I have written a post almost 15 months back on Swaraj Engine and it was similar position where we stand today in regards to investment within this business. Unfortunately, its market price is almost similar to what it was trading 15 months back. It won’t be fair not to disclose that its market
price per share had also jumped to Rs 500 plus in those 15 months.

We shared similar report as this one with our Delhi Brother and he got into this business for around Rs 380 after conducting his own due-diligence. He is waiting for this report to be released so that he can look for more information and take rational decision on what to do with his investments in this business.

I know many investors got into this business at those prices and there was a big debate going on whether to invest with Swaraj or VST Tiller. Both of these businesses are of good quality. But single-handedly quality should not be your decision taking source. We look for quality business where management is also adding intrinsic values year after year within the business. This is because; we believe that in the long run market price follows its intrinsic values.

To start with the history of quality ratings by Value Operations fund, it looks that this business has a good rating history.











The good part about this business is that they are debt free business.

Capital History:


Swaraj engines have grown profits by compounded 39% for last 4 year and shareholders contribution within the business has grown by 22% compounded every year for last 4 years.

From the last 5 years, every additional rupee contributed by its shareholders (retained earnings) had helped this business to get additional Rs 0.37 in the profits. That means additional equity is generating 37% return on its reinvestment!

This business had consistently generated cash from its operations and has also paid dividends every year in last 5 years.

Cash flow Analysis:


The earnings of this business had managed to grow consistently and are expected to grow in 2014 by 17%.






The sales have grown by compounded rate of 37% in last 4 years for Swaraj Engine.

The red line on the chart below is the actual intrinsic values calculated by the Value operations platform. The black line in the range of 2012 -2013 is the expected intrinsic value for March 2013 ending year.

The management of this business had increased its business value consistently for last four years but looks like they will fail to add any value this year. Also it has hardly traded below its intrinsic value due to high quality balance sheet.

So, what went wrong with this business in this current year where we are witnessing no growth in its value?


The intrinsic value of Swaraj Engine has grown by compounded 29% from last 4 years.

Last year Swaraj engines reported a sales growth (value) of 24% and looking at their 9 months results for the current year we have witnessed a growth of mere 10%. Mahindra & Mahindra’s year to date as of
Jan 2013 tractor sales (volumes) (domestic + Exports) had fallen down by 5%. This reflects that tractor industry had contracted for the current year.

Swaraj engine had invested money to increase its production capacity from 60,000 engines to 75,000 engines per year. We look at this as a positive point so far and they have prepared themselves for any rebound within the tractor industry.

As per us we expect its ROE for the year end 2013 to be 28% and had fallen down from 31% previous year on the suppress profit growth from last year.

Analyst consensus report expects Swaraj Engines profits to rise at Rs 66 Crore for the year end 2014 (EPS of Rs 53 per share). This represents a growth of 17% in its profits from the current year. And if that is true then we expect its intrinsic value for 2014 to be Rs 416 per share (that represents a growth of 27% in its IV from previous year).

What do you think about Tractor industry in India? Do you believe in the Consensus expected earning reports of 2014? If not then what kind of profits are you expecting from this business for the year end 2014? And why you expect those profits?

If you get answers to all these questions and you are satisfied with those answers then only take decision to invest in Swaraj Engines. To be successful in equity investments you need to think rationally
and independently. My advice would be not to assume but get the answers of all of them backed up with the facts. We will appreciate if you would like to share with us your findings.