8/12/2019 Swaraj Engines Note
2/2
Incremental returns:
Now, this is the most important point, its all right to expand,
but what the business will earn out the
incremental capex of 94 cr. Lets do some rough calculations - at
current sales of ~47,000 tractors, the
company earned 43.9 cr in profits. Lets say same proportions
continue, the company will earn 70 cr in
profits for 75,000 units sold. Thats an addition of 26 cr to
profits by an incremental capex of 94 cr, giving
a return of ~27% on investment.
Thats a great return to have on incremental capex, and that too
without any leverage.
So, here is a company with visible growth of 20-25% for the next
2-3 years, pure balance sheet, no debt,
earning good returns on equity (30% plus), generating enough
free cash flows and managed by
Mahindras. The fundamentals look really good. What about the
price?
Valuation:
At a market price of 400 per share, the companysmarket cap is ~
500 cr. The TTM P/E multiple is9.84
Taking out cash and investments, the P/E multiple reduces to
7.14. Everything looks pretty good sofar.
My DCF estimate of valuation in no growth scenario (assuming
company does not go beyond 75,000tractors) comes out to be 435 per
share.
All in all, I am buying at current levels as I am getting a good
company for a decent price. The stock
wont be amulti-bagger as over a longer period, the companys
fortunes would be tied to the overall
tractor Industry growth in India. That perhaps explains lack of
interest in the stock. The domestic tractor
Industry has grown by 8.5% CAGR over last 40 years and by 15%
CAGR over last 8 years. This year, the
growth might be around 12-14%, coming after a robust 20% growth
last year.
