vehicle engines. SEL was started as a joint venture between Punjab Tractor Ltd (now acquired by M&amp;M Ltd) and Kirloskar Oil Engines Ltd. M&amp;M holds 33.3% stake in SEL and is its key client.  
We are positive about the business because:

SEL's growth is correlated with M&amp;M's tractor business growth. SEL supplies engines to the Swaraj division of M&amp;M. M&amp;M expects tractor growth to be around 12% YoY in FY19E. We forecast SEL's tractor engine volumes will grow at a CAGR of 12% for FY18-21E.
The growth of the company is dependent on the monsoon and rural sentiments. We expect the profitability to improve with normal rainfall and government initiatives towards the rural sector. We expect the revenue/ EBITDA/ PAT CAGR for FY18-21E to be 14%/ 15%/ 14% respectively.
SEL is debt free and a cash generating company. It has a healthy and stable ROCE and ROE. SEL has increased its capacity from 75,000 engines in FY16 to 120,000 engines in FY18. We expect the capacity utilisation to reach 97% by FY20E from 90% in 1HFY19. SEL funds its capex through internal accruals. We forecast a capex of Rs 600 mn for FY19E to FY21E considering the requirement of the additional capacity, R&amp;D and testing costs for new and higher HP engines &amp; for upgradation of engines according to the TREM IV emission norms for &gt;50 HP engines.

We initiate coverage on SEL with a fair value objective of Rs 1,655/- over the next 12 months. This represents a potential upside of 15% from the closing price of Rs 1,435/- (as on 26-12-2018). We arrive at the fair value by applying PE multiple of 18x to EPS of Rs 87/- to the year ending December-20E and add cash of Rs 82/- per share. While the business outlook is good, we think the upside in the share price is limited due to rich valuation. 




Particulars (Rs mn) (Y/E March)


FY18


FY19E


FY20E


FY21E




Revenue


 7,712 


 9,210 


 10,478 


 11,525 




PAT


 801 


 906 


 1,063 


 1,190 




EPS (Rs)


 64.5 


 74.8 


 87.6 


 98.1 




PE (x)


 22.3


 19.2


 16.4


 14.6




Source: SEL Annual Report FY18, Trivikram Consultants Research as on 26-12-2018

Note: E= Estimates


Swaraj Engines: Positive Outlook But Growth Is Slowing and Valuation Is Rich