Swaraj Engines


Swaraj Engines Limited (SEL) is a Mohali based company originally established to manufacture engines for the erstwhile Punjab Tractors Ltd(PTL). The Company was a joint venture between PTL and Kirloskar Oil Engines Ltd(KOEL).

However  last year PTL was taken over by Mahindra & Mahindra (M&M) which is the market leader in Tractors having over 40% market share (PTL was 3rd).

Main Products/Segments

  • SEL manufactures diesel engines, diesel engine components and spare parts. It supplies 5 types of Engines from 20HP range to 50HP range.
  • It also manufactures high-tech engine components for Swaraj Mazda.

The Company’s engine business constitutes approximately 93% of its product revenue. The remaining 7% represents value of hi-tech engine components being supplied to SML for assembly of commercial vehicle engines.

Main Markets/Customers

  • More than 90% of Engines are sold to M&M’s tractor division
  • Remaining Sales comes from Swaraj Mazda through the sale of high-tech engine components

Bullish Viewpoints

  • India is still largely an Agrarian Economy and will continue to be so for a long time so the long term demand looks good.
  • Low Penetration of Tractors in India compared to the global average
  • Majority stake owned by M&M which is the leading tractor Manufacturer in the country for 26 years and now commands above 40% market share.
  • Though growth had been flat till FY2008 since the Mahindra stake, Swaraj engines have been growing Sales and Net Profits for the last 3 years at a CAGR of ~45% and ~60% respectively
  • Pristine Debt Free balance sheet, good cash flows with a decent amount of cash on books and negative cash conversion cycle. Further Capital Expenditure will probably get funded from internal accruals
  • Sustained Return on Equity averaging around 25% over the past 11 years. Good amount of free cash flows. Free Cash flows over the years has usually been between 10-20% of Sales which is rare to see in a manufacturing company. Free Cash Flow is higher than Net Profits by a significant margin for the 3rd year in a row. A company with a high RoE and high Free Cash Flow combination is said to be in a sweet spot.
  • Capacity Utilization was 100%+ first time last year. Worked in 2 shifts.
  • Swaraj Engines Cash Reserves stand at  ~114 Crs (Cash & short term Investments) in FY 2010. That’s over 20% of the company’s market capitalisation at Aug 2010.
  • Consistently improving debtors and inventory levels over last 3 years. Overall Swaraj Engines looks to be improving its operating efficiencies on all fronts. Mahindra Management stewardship can take it to greater heights

Bearish Viewpoints

  • As Most of SEL’s revenue comes from Tractor engines its fortunes are tied to Tractor sales .The tractor industry has a certain cyclical nature and depends heavily upon the general rural economy – investments by the Government, monsoons and availability of credit at affordable rate.
  • The main raw material used is steel which is a commodity whose prices are cyclical which directly impacts the margins of the company
  • SEL also gets a part of its revenue from engine components of light commercial vehicles(LCV) which is a again a cyclical industry
  • Only 1 major consumer(captive) constituting  more than 90% of sales. Conflict of interest could arise and put pressure on margins. The last 2 years, however, has seen margin expansions and other operational efficiencies kicking in from this captive customer relationship.

Barriers to entry

  • One of the lowest cost Engine makers mainly due to low Employee/Labor cost averaging at 6% of sales.
  • Assured customer in M&M the Largest tractor maker in the country also holding 33.2% of SEL and hence its in its interest to take Engines from SEL. This also helps in lower inventory,receivables & cash conversion cycle resulting in a stronger balance sheet and strong cash flows.

Interesting Viewpoints

  • India has about 11 crore farmers in the country and  roughly 4.5 lakh tractors are sold every year and Tractor population is about 45 lakh. That means for every 22 farmers there is one tractor whereas the world average is 1 tractor for every 5.5 farmers. So  there is a good chance  that over the next few years the demand for tractors is going to be very buoyant.
  • A lot of High Profile officials of M&M including Mr Pawan Goenka have joined the board of SEL indicating the importance of SEL for M&M’s Farm Equipment sector


Siddharth Shukla: No Holdings in the Company;