Buy Swaraj Engines; target of Rs 2402: Centrum

Centrum’s research report on Swaraj Engines

Despite a strong growth in the India tractor industry, Swaraj Engines (SWE) reported a moderate volume growth. Considering stellar growth reported by M&Ms tractor division, this performance was below our estimates. 4QFY18 EBITDA/PAT improved 19.0%/17.0% YoY, on the back of 9.8% growth in volumes and 49 bps YoY expansion in EBITDA margin. SWEs EBITDA and PAT were below our expectations on account of a slower than expected volume growth, affecting the topline.

Outlook

We value SWE on our differentiated AOCF/EV methodology and arrive at a TP of Rs2,402 (27.8x FY20E EPS) which indicates a 16.0% upside from current levels. Hence, we maintain our Buy rating on the stock. Key risks are a) dependence on a single client (i.e. Swaraj tractors) and b) lower-than-estimated growth in tractor volumes.

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