The Hindu Business Line : Swaraj Engines: Hold

SHAREHOLDERS of Swaraj Engines (SEL) can continue to hold on to the stock at the current price of Rs 316. The stock holds upside potential in the medium-term based on the prospects for the company this fiscal. The recommendation takes into consideration the fact that the company's performance is tied to that of its promoter, co-owner — Punjab Tractors (PTL).

The other factors that can influence the company's performance are the overall outlook for the farm sector and the commercial vehicles segment, both of which continue to exhibit buoyancy this fiscal.

SEL's performance during the just ended financial year gives a glimpse of the potential that a turnaround in the prospects for the agriculture sector can bring to the company's finances. In 2003-04, SEL posted an increase in net operating revenues of over 15 per cent to Rs 89.8 crore compared to Rs 77.9 crore in 2002-03.

Operating profits grew 11 per cent to Rs 20.2 crore in 2003-04 compared to the previous year. However, SEL's operating profit margins slipped marginally to about 22.5 per cent, down 23.2 per cent in 2002-03. The profit after tax in 2003-04 worked out to Rs 10.3 crore, up 14.4 per cent over the previous year. As a result, the earnings per share inched up to Rs 25 for the year ended March 2004 compared to Rs 21.8. The just-ended financial year also witnessed divergent trends during the first and second half, both in terms of volumes and profits. While in the first half, when the tractor industry was still in the grip of drought-inflicted woes, engine supplies to PTL reached 5,000 units and profits plummeted to Rs 4.2 crore from Rs 6.8 crore posted in the first half of financial 2002-03.

In sharp contrast, on the strength of the improvement in tractor sales due to the good monsoon during the later part of last year, second half operations staged a smart recovery. Engine supplies moved to 9,800 units and profits climbed to Rs 12 crore.Swaraj Engines, which was promoted by Punjab Tractors in technical and financial collaboration with Kirloskar Oil Engines, makes diesel engines for tractors. The company was promoted for the manufacture of engines that will be used in-house by PTL for its tractors. SEL's range of five diesel engines spans the entire series of tractors that start from 20 HP to over 50 HP. In addition to engines for tractors, the company also manufactures hi-tech engine components for Swaraj Mazda.

SEL continues to be highly dependent on the fortunes of the tractor industry, in general, and on the prospects of PTL, in particular.

The engine components business contributes much less to the company's revenues than the engines business. With the tractor engines being supplied to PTL still having a bearing on the company's overall performance, it is inevitable that SEL's finances are being swayed by the former's performance this year.

However, with PTL ridding itself of the bad influence of booking higher wholesale tractor sales (compared to the actual retail level sales) and with the prospects of the current year's monsoon being near normal, Swaraj Engines can also be expected to reap the effect of these benefits.

In addition, SEL's performance has a buffer in the form of its supply of engine components to group company — Swaraj Mazda.

The latter, a key player in the light commercial vehicles segment, had reported a 27 per cent increase in volumes last year and is expected to post similar growth in numbers in the next few years in line with the industry's growth trends.

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