Swaraj Engine - Good opportunity with 3-5 years perspective
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 Kirloskar Oil Engines Ltd., now known as Kirloskar Industries Ltd. Originally set up to manufacture engines for PTL, 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.
Industry Analysis
Despite a low penetration level of tractors, Indian tractor market is one of the largest markets in the world in terms of sales volume. The domestic tractor industry is fragmented, with about 13 national players and some regional players.
The domestic tractor market is traditionally segmented by horsepower into the low horsepower 20 HP - 30 HP segment, the mid-segment of 30 - 40 HP and the higher segment of above 40 HP. Most of the major players cater to all the three segments. However, their relative strengths and market positions differ from segment to segment.
M&M, which designs, develops, manufactures and markets tractors for Indian and overseas markets is the largest manufacturer of tractors in India and has sustained its market leadership in the Indian tractor market for over 27 years. The consolidated market share of the Farm Equipment Sector of M&M is now 41.1% of the domestic market.
Competition
At present, Swaraj Engines business is primarily limited to supplying engines to Swaraj tractors. But with change in ownership to M&M, I expect some move towards utilizing unutilized capacity either by expanding product portfolio or supplying the engines to other brand of tractors.
So far, except oblique hint management has not specified anything in this regards but M&M is definitely started the process of rationalizing its portfolio.
Financial Performance
Swaraj Engine has maintained pristine balance sheet over a decade. It has maintained RoNW and RoE in the excess of 20% over a decade.
Increased year-end inventories and due to creditors to Rs. 19.91 and 24.83 crores from 12.77 and 12.93 crores respectively due to increase in inventory of raw materials to support enhanced production level bodes well for coming years.
Industrial relations were cordial throughout the year under review and Company has also concluded new 4 year wage agreement with the workers. Employee strength as on 31st March, 2010 stood at 379 (31st March, 2009 - 285).
Management
a. Capital Allocation – The company has maintained pristine balance sheet over a decade and maintained RoE and RoNW over 25%. The mananement has also grown the net worth at around 13% over a decade. Return on RoNW dipped to around 20% in the year 07-08 and 08-09 but increased to around 30% in the year 09-10.
b. Leadership – The leadership, in true sense, has not really been tested as it is captive plant for Swaraj tractor. But within its limited domain, it has maintained a pristine company and one of the most efficient manufacturers of tractor engine.
c. Incentive – The compensation of the management is very reasonable and accounting practices appears to be very conservative.
Conclusion
The company has grown it revenue around 8% over last decade and profitability has also increased at around similar CAGR. The company has the capacity to increase its production by over 50% without making additional capital expenditure. With change in ownership and organization alignment of tractor division under Pawan Goenka I expect the move to leverage the unutilized capacity. The stock is trading at around PE 13 (TTM) and it fairly priced as year 09-10 has been one of best year for company. But with M&M has much better prospect and Q-1 result for the current year is indication towards better years ahead. Many positive factors are converging to improve the prospect of industry.
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.
Industry Analysis
Despite a low penetration level of tractors, Indian tractor market is one of the largest markets in the world in terms of sales volume. The domestic tractor industry is fragmented, with about 13 national players and some regional players.
The domestic tractor market is traditionally segmented by horsepower into the low horsepower 20 HP - 30 HP segment, the mid-segment of 30 - 40 HP and the higher segment of above 40 HP. Most of the major players cater to all the three segments. However, their relative strengths and market positions differ from segment to segment.
M&M, which designs, develops, manufactures and markets tractors for Indian and overseas markets is the largest manufacturer of tractors in India and has sustained its market leadership in the Indian tractor market for over 27 years. The consolidated market share of the Farm Equipment Sector of M&M is now 41.1% of the domestic market.
Competition
At present, Swaraj Engines business is primarily limited to supplying engines to Swaraj tractors. But with change in ownership to M&M, I expect some move towards utilizing unutilized capacity either by expanding product portfolio or supplying the engines to other brand of tractors.
So far, except oblique hint management has not specified anything in this regards but M&M is definitely started the process of rationalizing its portfolio.
Financial Performance
Swaraj Engine has maintained pristine balance sheet over a decade. It has maintained RoNW and RoE in the excess of 20% over a decade.
Increased year-end inventories and due to creditors to Rs. 19.91 and 24.83 crores from 12.77 and 12.93 crores respectively due to increase in inventory of raw materials to support enhanced production level bodes well for coming years.
Industrial relations were cordial throughout the year under review and Company has also concluded new 4 year wage agreement with the workers. Employee strength as on 31st March, 2010 stood at 379 (31st March, 2009 - 285).
Management
a. Capital Allocation – The company has maintained pristine balance sheet over a decade and maintained RoE and RoNW over 25%. The mananement has also grown the net worth at around 13% over a decade. Return on RoNW dipped to around 20% in the year 07-08 and 08-09 but increased to around 30% in the year 09-10.
b. Leadership – The leadership, in true sense, has not really been tested as it is captive plant for Swaraj tractor. But within its limited domain, it has maintained a pristine company and one of the most efficient manufacturers of tractor engine.
c. Incentive – The compensation of the management is very reasonable and accounting practices appears to be very conservative.
Conclusion
The company has grown it revenue around 8% over last decade and profitability has also increased at around similar CAGR. The company has the capacity to increase its production by over 50% without making additional capital expenditure. With change in ownership and organization alignment of tractor division under Pawan Goenka I expect the move to leverage the unutilized capacity. The stock is trading at around PE 13 (TTM) and it fairly priced as year 09-10 has been one of best year for company. But with M&M has much better prospect and Q-1 result for the current year is indication towards better years ahead. Many positive factors are converging to improve the prospect of industry.
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