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Swaraj Engines stock gains on strong Q2FY19 show

Swaraj Engines Limited (SEL), engine manufacturer for Mahindra and Mahindra Limited’s (M&M) “Swaraj” brand of tractors reported strong set of numbers in Q2FY19. Standalone revenue, EBITDA and PAT were better than expected.

Revenue: Rs247cr; up 18% yoy (5% qoq). Revenue growth was led by 14% yoy (7% yoy) volume growth and 4% yoy (down 1% qoq) growth in realization. SEL saw higher engine volume growth compared to parent M&M and peer Escorts in Q2FY19. Against 4% yoy volume decline for M&M and 4% yoy volume growth for Escorts in Q2FY19, volume for SEL was up 14% yoy. SEL’s revenue figure surpassed estimated revenue by 11%.

Gross Profit: Rs62cr; up 17% yoy (6% qoq). Gross Profit Margin: 25%; contraction of 40bps yoy (expansion of 26bps qoq). SEL is well protected from fluctuations in input cost due to pass-through clause with its promoter and client, M&M. As a result, the company has been able to maintain gross profit margin in the range of 24% to 26% consistently for more than 16 quarters.

EBITDA: Rs40cr; up 14% yoy (10% qoq). EBITDA margin: 16.2%; contraction of 57bps yoy (expansion of 63bps qoq). EBITDA surpassed expectation of Rs36cr.

PAT: Rs25cr; up 8% yoy (10% qoq). Against EBITDA growth of 14% yoy (10% qoq), PAT growth was slightly lower due to lower other income and higher tax rate. However, PAT was 14% higher than estimate of Rs22cr.

Valuation: At CMP of Rs1,402, SEL trades at 14x FY20E EPS. We recommend BUY with target price of Rs2,037 (20x FY20E EPS), implying upside of 45%.

Assuming no other broader market disruption, we expect the stock to trade on a positive note today in response to its strong Q2FY19 results.

Swaraj Engines Ltd is currently trading at Rs1,419 up by Rs17.3 or 1.23% from its previous closing of Rs1,401.70 on the BSE. The scrip opened at Rs1,486 and has touched a high and low of Rs1,486 and Rs1,412 respectively. So far 1,702 (NSE+BSE) shares were traded on the counter. The current market cap of the company is Rs1,700.01cr.

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