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M&M upgrades itself as sole promoter of Swaraj Engines


What's Buzzing
In a regulatory exchange filing M&M informed exchanges about acquisition of 21,14,349 equity shares constituting 17.41% of the paid up equity share capital of Swaraj Engines (SEL) from Kirloskar Industries (KIL) for Rs 296 crore i.e. Rs 1,400 per share (~17% discount to yesterday’s closing price)
Context
Swaraj Engines (SEL) is involved in manufacturing diesel engines for M&M's Swaraj brand of tractors. It is headquartered at Mohali (Punjab). It was earlier co-promoted by M&M (34.7%) and Kirloskar Industries (17.4%). With this acquisition, M&M now becomes the sole promoter at SEL with its stake increasing to 52.1% with SEL now becoming a subsidiary company vs. the classification as associate company in the past.
Our Perspective
From M&M's perspective this is a small investment and things will not materially change for it. We view this transaction as more of providing an exit to erstwhile co-promoter i.e. KIL. Given that we model M&M on a standalone basis, which includes automotive business including farm equipment, this transaction will not alter its standalone financials. On the valuation front, it will have a small upside (~Rs 5/share) given that we used to value M&M’s investment in SEL at book value and can now switch to market value. From Swaraj Engines’ standpoint, this would result in change at promoter level with M&M now being sole promoter for the business. vs. its current classification as co-promoter. In terms of decision making, we do not foresee any change as the top management at SEL were all M&M veterans with automotive division head always on SEL board. With largely no change in operational prospects, we continue to like SEL given its superlative financials in terms of cash rich b/s, high return ratios profile (RoCE: ~50%, RoIC: ~100%), high dividend yield (~5%) and easy to understand/track business model of suppling diesel engines (22-65 Hp) to Swaraj brand of tractors at M&M. The current valuations at SEL (trades at ~15x P/E, ~10x EV/EBITDA on FY24E), however, have limited scope for upside given the low growth prospects in the domestic tractor space in the near term (industry expectation of ~3-5% volume growth for FY23E).
Disclaimer – I ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is acting as a distributor to solicit bond related products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.
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