I recently received the Annual report of Swaraj Engines for the year 2009-10. For a small cap company like SEL and in general for most Small & Micro caps there is so much information & insight one can draw from just the Annual Report. Further, SEL's website is pretty basic & worthless giving you hardly any idea about the company. A couple of readers were eager to know if it is the right time to invest in the stock after the recent run up in the prices. This post is an update on the performance of SEL in the last year & other insights if any that i was able to glean off the Annual report.
Performance in FY 2009-10
SEL registered total revenue of 295Crs last FY ,a growth of 37.34% Y-O-Y and it clocked Net profit of 37.35Crs an impressive 75.5% growth Y-O-Y. Net profit margin was 12.66% as compared to 9.9% last year. Return on Equity was a record high in 7 years at 30.4%. All this was mainly due to the fact that the company sold 39143 engines(28539 last year) a record high of all time and first time going above 100% capacity utilization of 36000 in recent years. More importantly the Free cash flow was 38.21 Crs after another year of abysmally low Capex of around 2Crs . So in the past 3 yrs Free Cash Flow has always been higher than the Net profits , that is a positive for me as very few companies are able to do that. So overall it was a great year for SEL and the management seems to be bullish about the long term prospects of the tractor industry without giving any specific guidance for the short term. The sales for Apr'10 were 41% higher than the previous year as per the annual report. As i mentioned in the previous post the number of farmers per tractor in India is quite a bit above the global average and hence the long term story looks good .Although it can be hard to predict the short term trend given the vagaries of the sector.
Valuation
At the current Market price of 423 the stock is trading at a P/Ex of about 14 TTM and P/BV of 4.24 which on the face of it looks just about fairly valued. However the latest balance sheet shows that SEL's cash reserve's have grown over last year and it stands at 114.1 Crs(Cash & short term Investments). This is almost 22% of the current market cap & hence deducting the cash on books form the market cap the new numbers for P/Ex & P/BVx are 10.9 and 3.3 respectively. Now the valuation appears more reasonable from a long term view. However i would like to buy under a P/Ex of 10 to get a margin of safety and this translates to a price of about 390. So personally i would buy more if the stock corrects to below 390 levels. One reader also asked me about the kind of returns one can expect in 3yrs or so. Honestly i don't have the answer and it all depends on how SEL performs as simple as that.As i am not buying at dirt cheap prices i expect SEL to be a compounder and not a multibagger(if everything goes as expected). So over the long run if bought at a reasonable price the returns will mirror the company's growth in profits(true for any stock in my opinion).
Other Observations
1. One of the risks that i seemed to have overlooked which i learnt through comments & discussions with others is that over 90% of SEL's revenue comes from M&M the parent company. This can both be a negative or a positive. There is a chance that the margins will come under pressure as it can't bargain much with M&M. However so far this hasn't been true and there hasn't been any drop in margins(it actually went up last year). Margins have stayed in the range of 10-13%. The positive is that they can have stable & predictive revenue and an efficient operating cycle(lower inventories,receivables etc). The latter is already reflected in the pristine Balance sheet & good cash flows.
2. A couple of senior officials of M&M led by Mr Pawan Goenka have been appointed to the board of SEL recently. Also there have been rumors about M&M's intent to buy out the stake of Kirlosker Oil Engines Limited in SEL. I believe all of this sends a strong signal about M&M's plans for SEL. Ever since M&M took over PTL the fortunes of SEL have turned around and the company has performed very well. It would be good for SEL if M&M can also use its facilities to manufacture other engines like for LCVs. This would remove its dependence on the Tractor Industry.Even otherwise the prospects appear good. SEL would soon need to undertake Capacity expansion given the rate at which they are growing. This can be easily funded through internal accruals given the cash on books & strong cash flows.
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