1

SYNOPSIS

Swaraj Engines Ltd. (SEL) is a joint venture between erstwhile Punjab Tractors Ltd. (PTL), which has since been merged with Mahindra & Mahindra Ltd. (M&M) and Kirioskar Oil Engines Ltd. (KOEL).

The Company's principal activity is to manufacture and supply of engines and hi-tech engine components for tractors and other commercial vehicles.

SEL has supplied around 3,57,000 engines for fitment into “Swaraj” tractors.

Net Sales and PAT of the company are expected to grow at a CAGR of 19% and 15% over 2010 to 2013E respectively.

The Company products include internal combustion diesel engines, diesel engine components and spare parts. It supplies engines to Punjab Tractors Ltd and engine components to Swaraj Mazda Ltd.

During the quarter, the company has reported Net Profit increased to Rs.135.40 million from Rs.106.90 million in previous year same quarter.

Years Net sales EBITDA Net Profit EPS P/E

FY 11 3606.30 630.80 439.10 35.35 12.95

FY 12E 4201.34 713.26 502.47 40.46 11.32

FY 13E 4705.50 805.83 566.94 45.65 10.03

Stock Data:

Sector: Automobile Ancillary

Face Value Rs. Rs.10.00

52 wk. High/Low (Rs.) 557.40/376.60

Volume (2 wk. Avg.) 2701.00

BSE Code 500407

Market Cap (Rs.In mn) 5688.36

Share Holding Pattern

1 Year Comparative Graph

BSE SENSEX Swaraj Engines Ltd

C.M.P : Rs.458.00 Target Price : Rs.518.00 Date : 23rd Sep 2011 BUY

SWARAJ ENGINES LTD

Result Update: Q1 FY 12

2

Peer Group Comparison

Name of the company CMP(Rs.) Market

Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%)

Swaraj Engines Ltd 458.00 5688.36 35.35 12.95 3.74 100.00

Lumax Auto Tech 174.00 2371.9 15.08 11.54 3.34 60.00

Motherson Sumi 184.00 71308.1 8.35 22.04 7.07 275.00

Hindustan Composites Limited 480.00 2640.0 37.75 12.72 0.55 20.00

Investment Highlights

Q1 FY12 Results Update

Swaraj Engines Ltd disclosed results for the quarter ended June 2011. Net sales

for the quarter moved up 30% to Rs.1102.20 million as compared to Rs.849.00

million during the corresponding quarter last year. During the quarter, the

company has reported Net Profit increased to Rs.135.40 million from Rs.106.90

million in previous year same quarter. The Basic EPS of the company stood at

Rs.10.90 for the quarter ended June 2011.

Quarterly Results - Standalone (Rs in mn)

As At June-11 June-10 %change

Net sales 1102.20 849.00 30

PAT 135.40 106.90 27

Basic EPS 10.90 8.61 27

3

Basic EPS of the company stood at Rs.10.90

4

Break up of Expenditure

Expenditure for the quarter stood at Rs.924.00mn, which is around 32% higher

than the corresponding period of the previous year. Consumption of Raw Material

cost of the company for the quarter accounts for 76% of the sales of the company

and stood at Rs.842.40mn from Rs.623.70mn of the corresponding period of the

previous year. Employees cost increased 19%YoY to Rs.47.3mn from Rs.39.80mn

and accounts for 4% of the revenue of the company for the quarter.

OPM and NPM for the quarter stood at 17% and 12% respectively from 18% and

13% respectively of the same period of the last year.

5

FY11 Performance

Net profit of the company has increased at 18% yoy Rs.439.10mn from

Rs.373.50mn of same period of last year. Total revenue for the year stood at

Rs.3606.30 mn from Rs.2824.40 which is 28% increased than that of a year ago.

EPS for the year stood at Rs.35.35 per equity share of Rs.10.00 each.

Operating profit of the company stood at Rs.630.80mn. OPM for the year stood at

17.49%. Expenditure of the company increased 29% YoY to Rs.2999.20 mn.

Interest expenses for the year stood at Rs.57.30mn.

Declaration of dividend The Company has declared of dividend @ 100% i.e. Rs. 10.00 per equity share of

the face value of Rs. 10/- each for the year ended on March 31, 2011.

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Company Profile

Swaraj Engines Ltd. (SEL) is a joint venture between erstwhile Punjab Tractors Ltd.

(PTL), which has since been merged with Mahindra & Mahindra Ltd. (M&M) and

Kirioskar Oil Engines Ltd. (KOEL). Originally set up to manufacture engines for PTL, in

recent years, SEL has also been a supplier of hi-tech engine components to Swaraj

Mazda Ltd. (SML).

Since start of commercial operations in 1989-90, SEL has supplied around 3,57,000

engines for fitment into “Swaraj” tractors. SEL’s engine business currently constitutes

some 93% of Company’s product revenue. Balance 7% represents value of hitech

engine components being supplied to SML for assembly of commercial vehicle engines.

Financial Results

12 Months Ended Profit & Loss Account (Standalone)

Value(Rs.in million) FY10A FY11A FY12E FY13E

12m 12m 12m 12m

Description

Net Sales 2824.40 3606.30 4201.34 4705.50

Other Income 41.80 23.70 28.44 34.13

Total Income 2866.20 3630.00 4229.78 4739.63

Expenditure -2328.70 -2999.2 -3516.52 -3933.80

Operating Profit 537.50 630.80 713.26 805.83

Interest 58.00 57.30 71.17 81.84

Gross Profit 595.50 688.10 784.42 887.67

Depreciation -48.40 -44.60 -45.49 -47.77

Profit before Tax 547.10 643.50 738.93 839.91

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Tax -173.60 -204.40 -236.46 -272.97

Profit after Tax 373.5 439.1 502.47 566.94

Equity Capital 124.20 124.20 124.20 124.20

Reserves 1103.2 1398 1900.47 2467.41

Face Value(Rs.) 10.00 10.00 10.00 10.00

EPS 30.07 35.35 40.46 45.65

*A=Actual, *E=Estimated

Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in million) 30-Dec-10 30-Mar-11 30-Jun-11 30-Sep-11

3m(A) 3m(A) 3m(A) 3m(E)

Description

Net Sales 926.00 969.30 1102.20 1157.31

Other Income 3.80 9.00 7.20 7.63

Total Income 929.80 978.30 1109.40 1164.94

Expenditure -766.00 -820.60 -924.00 -967.51

Operating Profit 163.80 157.70 185.40 197.43

Interest 12.10 18.50 19.70 21.28

Gross Profit 175.90 176.20 205.10 218.71

Depreciation -11.50 -11.60 -9.30 -9.77

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Profit before Tax 164.40 164.60 195.80 208.94

Tax -51.10 -53.90 -60.40 -66.86

Profit after Tax 113.30 110.70 135.40 142.08

Equity Capital 124.20 124.20 124.20 124.20

Face Value(Rs.) 10.00 10.00 10.00 10.00

EPS 9.12 8.91 10.90 11.44

*A=Actual, *E=Estimated

Key Ratio

Particulars FY10 FY11 FY12E FY13E

EPS (Rs.) 30.07 35.35 40.46 45.65

EBITDA Margin (%) 19.03% 17.49% 16.98% 17.13%

PAT Margin (%) 13.22% 12.18% 11.96% 12.05%

P/E Ratio (x) 14.06 12.95 11.32 10.03

ROE (%) 30.43% 28.85% 24.82% 21.88%

ROCE (%) 39.85% 38.51% 32.98% 29.25%

EV/EBITDA (x) 9.77 9.02 7.98 7.06

Book Value (Rs.) 98.82 122.56 163.02 208.66

P/BV 4.28 3.74 2.81 2.19

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Charts:

10

11

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Outlook and Conclusion

At the current market price of Rs.458.00, the stock is trading at 11.32 x FY12E

and 10.03 x FY13E respectively.

Price to Book Value of the stock is expected to be at 2.81 x and 2.19 x

respectively for FY12E and FY13E.

Earning per share (EPS) of the company for the earnings for FY12E and FY13E

is seen at Rs.40.46 and Rs.45.65 respectively.

Net Sales and PAT of the company are expected to grow at a CAGR of 19% and

15% over 2010 to 2013E respectively.

The Company products include internal combustion diesel engines, diesel

engine components and spare parts. It supplies engines to Punjab Tractors Ltd

and engine components to Swaraj Mazda Ltd.

During the quarter, the company has reported Net Profit increased to Rs.135.40

million from Rs.106.90 million in previous year same quarter.

On the basis of EV/EBITDA, the stock trades at 7.98 x for FY12E and 7.06 x

for FY13E.

Long term prospects of both tractor and commercial vehicle industry are rated

good. In view of the various domestic macro economic indicators, it is expected

that the Indian tractor industry would maintain a growth trend in the long

term. Further, with Government massive investments planned for urban and

rural infrastructure including roads, ports, power etc., coupled with ongoing

growth trends in industry. We expect that the company will keep its growth

story in the coming quarters also. We recommend ‘BUY’ in this particular scrip

with a target price of Rs.518.00 for Medium to Long term investment.

13

Industry Overview

Poised to grow by over four-fold to US$ 113 billion by 2020, the Indian auto

component industry is one of the front runners for grabbing the global auto

components outsourcing market.

The total passenger car production in the country will jump four times to reach 9

million cars by 2020, according to Automotive Component Manufacturers' Association

(ACMA). Although a major chunk of this will come from the fast growing domestic

market, exports are likely to form around 35 per cent of the total market by 2020.

"India would be among the top-five vehicle producing countries in the world by 2020,"

said Vinnie Mehta, Executive Director, ACMA.

A recent ACMA report puts the turnover of the auto component industry at about US$

26 billion in 2010-11, up 18 per cent from US$ 22 billion in 2009-10. The report

states that 40 per cent of the auto component industry was dominated by body and

structural products in 2009, 20 per cent by engines and exhaust, and 10 per cent

each by suspension and braking parts, transmission and steering parts, electronics

and electrical and interiors. By 2015, body and structural will account for 35 per cent

of the auto component industry, engines and exhaust 20 per cent, suspension and

braking parts, transmission and steering parts and electronics and electrical will

account for 13 per cent each and interiors 9 per cent.

The potential compound annual growth rate (CAGR) of the auto component industry is

estimated to be around 18 per cent in the period 2010-11. Exports from the auto

component industry are estimated to be worth US$ 5 billion in 2010-11, according to

the ACMA report.

Europe is likely to have accounted for 36.9 per cent of India's auto components

exports in 2010-11, followed by Asia with 28.1 per cent and North America with 24 per

cent. The industry has witnessed a shift in the composition of exports over the years.

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Investments in the auto component industry are estimated at US$ 12 billion in 2010-

11, according to ACMA.

Destination India

India has proven product-development capabilities and proximity to emerging

markets. The Asian country is also turning out to be an attractive destination as a

global outsourcing hub and manufacturing base for original equipment manufacturers

(OEMs), especially after the global economic downturn.

With the finalisation of the Automotive Mission Plan (AMP) India is expected to become

a preferred destination for design and manufacture of automobile. The plan envisaged

an investment of US$ 40 billion and provided a road map to help transform India into

a global automobile player. The AMP proposed a 25-point plan that included making

India a manufacturing and export hub for small cars, multiutility vehicles, two and

three-wheelers, tractors and components.

Furthermore, Indian companies are compliant with global automotive standards, e.g.

the Japanese Industrial Standard Committee (JISC) and

DeutschesInstitutfürNormung (DIN). India offers the advantage of low manufacturing

costs due to economies of scale, low design, research and labour costs, and local

sourcing of tools and components. Large Indian players contribute around 43 per cent

of the total production, while foreign companies such as Magna, Visteon, Valeo,

Bosch, Federal-Mogul Corporation and Denso contribute 15 per cent.

Auto component exports are expected to grow to US$ 30 billion by 2020. India’s share

in the global auto components market is expected to rise from 0.9 per cent in 2008–09

to 2.5 per cent in 2015.

Investments

Auto component maker Jamna Auto would set up two new manufacturing units in

Tamil Nadu, with an investment of around US$ 17.95 million. The new units, at Hosur

and Chennai, will produce parts for commercial vehicles.

15

The world’s first facility to manufacture carbon foam batteries will be set up at Bavla

near Ahmedabad. Firefly Energy India is planning to build a plant to produce carbon

foam batteries at an investment of US$ 28.05 million, the company’s chairman

MukeshBhandari said.

The US$ 1-billion Pawan Kumar Ruia Group is taking big strides in the auto ancillary

space. The group has added yet another German company to its portfolio by acquiring

the assets of automotive fasteners firm, Acument GmbH & Co KG , for an undisclosed

sum.

Bangalore-based Pragati Automation Pvt Ltd (PAL), an Ace Group company engaged in

the manufacture of servo drives and motors, is foraying into Chinese market with the

setting up of its assembly plant in Shanghai. The company is also expanding its

capacities in Bangalore, Belgaum and Kolhapur in Maharashtra. It has drawn up a

capital expenditure plan of US$ 11.22 million for expansion, a top company official

said.

Automotive components maker Amtek Auto has formed a joint venture with South

Korean automaker Autech Corporation to manufacture vehicles for defence, para-

medical, fire fighting and waste management sectors to capitalise on the booming

demand for specialised vehicles. The Delhi-based company will set up an assembly

facility at Daruhera in Haryana with an initial capacity of 10,000 units per year.

JK Tyre& Industries Ltd has signed a memorandum of understanding (MoU) with the

Government of Tamil Nadu for setting up US$ 325.74 million greenfield facility at

Sriperumbudur. The facility would generate US$ 43.43 million every year for the

exchequer and create 1,000 skilled jobs, said RaghupatiSinghania, Vice Chairman and

Managing Director of the company.

German auto component major and industry technology provider Bosch Group has

made an upward revision in its Indian investment programme for 2010-2012 on the

back of booming domestic auto market. VK Viswanathan, President,Bosch India said

the group had decided to increase its investment quantum to US$ 517.5 million from

the proposed US$ 450 million. The group will utilise this investment for its six

separate entities in India.

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Policy Initiatives

The Ministry of Heavy Industries and Public Enterprises has envisaged the AMP 2006-

2016 to promote growth in the sector. It targets to:

Increase turnover to US$ 122 billion–US$ 159 billion by 2016 from US$ 34

billion in 2006

Increase export revenue to US$ 35 billion by 2016

Provide employment to additional 25 million people by 2016

Moreover, the announcement of Union Budget 2011-12 brought cheers to the auto

components industries in several ways. Some of the highlights are:

Retained the custom duty rates on auto components.

Retained the excise duty on small cars, two wheelers and three wheelers at 10

per cent

Enhanced and unified the export duty on all types of iron ore to 20 per cent ad

valorem. Export duty on iron ore pellets fully exempted.

Full exemption of basic customs duty on stainless steel scrap.

Reduced the basic customs duty on Ferro-nickel from 5 per cent to 2.5 per

cent.

A concessional rate of Nil BCD CVD at 5 per cent and full exemption from SAD

is being extended to specified parts of the hybrid vehicles, namely, battery pack,

battery charger, AC/DC electric motors, and motor controllers.

Full exemption on basic customs duty and 4 per cent excise duty on batteries

imported by manufacturers for replacement market.

_____________ ____ _________________________ Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation

for the purchase or sale of any financial instrument or as an official confirmation of any

transaction. The information contained herein is from publicly available data or other

sources believed to be reliable but do not represent that it is accurate or complete and it

should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s

affiliates shall not be in any way responsible for any loss or damage that may arise to any

person from any inadvertent error in the information contained in this report. This document

is provide for assistance only and is not intended to be and must not alone be taken as the

basis for an investment decision.

17

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