BUY Swaraj Engines Automobiles 1Company Update & Annual ... · tractors’ engine requirement....

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Powering the tractor growth story

Our recent dealer survey and in-depth analysis of Swaraj Engines Ltd’s (SEL) annual report reveals that SEL, which manufactures diesel engines for Swaraj tractors, has been gaining ground with each passing year. Mahindra & Mahindra Ltd’s (M&M) takeover of Punjab Tractors Ltd (PTL) in FY07, completely turned around the fate of ‘Swaraj’ brand of tractors, with a concomitant positive impact on SEL. Swaraj tractors has been outperforming the tractor industry’s growth for the past several years and now commands a market share of ~16.5% as compared to 9% market share before M&M’s acquisition. Our dealer survey suggests that Swaraj continues to command strong brand value due to its lower cost of maintenance, higher longevity and better resale value. A detailed financial analysis suggests that SEL’s business enjoys many qualities such as an asset light model, zero debt, negative working capital and high return ratios. The combination of a good monsoon in the past year and the expectation of normal rains in FY18, has led us to believe that SEL will continue its growth momentum with better return ratios in the coming years. Considering all these positives, we recommend Buy with a TP of Rs2,126.

� Increasing market share with a strong brand name: SEL caters to ~80% of Swaraj tractors’ engine requirement. Swaraj tractors have been gaining market share in each and every year, post its acquisition by M&M. Our dealer survey reveals that besides good support from M&M, its strong brand name and high product quality which offers a lower cost of maintenance, higher longevity and better resale value, are all aiding its growth. These factors will continue to help build Swaraj tractors’ growth momentum and in tandem drive SEL’s growth in the coming years.

� New launches and capacity expansion augurs well: SEL’s annual reports highlights that the company is developing a two-cylinder Genset engine, and its 60HP and 65HP engines are in the development stage (this reflects more product launches from the Swaraj stable). The company has already developed and commercialized the 54 HP engine. SEL’s client Swaraj tractors, has made a mark in the 60HP and 15HP segments, respectively, with the launch of 960FE and 717 models (so far, it was present in >20-50HP categories) during FY16. Our channel checks suggest that these models have been well received. This will create new growth opportunity for SEL. SEL has also increased its annual capacity from 75,000 units to 105,000 units during FY16 and plans to increase it further to 120,000 units in FY18. All this will help SEL maintain its growth momentum.

� Enviable business model: Our detailed financial analysis shows that SEL enjoys a high net asset turnover of ~7x (expected to improve to ~10x by FY19) and also has an impressive payback period of just ~1 year, if the new capacity gets fully utilized. SEL’s zero debt, negative working capital, high cash generation and low capex requirement enables it to reward its shareholders with very high dividend pay-outs. The return ratios stood at ~25% in FY17 and we expect them to hit nearly 36% in two years.

� Valuation: A good rain and the expected increase in MSPs, could increase farm income and subsequently increase tractor demand, hence we expect tractor demand to remain strong in the coming years. We remain convinced of SEL’s medium-to-long-term growth opportunity. We value SEL on our differentiated AOCF/EV methodology and arrive at a TP of Rs 2,126 (24x FY19E EPS).

Target Price Rs2,126 Key Data

CMP* Rs1,843 Bloomberg Code SWE IN

Upside 15% Curr Shares O/S (mn) 12.4

Previous Target Rs1,235 Diluted Shares O/S(mn) 12.4

Previous Rating Buy Mkt Cap (Rsbn/USDmn) 23/354.5

Price Performance (%)* 52 Wk H / L (Rs) 1985/1069.1

1M 6M 1Yr 5 Year H / L (Rs) 1985/380.1

SWE IN 24.2 39.7 67.4 Daily Vol. (3M NSE Avg.) 11535

NIFTY 3.6 16.8 19.8

*as on 18 May 2017; Source: Bloomberg, Centrum Research

Shareholding pattern (%)*

Mar-17 Dec-16 Sep-16 Jun-16

Promoter 50.6 50.6 50.6 50.6

FIIs 5.0 6.7 6.7 6.6

Dom. Inst. 12.2 12.1 10.5 10.4

Public & Others 32.2 30.6 32.2 32.4

Source: BSE, *as on 18 May 2017

Swaraj Tractors Snatching Market Share

Source: Centrum Research Estimates

Centrum vs. Bloomberg Consensus*

Particulars (Rs mn)

FY18E FY19E

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

Sales 7,806 7,653 2.0 9,037 8,635 4.7

EBITDA 1,259 1,209 4.1 1,489 1,398 6.5

PAT 895 824 8.6 1,089 956 14.0

Bloomberg Consensus* Centrum Target Price (Rs)

Variance (%)

BUY SELL HOLD Target Price

(Rs)

5 0 3 1,737 2,126 22.4

*as on 18 May 2017; Source: Bloomberg, Centrum Research Estimates

Awanish Chandra [email protected]; 91 22 4215 9815

Vikas Rajpal [email protected]; 91 22 4215 9771

Y/E Mar (Rs mn) Rev YoY (%) EBITDA EBITDA (%) Adj PAT YoY (%) Fully DEPS RoE (%) RoCE (%) P/E (x) EV/EBITDA (x)

FY15 5,397 (11.3) 747 13.8 518 (24.0) 41.7 22.0 21.4 21.2 12.2

FY16 5,259 (2.6) 736 14.0 512 (1.2) 41.2 19.5 19.0 21.3 12.3

FY17E 6,661 26.7 1,047 15.7 688 34.4 55.4 25.2 24.6 22.5 12.6

FY18E 7,806 17.2 1,259 16.1 895 30.1 72.1 31.2 30.5 25.6 15.8

FY19E 9,037 15.8 1,489 16.5 1,089 21.7 87.7 36.7 36.0 21.0 13.1

Source: Company, Centrum Research Estimates

11.6

13.2

16.6

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

%

BUY Automobiles

Company Update & Annual Report Analysis 19 May 2017

INDIA

Swaraj Engines

2 Swaraj Engines

Key takeaways from our dealer survey

Over the last few days, we interacted with more than 25 Swaraj tractor dealers, along with tractor dealers of other companies across key markets like Rajasthan, Madhya Pradesh, Punjab, Tamil Nadu etc. to gain a better understanding of the demand environment. SEL’s growth hinges on the growth of Swaraj tractors as it caters to ~80% of the latter’s engine requirements. Key takeaways from our channel checks are as follows:

� Favourable demand outlook: The tractor industry posted robust volume growth of 18% in FY17 after two consecutive years of decline in demand. FY18 started off on a strong note with a healthy growth of 21% in April and is all set to witness double digit growth. Our interaction with the dealers echoes the belief that 12-13% industry volume growth is very much achievable in FY18 and ahead. However, some dealers highlighted that retail sales were not good in the month of April.

� Demand for Swaraj tractors continues to remain strong: Swaraj tractors not only posted robust growth in volume, but also gained market share. Earlier, of the total tractors sold by M&M, Swaraj tractors would be less than 40%. According to our interaction with the dealers, this may have now increased to ~45%.

Exhibit 1: Swaraj tractor growth vs Industry


Across India, Swaraj tractors is second to Mahindra in terms of sales, as earlier Mahindra tractors had financial assistance from Mahindra and Mahindra Financial Services Limited (MMFSL). Post-the acquisition of PTL by M&M, Swaraj tractors also started getting the same support and has been fast catching up for the past several years.

� Why are Swaraj tractors preferred? While Swaraj tractors cost almost the same as Mahindra tractors, they are among the cheapest to maintain which is their biggest USP in the market. Moreover, dealers say that Swaraj tractors are highly durable and are available in a wide variety of HP options. Over the years, 735 (35-40HP) has been one of Swaraj’s most popular models. However, during the last few years, 744 (45-50HP) has also been gaining popularity. Growing popularity of 744 has not only supported overall volumes, but more importantly has helped Swaraj retain customers upgrading to higher HP segment. In FY16, the company launched 960FE and 717 models to cater to the demand for >55HP and <20HP tractors. The dealers do mention that the demand and sales for 717 is yet to pick up though. With the expected success of new launches, we expect Swaraj tractors’ sales outperformance to continue unfazed in the coming years.

24

13

3

27

(8) (6)

27

20

11

(2)

20

(13)(11)

18

(20)

(10)

-

10

20

30

40

FY11 FY12 FY13 FY14 FY15 FY16 FY17

% growth

Swaraj Tractors growth Industry growth

Launch of 960FE and 717

Launch of 825XM, 841XM, 744XM, 855XM - strengthening the product portfolio with XM series

Launch of 735XM (thefirst of the XM series of models) and 843 XM

3 Swaraj Engines

Exhibit 2: Swaraj tractor market share gain


� Better resale value: The dealer survey put forward another interesting fact that Swaraj tractors have a better resale value compared to the market leader Mahindra tractor. The delta can be as high as Rs40,000-Rs50,000. Additionally, around 40% of the people who come to buy tractors want to exchange their existing tractors to upgrade to a better HP variant. Of these 40%, the ones who exchange their older Swaraj tractor would most likely go for a higher HP variant of Swaraj only and the others also first prefer to opt for a Swaraj tractor. The best discount on a new tractor is offered by the dealer on exchanged Swaraj tractors vs any other brand.

� Network expansion to support volumes in medium term: Our interaction with the dealers also highlighted that Swaraj tractors’ volumes in the near – medium term will also be supported by network expansion – as there are places which have not been optimally penetrated by Swaraj tractors yet.

Exhibit 3: Total dealers by companies


11.6 12.0

12.4 12.6

13.2

13.9

14.7

15.4

16.6

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

%

908 823

257

660

485

916

561

140

407

668

-

150

300

450

600

750

900

1,050

Swaraj

M&M

TAFE

Eicher

Massey Ferguso

n

JD

Sonalika

Kubota

New Holland

Escorts

Locations

4 Swaraj Engines

Annual report analysis snapshot

As part of the annual report analysis, we have carried out a detailed study of the financial statements, corporate governance standards, and analysed management discussions as well as the director’s report. While, the details of the above mentioned points have been discussed in separate sections in this report, we have summarised the analysis in the table below for a quick reference.

Exhibit 4: Snapshot of the annual report analysis

Area Measure/Attribute Impact Remarks

Financials - P&L

Strong growth at the parent company

In line with strong growth of Swaraj tractors, SEL has been growing well for the past several years

SEL supplies ~80% 0f Swaraj tractor’ engines, which has helped the company achieve profitable growth. We believe Swaraj tractors will outpace the industry growth, ensuring continued growth for SEL

Focus on R&D continues SEL has been consistently spending on R&D and spent Rs21.3mn in FY16

Technical collaboration with Kirloskar Oil Engines helped it set up an extensive R&D facility, which has enabled SEL develop new engine variations in terms of HP as required by Swaraj tractors for new launches, that too at a lower R&D cost

Financials - BS

Capex for new capacity Major gross block additions during FY16

To meet the growing demand for Swaraj tractors and its increasing market share, SEL has been preparing for the requirements by adding fresh capacities over the years and has also guided for capacity addition in FY18

Debt free status and asset light model

The company has never raised debt to fund its capex plans, which has helped curb its interest expense

The nature of the business is such that SEL has never had to spend a big amount to get additional capacity and the payback period is just ~1 year, if the additional capacity gets fully utilized

Financials - CF

Efficient cash conversion cycle

Cash conversion cycle improved by 7 days in FY17, due to focus on controlling raw material and other costs. SEL has a negative cash conversion cycle

SEL’s receivable days are the best among its peers and the continued focus on controlling cost metrics will help improve the cash conversion cycle going forward

Strong cash flow generation

SEL has consistently generated strong operating cash flows, which has helped fund capex through internal accruals, thereby helped maintain a debt free status and pay-out dividends as well

As SEL continues to report profitable growth with enviable working capital cycle, it ensures healthy cash flows and a higher dividend pay-out of ~80%

Management Discussion & Director’s report

Developing higher HP engines

Higher HP Swaraj tractor models will help cater to the shift in demand from lower HP towards higher HP

Over the last 3 years, SEL has been working on 54HP, 60HP and 65HP engines. 54HP is now commercialized, whereas the other engines are under final testing stages. With the growing demand for powerful and fuel efficient engine tractors in the future, SEL will have the ammunition ready to load into Swaraj Tractors and address the demand

Capacity expansion Increased the annual manufacturing capacity from 75,000 units in FY15 to 105,000 units in Fy16

SEL has been consistently expanding its capacity to cater the demand requirement. After a decline in industry tractor volumes in FY15 and FY16, the sales rebounded in FY17, posting an 18% growth. The strong growth spilled over to the first month of FY18 as well. Keeping in mind the strong demand outlook, SEL has decided to further expand its annual manufacturing capacity by 15,000 units by the end of FY18

Corporate Governance

Promoter holding consistent

Promoter holding has been consistent at 51%

Indicates continued promoter focus on the business. Here the promoters are reputed institutions such as M&M and Kirloskar Industries. This gives strong confidence to investors

Source: Annual Reports, Centrum Research

Company Background

SEL manufactures engines for tractors in the 20-54 HP segment and caters to ~80% of the total engine requirement at M&M’s Swaraj tractor division, which was earlier owned by PTL. The Government of India originally set up the company in 1985 as a technical and financial collaboration between PTL and Kirloskar Oil Engines for manufacturing diesel engines for PTL, which marketed their products under the Swaraj brand. Kirloskar Oil Engines (KOEL) owned a 17.4% stake in the JV which was then transferred to Kirloskar Industries in FY11. PTL has been taken over and merged with Mahindra and Mahindra Ltd (M&M). As a result, M&M holds 33% of SEL’s equity. SEL also supplies hi-tech engine components to SML Isuzu Ltd., for assembly of commercial vehicle engines. Since the start of its commercial operations in 1989-90, SEL has supplied around 800,000 engines for fitment into "Swaraj" tractors.

5 Swaraj Engines

Financial statement analysis

We highlight the key points in SEL’s P&L, balance sheet and cash flow statements that caught our attention and merited further analysis. We discuss in detail each of these points and their impact on the financials.

Profit and loss

� A Moderate Long Term Growth: SEL’s FY16 top line performance was impacted by sluggish volume performance of the domestic tractor industry, which was down 10.5%. However, in FY17 the industry rebounded and grew by 18% on the back of strong monsoon and bumper crop production, the effect of which was visible in SEL’s performance as well, which grew by 27%, outpacing the industry by ~9oo bps. That said we expect SEL’s revenue to increase at a CAGR of 16% over FY17-FY19 on the back of strong volume growth of 14% per year attributed to normal monsoon and expected increase in farm income, which will help maintain traction in the tractor industry. Furthermore, the new launches by Swaraj tractors will also help push SEL’s revenues upwards.

Exhibit 5: Sales and Sales Growth

Source: Annual Reports, Centrum Research Estimates

Exhibit 6: Engine Volume and Realization


SEL has been a direct beneficiary of the growth momentum in Swaraj tractors. Continued market share gain by Swaraj tractors has been helping SEL post higher growth as compared to the growth of domestic tractor industry.

3,606

4,486

4,790

6,083

5,397

5,259

6,661

7,806

9,037

28 24

7

27

(11)

(3)

27

17 16

-15

-10

-5

0

5

10

15

20

25

30

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E

Rs mn

Revenue Revenue Growth - RHS

47,413

55,239

57,377

74,062

64,595

64,088

82,297

69,565

75,023

78,481 79,637

81,344

79,456 78,584

62,000

64,000

66,000

68,000

70,000

72,000

74,000

76,000

78,000

80,000

82,000

84,000

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000


Units

Engines sold Realization per unit (Rs) - RHS

6 Swaraj Engines

Exhibit 7: SEL’s Growth vs Tractor Industry Growth


� Robust Margin Performance: SEL’s EBITDA growth during FY17 was driven by its 27% revenue growth. This along with a reduction in employee cost and raw material cost as a percent of sales was responsible for an expansion in the EBITDA margin. The margins have remained robust and continue to expand on the back of improved efficiencies and revenue growth. We expect to see a further expansion in the EBITDA margin going forward on account of lower administrative and employee expenses as a percent of sales. Subsequently, EBITDA is expected to grow at a CAGR of 19% over FY17-FY19.

Exhibit 8: Improving Margins


6.2

7.8 4.6

1.5 2.1

(2.3)

(1.1)

19.9

11.4

(1.7)

20.5

(12.9)(10.5)

18.1

21.1

16.5

3.9

29.1

(12.8)

(0.8)

28.4

(20)

(15)

(10)

(5)

-

5

10

15

20

25

30

35


%

Relaization growth (%) Tractor Industry growth (%) Engines Volume growth (%)

607

697

714

906

747

736

1,047

1,259

1,489

16.8 15.5

14.9

14.9 13.8

14.0 15.7

16.1 16.5

25.5 24.1 23.9 24.0 24.2 24.8

25.6

25.5

25.5

0

5

10

15

20

25

30

0

200

400

600

800

1,000

1,200

1,400

1,600


Rs mn

EBITDA - LHS EBITDA Margin (%) Gross Margin (%)

7 Swaraj Engines

� R&D Expenses: SEL’s R&D expenditure has reduced from 0.8% of sales in FY11 to 0.4% of sales in FY16, with an increasing revenue base. Technical support from Kirloskar Oil Engines also helped keep a check on R&D spends. Major spend on technology enhancement was done before FY16. However, the company wouldn’t shy away from any future spending on development of new technology or products.

Exhibit 9: R&D Expenses


� Stringent Cost Control: Total other expenses marginally increased to 3% of sales in FY16 compared to 2.7% of sales in FY11. The power and fuel expenditure remained more or less flat at 0.8% of revenues in FY16 from 0.7% in FY11. The selling & distribution expenditure fell to 0.2% of sales in FY16 from 0.4% in FY11. The stringent cost control measures have helped boost the company’s operating performance across the years.

Exhibit 10: Major other expenses

Particulars (Rs mn) FY11 FY12 FY13 FY14 FY15 FY16

Total Revenues 3,606 4,486 4,790 6,083 5,397 5,259

Selling & distribution 13 13 13 21 36 10

As % of revenues 0.4 0.3 0.3 0.3 0.7 0.2

Power & Fuel 25 33 38 50 45 43

As % of revenues 0.7 0.7 0.8 0.8 0.8 0.8

Repairs & Main 20 32 28 28 31 31

As % of revenues 0.6 0.7 0.6 0.5 0.6 0.6

Others 38 40 54 60 40 74

As % of revenues 1.1 0.9 1.1 1.0 0.7 1.4

Key Other Expenses* 97 118 133 159 152 158

As % of revenues 2.7 2.6 2.8 2.6 2.8 3.0

Source: Annual Reports, Centrum Research, *Ex stores and spares

28 18 29 27 17 21

0.8

0.4

0.6

0.4

0.3

0.4

-

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

-

5

10

15

20

25

30

35

FY11 FY12 FY13 FY14 FY15 FY16

Rs mn

Total R&D Expenditure As a % of revenues -RHS

8 Swaraj Engines

� PAT to Grow Steadily: We expect SEL’s PAT to grow at a CAGR of 26% over FY17-FY19E on good sales growth and 86 bps operating margin expansions during the same period. PAT margins are expected to stabilize around 12% in the medium term. PAT grew at a slower CAGR of 8% from FY11-FY17 due to a challenging macro environment; however the company did expand its PAT margin in FY17, due to higher operating margin.

Exhibit 11: PAT and PAT Margin


Balance sheet

� Strong Capacity Addition: Due to the increasing demand for Swaraj brand of tractors the company expanded its capacity thrice over FY10-FY13 from 36,000 units per annum to 75,000 units per annum. It achieved over 100% utilization levels in FY10 and FY11 and needed to expand capacity. Despite gradual expansion, the company achieved close to 100% utilization in FY14. Sensing further increase in demand it expanded its annual capacity from 75,000 units to 105,000 units in FY16 at a cost of Rs 380mn, funded through internal accruals. Post slowdown in FY15-FY16, the utilization levels quickly rose from 61% in FY16 to 78% in FY17. The company has thus decided to further enhance its capacity by another 15,000 units and take its total capacity to 120,000 units.

Exhibit 12: Installed Capacity and Capacity Utilization


439

532

554

682

518

512

688

895

1,089

12.2 11.9

11.6 11.2

9.6 9.7

10.3

11.5

12.1

6

7

8

9

10

11

12

13

0

200

400

600

800

1,000

1,200


%

Rs mn

PAT PAT Margin - RHS

42,000

60,000

75,000

75,000

75,000

1,05,000

1,05,000

1,20,000

1,20,000

113

92

77

99

86

61

78 79

90

6

26

46

66

86

106

126

0

20,000

40,000

60,000

80,000

1,00,000

1,20,000

1,40,000


%

Units

Installed Capacity Capacity utilization - RHS

9 Swaraj Engines

� Significant gross block addition in the recent past: SEL’s gross block has increased at a CAGR of 20% over the last five years and has been adding new capacities over the last five year period. In FY16, SEL invested in plant & machinery worth Rs302mn (16% of FY16 the gross block) apart from other additions towards capital work in progress/ capital spares.

Exhibit 13: Gross Block Addition


� Higher Depreciation Costs: The depreciation costs have inched up from 1.2% of sales in FY11 to 2.6% of sales in FY16. The uptick in depreciation is due to the fresh capacity additions across the years.

Exhibit 14: Depreciation Charges

Particulars (Rs mn) FY11 FY12 FY13 FY14 FY15 FY16

Depreciation 45 43 72 91 132 138

Dep. as % of sales 5.7 4.4 5.1 6.0 8.1 7.1

Gross Block 776 960 1,415 1,529 1,634 1,936

Dep. as % of Gross Block 5.7 4.4 5.1 6.0 8.1 7.1

Source: Annual Report, Company, Centrum Research

� Working Capital Cycle: SEL’s cash conversion cycle has been improving consistently. In FY16, the cash conversion cycle has dropped to negative levels and further improved in FY17 due to a sharp fall in inventory days (14 days in FY17 compared to 36 days in FY11). The debtor days also reduced to 7 days in FY17 from 8 days in FY11, whereas the creditor days remained more or less at the same level. Swaraj has been managing its working capital in an efficient manner and we expect the same to continue going forward.

Exhibit 15: Cash Conversion Cycle


0.8

1.0

1.41.5 1.6

1.9

0.2

0.4

0.8 0.8 0.8

1.0

0.02 0.090.0 0.0

0.0 0.00.0

0.5

1.0

1.5

2.0

2.5

FY11 FY12 FY13 FY14 FY15 FY16

Rs bn

Gross Block Net Fixed Assets CWIP

36

27 30

28

22 19 14

16 16 8 10 7

5 5 5

7 6 6

36 35 31

36 33

37 38 36 36

7 2

6

(3)(6)

(13)(17)

(14) (14)(20)

(10)

-

10

20

30

40

50


No of days

Inventory Period Debtors Period

Creditors Period Cash Conversion Cycle

10 Swaraj Engines

� Strong Cash Position: SEL has managed to remain a debt free company for the past several years and has successfully managed to increase capacity through internal accruals and strong cash flow generation.

Exhibit 16: Strong Net Cash Position


� Consistent Return Ratios: SEL has consistently maintained its return ratios above 28% in the FY11-FY14 period, however due to the overall slowdown in the tractor industry the return ratios came down to ~20% levels in FY16. In FY17 it came back to 25%, due to a strong pick up in tractor demand, which we expect to continue its growth momentum going forward and help SEL’s return ratios achieve historical levels.

Exhibit 17: Return Ratios


1,340

1,508

1,549

1,771

1,819

1,847

2,351

124

161

410

435

410

410 534

28 30

74

65

79 80 78

-

10

20

30

40

50

60

70

80

90

0

500

1,000

1,500

2,000

2,500


Dividend Payout %

Rs mn

Net Cash Dividends paid Dividend payout % - RHS

31.9 31.4

29.1

33.8

22.0

19.5

25.2

31.2

36.7

28.6

31.0

28.5

32.7

21.4

19.0

24.6

30.5

36.0

15

20

25

30

35

40


%

ROE ROCE

11 Swaraj Engines

Cash flow

� Strong operating cash flow: Swaraj has been generating strong cash flows over the past several years. The adjusted operating cash flow which is the operating cash flow after adjusting for interest payments has been growing at a CAGR of 20% over FY11-FY17. Cash profit has grown at a CAGR of 10% in the same period led by operating profit growth and more efficient working capital management. We expect it to edge higher in the coming years.

Exhibit 18: Strong Operating Cash Flow

Particulars (Rs mn) FY11 FY12 FY13 FY14 FY15 FY16 FY17E

Cash Profit 484 574 625 773 650 650 851

OCF (reported) 306 499 475 671 556 630 1,057

Interest expenses (57) 1 2 0 0 0 1

Adj. OCF(AOCF) 363 498 473 670 556 630 1,056

Capex (72) (310) (398) (118) (167) (273) (63)

Adj. FCF 291 188 75 552 389 357 993


� Higher cash flow supported CAPEX: SEL has been on an expansion spree in the past several years and has guided that it would add another 15,000 units by the end of FY18. The company has never had to leverage to fund its capex requirements and sources all its needs from internal accruals. Despite spending on increasing capacities without leveraging the company has been continually paying out dividends. In FY13, despite spending Rs380mn on capacity expansion, SEL paid out 74% of EPS in dividend.

Exhibit 19: Strong AOCF generation


� Total tax Paid – higher as per cash flow: SEL has paid higher tax as per cash flow statements, compared to total tax provisions in its P&L account in FY16. However, total tax on P&L has two components – current tax and deferred tax. Taxes paid as per cash flow statements are in sync with current tax provisions in the P&L accounts. The company’s tax rate has remained stable over the last five years.

Exhibit 20: Tax Payment and Provision

Particulars (Rs mn) FY11 FY12 FY13 FY14 FY15 FY16 Cumulative

FY11-FY16

Profit before tax 644 776 795 990 778 761 4743

Tax prov. As per P & L 204 245 241 308 260 249 1506

as % of PBT 31.8 31.5 30.3 31.1 33.4 32.7 31.8

Current Tax 212 232 210 302 264 233 1452

as % of PBT 32.9 29.8 26.4 30.5 34.0 30.6 30.6

Deferred Tax (8) 13 31 6 (5) 16 54

Tax as per cash flow 215 226 215 301 273 238 1467

as % of PBT 33.4 29.1 27.0 30.4 35.0 31.3 30.9


363

498473

670

556

630

72

310

398

118167

27328

30

74

65

79 80

-

10

20

30

40

50

60

70

80

90

0

100

200

300

400

500

600

700

800

FY11 FY12 FY13 FY14 FY15 FY16%

Rs mn

AOCF CAPEX Outgo Dividend Payout - RHS

12 Swaraj Engines

Management discussion highlights and our inference

We highlight below the key areas on which management discussions and directors’ reports have laid special emphasis. We draw an objective inference of these key points from an earnings point of view.

Exhibit 21: Management discussion analysis & our inference on the same

Key areas discussed Management Comments Our Inference

Strong opportunity in the Indian tractor industry

The domestic tractor industry after registering de-growth of 13% during FY15 continued to be on declining trend in FY16 as well and registered a further de-growth of 10%. On the basis of current positive market trends witnessed during last quarter of fiscal 2016 where tractor industry, after posting de-growth in 5 consecutive quarters, had registered a growth of 8%, it is expected that the domestic tractor industry will register growth in the near term.

The domestic tractor industry saw an 18% strong growth in FY17. Growth was maintained throughout the year except for a de-growth in November 2016 due to demonetization. However, the sales started picking up soon after and the same strong growth was witnessed during the first month of FY18, with April 2017 witnessing a 21% growth. We expect this good run to continue on account of normal rainfall guided by the IMD.

Industry shift towards higher HP tractors

Over a period of time, the medium and higher HP segments have become the most popular and fastest growing segments in the country. Further, to increase the tractor penetration in the lower segment of the market and to provide a cost effective product, some of the industry players have also taken keen an interest in below 20 HP category tractors.

Over the last few years, the tractors have indeed seen a shift in demand from lower HP towards higher HP. Demand for tractors up to 30HP declined at a CAGR of 2% and 30-40HP declined at 3% CAGR over the last 5 years. The demand for 40-50HP has seen strong demand growth and has seen 8% CAGR growth over the same period. Tractors more than 50HP have also seen a decline of 3% CAGR in the last 5 years, but our dealer checks indicate that the demand for 55HP is high, so we expect to see some traction in this segment. Swaraj tractors has realized this and last year launched 960FE to cater to higher HP demand.

Focus on R&D

The company's focus on technology upgradation and development of new engines in middle and higher HP ranges continues. Besides this, the company is also constantly working on value engineering and standardization of parts and on reducing the cost of ownership for customers.

SEL has consistently been spending on R&D over the past five years. Since the single largest customer is Swaraj tractors, SEL has been working on newer engine HP to expand its product range and cater to all HP requirements. The company is currently working on developing a 2 Cylinder Genset Engine which is in final testing stages. New 60 and 65 HP engines are also under testing stages.

Industry concerns

As a supplier to M&M & SML Isuzu, SEL would be directly affected by factors impacting the tractor industry and the commercial vehicle industry. These would include issues like the rain-dependent nature of agriculture, Government policy on procurement, credit availability, auto regulations, commodity price trends etc.

The fact that tractor penetration in India is very low at <1HP/hectare compared to other countries which have more than 2HP/ hectare. West Germany has the highest penetration at ~10HP/hectare. There are a lot of factors that can increase penetration such as government focus on enhancing irrigation, reducing farm labour; increased allocation towards farm credit, and increasing farm mechanization along with normal monsoons would help create traction in tractor demand. Since Mahindra and Swaraj tractors are the market leaders, all the above factors augur well for a positive demand outlook for the next few years.


13 Swaraj Engines

Corporate Governance Study and Analysis

We believe that sound corporate governance is necessary for enhancing the trust of shareholders and other stakeholders. We have undertaken a detailed corporate governance study covering broad aspects such as the composition of the board of directors, independent directors, compensation paid to the promoter directors and independent directors, details of auditors and their remuneration, nature and amount of contingent liabilities, related party transactions and CSR expenditure.

Promoters’ Shareholding

The Swaraj brand of tractors was originally promoted by Punjab Tractors Ltd (PTL). PTL had a 33.2% stake in Swaraj Engines and Kirloskar Oil Engines had a 17.4% stake. In June’07, PTL was acquired by M&M, which ended up owning “Swaraj” brand of tractors and 33.2% stake in Swaraj Engines while Kirloskar Oil Engines continued to be the co-promoter with 17.4% stake. Kirloskar Oil Engines, then transferred its stake to Kirloskar Industries in FY11. Swaraj has a strategic importance to the parent as it supplies ~80% of its production to M&M’s Swaraj Tractor division. The two promoters of the companies have consistently held on to their stake.

Exhibit 22: Promoters’ shareholding

Particulars % Holding

Kirloskar Industries Ltd. 17.4

Mahindra and Mahindra Ltd. 33.2

Total 50.6


Exhibit 23: Promoters’ shareholding


50.6 50.6 50.6 50.6 50.6

40.0

42.0

44.0

46.0

48.0

50.0

52.0

FY13 FY14 FY15 FY16 FY17

%

14 Swaraj Engines

Board of Directors

SEL’s board consists of 40% independent directors who have been on the board for a considerable period of time. The chairman of the board is an independent director, which is a big positive. The independent directors actively participate in the board meetings. There are no promoter directors on the board as the promoters of SEL are two entities M&M and Kirloskar Industries. The details of the board composition are as follows:

Exhibit 24: Board composition

Particulars FY13 FY14 FY15 FY16

Swaraj Engines

- Total Strength 10 10 10 10

- Non-Executive Independent Directors 4 4 4 4

- Non-Executive Non-Independent Directors 5 5 5 5

- Executive Non-Independent Directors 1 1 1 1

- % Non-Executive Independent Directors 40.0 40.0 40.0 40.0

- % Non-Executive Non-Independent Directors 50.0 50.0 50.0 50.0

- % Executive Non-Independent Directors 10.0 10.0 10.0 10.0

Source: Annual reports, Centrum Research

Key Management Compensation

The key management executives are compensated through a good salary and perquisites. The affairs of the company are managed by Shri M. N. Kaushal. He joined Punjab Tractors in 1981 and his last assignment in M&M was as Senior Vice President – Finance (Farm Division of M&M). The total compensation for the managing director was 1% of PBT. His compensation details are as follows

Exhibit 25: Key Management compensation

Name (Rs mn) FY13 FY14 FY15 FY16 FY13-FY16 Total

Swaraj Engines

M.N.Kaushal 1.2 1.2 3.8 7.5 13.7

- % share of PBT 0.2 0.1 0.5 1.0 0.4

Total 1.2 1.2 3.8 7.5 13.7

- % share of PBT 0.2 0.1 0.5 1.0 0.4


Please note that SEL is not governed by any individuals who are promoters as well. Here promoters are institutions viz. M&M Ltd and Kirloskar Industries Ltd.

Independent Directors and their compensation

SEL’s board consists of four independent directors. The independent directors were collectively paid Rs1mn in FY16. The details of the same are as follows:

Exhibit 26: Independent directors & their compensation

Name (Rs mn) Since No. of directorships in other public cos.

Listed/Prominent Companies in which director in FY16

FY16 compensation

as % of FY16 PBT

Shri Sudhir Mankad At least 2015 9 Deepak Nitrite Limited, Navin Fluorine, National Securities Depository Limited Gruh Finance Limited and many other marquee companies

0.9

0.11

Dr. T.N.Kapoor At least 2002 3 Omax Autos Limited, Sterling Tools Limited 1.0 0.12

Shri Dileep C. Choksi At least 2015 9 ICICI Bank Limited, ICICI Home Finance Co., Lupin, Hexaware, Arvind Ltd and many other marquee companies

0.8 0.10

Smt. Neera Saggi At least 2015 9

SICOM Ltd, Tata Projects Ltd, TRF Ltd, Maithon Power Limited, Mahindra Heavy Engines Limited, Tata Consulting Engineers and many other marquee companies

0.9 0.11


15 Swaraj Engines

Contingent Liabilities

SEL’s contingent liabilities gradually reduced to 1.9% of net worth in FY16 from 3.1% of net worth in FY13. The contingent liabilities were on account of indirect taxes as well as custom and excise duties. As such, these items are considered safe. The details are as follows:

Exhibit 27: Contingent Liabilities

Particulars FY13 FY14 FY15 FY16

Taxation and Duty Related 36 37 33 25

Others 24 24 24 24

Total 60 61 57 49

As a % Of Net Worth 3.1 2.9 2.2 1.9


Related Party Transactions

SEL’s related party transactions mainly involve purchase and sale of goods, dividend payments to promoter entities and services rendered to M&M. It is safe to assume that these transactions are synchronous with the normal course of business, hence there is nothing noteworthy. The details are as follows:

Exhibit 28: Key Related party transactions

Particulars (Rs mn) FY13 FY14 FY15 FY16

M&M - Purchase of Goods 43 6 52 106

% of Raw Material Cost 1.1 0.1 1.2 2.6

M&M - Sale of Goods 5,460 7,114 6,258 6,224

M&M - Receiving Services 39 38 46 46

M&M - Rendering of services 12 6 10 10

M&M - Dividend paid 82 136 144 136


Auditors

The company’s auditor is Davinder S. Jaaj & co. the firm is not auditor of any other prominent listed company. The details are as follows:

Exhibit 29: Auditors and Their Remuneration

Company (Rs mn) Auditors Name Type Auditor since

Other listed/prominent companies audited

Audit Fees -FY16

as % of PBT

Swaraj Engines Davinder S. Jaaj & co

Statutory At least 1997

None 0.59 0.08%

Source: Annual Report, Centrum Research

CSR Activities

SEL has been actively involved in CSR activities for the betterment of society. The company spent Rs17mn in FY16 and in FY15 both. The spending was 100% of the prescribed limit which is a very positive characteristic of the company.

Exhibit 30: The details are as follows: CSR activities spend

Year Prescribed Expenditure Total Spends Spend as % of prescribed limit-FY16

FY16 17 17 100

FY15 17 17 100

Source: Annual Report, Centrum Research

16 Swaraj Engines

Valuation and recommendations

SEL’s stock has risen nearly 50% in the last six months on account of strong quarterly performances, along with strong volume growth. Structurally the company still retains its fundamental strengths and is all set to grow its business with expected strong demand for tractors. We value SEL on our differentiated AOCF/EV methodology and arrive at a TP of Rs2,126. We ascribe a premium to historical multiples and specify the key reasons for the same below.

AOCF/EV valuation – 30% premium ascribed to historical AOCF/EV yield

As per our AOCF/EV based valuation, we note that SEL’s four year average AOCF/EV yield stands at 6.8%. We have ascribed a 30% premium to this average to arrive at a target AOCF/EV yield of 5.2%, and hence, the implied EV/AOCF multiple of 19.2x. We use average AOCF over FY16-19E and a 19.2x EV/AOCF multiple to arrive at our target EV and our TP of Rs 2,126/share.

Exhibit 31: AOCF/EV based valuation


We believe that the premium assigned to the multiple is justified on account of the following reasons:

� Gaining market share: SEL has been a direct beneficiary of consistent industry outperformance by Swaraj tractors post acquisition of PTL by M&M. Swaraj tractors has been beating the industry growth rate by an average margin of ~500 bps in the last 8 years. This implies that there is a strong demand for Swaraj tractors which was reaffirmed by our interaction with the dealers. All this has led to continued market share gain by Swaraj tractors, which translated into SEL’s strong performance. We expect the outperformance by Swaraj to be maintained going forward.

� Asset light model and low payback period for new capex: Our detailed financial analysis shows that SEL enjoys a high net asset turnover of ~7x (expected to improve to ~10x by FY19) and also has an impressive payback period of just ~1 year, if the new capacity gets fully utilized. Average capacity utilization was 86.5% during FY11-FY17. We expect this to further improve in the coming years.

� High return ratios and consistent dividend pay-outs: SEL has maintained its profitability ratios (ROE & ROCE) above 20%, except in FY16 when the domestic tractor volumes declined for two year consecutively. However, it returned back to ~25%, when the volume growth picked up in FY17. Additionally, due to its capability of generating strong FCF, SEL has been rewarding its shareholders handsomely with an average 75% pay-out ratio. We expect these return ratios to improve in the years ahead.

Exhibit 32: 1 year forward EV/EBITDA chart Exhibit 33: 1 year forward P/E chart

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

2

4

6

8

10

12

14

16

18

May-11

Nov-11

May-12

Nov-12

May-13

Nov-13

May-14

Nov-14

May-15

Nov-15

May-16

Nov-16

May-17

EV/EBITDA Mean

Mean + Std Dev Mean - Std Dev

6

9

12

15

18

21

24

27

May-11

Nov-11

May-12

Nov-12

May-13

Nov-13

May-14

Nov-14

May-15

Nov-15

May-16

Nov-16

May-17

P/E Mean

Mean + Std Dev Mean - Std Dev

Average 4-yr adj. cash flow yield (FY14-17, %) 6.8

Premium 30%

Average 4-yr adj. cash flow yield (FY16-19, %) after discount 5.2

Implied EV/4 yr AOCF Multiple (x) 19.2

Average Operating cash flow after interest (FY16-19E, Rs mn) 1,199

Target Enterprise Value (Rs mn) 23,058

Net Debt (FY19, Rs mn) (3,349)

Target Market Cap (Rs mn) 26,408

No of shares (mn) 12.4

Target Price (Rs/shr) 2,126

17 Swaraj Engines

Quarterly financials, Operating Metrics and Key Performance Indicators

Exhibit 34: Quarterly Financials

Y/E March (Rs mn) 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17

Net Sales 1,532 1,532 1,056 1,140 1,717 1,789 1,548 1,608

Raw Materials 1,161 1,150 801 846 1,280 1,328 1,144 1,204

Employee Costs 70 84 65 63 73 76 81 81

Other Expenditure 79 71 63 71 81 94 93 82

EBITDA 223 227 128 160 284 292 230 241

Depreciation 34 37 33 35 40 42 40 42

Interest - 0 0 - 0 0 1 0

Other Income 44 41 37 40 47 45 44 36

PBT 233 232 132 165 291 295 234 235

Tax 77 76 49 48 101 102 81 82

Tax rate (%) 32.8 32.9 36.8 28.8 34.7 34.7 34.7 34.9

Reported PAT 157 155 83 118 190 193 153 153

Other Comprehensive Income (Net of Tax)

- - - (1) - - - 2

Total PAT 157 155 83 117 190 193 153 155

YoY Growth (%)

Revenue (7.8) (8.4) 3.5 9.3 12.1 16.8 46.6 41.0

EBITDA (10.7) (7.4) 7.4 19.8 27.5 28.3 80.2 50.6

PAT (11.0) (12.4) 0.8 42.7 21.4 23.9 83.2 29.8

QoQ Growth (%)

Revenue 0.0 (31.1) 8.0 50.6 4.2 (13.5) 3.9

EBITDA 2.1 (43.9) 25.5 77.2 2.7 (21.2) 5.0

PAT (0.7) (46.3) 41.0 61.4 1.3 (20.5) (0.1)

Margin (%)

EBITDA 14.5 14.8 12.1 14.1 16.5 16.3 14.9 15.0

PAT 10.2 10.1 7.9 10.3 11.1 10.8 9.9 9.5

Key Drivers

Engine sales ( in Units) 18,383 18,890 12,845 13,970 20,910 22,395 19,150 19,842

Per Vehicles basis (Rs.)

Realizations (Rs/Engine) 83,311 81,091 82,203 81,596 82,109 79,888 80,820 81,025

Raw material costs (Rs/Engine) 63,140 60,879 62,320 60,558 61,196 59,299 59,728 60,679

Employee costs (Rs/Engine) 3,786 4,447 5,076 4,495 3,486 3,376 4,209 4,067

Other Expenditure (Rs/Engine) 4,276 3,732 4,873 5,075 3,850 4,188 4,877 4,118

EBITDA (Rs/Engine) 12,109 12,033 9,934 11,467 13,577 13,025 12,005 12,161

Source: Company, Centrum Research

Exhibit 35: Quarterly sales trend Exhibit 36: Quarterly EBITDA trend

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

1,532 1,532

1,056 1,140

1,717 1,789

1,548 1,608

-

400

800

1,200

1,600

2,000

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

Rs mn

223

227

128

160

284

292

230

241

14.5 14.8

12.1

14.1

16.5 16.3

14.9 15.0

10.0

12.0

14.0

16.0

18.0

-

100

200

300

400

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

%

Rs mn

EBITDA EBITDA Margin (%) - RHS

18 Swaraj Engines

Financials

Exhibit 37: Income Statement

Y/E March (Rs mn) FY15 FY16 FY17 FY18E FY19E

Net Sales 5,397 5,259 6,661 7,806 9,037

Raw Materials 4,189 4,046 5,087 5,971 6,912

% of sales 77.6 76.9 76.4 76.5 76.5

Personnel 308 319 310 341 375

% of sales 5.7 6.1 4.7 4.4 4.1

Manufacturing & Other Exp. 152 158 217 236 261

% of sales 2.8 3.0 3.3 3.0 2.9

EBITDA 747 736 1,047 1,259 1,489

EBITDA Margin (%) 13.8 14.0 15.7 16.1 16.5

Depreciation & Amortisation 132 138 163 164 176

EBIT 615 598 884 1,096 1,313

Interest Expenses 0 0 1 - -

EBT 615 598 883 1,096 1,313

Other Income 163 163 172 241 313

PBT 778 761 1,055 1,336 1,626

Tax-Total 260 249 366 441 536

Effective tax rate (%) 33.4 32.7 34.7 33.0 33.0

Extraord. items -Adj. - - - - -

Reported PAT 518 512 688 895 1,089

Minority Interest - - - - -

Adjusted PAT 518 512 688 895 1,089


Exhibit 38: Key Ratios

Y/E March FY15 FY16 FY17 FY18E FY19E

Growth ratios (%)

Net sales & operating other income (11.3) (2.6) 26.7 17.2 15.8

EBITDA (17.6) (1.5) 42.2 20.3 18.3

Adjusted Nt Profit (24.0) (1.2) 34.4 30.1 21.7

Margin Ratio (%)

EBITDA Margin 13.8 14.0 15.7 16.1 16.5

EBIT Margin 11.4 11.4 13.3 14.0 14.5

PBT Margin 14.4 14.5 15.8 17.1 18.0

PAT Margin 9.6 9.7 10.3 11.5 12.1

Return Ratio (%)

ROE 22.0 19.5 25.2 31.2 36.7

ROCE 21.4 19.0 24.6 30.5 36.0

Turnover Ratio days (days)

Gross Block Turnover (x) 3.41 2.95 3.39 3.72 3.99

Inventory Period 22 19 14 16 16

Debtors Period 5 5 7 6 6

Creditors 33 37 38 36 36

Cash Conversion Cycle (5.5) (13.0) (17.0) (14.0) (14.0)

Solvency Ratio (%)

Debt-equity (x) - - - - -

Net Debt-equity (x) (0.5) (0.7) (0.7) (0.9) (0.9)

Liquidity ratio (x) 3.4 3.4 2.8 1.9 1.9

Per share (Rs)

Adjusted EPS 41.7 41.2 55.4 72.1 87.7

CEPS 52.3 52.3 68.5 85.2 101.9

Book value 210.5 212.1 228.2 234.0 243.5

Dividend per share 33.0 33.0 43.0 55.0 65.0

Dividend Payout (%) 79.1 80.0 77.6 76.3 74.1

Dividend Yeild (%) 2.5 2.5 3.2 4.1 4.9

Valuation

P/E 21.2 21.3 22.5 25.6 21.0

P/BV 4.2 4.1 5.5 7.9 7.6

5 Year Average AOCF/EV Yield % 5.6 6.2 5.2 4.6 5.5

EV/EBITDA 12.2 12.3 12.6 15.8 13.1

EV/Sales 1.7 1.7 2.0 2.5 2.2


Exhibit 39: Balance Sheet

Y/E March (Rs mn) FY15 FY16 FY17 FY18E FY19E

Sources of funds

Capital 124 124 124 124 124

Reserves & Surplus 2,491 2,510 2,710 2,783 2,900

Shareholders’ Funds 2,615 2,634 2,834 2,907 3,024

Minority Interest - - - - -

Total Debt - - - - -

Deferred Tax Liabilities 63 76 63 63 63

Total Liabilities 2,678 2,710 2,896 2,969 3,087

Application of funds

Gross Block 1,634 1,936 1,994 2,202 2,322

Accumulated Dep. (795) (918) (1,081) (1,245) (1,421)

Capital WIP 48 3 8 0 0

Net Fixed Assets 886 1,021 921 957 901

Investments 420 104 489 489 489

Goodwill - - - - -

Inventories 331 278 261 342 396

Sundry Debtors 69 75 131 128 149

Other Current Assets - - - - -

Cash & Bank Balances 1,399 1,743 1,862 2,527 2,860

Loans and Advances 148 147 58 156 181

Total Current Assets 1,947 2,242 2,312 3,154 3,586

Creditors 482 540 701 770 891

Other Current Liabilities 48 69 72 80 94

Provisions 45 47 52 781 904

Total Current Liabilities 575 656 825 1,631 1,889

Net Current Assets 1,371 1,586 1,486 1,523 1,697

Total assets 2,678 2,710 2,896 2,969 3,087


Exhibit 40: Cash Flow

Y/E March (Rs mn) FY15 FY16 FY17E FY18E FY19E

Operating profit before WC changes 638 660 838 1,059 1,266

Net change in working capital 81 130 219 628 159

Cash flow from operating activities (a) 719 791 1,057 1,687 1,425

Adjusted Operating Cash flow 718 790 1,056 1,687 1,425

Capital expenditure (167) (273) (63) (200) (120)

Adjusted FCF 552 517 993 1,487 1,305

Cash flow from investing activities (b) (107) (138) (448) (200) (120)

Cash flow from financing activities (c) (505) (492) (489) (822) (972)

Net change in cash (a+b+c) (56) 1 120 665 333


19 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 accepted 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.

20 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. “The company covered in this report may have availed services from Centrum and / or its affiliates and therefore, Centrum or its affiliates may have received compensation from the company covered in this report during the preceding twelve months. Centrum Broking Limited and its affiliated company (ies), their directors and employees may have any other potential conflict of interests with respect to any recommendation and other related information and opinions.”

As per the declarations given by them, Mr. Awanish Chandra & Mr. Vikas Rajpal, 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.

The information contained herein is not intended for publication or distribution or circulation in any manner whatsoever and any unauthorized reading, dissemination, distribution or copying of this communication is prohibited unless otherwise expressly authorized. Please ensure that you have read “Risk Disclosure Document for Capital Market and Derivatives Segments” as prescribed by Securities and Exchange Board of India before investing in Indian Securities Market.

Swaraj Engines price chart

Source: Bloomberg, Centrum Research

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Swaraj Engines Ltd

21 Swaraj Engines

Disclosure of Interest Statement

1 Business activities of Centrum Broking Limited (CBL)

Centrum Broking Limited (hereinafter referred to as “CBL”) is a registered member of NSE (Cash, F&O

and Currency Derivatives Segments), MCX-SX (Currency Derivatives Segment) and BSE (Cash

segment), Depository Participant of CDSL and a SEBI registered Portfolio Manager.

2 Details of Disciplinary History of CBL CBL has not been debarred/ suspended by SEBI or any other regulatory authority from accessing /dealing in securities market.

3 Registration status of CBL: CBL is registered with SEBI as a Research Analyst (SEBI Registration No. INH000001469)

Swaraj Engines

4 Whether Research analyst’s or relatives’ have any financial interest in the subject company and nature of such financial interest No

5 Whether Research analyst or relatives have actual / beneficial ownership of 1% or more in securities of the subject company at the

end of the month immediately preceding the date of publication of the document. No

6 Whether the Research Analyst has received any compensation or any other benefits from the subject company or third party in

connection with the research report No

7 Whether Research Analysts has served as an officer, director or employee of the subject company No

8 Whether the Research Analyst has been engaged in market making activity of the subject company. No

Rating Criteria

Rating Market cap < Rs20bn Market cap > Rs20bn but < 100bn Market cap > Rs100bn

Buy Upside > 20% Upside > 15% Upside > 10%

Hold Upside between -20% to +20% Upside between -15% to +15% Upside between -10% to +10%

Sell Downside > 20% Downside > 15% Downside > 10%

Member (NSE and BSE)

Regn No.:

CAPITAL MARKET SEBI REGN. NO.: BSE: INB011454239 CAPITAL MARKET SEBI REGN. NO.: NSE: INB231454233

DERIVATIVES SEBI REGN. NO.: NSE: INF231454233 (TRADING & CLEARING MEMBER)

CURRENCY DERIVATIVES: MCX-SX INE261454230 CURRENCY DERIVATIVES:NSE (TM & SCM) – NSE 231454233

Depository Participant (DP)

CDSL DP ID: 120 – 12200 SEBI REGD NO. : CDSL : IN-DP-CDSL-661-2012

PORTFOLIO MANAGER

SEBI REGN NO.: INP000004383

Website: www.centrum.co.in

Investor Grievance Email ID: [email protected]

Compliance Officer Details: Kavita Ravichandran

(022) 4215 9842; Email ID: [email protected]

Centrum Broking Ltd. (CIN :U67120MH1994PLC078125)

Registered Office Address

Bombay Mutual Building ,

2nd Floor,

Dr. D. N. Road, Fort, Mumbai - 400 001

Corporate Office & Correspondence Address

Centrum House

6th Floor, CST Road, Near Vidya Nagari Marg, Kalina,

Santacruz (E), Mumbai 400 098.

Tel: (022) 4215 9000

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