18 December 2018

Swaraj Engines Stock Analysis

We do a Swaraj Engines Stock Analysis to see if it is worth investing in for the long term. Predicting multibaggers is tough. However, buying quality companies at a fair value helps compound wealth.


Swaraj Engines Ltd. (SEL) was promoted by Kirloskar Oil Engines and Punjab Tractors in 1985. After Punjab Tractor’s merger with Mahindra & Mahindra, the company primarily supplies engines to M&M’s Swaraj divison. Mahindra & Mahindra is the biggest shareholder. 
The company’s plant is located in Mohali (Punjab).


The Indian tractor industry is the world’s largest by volumes, contributing 35% volume share. There is a mix of both international and domestic players in the industry. The segregation is based on horsepower:
Below 30 HP – Low
30 HP to 50 HP – Medium
Above 50 HP – High
The 30Hp to 50HP segment has a 82% market share.
The fortunes of the tractor industry are tied to the monsoons. Good monsoons, higher spending by farmers and thus more sales of tractors. In FY18, tractor sales grew 22% in volume terms (709,000 vs 582,000). Currently, Trem3A norms are in place. However, the industry is bracing up for transition into the Trem4 emission norms by 2020.
Both Mahindra and Swaraj put together enjoy a 42.5% market share of the tractor industry. However, the two companies compete in many geographies.

Product and Raw Materials

Swaraj Engines manufactures diesel engines for tractors. The range is 20bhp to 60bhp.  The current capacity of 120,000 engines per annum will be increased to 135,000 engines. Raw materials make up ~ 74.5% of the revenues.


Swaraj Engines has gained market share and improved margins during the dull FY14 to FY16 period. The entire revenue is from sale of engines to M&M for the Swaraj tractors. The realization per engine sold has remained in a small range.
Swaraj Engines Stock Analysis is tricky as the entire revenue comes from a single customer who is also a related party. The company enjoys little pricing power as evident from the stagnant realisation per unit. However, the company has low working capital requirements. The investment required in inventory and receivables is very low. The company receives payment within 7 days.

  • The company is free cash flow generating and debt free
  • There is negative working capital requirement
  • The company has maintained a high ROE of more than 20% since FY09
  • There is ~ Rs 86 Crores in current investments and bank as per the Balance Sheet for 30th September, 2018
  • The company did a buyback in FY18 amounting to ~ Rs 70 Crores

Peer Comparison

Although the above four companies are not direct peers, their fortunes are more or less tied to similar factors. Moreover, all the above companies are debt free and offer a good dividend yield. Swaraj Engines is trading at higher valuations but it has a better revenue growth rate on a 5 year CAGR basis.
Higher farm mechanization can benefit all of the above compared companies. But since the products are different, this cannot be treated as a direct apple to apple comparison.

Key risk factors

  • Dependence on monsoon which varies year on year
  • Agricultural policies of ruling governments can have severe medium term impacts
  • Dynamics related to the regulations regarding emissions
  • Low pricing power
  • Long term earnings growth is usually in higher single digits for agriculture sector companies
  • Depends on one client, a related party, for 100% of the revenue
  • Has a single product and no ambitions of diversifying

Opportunities and Strengths

  • Healthy balance sheet
  • Clear cut related party transaction policies
  • Strong cash flow generation record
  • Farm loan waivers might boost tractor sales
India still has a long way to go in mechanization of agriculture. The tractor density for developed markets is 32 per 1000 ha but in India it is 13 per 1000 ha. Moreover, developed markets have a higher usage of  > 50 HP tractors. Nearly 70% of the farmers in India hire tractors on rent.


The stock trades at a PE of 20.9. The current market cap of Rs 1,760 Crores which 2x the sales. For auto component makers and companies operating in the agricultural equipment space, the ideal PE is usually below 15.
However, caveat needs to be exercised before concluding the Swaraj Engines Stock Analysis. Due to high dividend yield and high expectations of future growth, the stock could still command a premium – 15x to 20x.


Swaraj Engines has fallen ~ 40% from it’s peak. The stock was trading at 40x it’s earning which was not sustainable. But at 20x, the stock’s valuations seem fair. Keeping in mind the opportunity size for tractor market in India, we feel Swaraj Engines Ltd can be a long term compounder. From the current price, Swaraj Engines Ltd has to potential to deliver ~ 12% CAGR (or more) over the next 3-5 years.
At Alphamultiple Advisors, we would like to buy the stock at lower valuations. It is on our watchlist but not a recommendation as on date. What are your views on the Swaraj Engines Stock Analysis?

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