East India Securities is bullish on Swaraj Engines has recommended buy rating on the stock with a target price of Rs 1514 in its research report dated July 20, 2020.
East India Securities' research report on Swaraj Engines
Swaraj Engines (SWE) reported lower-than-expected volume in Q1FY21, as compared to overall tractor industry performance. Based on our recent survey, we believe Swaraj tractors continue to enjoy strong brand equity. One of the reasons for underperformance is the tractor industry had inventory which led to better performance by tractor OEMs. The company reported revenues of Rs 1,170mn in Q1FY21, a decline of 43.0% YoY (down 33.2% QoQ), below our estimates. This was on account of engine volume degrowth of 40.3% YoY. Blended realization declined by about 4.6% YoY. The company witnessed an EBITDA margin contraction of ~230bps YoY to 11.0% due to negative operating leverage. PAT witnessed a steep fall of 53.7% YoY to Rs 78mn. We believe tractor sector would outperform in the auto industry with a government focus on agriculture and construction activities.
Outlook
Considering the strong recovery in tractor sales, we have raised our target price to Rs 1,514. However, the recent rally in the stock seems to be discounting most of the positives. Hence, we assign a ‘HOLD’ rating on the stock.
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