Swaraj Engines - Great cash flows!

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84

I thought so too. But it’s already here.

In 2017, Escorts unveileved their Electric Tractor (Source). They have been exporting it since 2019. Now in 2021, Escorts is the first manufacturer to get approval for selling Electric Tractors in India:

According to the above, the Motor for Escorts’ Electric Tractors will be manufactured by Kirloskar Electric Company (Listed). FYI Kirloskar Industries (Also listed) holds a sizeable stake in Swaraj Engines.

At the moment, the pros are the fact that there is no engine and hence, the maintenance costs are low. This is apart from the obvious benefit to the environment. The cons are the low battery life, but I’m sure this will be fixed in due time. Another important drawback is that Electric Tractors can’t match the raw power of Diesel ones, at least not with current technology. So whether this is a scalable solution to all tractor sizes is a question that needs answering.

John Deere, the “Tesla of Tractors”, certainly seems to think so:

Some counter-views are provided in this article, where experts say Electric Tractors will not have the same power as Diesel ones.

I would invite the view of long term investors in this company like @dd1474

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85

@dineshssairam I feel Escorts has announced the arrival of electric tractor. The mass adaptation is still some time away. If you notice they have announced it in <30HP segment which has lowest volume in the industry. You can refer to escorts Q2 presentation for the details.


I feel they are testing the waters…only time will tell about the near term success, long term anyway we know it will be a reality.

Another point is on the abysmal charging infrastructure in the country. Tractors are basically a rural ask. Not sure when we will have proper charging infrastructure in villages. I have a feeling that we are still at least 5-10 years away from mass adaptation of electric tractors.

Regards,
Raj

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86

Hi,

Q3 results came last month.

Thanks,
Deb

87

Swaraj Engine Results out.

30-Jun-15 30-Sep-15 31-Dec-15 31-Mar-16 30-Jun-16 30-Sep-16 31-Dec-16 31-Mar-17 30-Jun-17 30-Sep-17 31-Dec-17 31-Mar-18 30-Jun-18 30-Sep-18 31-Dec-18 31-Mar-19 30-Jun-19 30-Sep-19 31-Dec-19 31-Mar-20 30-Jun-20 30-Sep-20 31-Dec-20 31-Mar-21 Q-Q Y-Y
Sales Engines Units 18,383 18,890 12,845 13,970 20,910 22,395 19,150 19,842 23,287 24,984 21,971 21,780 26,742 28,560 22,569 21,767 23,033 26,271 19,797 20,827 13,756 34,489 31,193 33,831 8.5% 62.4%
Sales Rs Cr Engine 152.47 152.45 105.11 113.40 193.05 178.90 154.77 160.80 218.19 208.66 183.28 185.26 234.52 247.03 198.72 191.47 205.38 222.70 170.07 175.13 116.99 292.28 272.39 304.91 11.9% 74.1%
Operational EBIT Rs Cr (Net of other income) 14.48 14.92 5.76 8.33 19.77 25.03 19.04 19.93 28.06 30.85 21.47 22.59 31.88 35.33 22.77 22.13 22.60 23.37 14.57 21.43 8.65 34.36 31.42 41.46 -8.6% 115.6%
Net Revenue per engine 83,311 81,091 82,203 81,596 82,109 79,884 80,820 82,824 83,300 83,517 83,419 85,060 87,697 86,495 88,050 87,963 89,168 84,770 85,907 84,088 86,544 85,349 88,033 90,790 3.1% 8.0%
Contribution per engine 19,801 19,825 19,502 20,616 31,129 20,585 21,091 20,361 32,340 21,162 20,946 21,520 21,644 21,572 21,184 21,992 20,753 19,569 19,776 20,382 21,089 18,296 18,995 20,549 8.2% 0.8%
Opeational EBIT per engine 10,276 10,085 7,396 8,840 11,688 13,186 12,261 11,844 14,119 14,389 12,002 12,273 13,361 13,722 11,875 11,839 11,384 10,205 8,754 11,711 7,786 10,566 10,781 12,917 19.8% 10.3%

Second highest quarterly Sales in units, Highest quarterly sales in Value, Highest quarterly engine realisation.

Despite increase in realization, Contribution per Engine at Rs 20549 in Q4FY21 is still materially lower when compared with Q1FY18 when it achieved Rs 32340 / engine sales as contribution.

Also, cashflow from operation decline mainly due to increase in receivable.

While Dividend of Rs 69 per share is very encouraging, sustainability of this performance would depend on tractor demand, which in turn depend on monsoon for 2021. Also, as against annual capacity of around 135,000 during FY21 total engine sold were 113,269. Assuming sales being same as production, the company would by able to meet around 20% demand growth from unutlised capacity.

ROCE and ROE continue to remain good. However, sustainability of performance in medium term and prospect of Engine business in Long term (in context of development of EV) would be key factor deciding prospect of the company in future.

Discl: Among my top 10 holding. My view may be biased. Investor shall consult his advisor before making any investment. I am not SEBI registered advisor. I am not recommending the investment in the company.

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88

Hi,

I have one query if contribution per Engine has decreased does it mean that they have reduced the prices or variable cost has increased?

Last year they gave less dividend so they might be compensating that by giving higher this time.

Regarding EV, Does the management has any plans?

Thanks,
Deb

89

Any idea about the increase in receivables to 42 days in FY21 from an average of 5-6 days over the previous 5 years? The net working capital days have swung from negative 15 to positive 15 in FY21.

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90

Result excellent with good dividend yield…any idea about capacity expansion considering capacity utilisation of 80%…also, are they supplying engines to swaraj tractors only or other Mahindra series tractors? Are they aggressive enough to finding opportunity in supplying engines to other manufacturers also?
Invested this quarter only in anticipation of good result considering good growth in tractor sales…not digged enough…your reply definitely going to help…Thanks.

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First thanks all members to provide their view on thread. Certain members seek my opinion on some aspect. I try to address those point to the best of my understanding and ability
@babu44b
As per my understanding, the company has agreement with M&M. The RM change is passed on every quarter. So while there might be quarterly change in contribution margin, over a year or so, things get streamlined. I do not know how does price of end engine happen? It is based on ROCE or provide fixed margin on cost of production? Nearly 95% of sales of the company is to M&M (Swaraj Tractor division).

However, over a period, average HP Tractor sold has increased consistently over decade for the industry. Same shall also be applicable to Swaraj Tractor and Swaraj Engine. Hence, despite increased in average HP of tractor increased, we do not find corresponding major increase in realisation. Average realisation as per my calculation has increased at CAGR of 1.6% from Rs 73224 per engine in FY2010 to Rs 87100 per engine in FY2021. This is despite increase in average HP from 38.9 HP (my calculation from Monarch enclosed graph for everyone reference) in FY2013 to 40.3 HP in FY2019. So broadly, 1.5 HP increase in average HP capacity over 6 years can explain 1.6% increae in CAGR. Hence, the gain in profit has mainly came from only operating leverage (higher scale ) in my opinion. I would assume same to continue to future.
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During FY21, average contribution per engine sold increased from Rs 85600 per engine in FY19 to Rs 87,100 in FY20 as per my calculation.

Last year lower dividend was more to conserve resource for Covid related uncertainity then normal practice of the company. We also need to understand benefit of DDT not being paid by company from last year, passed on the investor now in my view.

On EV, management has not publicly disclosed any plan. Further, with Kirloskar group also being large investor, I suspect Swaraj Engine would be prefered company for M&M group for EV related investment. This is my
image

@Rohit_Kadam
Till Sep 2020, M&M was buying in cash which has increase now to 30 days in my understanding, if I back calculate figures. Hence, working capital increase and I expect same to be new normal now.

@ORION
While there is no public announcement of capacity, in past, the company has increased capacity by greenfield expansion at very negligible capex and 12-15 months period. I see same can be expected to cotninue.

Due to Kirloskar group being also large stakeholder (which also interest in Engine business) and supply just being able to meet M&M demand for engine, I doubt that company would add new client in near future. They contnue to supply some component to SML Isuzu although, but that is very nominal (1-2% of sales) if my memory is correct.

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92

Isn’t such a single customer concentration a very high risk for this business. Just like that M&M has changed payment terms (they can throw around their weight since they are the only customer).

How do we know margins wont change in the future? after all, this supplier (Swaraj Engines) is clearly more profitable than the customer (M&M). Unless, engine suppliers of high quality are few and not easily replaceable.

93

I am old investor in this company before M&M’s entry in this company through Punjab Tractor in 2007.
I was mainly invested because of dividend policy of the company.

Please note that before entry of M&M in Swaraj Tractor (old Punjab Tractor) its production capacity was 30,000 per year. But company was able to operate at 50 to 60 % capacity. Its Market share was in the range of 6 to 9 % and was lacking in sales and marketing. After entry of M&M in 2 years time Company has started to expand its dealer network in new geographical areas and within 4 to 5 years M&M has started small expansion every 2 years. My rough calculation shows that for 15,000 capacity expansion it requires 35 Cr investment which generate 11 to 13 Cr net profit which is healthy.
So current installed capacity is at 1,35,000 with new 15,000 is approved last year is work in progress.
Currently market share for Swaraj Tractor is stands at 14 to 16 %. Its remain 2nd or 3 rd largest Tractor sellers after M&M’s own brand since many years which is a market leader.

So after initial growth between 2009 and 2014 now growth may be cyclic in nature and may remain 9/10 % cagr over vey long term provided there is no EV disruption.
As per my limited understanding EV tractors may be reality in low HP segment but in higher HP segment it looks difficult.
Corporate farming and Infra push are two possible trigger for above average growth in this sector going forward.
Surprisingly despite Farmers protest Tractor sales remain healthy. But Swaraj Engine share has not performed in synchronize with Market and Tractor sales nos.

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94

I am slightly inclined towards your thought process here. My personal view is - Swaraj Engines are a contract manufacturer with a twist - a single customer. Compare this with something like Amber Enterprises (not a same sector company - but same business philosophy) - you can list some of the differences.

  • Amber Enterprises is into multi-products and multi-customer contract manufacturing business; whereas Swaraj Engines is into mostly single product (tractor engines) and single customer.

  • Amber Enterprises can chart their own road-map and extend into multiple contract manufacturing products in future. However, the fate of Swaraj Engines is tied with the road-map of the M&M and also at the mercy of which part of the road-map (of M&M) does it gets tagged into for future product manufacturing.

  • Even the pricing power (atleast to the extent of off-setting input cost) I know contract manufacturing is a low margin game with little scope for margin expansion is more secular (meaning transparent) in the Amber Enterprises - when compared to Swaraj Engines. Especially when your customer is your promoter and on the board. I understand the angle of presence of Kirloskar on the promoter list. However, much has to be done in the secular/transparency of pricing power for selling the products.

Eventually, the way we need to build the business model for Swaraj Engines is

  • Consider the company as a backend listed company of M&M Tractors (as parent) with specialization in engines production.
  • Keep the margin constant (low single digit) without scope for any improvement (as a safety net during building the investment model).
  • Tie the growth of the company to the growth of its one and only customer.

Disc : Have no investment.
Not a registered security advisor and this post does not suggest for anyone to either buy/sell/hold the investment in the company.

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95

Perfect. On top of that, it is in a highly cyclical business with dependency on monsoon. Currently we are going through a spell of consecutive good monsoons but as we know, these things don’t last forever. So the company may be good only as a short term tactical play rather than secular long term compounding story.

(Disc.: No exposure at present but held it in the past)

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Concern about single promoter/buyer is genuine…and it is in the price IMO…
Some expansion plan details emerging…ET Article…

M&M to set up a new tractor plant, scouting for land in Punjab, elsewhere

“We are actively looking at an additional factory and for this we may need a land parcel of about 50 acres,” Hemant Sikka, president of farm equipment division at M&M, told ET.

He said the maker of Swaraj brand of tractors is fully maxed out on capacity. The debottlenecking measures the company has taken across its manufacturing units will improve its output incrementally and help meet the demand this fiscal year. “But beyond that, we need to add a new plant,” Sikka said.

“We are already in touch with several state governments and the decision is likely to be taken shortly.”

According to people in the know, the new tractor plant is expected to have a minimum capacity of 50,000 units a year.

The exact quantum of investment is yet to be defined as the company is deliberating over what operations to outsource or manage internally.

Expert estimated that setting up a greenfield plant that can build 50,000 tractors a year would cost Rs 250-300 crore.

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97

Todays ET Article…Some foresight about Tractor Sales.

Tractor Sales Down in April, but may Revive

Mumbai:

Tractor sales in India lost steam in April, dropping for the first time in 10 months, but experts and manufacturers said they expect a rebound after the fresh wave of Covid-19 infections subsides.

Retail sales in April were down by 40-45% from the preceding month, according to data from Crisil, as lockdowns were imposed in several parts of the country to check a massive surge in Covid-19 infections.

The decline in wholesale was narrower at 20-25%, as manufacturers increased channel inventory which was running low after months of high sales.

Despite this, wholesale in April 2021 was higher than that in April 2019 by about 17%, indicating a lower impact on tractor demand compared with other automobile segments. April 2020 was an abnormal month due to large-scale lockdowns to arrest the spread of Covid-19 and, hence, cannot be compared with.

“Assuming the spread of Covid-19 does not intensify further in rural areas, we believe sales lost in the month of April will come back in the subsequent months, as was seen in the previous fiscal,” said Hetal Gandhi, director, Crisil Research. “In fact, the current rabi harvest remains on schedule with about 82% of wheat sown being already harvested as of Aprilend.”

As per Crisil’s estimate, domestic tractor demand could grow by 3-8% in FY22.

Hemant Sikka, president for the farm equipment sector at Mahindra & Mahindra, the market leader in tractors, said all agriculture related fundamentals remain strong with a bumper rabi crop harvest and forecast of a normal monsoon this year.

“We expect that tractor demand will bounce back as farmers start preparing their land for kharif crops in the ensuing weeks,” he said in a statement.

Mahindra and Mahindra’s wholesale in April stood at 26,130 tractors for the domestic market compared with 29,817 in March.

Escorts, the other listed tractor maker, said its wholesale was about 6,386 units, down from 11,730 in March.

Industry stakeholders expect the ongoing demand downturn can help component makers catch up with demand and build buffer stocks.

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98

The only customer it has is the market leader in its segment and has pricing power. Also, if you look at the history of past 11 years for Swaraj, you can see that their margins and returns profile have been stable and robust. I dont think we should disregard it as an investment just because it is a contract manufacturer like Amber to majorly only one client which happens to be its promoter. Not many companies have shown the consistency which Swaraj has over the past decades.

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99

Which is exactly why you should either hold it for longer term to reduce the impact of cyclicality or add/average your investments during bad years.

100

Very solid tractor sales growth from M&M…Q1FY22 Sales 99929 Units Comapre to 65657 during Q1FY21 and 93894 during Q4FY21…So both QoQ and YoY there is sales growth…hope tractor sales growth momentum continues…
DISC. 10% of portfolio, hope to continue to hold as long as tractor sales grows…

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101

Hi,

Quarterly results are out. YOY results have improved significantly owing to lower base due to lockdowns. Compared to last quarter also the results are good.

“Continuing its growth journey, Swaraj Engines reported its ever best Q1 performance in terms of achieving highest ever first quarter engine sale of 33,747 units and Profit After Tax of Rs. 33.65 crores”

For details:

Thanks,
Deb

102

Sep tractor sales numbers

Domestic sales in September 2021 were at 39053 units, as against 42361 units during September 2020.
Total tractor sales (Domestic + Exports) during September 2021 were at 40331 units, as against 43386
units for the same period last year.
Exports for the month stood at 1278 units.

Commenting on the performance, Hemant Sikka, President - Farm Equipment Sector, Mahindra &
Mahindra Ltd. said, “We have sold 39053 tractors in the domestic market during September 2021. Strong
revival in rainfall during September brought cheers to the farming community, with the entire rainfall deficit
wiped off by end of September and monsoon achieving normal levels. This is back-to-back normal or above normal monsoon for the third year. Reservoir levels have improved and excess rainfall in September will lead to high moisture content in the soil, leading to strong Rabi sowing. With initial crop production estimates indicating highest ever Kharif Crop, coupled with the upcoming festive season, we are optimistic of a strong demand in the coming months. In the exports market, we have sold 1278 tractors with a growth of 25% over last year.”

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With few continuous years of normal monsoons, will it not make sense to cash out on share as i personally believe that monsoons are followed by drought years as well. This will help us save from cyclicality in demand.