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Buy Swaraj Engines, target Rs 2,500: ICICI Direct

ICICI Direct has a buy call on Swaraj Engines with a target ..

ICICI Direct has a buy call on Swaraj Engines with a target price of Rs 2,500.

The current market price of Swaraj Engines is Rs 2,018.25.

Time period given by the brokerage is 18 Months when Swaraj Engines price can reach the defined target.

Investment rationale
Skymet forecasts monsoon 2018 at 100 per cent of LPA; SEL to benefit: Skymet, a private weather forecasting agency, expects the upcoming monsoon 2018 to be normal at 100 per cent of LPA with a +/- 5 per cent model error. On a month wise distribution, they expect June to be 111 per cent of LPA, July at 97 per cent of LPA, August at 96 per cent of LPA and September at 101 per cent of LPA. The most encouraging part of the prediction was the 80 per cent probability of a normal to above normal monsoon and no chance of a drought like scenario. This is likely to result in robust farm production and consequent increase in farm income, boosting rural demand, thereby benefiting all farm mechanisation companies, including SEL.

Domestic tractor industry records new high in FY18E: The domestic tractor industry has been at the forefront of farm mechanisation in India. Tractor sales in FY18E have surpassed a previous high (6.3 lakh units) with annual sales at nearly 7 lakh units (up 20 per cent YoY). M&M, the industry leader, has further consolidated its position with annual sales at nearly 3 lakh units implying a market share of 43.3 per cent, up 50 bps YoY. With governments focus on augmenting farm income and early signs of normal monsoon 2018, the domestic tractor industry is on a firm footing with robust FY19E prospects (growth to taper albeit on high base).

Strong brand recall, capital efficiency at its very best: Swaraj tractors have a strong brand recall, which translated to nearly 500 bps increase in its market share over a five-year period to nearly 17 per cent in FY17. The larger acceptance of Swaraj brand of tractors is primarily on the back of balanced design, low cost of ownership over the lifecycle of product, robust service network and fuel efficiency among others. We expect Swaraj Brand to continue outperforming the domestic tractor industry with consequent benefits flowing down to SEL. SEL has a healthy balance sheet with no debt on its books, negative working capital cycle and robust return ratios amid healthy dividend payouts (nearly 75 per cent). Post buyback (utilisation of surplus cash on books), its return ratios have further improved with average RoCE, RoE & RoIC over FY18-20E is at 56 per cent, 41 per cent & 290 per cent, respectively. Going forward, with macro drivers in place, we expect SEL to clock engine sales volume CAGR of 14 per cent in FY17-20E to 1,21,392 units in FY20E (82297 units in FY17). We expect sales, PAT to grow at a CAGR of 15.4 per cent, 15.9 per cent, respectively, in FY17-20E. We value SEL at Rs 2500 i.e. 30x P/E on FY19E & FY20E average EPS of Rs 84 with a BUY recommendation on the stock.

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