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Kirloskar Industries (KIL) announced the proposal of divesting its 17.41% stake in Swaraj Engines (SEL) to Mahindra & Mahindra (M&M). The divestment is proposed through inter-se transfer amongst the promoter through an off-market transaction. The transfer will be carried at a price of 1,400 per share. Notably, the acquisition will result in increasing Mahindra's stake in Swaraj Engines Ltd to 52.13% from 34.72%. ICICI Direct expects SEL's growth to mirror the tractor growth at the Swaraj brand of tractors at M&M.

As per the agreement, the shareholding and consequent voting rights of Kirloskar Industries in SEL will decrease from 17.41 % to zero percent of the equity share capital in the latter.

Mahesh Chhabria, Managing Director, KIL, on Thursday said, “We are happy to get into this agreement with M&M. As SEL shares were not core to our holdings and were illiquid, we decided to monetise our shareholding by selling it thru an off-market transaction to the Co-promoter."

Chhabria added, "We plan to invest the proceeds from this transaction in our business and group companies/subsidiaries, in the due course."

On BSE, Kirloskar Ind shares closed at 1818 apiece up by 74.20 or 4.26%. The shares hit a new 52-week high of 1,845 apiece earlier today. Its market cap is around 1,783 crore.

Meanwhile, M&M shares ended at 1310.65 apiece marginally up. The auto major's market cap is around 1,62,939.03 crore.

As for Swaraj Engines, the shares settled lower by 30.40 or 1.67% on BSE at 1786.90 apiece. The company has a market cap of 2,170.09 crore.

Should you buy Swaraj Engines shares?

SEL is into manufacturing and supplying diesel Engines in the range of 22 HP to above 65 HP. The company is equipped with highly productive & precise quality analyzing machines. It is also manufacturing hi-tech engine components.

According to Shashank Kanodia and Raghvendra Goyal Research Analysts at ICICI Direct, "structurally, 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."

"We expect SEL’s growth to largely mirror the tractor growth at Swaraj brand of tractors at M&M, as was the case in past," the analysts added in their latest note.

On valuation, the analysts note said, "The stock has largely been flat in a five-year period from 2000 in September 2017, underperforming the broader Nifty Auto index." The note added," We maintain HOLD rating tracking muted growth prospects in tractor space on high base of FY21 and await structural positives before turning positive."

Thereby, the note said, "upgrading our estimates, we now value SEL at 2,075 i.e. 18x P/E on FY24E EPS of ~ 115/share (earlier target price 1,680)."

Among key triggers for future performance in Swaraj Engines, the analysts note said --- play on farm mechanisation courtesy ~33% volume share of M&M’s tractor sales via Swaraj brand. The company is also a beneficiary of positive monsoons. Further, superlative return ratios (RoCE: ~50%, RoIC: ~100%) along with positive CFO, FCF generation & high dividend yield (~5%) will also be among the key triggers.

 

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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