I attended Swaraj Engine AGM on July 24 2017. Find enclosed my notes on AGM and other dicussion. Please note that Swaraj is among my Top 5 holdings and my views may be biased due to my holding. Also, there may some communication error from my side and reader should do his/her own due diligence before taking any decision.
Chairman Mr Makand appreciated contribution of Mr NR Thakker who died in 2017 as age of 84 years, for being pioneer and main person to set up plant with Cost of Rs 4 Crore and completed installation of new plant within 12 months time. He was associated with Kirloskar group who has been associated with the company since inception as a promoter when Punjab Government intended to set up Swaraj Engine in mid 80s. Subsequently Punjab State divested its stake to M&M group while Kirloskar group continue to maintain its original holding.
The company’s fortune are directly linked to Tractor industry, which in turn, is depedent on Monsoon and agricultural income. After 5 years of decline, during FY17, tractor demand regusteres 18% growth in domestic market to 582,084 units. Swaraj delivered its best ever life performance on all paramters (i.e. Highest engine sale of 82297 units, Net operating revenue of Rs 666 Cr, PBT of Rs 105.5 Cr and PAT of Rs 68.8 Cr).
For first time, the company reported PBT crossed Rs 100 Cr. The company increased dividend declared at Rs 43 per share (including Rs 25 per share special dividend) for FY17 as against Rs 33 per share declared for FY16. The share price also increased significantly resulting in market capitilisation of the company crossing Rs 2,500 Cr.
The company has continue to work along with society and employee well being and constantly assist neighbour villlages by providing skill training to provoding primary healthcare through mobile healthcare van.
During FY17, Swaraj received TPM excellence awared by Japanese Institute (not sure about the name) and also quality circle team won Gold award in Banglore.
In Q1FY18, the company report all time high sales of 23,287 engine (20,910 in Q1FY17); Sales of Rs 194 Cr, PBT of Rs 32.2 Cr and PAT of Rs 21.5.
Based on good monsoon anticipation and performance and also based on interaction with the clients, the company anticipate demand to continue to remain strong. In order to capture growth in the demand, the company has announced to enhance capacity by 15,000 units to 120,000 units which is expected to operational from next financial year.
Swaraj transition to GST was very smooth with no loss of production. Further, commercially also GST rate is broadly in line with previous tax regime and hence there is no major impact expected either on Swaraj or on its end use industry i.e. Tractor in view of management.
The company would be spending Rs 35 Cr to increase capacity from by 15,000 units. (Average Capex of 23,333 per engine vis FY17 EBIT of Rs 12,829 per engine, giving incremental ROCE of more than 50%).
The management were asked about perceive threat from Electrical vehicle and likely threat of same to Swaraj engine. Management consider that current threat of EV is more proximate to Car/SUV business. The load required for tractor engine is very high which would not be possible to replace with current development in battery for tractors. Hence, management do not consider Electrical betteries replamcent to Enginre in foreseeable future.
The company has Rs 180 Cr worth of liquid balance (in MF and FD). The management were asked about usage of same. Management said they would like to invest in business which can match the ROCE return with Swaraj Engine is generating currently. Till the time they find such remunerative opportunity, they would continue to hold same on balance sheet and reward the shareholder by way of increased dividend (from income generated of cash surplus) rather then make wrong acquisition which would adversly affect future prospect of the company. Management appear to have clear focus on wealth creation as appeared from the reply.
There were also queries about potential to expand product range of Swaraj Engine. Management said currently there is no product which Swaraj can enter and replicate market leadership which is enjoy in the tractor engine. However, they are open in case appropriate opportunity arises.
The company has suffient space/infastructure to expand capacity at present location in Mohali for at least 5-7 years. Hence, with growing demand for tractor, the company would continue to do expansion at appropriate time with lower capex resulting and superior ROCE and cashflow in medium to long term.
The company has proper agreement with M&M (Swaraj Tractor division) which provide of pass on increase/decrease in material cost. During the recent year, the company new product launches are for higher HP tractor which generally get higher realisation then in 2-3 years back. Despite imrpoved product mix, average engine realisation continue to remain in range of 80-82K. Enclosed table provide detail information
Due to lower raw material cost, the commpany has passed on input cost benefit to M&M as per the agreement. Hence, while sales realisation has remain constant, operational EBIT increased from Rs 7,558 in FY15 to Rs 10,742 in FY17.
The management also indicated that the company is well prepared to manufacture engine which are in compliance with new emission norms as and when implemented.
This was my first AGM with Swaraj despite my holding the company for last 5 years due to location. However, I must acknowledge that my experience for this AGM was one of the best I have attended over last 3 years, definitely much better then all Mumbai AGMs.