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Powering the strong “Swaraj” brand SEL, probably one of the best proxies on the tractor growth story, should be a key beneficiary of the recent structural change in the tractors market. We believe that there is a possibility of SEL merging with Swaraj tractors, now part of M&M FES division, or becoming a part of the much bigger engine ecosystem at M&M. The Swaraj brand of tractors, consumer of SEL’s products, has seen remarkable improvement in operations and market share post acquisition by M&M; it today commands 14% market share up from 9% in FY08. Zero debt and superior return ratios will help it withstand adverse business cycles. We are above-consensus on earnings and target price for this relatively thinly-covered stock.

SEL can be part of a much bigger entity and get the required scale: We believe that as a logical long term outcome, SEL will either be merged with the operations of Swaraj tractors, part of M&M FES division (in line with the structure followed by other tractor manufactures, integrated unit with in-house engine facility) or will have the chance to become part of much bigger engine ecosystem at M&M (logical to have related engines business under one umbrella). This is subject to M&M successfully taking 17.39% stake from Kirloskar Industries, the other large shareholder of SEL.

Market checks suggest underlying drivers for tractor demand intact: Our interaction with tractor dealers, financiers and recent data points related to agriculture/tractor sector largely validate our view on tractor industry and make us believe that factors such as increasing use for non-farm (commercial) purposes, shortening of replacement cycle, rising rural income and shortage of labour would continue to support volume growth. Further, the current penetration level for tractors in India is much lower than in developed and other emerging economies. Hence, we expect the industry to grow at ~10-12%, in line with growth in FY10-13 (higher than the growth in the last decade).

A proxy on structural shift seen in tractor industry in India, Swaraj brand getting better foothold: While industry drivers continue to remain favourable for the domestic tractor industry, growth of SEL is directly linked to the underlying growth of Swaraj Brand as it caters to ~80% of Swaraj tractor’s engine requirements. Since the takeover by M&M, there has been a complete turnaround in the fate of ‘Swaraj’ brand of tractors, with attendant positive impact on SEL. While Swaraj tractors had slipped to 5th place with 9% market share before the acquisition by M&M in 2007, it now commands a market share of 14% and ranks 3rd behind M&M tractors and TAFE.

Valuation and key risks: We have valued the company at 11x FY16E EPS (mean+sd1) as we believe that strong earnings, return ratios and the ability to generate free cash flow with strong FCF yield at 6% ( average for past 5 years) can engender a further re-rating of the stock. The absence of a direct comparable (other engine companies are diversified) can ensure that the stock trades at a premium to other auto-ancillaries. We arrive at a price target of Rs790, an upside of 39% from the CMP. Key risks to our thesis are: a) Dependence on single customer i.e. Swaraj brand, and b) Drought in the forecasted period.

Target Price Rs790 Key Data

CMP* Rs569 Bloomberg Code SWE IN

Upside 39% Curr Shares O/S (mn) 12.4

Diluted Shares O/S(mn) 12.4

Mkt Cap (Rsbn/USDmn) 7.1/114.1

Price Performance (%)* 52 Wk H / L (Rs) 627/365.8

1M 6M 1Yr 5 Year H / L (Rs) 627/66.4

SWE IN 3.1 14.5 23.9 Daily Vol. (3M NSE Avg.) 6190

NIFTY 0.5 7.0 5.5

*as on 17 December 2013; Source: Bloomberg, Centrum Research

Shareholding pattern (%)

Sep-13 Jun-13 Mar-13 Dec-12

Promoter 50.6 50.6 50.6 50.6

FIIs 1.9 1.5 1.5 1.5

DIIs 10.4 10.6 10.9 12.1

Others 37.1 37.3 37.0 35.8

Source: BSE

Swaraj brand of tractors gaining market share

Source: Company, Centrum Research Estimates

Centrum vs. Bloomberg Consensus*

FY14E FY15E

Particulars (Rs mn)

Centrum BBG Var (%) Centrum BBG Var (%)

Sales 5,770 5,787 (0.3) 6,647 6,410 3.7

EBITDA 871 895 (2.7) 1,015 1,000 1.5

PAT 656 658 (0.3) 766 727 5.4

*as on 19 October2013; Bloomberg Consensus Centrum

Target Price (Rs)

Variance (%) BUY SELL HOLD Target Price

(Rs)

7 0 2 607 790 30.1

*as on 17 December 2013; Source: Bloomberg, Centrum Research

Ajay Shethiya, [email protected]

91 22 4215 9855

Y/E Mar (Rsmn) Revenue YoY (%) EBITDA EBITDA (%) Adj. PAT YoY (%) Adj. EPS (Rs) RoE (%) RoCE (%) P/E (x) EV/EBITDA (x)

FY12 4,486 24.4 697 15.5 532 21.1 42.8 31.4 31.5 13.3 9.1

FY13 4,790 6.8 714 14.9 554 4.1 44.6 29.1 29.2 12.8 8.8

FY14E 5,770 20.5 871 15.1 656 18.5 52.8 30.5 30.5 10.8 7.1

FY15E 6,647 15.2 1,015 15.3 766 16.8 61.7 29.3 29.4 9.2 6.0

FY16E 7,660 15.2 1,183 15.4 888 16.0 71.5 28.2 28.2 7.9 5.0


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YTDF

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(%)

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nits

)

Swaraj brand domestic vol's (LHS) Swaraj market shr (%) (RHS)

Automobiles Buy

Initiating Coverage 18 December 2013

INDIA

Swaraj Engines

Centrum Equity Research is available on Bloomberg, Thomson Reuters and FactSet

Table of Contents

Crystal gazing and scenario analysis…………………………………………………….... 03

Scenario 1: SEL can be merged with Swaraj tractors ………………………………… 03

Scenario 2: SEL can be part of the overall engine ecosystem at M&M……………….. 04

SEL to leverage on strong Swaraj brand of tractors……………………………………… 06

Strong fundamentals to help withstand adverse business cycles………………………. 08

Structural change in the tractor industry likely to continue …………………………….. 09

A long term proxy on tractor growth story in India……………………………………… 10

Financial Outlook …………………………………………………………………………. 13

Valuation and recommendation…………………………………………………………. 16

Company Background……………………………………………………………….……. 17

Financial Summary………………………………………………………………………... 19

2 Swaraj Engines

Crystal gazing and scenario analysis Swaraj brand of tractors were originally promoted by Punjab Tractors Ltd (PTL). PTL had 33.16% stake in Swaraj Engines and Kirlosakar Industries, 17.39%. In June’07, PTL was acquired by Mahindra and Mahindra (M&M) and M&M ended up owning “Swaraj” brand of tractors and 33.22% stake in Swaraj Engines while Kirloskar Industries continued to be the co-promoter with 17.39% stake. Since the takeover of PTL by M&M, there’s been complete turnaround in the fate of “Swaraj” brand of tractors and the same has also rubbed off on Swaraj Engines. While Swaraj tractors had slipped to 5th place with 9% market share before the acquisition by M&M in 2007, it now commands a market share of 14% (YTDFY14) and ranks 3rd behind M&M tractors and TAFE.

We believe that in the long term as a logical outcome, SEL will either be merged with the operations of Swaraj tractors, part of M&M FES division (in line with the structure followed by other tractor manufactures, integrated unit with in-house engine facility) or will have the chance to become part of much bigger engine ecosystem at M&M (logical to have related engines business under one umbrella). This is subject to M&M successfully taking 17.39% stake from Kirloskar Industries.

The two scenarios presented in the report are not the facts and do not reflect our definite view of how the future will, in fact, develop. But knowing our limits should not prevent us stretching our thoughts and considering what might transpire. The scenario analysis for SEL is based on what we think can be a reasonable outcome based on the current structure of the industry and synergies of different engine verticals at M&M.

Scenario 1: SEL can be merged with Swaraj tractors

A look at the operations of existing tractor companies suggests that most have engine operations that are integrated and a part of core operations are housed in the same facility. SEL’s engine operations are separate (also a separately listed entity) from core operations and not integrated with its tractor manufacturing facility.

Exhibit 1: Current format indicates integrated manufacturing facility for tractor manufactures

Source: Industry, Company, Centrum Research

In recent times, we have seen Maruti Suzuki India Limited (MSIL) merging its engine division (Suzuki Powertrain India Limited in which MSIL had 30% holding) with its core operations to take advantage of better integration and flexible production based on market needs.

We see following advantage for M&M to bring SEL under its fold

M&M can benefit from common raw material sourcing. It can have greater flexibility and control over the operations of SEL. It has set up a new tractor plant with an annual capacity of 100k units at Zaheerabad to cater to tractor requirements of both brands – Mahindra and Swaraj. We believe it is logical for M&M to have integrated engine facility.

Companies Agricultural Tractors/Engines

Industrial Equipment’s

DG Sets Remarks

TAFE Yes - Yes

Along with the Eicher tractor division, TAFE also acquired Eicher’s engine plant at Alwar (Rajasthan). Diesel engines from the Alwar plant find a variety of automotive, genset and industrial applications including telecom and retail sectors.

M&M Yes Yes Yes

M&M has an in-house engine plant with manufacturing capacity of ~300k units and is currently housed under FES (Farm Equipment Sector) division and is part of the listed M&M entity.

New Holland Yes - -

Escorts Yes Yes Yes Escorts has an in-house engine plant and is part of the listed Escorts entity.

Sonalika Yes - Yes

Sonalika has tractor assembly line equipped with a capacity of 80,000 tractors and engines per year. The plant has in house facilities for producing transmission hydraulic components and engines.

3 Swaraj Engines

Scenario 2: SEL can be part of the overall engine ecosystem at M&M

As seen from the Exhibit 1, most tractor manufacturing companies have their presence across the value chain of engines. We believe that diversification into DG sets/Industrial engines is a logical extension of the engine vertical. In the long run, we see the possibility of M&M merging its Powerol (currently housed under FES division), Mahindra Heavy engines and SEL. The Powerol business has seen a substantial increase in its revenues. M&M entered the field of Power Generation in FY-02. Today, the engines under the brand name Mahindra Powerol are powering Diesel Generating sets from a rating 5kVA to 500 kVA.

Overview of the Powerol business

The Powerol brand of M&M today has revenues of Rs10bn and has been continuously adding products to its line of business to make it more diversified, offering a range of products and services to boost its revenues. Over a period of time, it has expanded itself into DG sets, Inverters, home UPS and batteries. Since FY02, Mahindra Powerol has sold over 270,000 Diesel Generators & Industrial Engines. Further, it has also started undertaking turnkey projects for DG sets from 500kVA to 3000kVA and has introduced DGs with Mahindra Heavy engines up to a range of 200kVA with CRDi technology.

Exhibit 2: Revenue trend for M&M’s Powerol business

Source: Company, Centrum Research, FY11 is based on our estimates

Exhibit 3: Increasing value addition to products: Complimentary business share technology, customers and service channel

Source: Cummins company presentation, Centrum research

As shown in the above chart, we believe that it is more logical to have the entire value chain of the engine business under one umbrella and it makes sense for M&M to house related engines vertical as one entity. As a result, we believe that SEL, Powerol and MHEPL would share commonality.

1,240

3,270

5,690

10,100 10,090

6,500

8,700

10,000

-

2,000

4,000

6,000

8,000

10,000

12,000

FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013

(Rs mn)

4 Swaraj Engines

Exhibit 4: Huge opportunity for Powerol business

Genset The genets sector has a market size of 112k (in volumes) and revenue of around Rs.70bn. Mahindra Powerol today ranks number two in terms of volumes and enjoy a number three position in terms of revenues.

Source: Industry, Centrum research

Overview of the Mahindra Heavy Engines

After the termination of the JV agreement between Mahindra & Mahindra Ltd and International Truck and Engine Mauritius Holding Ltd, Mahindra Heavy Engines Pvt Ltd (MHEPL) is now a 100% subsidiary of Mahindra & Mahindra. MHEPL was set up to service the engine requirement for M&M’s M&HCV business. The installed capacity of the plant is 45,000 engines/ annum. We believe that MHEPL can play a vital role in the entire engine ecosystem of M&M especially Powerol brand. We understand that Powerol has introduced DGs with Mahindra Heavy engines up to a range of 200kVA with CRDi technology.

Exhibit 5: M&M Powerol has launched DG sets using MHEPL engines

Parameter Unit Specifications

Prime Genset Rating kVA 62.5/82.5/100 125/140/160 180/200

Engine model 4.12 TCA 6.12 TCA 6.12 TCE

Dry weight (basic engine) kg 354 610 610

Source: Company, Centrum Research

Exhibit 6: Financial summary : MHEPL Particulars ( Rsmn) FY2010 FY2011 FY2012 FY2013

Revenue from operations (Gross) - 467 1,266 1,174

Less: Excise Duty - 49 102 118

Revenue from operations (Net) - 418 1,165 1,056

Cost of materials consumed - 509 914 830

Change in stock - (66) 22 7

Total raw material cost - 442 937 837 - % of sales 105.9 80.4 79.3

Staff cost 41 106 172 193

- % of sales

25.5 14.8 18.3

Other expenses 58 199 347 250

- % of sales 47.7 29.8 23.7

Total Expenditure 99 748 1,455 1,281

EBITDA (99) (330) (291) (224) EBITDA margin (%) (79.0) (25.0) (21.3)

Other Income 3 3 3 3

Finance costs 1 70 174 203

Depreciation and amortization expense 43 153 186 195

PBT (140) (551) (648) (619)

Tax (1) - - -

PAT (141) (551) (648) (619)

Total equity Investments

1,963

Total Accumulated losses (1,958)


Import content in FY13 stood at 11% vs. 26% in FY12. Due to effective localisation efforts, it is expected that import content will be less than 5% in FY14E. - MHEPL AR FY13

5 Swaraj Engines

SEL to leverage on strong Swaraj brand of tractors

Currently SEL caters to ~80% of engine requirement of Swaraj brand of tractors (now part of M&M FES division). While the industry drivers continue to remain favourable for the domestic tractor industry (refer pg 10 for details), the growth of SEL is directly linked to the underlying growth of Swaraj brand. Based on our interaction with dealers, we understand that Swaraj tractors commands a strong brand equity in the domestic tractor industry, also reflected from the fact that it scores highest in the overall customer satisfaction index, even better than M&M brand and has prestigious DEMING award to its credit. It is encouraging to note that Swaraj brand has been able to steadily increase its market share in the domestic tractors segment and currently commands 14% market share.

M&M acquired Punjab Tractors (PTL, Swaraj brand of tractors) from PE players in 2007 for Rs13.7bn (US$300m). PTL was losing share, had high dealer stock levels of 12,000 tractors (about 50% of capacity) and had a high level of receivables of 189 days at end of FY07. Post the acquisition, almost four years down the line, M&M has successfully turned around PTL. Swaraj brand today commands a market share of 14% in the domestic tractor industry, up from 9% in FY08.

Exhibit 7: Steps taken by M&M to turnaround Swaraj brand

Source: Media Articles, Management interviews, Centrum Research

Exhibit 8: Market share gains visible Exhibit 9: Swaraj now score better on CSI* vs. M&M

Source: TMA, Industry, Centrum Research Source: Company, Centrum Research , * - customer satisfaction index

PTL’s dealer network was expanded from 535 in 2007 ( 566 in 2008) to 615 in 2010. Focus on training PTL’s dealers in dealing with customers and offering better after sales service.

Mahindra & Mahindra Financial Services (MMFSL) - M&M’s financing arm - was brought in to finance PTL’s tractors, which made a meaningful improvement to sales

Dealer network expansion and Finance availability

Product refreshments were implemted at PTL based on the feedback from the customers to make it more appealing to youth. New products, such as 843 XM, were introduced by 2009 to fill the gaps in PTL’s product portfolio.M&M invested Rs8bn and worked with engineering group AVL Austria to upgrade the Swaraj engines to improve fuel efficiency and meet new emission norms. Fuel efficiency was also improved by 4-5%, which further improved customer perception.

Product refreshments

To order to liquidate the high levels on inventroy at PTL's, M&M took production cut at PTL.. Flexibiltiy was given to dealers to repay the outstanding amount in parts. Tractor demand also improved due to which the inventory was sold off in six months and 80% of the receivables were recovered in a year.

Inventory management

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76 79 83

96 106

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FY2008 FY2009 FY2010 FY2011 FY2012 FY2013

M&M Swaraj

Swaraj tractors share has

improved from 9% in FY08 to

14%

6 Swaraj Engines

We understand that Swaraj brand of tractors has now much more balanced presence and market share across the regions compared to what it used to be few years back. This has also helped Swaraj in increasing its overall market share. The current domestic positioning of Swaraj brand of tractors indicates that it has a sizable market share in larger pockets like MP and UP.

Exhibit 12: Swaraj brands competitive position in various markets

Source: Industry, Centrum Research, Positioning based on YTDFY14 domestic tractor sales for SEL and industry, Note: The size of the bubble and the number at its centre reflects the % contribution of the respective state to Swaraj‘s total domestic tractor sales volumes

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West Bengal

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Punjab

Karnataka Bihar

Haryana Andhra Pradesh

Exhibit 10: Regional market share : FY2008 Exhibit 11: Regional market share : YTDFY14

Source: TMA, Industry, Centrum Research Source: Company, Centrum Research , * - customer satisfaction index

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7 Swaraj Engines

Strong fundamentals to help withstand adverse business cycles

As discussed earlier, since the takeover of PTL by M&M, there has been a complete turnaround in the fate of ‘Swaraj’ brand of tractors and this trend has also rubbed off on Swaraj Engines. The superior growth in Swaraj brand of tractors helped SEL in registering volume CAGR of 28% over FY08-FY13 compared to domestic tractor growth of 11%. Also, there was remarkable improvement in the overall performance of SEL – the company turned to negative working capital (Debtor days declined from 88 in FY08 to 6 in FY13) , utilization rate saw significant jump ( average 94% over FY09-FY13 vs. 48% over FY04-FY07) and it saw significant thrust on its overall spend in R&D.

SEL has demonstrated strong and profitable volume growth over the years (Revenue/EBITDA/PAT CAGR of 29%/22%/30% over FY02-FY08). Given the strong cash flows, the company has largely funded its capex through internal accruals delivering healthy return ratios (ROE and ROCE at 30 %+). The company is debt free and this gives it significant headroom to withstand adverse business cycles.

Remarkable improvement seen in overall performance of SEL

Negative working capital

Its operations are now conducted at a negative working-capital cycle. Debtor days declined from 88 in FY08 to 6 in FY13. Its FCF has been extremely strong and the company has focussed on producing only engines and has not diversified into unrelated fields. The FCF yield for the past 5 years ( FY09-FY13) has averaged at 6%+.

Increased capacity utilization

SEL has seen significant improvement in its overall capacity utilizations rates since FY08. The company has achieved average capacity utilization rate of 94% over FY09-FY13 compared to 48% during FY04-FY07. In fact, it is encouraging to note that company has operated at 109% in FY10 and 113% in FY11.

Exhibit 13: Negative working capital Exhibit 14: Increased capacity utilization

Source: Company, Centrum Research Source: Company, Centrum Research

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ays)

Debtors days Working capital days

SEL has been operating with negative working capital since FY10

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120

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

(%)

Capacity Utilization Average utilization

Averaage capacity utilization at 94%

Averaage capacity utilization at 48%

8 Swaraj Engines

Channel checks suggest that the structural change seen in the tractor industry is likely to continue; rural market remains strong Our interaction with tractor dealers, financiers and recent data points related to agriculture/tractor sector largely validates our view on tractor industry and make us believe that factors such as increasing use for non-farm (commercial) purposes, shortening of replacement cycle, rising rural income and shortage of labour would continue to support volume growth over the next 3-5 years. Further, the current penetration level for tractors in India is much lower than in developed and other emerging economies. Hence, we expect the industry to grow at ~10-12% in line with the growth in FY10-13 (higher than in the last decade).

Mahindra & Mahindra Financial Services (MMFSL): Interaction with MMFSL indicates significant improvement in farmers’ income reflected in the fact that while 30% of the farmers paid quarterly or half yearly EMIs for their tractor loans, this has changed and now 40-45% farmers pay EMIs on monthly basis. This in turn has helped to reduce NPAs in the tractor segment. It further indicates that tractor segment is one of the best yielding portfolios and NPAs have come down to 4% compared to overall bucket of 5.5%.

Rural growth continues in double digits, increased wallet share seen from rural areas for Auto and FMCG companies: FMCG and Auto companies continue to indicate strong momentum in rural growth and its increasing share of business. 1HFY14 volume growth for Maruti Suzuki India Limited (MSIL) has been in the range of 18-20%. Hero MotorCorp also continues to see strong growth and rural sales now accounts for 47% of its overall volumes. The FMCG sector has seen strong double digit growth of 14-17% in rural markets (Average of 4QFY13 and 1QFY14) compared to single digit growth of 9-10% in urban markets. The data points to strong rural demand most of the players expect volume momentum to continue going forward.

Exhibit 15: Rural markets outpacing urban demand in FMCG sector

Source: Dabur India 2QFY14 investor presentation, Centrum Research

Interaction with dealers indicates higher usage for non-agriculture (commercial) purposes and shorter replacement cycle: Our interaction with dealers across regions indicates that commercial usage of tractors now accounts for 35-40% of the overall tractor sales (higher in some pockets like Kerala where commercial usage stands at 55-60%). Dealers indicated that, while the replacement cycle for commercial use was as short as 2-3 years, the replacement cycle for agricultural tractors has also become short to 3-4 years driven by farmers upgrading to new product launches. The domestic tractor industry has seen broad-based growth in 1HFY14 with most states contributing: Regionally, Chhattisgarh, Maharashtra, Madhya Pradesh and Rajasthan have grown by 83%, 50%, 43% and 41% YoY, respectively in 1HFY14. Andhra Pradesh recovered as well, with 40% YoY growth on good monsoon. Gujarat, which was impacted by drought last year, has been showing positive signs in the last 2-3 months. Karnataka has also recovered in 2Q, with positive growth. MSP further increases in 2014: The MSP for FY14 has been announced. The MSP for paddy per quintal has been increased to Rs1310 from Rs1250 in FY13 (up 5%), Bajra is at Rs1310 vs. Rs1175 in FY13 (up 11%) and Sugarcane at 210/kg up from Rs170/kg.

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1QFY13 2QFY13 3QFY13 4QFY13 1QFY14

(YoY growth,%)

Urban Rural

9 Swaraj Engines

SEL: A long term proxy on tractor growth story in India

The fortunes of SEL are directly linked to underlying growth in the domestic tractor industry as it caters to ~80% of Swaraj tractor’s engine requirements. Given the structural shift in growth trajectory for tractor industry in recent decade, SEL remains a long term proxy on tractor growth story in India. We believe that a combination of rising rural incomes, low penetration levels, improving credit, diversifying usage of tractors and labour shortage are driving a structural upturn in tractor demand in India. India’s tractor industry sales have historically grown at 8% CAGR over the past 30 years; however in the recent decade, the industry has seen a strong volume CAGR of 12.4%. Further, we believe that higher industry concentration levels and minimal incremental competition in the domestic tractor industry are helping to improve pricing power of the incumbents.

After registering a volume drop of 2% in FY13, the growth has bounced back in FY14, with 1HFY14 volumes increasing 24% YoY, owing to positive market sentiments after good monsoons. Going forward, we expect the industry growth to continue in the range of 10-12% for FY5E and FY16E. Historical evidence for the past 35 years suggests that the upturn in tractor segment typically lasts for 2-3 years and the average growth in the earlier up cycle has been in the range of 16-21%. With strong rebound in FY14E and better monsoon, we expect the momentum to continue over FY15-FY16E.

Exhibit 16: In the past , the upturn in the domestic tractor industry has lasted for more than 2-3 years, FY14 first year of upturn

Source:: Industry, Company, Centrum Research

Long term drivers in place

We believe that a combination of rising rural incomes, improving rural credit, diversifying usage of tractors and worsening labour shortage is driving a structural upturn in tractor demand in India.

Rural incomes improve substantially – Reflected in strong rural consumption

We believe that multiple years of relatively normal rainfall (India has received normal rainfall in five out of the past six years, FY10 being the last weak monsoon year), improving yields (Improving availability of irrigation and deployment of better farming techniques), rising agricultural output and strong agri-commodity prices (the minimum support price (MSP), which is the price at which the government buys food grain from farmers, has consistently moved up in recent years) all have resulted in big improvement in income levels of India’s rural population. Despite a weak monsoon in FY10, the fact that tractor sales grew 32%/19 in FY10/FY11 underscores the structural improvement that is happening in tractor demand in India.

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Historical evidence for the past 35 years suggests that the upturn in tractor segment typically lasts 2-3 years and the average growth in the earlier up cycle has been in the range of 16-21%. With strong rebound in FY14E and better monsoon, we expect the momentum to continue over FY15-FY16E.

10 Swaraj Engines

Rising usage of tractors in non-agricultural activities driving shorter replacement cycle

Based on the industry data, we believe that the dependence of tractor sales on agriculture is coming down and the use of tractors in agricultural activities is now down to just 60% of the total. This falling dependence of tractor sales on agriculture substantially de-risks tractor demand going forward. Higher use of tractors for commercial usage also makes owning a tractor more economically feasible for even farmers with smaller land holdings. Our interaction with dealers across regions indicates that commercial usage of tractors now accounts for 35-40% of the overall tractor sales (higher in some pockets like Kerala where the commercial usage stands at 55-60%). Dealers indicated that, while the replacement cycle for commercial use was as short as 2-3 years, the replacement cycle for agricultural tractors has also become short to 3-4 years driven by farmers upgrading to new product launches

Agriculture credit has seen significant increase

Agricultural credit has seen 29% CAGR since FY04-FY12 and stood at Rs5,833bn in FY12. The rural credit environment is an important parameter when assessing tractor demand. As seen from the chart, post FY2004, there has been a steep jump in the overall quantum of credit disbursed in India’s rural areas. Previously, banks would not approve loans to farmers owning less than five acres of land. However, this has started changing and Banks are now much more open to accepting less than five acres of land as mortgage in some parts of the country. Given that ~80% of India’s farming households own land of less than five acres, this substantially increases the number of farmers who are eligible for financing.

Exhibit 17: 1 Food grain yields have been improving Exhibit 18: ….Coupled with better MSP’s

Source: RBI, Centrum Research Source: RBI, Centrum Research

Exhibit 19: Agri credit has seen significant increase Exhibit 20: Wide spread across land holdings

Source: RBI, Company, Centrum Research Estimates Source: RBI, Company, Centrum Research Estimates

1,000

1,200

1,400

1,600

1,800

2,000

2,200

FY19

85

FY19

87

FY19

89

FY19

91

FY19

93

FY19

95

FY19

97

FY19

99

FY20

01

FY20

03

FY20

05

FY20

07

FY20

09

FY20

11

FY20

13

Yiel

d (k

g/H

ecta

re)

-

750

1,500

2,250

3,000

3,750

4,500

FY19

84

FY19

86

FY19

88

FY19

90

FY19

92

FY19

94

FY19

96

FY19

98

FY20

00

FY20

02

FY20

04

FY20

06

FY20

08

FY20

10

FY20

12

( in

Rs p

er q

uint

al)

Paddy Wheat Cotton Jute Groundnut

0

1000

2000

3000

4000

5000

6000

FY19

85

FY19

87

FY19

89

FY19

91

FY19

93

FY19

95

FY19

97

FY19

99

FY20

01

FY20

03

FY20

05

FY20

07

FY20

09

FY20

11

(Rs

bn)

0

200

400

600

800

1000

FY19

86

FY19

88

FY19

90

FY19

92

FY19

94

FY19

96

FY19

98

FY20

00

FY20

02

FY20

04

FY20

06

FY20

08

FY20

10

FY20

12

(Rs

bn)

Up to2.5 Acres Above2.5 acres to 5 Acres Above5 Acres

11 Swaraj Engines

Indian tractor industry is now much more consolidated

The tractor industry has seen greater consolidation over the last ten years. Ten years back, the top-three tractor companies in India accounted for 54% of the market; today, after the acquisition of Eicher’s tractor business by TAFE (in 2005) and the acquisition of Punjab Tractors by M&M ( in 2007), the top-three companies account for ~77% of total domestic market. The greater level of industry consolidation has substantially improved pricing discipline in recent years and has boosted profitability. We see this as a positive factor for SEL as the improved pricing discipline is unlikely to stress its profitability.

… MNCs likely to gain share, but this would be a gradual process:

Given their access to better technology, MNCs would gain relevance, as customers mature. While the pan-India market share of MNCs is in mid-single digits, in select mature markets, their market share is much higher. Market share gains by MNCs would, however, be a gradual process, considering the incumbents’ deep reach and their strong ecosystem

Exhibit 21: 1 Greater level of consolidation in domestic tractor industry has substantially improved pricing discipline within the industry in recent years

Source: TMA, Company, Centrum Research

64 68

63

49 53 54

64 67

77 77 77 77 77 77 77

0

10

20

30

40

50

60

70

80

90

FY20

00

FY20

01

FY20

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FY20

03

FY20

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FY20

05

FY20

06

FY20

07

FY20

08

FY20

09

FY20

10

FY20

11

FY20

12

FY20

13

YTD

FY1

4

(Mkt

sha

re o

f top

3 p

laye

rs, i

n %

)

M&M acquired PTL in 2007

TAFE acquired EICHER in 2005

Consolidation level has improved with acquisitions of Eicher (TAFE) and PTL (M&M). Top-three players now account for 77% of the tractor industry

12 Swaraj Engines

Financial Outlook

Revenue Outlook: Near term growth encouraging; upturn to continue

SEL has registered a CAGR volume growth of 28% over FY08-FY13. This was largely added by better than industry growth achieved by Swaraj brand of tractors (21% vs. industry CAGR of 11% over the same period). Historical evidence for the past 35 years suggests that the upturn in tractor segment typically would last for 2-3 years and the average growth in the earlier up cycle has been in the range of 16-21%. With strong rebound in FY14E and better monsoon, we expect the momentum to continue over FY15-FY16E. As a result, we expect 12% volume growth each for SEL for FY15E and FY16E. We expect SEL to register revenue CAGR of 15% over FY14-FY16E. The company recently increased its overall capacity to 75,000 units. We are assuming the company would be able to meet ~12% volume growth through productivity gains. In the past in FY10 and FY11, the company achieved capacity utilization of 109% and 113% respectively.

Exhibit 22: Trend in volumes (YoY) Exhibit 23: Trend in volumes (QoQ)

Source: Company, Centrum Research Estimates Source: Company, Centrum Research Estimates

Exhibit 24: Trend in revenues (YoY) Exhibit 25: Trend in revenues (QoQ)


Margin Outlook: EBITDA margins to remain stable

EBITDA margins for the company in the recent past (FY12-FY13) have been in the range of 15.0-15.5%. We believe that the EBITDA margins for the company have stabilized in the range of 15-15.5% and have seen the same trend in 1HFY14, where the EBITDA margins for the company have averaged at 15.1%. We expect EBITDA margins to remain in the range of 15.0-15.5% over FY14-FY16E.

47,

413

55,

239

57,

377

69,

426

77,

757

87,

088

21

17

4

21

12 12

-

5

10

15

20

25

-

20,000

40,000

60,000

80,000

100,000

FY11 FY12 FY13 FY14 FY15E FY16E

Engines sold ( in units) (LHS) YoY Growth (%) (RHS)

13,

853

12,

839

14,

273

14,

274

14,

014

14,

389

15,

288

13,

686

17,

783

18,

484

-

4,000

8,000

12,000

16,000

20,000

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

Engines sold ( in units)

3,6

06

4,4

86 4

,790

5,7

70

6,6

47

7,6

60

28

24

7

20

15 15

-

5

10

15

20

25

30

-

2,000

4,000

6,000

8,000

10,000


(%)

(Rs

mn)

Revenues ( in Rsmn) (LHS) YoY Growth (%) (RHS)

1,0

98

1,0

35

1,1

69

1,1

84

1,1

82

1,2

18

1,2

46

1,1

45 1

,472

1,5

16

-

200

400

600

800

1,000

1,200

1,400

1,600

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

Revenues ( in Rsmn)

13 Swaraj Engines

Exhibit 26: EBITDA margins for SEL have remained constant despite volatility seen in volumes


Exhibit 27: Trend in EBITDA and EBITDA margin (YoY) Exhibit 28: Trend in EBITDA and EBITDA margin (QoQ)


Exhibit 29: Trend in PAT and PAT margin (YoY) Exhibit 30: Trend in PAT and PAT margin (YoY)


7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

19.0%

21.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Q1F

Y10

Q2F

Y10

Q3F

Y10

Q4F

Y10

1QFY

11

2QFY

11

3QFY

11

4QFY

11

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

YoY volume growth (LHS) EBITDA margin Average

607

697

714

871

1,0

15

1,1

83

16.8

15.5

14.9 15.1

15.3 15.4

13.5

14.0

14.5

15.0

15.5

16.0

16.5

17.0

-

200

400

600

800

1,000

1,200

1,400


EBITDA ( in Rsmn) EBITDA margins (%,RHS)

178

152

181

182

180

187

184

164

221

227

16.3

14.8

15.6 15.5 15.4 15.5

14.9

14.5

15.1 15.1

13.5

14.0

14.5

15.0

15.5

16.0

16.5

-

50

100

150

200

250

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

EBITDA ( in Rsmn) EBITDA margins (%,RHS)

439

532

554

656

766

888

12.2

11.9

11.6

11.4

11.5 11.6

10.8

11.2

11.6

12.0

12.4

-

200

400

600

800

1,000


PAT ( in Rsmn) PAT margins (%,RHS)

135

118

141

134

137

140

138

139

168

172

12.3

11.4

12.0

11.3 11.6

11.5

11.0

12.2

11.4 11.3

10.0

10.5

11.0

11.5

12.0

12.5

-

40

80

120

160

200

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

PAT ( in Rsmn) PAT margins (%,RHS)

14 Swaraj Engines

Exhibit 31: Trend in capacity Exhibit 32: …Strong cash flows to support organic growth


Key risks to our thesis

Loss of market share by its key customer: At present 90% of the company’s revenues comes from the supply of engines to Swaraj brand of tractors and components to Swaraj Mazda, another group company. Though Swaraj brand has seen gradual improvement in its market share, any drop can directly impact volumes of SEL.

Consecutive drought to affect sales: Though the underlying drivers for the domestic tractor industry continues to remain intact, our interaction with dealers/tractor OEMs indicates that two consecutive years of draught can have an adverse impact on domestic tractor sales.

Delay in capacity addition to cap further potential: The Company currently has a production capacity of 75,000 units. Considering the strong growth in 1HFY14 and our estimate of volume growth of FY14, the capacity utilization of the company should stand at ~92-93%. Though, we believe the company will manage 12% volume growth for FY15E, any surprise in the volume growth for the tractor industry beyond 12% will restrict SEL from taking full advantage of the higher growth due to capacity constraints.

36,

000

36,

000

36,

000

42,

000

60,

000

75,

000

75,

000

75,

000

90,

000

46 79

109

113

92 77 93

104

97

-

20

40

60

80

100

120

140

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E

Engine capacity ( in units) (LHS) Capacity Utilization (%) (RHS)

415

643

918

422

894 1,

012

72

284

398

150

500

500

0

200

400

600

800

1,000

1,200


(Rs

mn)

Free cash flow from operations (Rs mn) Capex ( Rsmn)

15 Swaraj Engines

Valuation and recommendation We have valued the company at 11x FY16E EPS (mean+sd1) as we believe that strong earnings, return ratios and the ability to generate free cash flow with strong FCF yield at 6% ( average for the past 5 years) can engender a further re-rating of the stock. The absence of a direct comparable (other engine companies are diversified) can ensure that the stock trades at a premium to other auto-ancillaries. We arrive at a price target of Rs790, an upside of 39% from the CMP. Key risks to our thesis are: a) Dependence on single customer i.e. Swaraj brand, and b) Drought in the forecasted period.

.Centrum Estimates vs. Bloomberg Consensus

(Rs mn) Centrum Estimates Bloomberg consensus

Var % FY14E Var % FY15E FY14E FY15E FY14E FY15E

Sales 5,770 6,647 5,787 6,410 (0.3) 3.7

EBITDA 871 1,015 895 1,000 (2.7) 1.5

PAT 656 766 658 727 (0.3) 5.4

Source: Bloomberg, Centrum Research Estimates

Exhibit 33: Sensitivity Analysis for FY15E Sensitivity to key variables % increase % impact on EBITDA % impact on EPS

Change in volumes 5% 20bps 4

Change in realizations 3% 20bps 4


Exhibit 36: Peer comparison

Company Mkt. Cap (Rs mn)

CAGR FY13-FY15E (%) EBITDA Margin (%) P/E (x) EV/EBITDA (x) RoE (%) Div Yield (%)

Rev. EBITDA PAT FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E

SEL 7,231 17.8 19.2 17.6 15.1 15.3 15.4 12.8 10.8 9.2 8.8 7.1 6.0 29.1 30.5 29.3 5.8 2.8 3.3

KOEL* 22,560 1.9 -1.1 3.6 15.1 13.6 14.2 11.4 11.4 10.1 5.7 - - 18.2 15.9 16.1 3.2 3.0 2.9

Greaves Cotton* 15,812 7.8 9.1 10.0 12.6 12.3 12.9 10.7 10.2 8.9 6.1 5.6 4.6 21.7 19.8 20.5 2.5 3.2 3.6

Source: Bloomberg, Centrum Research, * Bloomberg Estimates

Exhibit 34: 1 year forward P/E chart Exhibit 35: 1 year forward EV/EBITDA chart

Source: Bloomberg, Company, Centrum Research Estimates Source: Bloomberg, Company, Centrum Research Estimates

0

4

8

12

16

20

Aug

-07

Dec

-07

Apr

-08

Aug

-08

Dec

-08

Apr

-09

Aug

-09

Dec

-09

Apr

-10

Aug

-10

Dec

-10

Apr

-11

Aug

-11

Dec

-11

Apr

-12

Aug

-12

Dec

-12

Apr

-13

Aug

-13

Dec

-13

P/E Mean

Mean + Std Dev Mean - Std Dev

0.0

5.0

10.0

15.0

Aug

-07

Dec

-07

Apr

-08

Aug

-08

Dec

-08

Apr

-09

Aug

-09

Dec

-09

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-10

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-10

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-10

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-11

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-11

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-12

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-12

Apr

-13

Aug

-13

Dec

-13

EV/EBITDA Mean

Mean + Std Dev Mean - Std Dev

16 Swaraj Engines

Exhibit 37: Shareholding pattern (%) Q2FY14 Q1FY14 Q4FY13 Q3FY13

Promoter 50.6 50.6 50.6 50.6 FII 1.9 1.5 1.5 1.5 DII 10.4 10.6 10.9 12.1 Others 37.1 37.3 37.0 35.8

Source: BSE

Company Background Swaraj Engines was set up as a Joint venture between Punjab Tractors and Kirloskar Engines to manufacture engines for Punjab Tractors. PTL has been taken over and merged with Mahindra and Mahindra Ltd. As a result, M&M holds 33% of SEL's equity with 17% held by Kirloskar Industries Ltd. SEL supplies engines from 20HP to 50HP to "Swaraj" branded tractors of M&M. It, also, manufactures engine components for the erstwhile Swaraj Maza Ltd i.e. SML Isuzu.

Key management personnel

No Name Designation

1 Mr. G.P. Gupta Chairman Shri G.P.Gupta is on the Board of the Company as Independent Director since September 2001 and was appointed as the Chairman of the Board in July 2007. Shri Gupta served as Chairman of Unit Trust of India and Chairman & Managing Director of Industrial Development Bank of India

2 Mr M.N.Kaushal Chief Financial officer Shri Kaushal is a Member of the Institute of Chartered Accountants of India and the Institute of Company Secretaries of India. Having joined the erstwhile Punjab Tractors (since merged with M&M) in 1981, he is currently Chief Financial Officer of Swaraj Division of M&M and has made significant contributions in business planning, cost control and management & judicious allocation of financial resources.

4 Mr. Rajesh Jejurikar Additional Director Shri Rajesh Jejurikar was appointed by the Board as an Additional Director with effect from 22nd April, 2013Shri Jejurikar joined Mahindra & Mahindra Limited (M&M) in 2000 in its Automotive Division and in 2008, he was appointed Chief of Operations of the Automotive Sector and was subsequently named Chief Executive for Automotive Division. After a short stint in the media industry, Shri Jejurikar re-joined M&M in 2013 and is currently Chief Executive - Tractor & Farm Mechanisation.

5 Mr. S C Bhargava Director Shri S.C.Bhargava is on the Board of the Company as an Independent Director since January 2006.He has vast experience in Finance / Insurance related matters in LIC and had been deeply involved in the investment portfolio at LIC which virtually covered all segments of Indian Economy.

6 Mr. V S Parthasarathy Director Shri V.S.Parthasarathy is on the Board of the Company since January 2008. Shri Parthasarathy joined Mahindra & Mahindra Limited (M&M) in 2000 as Head of Performance Management & IT and is currently its Group CIO, Executive Vice President - Group Mergers & Acquisitions, Finance and Accounts. During his past 13 years of association, he has led various critical corporate functions

7 Dr. Pawan Goenka Director Dr. Pawan Goenka is on the Board of the Company since May 2010. Having joined Mahindra & Mahindra Limited (M&M) in 1993, in April 2003 he was appointed COO of Automotive Sector, in September 2005 he became President of its Automotive Sector and in April 2010 he assumed his current role of President – Automotive and Farm Equipment Sectors. Prior to joining M&M, he served with General Motors R&D Centre at Detroit, U.S.A. He is an internationally acknowledged scientist-manager with several citations to his credit.


Exhibit 38: Trend in volumes (YoY) Exhibit 39: Trend in capacity


47,

413

55,

239

57,

377

69,

426

77,

757

87,

088

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000


Engines sold ( in units)

36,

000

36,

000

36,

000

42,

000

60,

000

75,

000

75,

000

75,

000

90,

000

-

20

40

60

80

100

120

140

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E

Engine capacity ( in units) (LHS) Capacity Utilization (%) (RHS)

17 Swaraj Engines

Exhibit 40: Quarterly financials

Source: Company, Centrum Research Estimate, *- based on total revenues as separate break up of engines revenues is not available on quarterly basis

Exhibit 41: Key performance indicators

Key Variable FY12 FY13 FY14E FY15E FY16E

Engine Sales ( in units) 55,239 57,377 69,426 77,757 87,088

Engine Realization ( Rs) 75,023 78,481 78,481 80,835 83,260

Engine Revenues ( Rsmn) 4,144 4,503 5,449 6,286 7,251

Component Revenues (Rsmn) 231 154 161 170 178

Total (Rsmn) 4,375 4,657 5,610 6,455 7,429 Other operating Income* (Rsmn) 111 134 160 192 231

Total Operating income ( Rsmn) 4,486 4,790 5,770 6,647 7,660

YoY Change (%) FY12 FY13 FY14E FY15E FY16E Engine Sales 16.5 3.9 21.0 12.0 12.0

Engine Realization 7.8 4.6 - 3.0 3.0

Total Operating income 24.4 6.8 20.5 15.2 15.2

Source: Centrum Research Estimates, * - Other operating income pertain to spare part sales

Particulars (Rs mn) 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14

Net Sales 1,098 1,035 1,169 1,184 1,182 1,218 1,246 1,145 1,472 1,516

Raw Materials 829 781 904 891 907 920 951 866 1,127 1,141

Employee Costs 47 47 48 50 53 55 58 56 62 68

Other Expenditure 44 54 36 61 42 56 53 59 62 80

EBITDA 178 152 181 182 180 187 184 164 221 227

Depreciation 9 10 10 13 14 14 21 22 21 22

Interest 0 1 - - 0 0 1 0 0 0

Other Income 27 29 33 34 31 29 36 58 47 46

PBT 196 170 204 203 197 201 198 199 247 250

Tax 60 52 63 68 60 61 60 60 79 79

Tax rate (%) 26.2 27.2 28.2 29.2 30.2 31.2 32.2 33.2 34.2 35.2

Reported PAT 135 118 141 134 137 140 138 139 168 172

YoY Growth (%)

Revenue 29.4 20.0 26.2 21.5 7.6 17.7 6.6 (3.3) 24.5 24.5

EBITDA 20.1 1.5 13.3 22.4 1.2 22.4 1.4 (9.7) 22.6 21.5

PAT 26.7 8.9 24.3 21.2 1.2 18.8 (2.3) 3.9 22.8 22.6

Margin (%)

EBITDA 16.2 14.7 15.5 15.4 15.3 15.3 14.8 14.3 15.0 14.9

PAT 12.3 11.4 12.0 11.3 11.6 11.5 11.0 12.2 11.4 11.3

Key Drivers

Engine sales ( in Units) 13,853 12,839 14,273 14,274 14,014 14,389 15,288 13,686 17,783 18,484

Per engine basis* (Rs.)

Average Realizations 79,290 80,590 81,889 82,941 84,316 84,620 81,482 83,691 82,753 82,006

Raw material costs 59,850 60,838 63,301 62,435 64,707 63,959 62,193 63,284 63,353 61,734

Other Expenditure 3,414 3,669 3,349 3,468 3,761 3,829 3,787 4,063 3,475 3,679

Employee costs 3,169 4,214 2,536 4,295 2,983 3,871 3,480 4,340 3,492 4,333

EBITDA 12,856 11,870 12,702 12,743 12,866 12,961 12,023 12,005 12,433 12,259

18 Swaraj Engines

Financials Exhibit 42: Income Statement Y/E March (Rsmn) FY12 FY13 FY14E FY15E FY16E

Net Sales 4,486 4,790 5,770 6,647 7,660

Raw Materials 3,478 3,722 4,508 5,193 5,984

% of sales 77.5 77.7 78.1 78.1 78.1

Personnel 192 221 248 278 311

% of sales 4.3 4.6 4.3 4.2 4.1

Manufact. & Other Exp. 118 133 143 161 182

% of sales 2.6 2.8 2.5 2.4 2.4

EBITDA 697 714 871 1,015 1,183 EBITDA Margin (%) 15.5 14.9 15.1 15.3 15.4

Depn..& Amortn 43 72 82 90 108

EBIT 655 643 790 925 1,075

Interest Expenses 1 2 1 1 1

EBT 654 641 789 924 1,074

Other Income 122 153 176 203 233

PBT 776 795 965 1,127 1,307 Tax-Total 245 241 309 361 418

Tax Rate (%) - Total 31.5 30.3 32.0 32.0 32.0

Reported PAT 532 554 656 766 888


Exhibit 43: Key Ratios Y/E March FY12 FY13 FY14E FY15E FY16E

Growth ratios (%) Net sales 24.4 6.8 20.5 15.2 15.2 EBITDA 14.9 2.5 22.0 16.5 16.5 Adjusted Net Profit 21.1 4.1 18.5 16.8 16.0 Margin Ratio (%) EBITDA Margin 15.5 14.9 15.1 15.3 15.4 EBIT Margin 14.6 13.4 13.7 13.9 14.0 PAT Margin 11.9 11.6 11.4 11.5 11.6 Return Ratio (%) ROE 31.4 29.1 30.5 29.3 28.2 ROcE 31.5 29.2 30.5 29.4 28.2 ROIC 37.4 37.5 34.0 32.3 31.4 Turnover Ratio days (days) Inventory Period 24.6 26.7 27.0 27.0 27.0 Debtors Period 8.8 6.3 7.0 7.0 7.0 Net working capital (8.7) (25.8) (3.6) (5.0) (5.0) Solvency Ratio (x) Debt-equity - - - - - Net Debt-equity (0.4) (0.4) (0.4) (0.3) (0.3) Liquidity ratio 1.8 1.4 1.9 1.9 1.9 Interest coverage ratio 861.5 427.7 789.5 925.2 1,074.5 Dividend Dividend per share 13.0 33.0 15.8 18.5 21.5 Dividend Payout (%) 30.4 74.0 30.0 30.0 30.0 Dividend Yield (%) 2.3 5.8 2.8 3.3 3.8 Per share (Rs) Basic EPS - reported 42.8 44.6 52.8 61.7 71.5 Basic EPS - adjusted 42.8 44.6 52.8 61.7 71.5 FDEPS - Reported 42.8 44.6 52.8 61.7 71.5 FDEPS - Adjusted 42.8 44.6 52.8 61.7 71.5 CEPS 46.3 50.3 59.4 69.0 80.2 Book value 150.0 156.0 190.3 230.3 276.7 Valuation P/E 13.3 12.8 10.8 9.2 7.9 P/BV 3.8 3.6 3.0 2.5 2.1 EV/EBITDA 9.1 8.8 7.1 6.0 5.0 EV/Sales 1.4 1.3 1.1 0.9 0.8


Exhibit 44: Balance Sheet Y/E March (Rsmn) FY12 FY13 FY14E FY15E FY16E

Sources of funds

Capital 124 124 124 124 124

Reserves & Surplus 1,739 1,813 2,239 2,736 3,313

Shareholders’ Funds 1,863 1,937 2,363 2,860 3,437

Total Loan Funds 0 0 0 0 0

Deferred Tax Liabi. - Net 32 63 63 63 63

Total 1,895 2,001 2,426 2,924 3,500

Application of funds

Gross Block 960 1,415 1,565 1,715 2,215

Accumulated Dep. (542) (608) (690) (780) (888)

Capital WIP 87 25 25 375 375

Net Fixed Assets 505 832 900 1,310 1,702

Investments 811 742 742 742 742

Inventories 334 393 480 552 637

Sundry Debtors 119 93 124 143 165

Cash & Bank Balances 697 807 849 975 1,175

Loans and Advances 167 143 195 224 258

Total C A ,loans & Adv. 1,317 1,436 1,648 1,894 2,234

Current Liabilities 525 500 538 648 747

Provisions 214 508 324 373 430

Total Current Liab. & Prov. 739 1,008 862 1,022 1,177

Net Current Assets 578 427 785 873 1,057

Miscellaneous Expend.

Total assets 1,895 2,001 2,426 2,924 3,500


Exhibit 45: Cash Flow Y/E March (Rsmn) FY12 FY13 FY14E FY15E FY16E

Pre-tax profit 776 795 965 1,127 1,307

Total tax paid (232) (210) (309) (361) (418)

Depreciation 43 72 82 90 108

Chg in debtors (39) 27 (32) (19) (22)

Chg in inventory 17 (59) (86) (73) (84)

Chg in loans & advances (83) 24 (52) (30) (34)

Chg in provisions 47 295 (184) 49 57

Chg in other current liabilities 113 (25) 38 110 99

Net chg in working capital 56 261 (316) 38 15 Cash flow from operating activities (a) 643 918 422 894 1,012

Capital expenditure (284) (398) (150) (500) (500)

Chg in Trade investments (233) 70 - - - Cash flow from investing activities (b) (517) (328) (150) (500) (500)

Dividend (incl. tax) (188) (480) (230) (269) (312)

Other financing activities (4) - - - - Cash flow from financing activities (c)

(192) (480) (230) (269) (312)

Net chg in cash (a+b+c) (65) 110 42 125 200


19 Swaraj Engines

Financials - Historical Exhibit 46: Income Statement Y/E March (Rsmn) FY07 FY08 FY09 FY10 FY11

Net Sales 1,282 1,290 1,253 2,824 3,606

Raw Materials 902 901 892 2,103 2,733

% of sales 70.3 69.8 71.2 74.5 75.8

Personnel 79 91 92 144 170

% of sales 6.1 7.0 7.3 5.1 4.7

Manufact. & Other Exp. 43 36 33 82 97

% of sales 3.4 2.8 2.7 2.9 2.7

EBITDA 258 263 236 496 607

EBITDA Margin (%) 20.1 20.4 18.9 17.6 16.8

Depn..& Amortn 43 44 46 48 45

EBIT 215 219 191 447 562

Interest Expenses 1 (4) (27) (58) (57)

EBT 214 223 218 505 620

Other Income 0 3 2 42 24

PBT 214 226 220 547 644 Tax-Total 74 78 77 174 204

Tax Rate (%) - Total 34.7 34.3 34.9 31.7 31.8

Reported PAT 140 149 144 374 439


Exhibit 47: Key Ratios Y/E March FY07 FY08 FY09 FY10 FY11

Growth ratios (%) Net sales - 0.6 (2.9) 125.4 27.7 EBITDA - 1.7 (9.9) 109.6 22.5 Adjusted Net Profit - 6.3 (3.4) 160.1 17.6 Margin Ratio (%) EBITDA Margin 20.1 20.4 18.9 17.6 16.8 EBIT Margin 16.8 16.9 15.2 15.8 15.6 PAT Margin 10.9 11.5 11.5 13.2 12.2 Return Ratio (%) ROE 23.6 21.7 18.1 36.3 31.9 ROcE 23.4 21.3 15.8 32.5 29.1 ROIC - - 21.6 44.2 49.2 Turnover Ratio days (days) Inventory Period 23.1 24.5 21.3 23.7 32.2 Debtors Period 99.5 88.4 42.4 4.8 7.4 Net working capital 70.2 102.7 27.1 (14.7) (5.7) Solvency Ratio (x) Debt-equity - - - - - Net Debt-equity (0.1) (0.1) (0.4) (0.5) (0.5) Liquidity ratio 2.3 4.4 3.1 2.0 2.2 Interest coverage ratio 157.9 (48.6) (7.0) (7.7) (9.8) Dividend Dividend per share 7.5 5.0 5.0 8.0 10.0 Dividend Payout (%) 66.6 41.8 43.2 26.6 28.3 Dividend Yield (%) 1.3 0.9 0.9 1.4 1.8 Per share (Rs) Basic EPS - reported 11.3 12.0 11.6 30.1 35.4 Basic EPS - adjusted 11.3 12.0 11.6 30.1 35.4 FDEPS - Reported 11.3 12.0 11.6 30.1 35.4 FDEPS - Adjusted 11.3 12.0 11.6 30.1 35.4 CEPS 14.7 15.5 15.3 34.0 38.9 Book value 49.1 61.1 66.8 98.8 122.6 Valuation P/E 50.5 47.5 49.2 18.9 16.1 P/BV 11.6 9.3 8.5 5.8 4.6 EV/EBITDA 27.2 26.6 28.6 13.1 10.4 EV/Sales 5.5 5.4 5.4 2.3 1.7


Exhibit 48: Balance Sheet Y/E March (Rsmn) FY07 FY08 FY09 FY10 FY11

Sources of funds

Capital 124 124 124 124 124

Reserves & Surplus 486 634 705 1,103 1,398

Shareholders’ Funds 610 759 830 1,227 1,522 Total Loan Funds 0 0 0 0 0

Deferred Tax Liabi. - Net 63 55 51 27 19

Total 673 814 880 1,254 1,541

Application of funds

Gross Block 667 675 701 719 776

Accumulated Dep. (322) (359) (403) (492) (537)

Capital WIP 5 8 2 10 25

Net Fixed Assets 351 325 300 237 264

Investments 0 0 167 577 578

Inventories 94 101 85 199 351

Sundry Debtors 405 362 169 41 81

Cash & Bank Balances 37 68 305 564 762

Loans and Advances 42 102 49 60 84

Total C A ,loans & Adv. 577 633 608 864 1,278

Current Liabilities 147 126 109 286 412

Provisions 108 17 85 137 167

Total Current Liab. & Prov. 255 143 194 423 579

Net Current Assets 322 489 413 440 699 Miscellaneous Expend.

Total assets 673 814 880 1,254 1,541


Exhibit 49: Cash Flow Y/E March (Rsmn) FY07 FY08 FY09 FY10 FY11

Pre-tax profit 214 226 220 547 644

Total tax paid (79) (85) (82) (198) (212)

Depreciation 43 44 46 48 45

Chg in debtors 59 42 194 128 (40)

Chg in inventory 5 (7) 16 (114) (152)

Chg in loans & advances (11) (60) 53 (11) (24)

Chg in provisions (0) (91) 68 52 30

Chg in other current liabilities (46) (21) (17) 177 126

Net chg in working capital 7 (136) 313 232 (61) Cash flow from operating activities (a) 185 49 498 629 415

Capital expenditure (34) (18) (21) 15 (72)

Chg in Trade investments - - (167) (410) (1) Cash flow from investing activities (b) (517) (328) (50) (500) (500)

Dividend (incl. tax) (106) (73) (73) (116) (144)

Other financing activities - 73 - 140 - Cash flow from financing activities (c)

(120) 0 (73) 24 (144)

Net chg in cash (a+b+c) 31 31 237 259 198


20 Swaraj Engines

Appendix A

Disclaimer

Centrum Broking Limited (“Centrum”) is a full-service, Stock Broking Company and a member of The Stock Exchange, Mumbai (BSE) and National Stock Exchange of India Ltd. (NSE). Our holding company, Centrum Capital Ltd, is an investment banker and an underwriter of securities. As a group Centrum has Investment Banking, Advisory and other business relationships with a significant percentage of the companies covered by our Research Group. Our research professionals provide important inputs into the Group's Investment Banking and other business selection processes.

Recipients of this report should assume that our Group is seeking or may seek or will seek Investment Banking, advisory, project finance or other businesses and may receive commission, brokerage, fees or other compensation from the company or companies that are the subject of this material/report. Our Company and Group companies and their officers, directors and employees, including the analysts and others involved in the preparation or issuance of this material and their dependants, may on the date of this report or from, time to time have "long" or "short" positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. Centrum or its affiliates do not own 1% or more in the equity of this company Our sales people, dealers, traders and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. We may have earlier issued or may issue in future reports on the companies covered herein with recommendations/ information inconsistent or different those made in this report. In reviewing this document, you should be aware that any or all of the foregoing, among other things, may give rise to or potential conflicts of interest. We and our Group may rely on information barriers, such as "Chinese Walls" to control the flow of information contained in one or more areas within us, or other areas, units, groups or affiliates of Centrum. Centrum or its affiliates do not make a market in the security of the company for which this report or any report was written. Further, Centrum or its affiliates did not make a market in the subject company’s securities at the time that the research report was published.

This report is for information purposes only and this document/material should not be construed as an offer to sell or the solicitation of an offer to buy, purchase or subscribe to any securities, and neither this document nor anything contained herein shall form the basis of or be relied upon in connection with any contract or commitment whatsoever. This document does not solicit any action based on the material contained herein. It is for the general information of the clients of Centrum. Though disseminated to clients simultaneously, not all clients may receive this report at the same time. Centrum will not treat recipients as clients by virtue of their receiving this report. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Similarly, this document does not have regard to the specific investment objectives, financial situation/circumstances and the particular needs of any specific person who may receive this document. The securities discussed in this report may not be suitable for all investors. The securities described herein may not be eligible for sale in all jurisdictions or to all categories of investors. The countries in which the companies mentioned in this report are organized may have restrictions on investments, voting rights or dealings in securities by nationals of other countries. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. Persons who may receive this document should consider and independently evaluate whether it is suitable for his/ her/their particular circumstances and, if necessary, seek professional/financial advice. Any such person shall be responsible for conducting his/her/their own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this document.

The projections and forecasts described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. Projections and forecasts are necessarily speculative in nature, and it can be expected that one or more of the estimates on which the projections and forecasts were based will not materialize or will vary significantly from actual results, and such variances will likely increase over time. All projections and forecasts described in this report have been prepared solely by the authors of this report independently of the Company. These projections and forecasts were not prepared with a view toward compliance with published guidelines or generally accented accounting principles. No independent accountants have expressed an opinion or any other form of assurance on these projections or forecasts. You should not regard the inclusion of the projections and forecasts described herein as a representation or warranty by or on behalf of the Company, Centrum, the authors of this report or any other person that these projections or forecasts or their underlying assumptions will be achieved. For these reasons, you should only consider the projections and forecasts described in this report after carefully evaluating all of the information in this report, including the assumptions underlying such projections and forecasts.

The price and value of the investments referred to in this document/material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance. Future returns are not guaranteed and a loss of original capital may occur. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. Centrum does not provide tax advice to its clients, and all investors are strongly advised to consult regarding any potential investment. Centrum and its affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Foreign currencies denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. In addition, investors in securities such as ADRs, the value of which are influenced by foreign currencies effectively assume currency risk. Certain transactions including those involving futures, options, and other derivatives as well as non-investment-grade securities give rise to substantial risk and are not suitable for all investors. Please ensure that you have read and understood the current risk disclosure documents before entering into any derivative transactions.

This report/document has been prepared by Centrum, based upon information available to the public and sources, believed to be reliable. No representation or warranty, express or implied is made that it is accurate or complete. Centrum has reviewed the report and, in so far as it includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. The opinions expressed in this document/material are subject to change without notice and have no obligation to tell you when opinions or information in this report change.

This report or recommendations or information contained herein do/does not constitute or purport to constitute investment advice in publicly accessible media and should not be reproduced, transmitted or published by the recipient. The report is for the use and consumption of the recipient only. This publication may not be distributed to the public used by the public media without the express written consent of Centrum. This report or any portion hereof may not be printed, sold or distributed without the written consent of Centrum.

The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions. Neither Centrum nor its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

This document does not constitute an offer or invitation to subscribe for or purchase or deal in any securities and neither this document nor anything contained herein shall form the basis of any contract or commitment whatsoever. This document is strictly confidential and is being furnished to you solely for your information, may not be distributed to the press or other media and may not be reproduced or redistributed to any other person. The distribution of this report in other jurisdictions may be restricted by law and persons into whose possession this report comes should inform themselves about, and observe any such restrictions. By accepting this report, you agree to be bound by the fore going limitations. No representation is made that this report is accurate or complete.

21 Swaraj Engines

The opinions and projections expressed herein are entirely those of the author and are given as part of the normal research activity of Centrum Broking and are given as of this date and are subject to change without notice. Any opinion estimate or projection herein constitutes a view as of the date of this report and there can be no assurance that future results or events will be consistent with any such opinions, estimate or projection.

This document has not been prepared by or in conjunction with or on behalf of or at the instigation of, or by arrangement with the company or any of its directors or any other person. Information in this document must not be relied upon as having been authorized or approved by the company or its directors or any other person. Any opinions and projections contained herein are entirely those of the authors. None of the company or its directors or any other person accepts any liability whatsoever for any loss arising from any use of this document or its contents or otherwise arising in connection therewith.

Centrum and its affiliates have not managed or co-managed a public offering for the subject company in the preceding twelve months. Centrum and affiliates have not received compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for service in respect of public offerings, corporate finance, debt restructuring, investment banking or other advisory services in a merger/acquisition or some other sort of specific transaction.

As per the declarations given by them, Mr. Ajay Shethiya, research analyst and and/or any of his family members do not serve as an officer, director or any way connected to the company/companies mentioned in this report. Further, as declared by him, he has not received any compensation from the above companies in the preceding twelve months. He does not hold any shares by him or through his relatives or in case if holds the shares then will not to do any transactions in the said scrip for 30 days from the date of release such report. Our entire research professionals are our employees and are paid a salary. They do not have any other material conflict of interest of the research analyst or member of which the research analyst knows of has reason to know at the time of publication of the research report or at the time of the public appearance.

While we would endeavour to update the information herein on a reasonable basis, Centrum, its associated companies, their directors and employees are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent Centrum from doing so.

Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or Centrum policies, in circumstances where Centrum is acting in an advisory capacity to this company, or any certain other circumstances.

This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Centrum Broking Limited or its group companies to any registration or licensing requirement within such jurisdiction. Specifically, this document does not constitute an offer to or solicitation to any U.S. person for the purchase or sale of any financial instrument or as an official confirmation of any transaction to any U.S. person unless otherwise stated, this message should not be construed as official confirmation of any transaction. No part of this document may be distributed in Canada or used by private customers in United Kingdom.

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Rating Criteria

Rating Market cap < Rs20bn Market cap > Rs20bn but < 100bn Market cap > Rs100bn Buy Upside > 25% Upside > 20% Upside > 15% Hold Upside between -25% to +25% Upside between -20% to +20% Upside between -15% to +15% Sell Downside > 25% Downside > 20% Downside > 15%

Member (NSE, BSE, MCX-SX), Depository Participant (CDSL) and SEBI registered Portfolio Manager Registration Nos.

CAPITAL MARKET SEBI REGN. NO.: BSE: INB011454239, NSE: INB231454233 DERIVATIVES SEBI REGN. NO.: NSE: INF231454233 (TRADING & SELF CLEARING MEMBER)

CDSL DP ID: 12200. SEBI REGISTRATION NO.: IN-DP-CDSL-661-2012 PMS REGISTRATION NO.: INP000004383

MCX – SX (Currency Derivative segment) REGN. NO.: INE261454230

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Compliance Officer Details:

Mr. Ashok Devarajan; Tel: (022) 4215 9000; Email ID: [email protected]

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Bombay Mutual Building ,

2nd Floor,

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Correspondence Address

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Tel: (022) 4215 9000

22 Swaraj Engines

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