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Before commenting on swaraj engines first quarter reports, I thought it will be better to look at the M&M report. Tractor sector is going through a very tough business conditions these days. Lack of rainfall, less production in agricultural goods, high borrowing cost and many more such business conditions have slowed down the sale of new tractors.

The good part of Swaraj engines was that Value Operations upgraded its quality and performance ratings from A2 to A1 for the year end 2012 and the actual intrinsic value for the year was Rs 339.

Swaraj engines had not traded a single time in last financial year below its 2012 intrinsic value. The lowest price it went down was at Rs 350 on 3rd Feb. 2012. But same time if you would have invested two years back (9th Aug 2010) in this business then your investments would be down by 4% today! This is one of the many examples of why you should always buy when you get good margin of safety. Remember that price always follows value of the underlying business.

Looking at the current year earnings we feel that Swaraj Engines earnings will be Rs 43 for the year end 2013. Value Operations expects its 2013 intrinsic value to be Rs 318 (down by Rs 21!).

But let me warn you that I am not saying that Swaraj Engines price will fall down! I don’t know how prices will react for this business or any business in the short term. But I do know that in long run prices always follows the intrinsic values of the underlying business. We expect its intrinsic value for the year end 2014 to be Rs 397 and Rs 496 for the year end 2015.

It is very important to keep track on company’s quality and intrinsic values all the time. Also don’t forget that these values can change anytime (values can change when company upgrades/downgrades its forecast earnings, dilutes its equity, changes dividend policy and anything that can impact the underlying business profitability).

Always take my analysis as a second opinion to compare your research. We are not for any reasons in business of predicting stock prices!!