The Hindu Business Line : Kirloskar Pneumatic Company: Hold

Investors with a one/two-year horizon can retain their holdings of the Kirloskar Pneumatic Company (KPCL) stock. As a leading player in the industrial refrigerants segment, the company is well placed to benefit from the on-going capex boom across its user industries.

A healthy order book, coupled with a strong business outlook, also lends sufficient visibility to its future earnings. At the current market price, the stock trades at about 17 times its expected FY-08 per share earnings.

While the stock has appreciated considerably in the recent past, there is room for growth over the longterm. Investors can use broad market corrections to build up exposure in the stock.

Investment rationale

Kirloskar Pneumatic operates in two business segments — compression systems and transmission products. Apart from manufacturing compressors, the compression systems division also undertakes design and packaging of refrigeration systems.

Additionally, the division packages gas compression systems for CNG (compressed natural gas) stations, refineries and petrochemical industries.

Given the government’s targeted GDP growth of 9 per cent-plus and the fact that the economy is running on almost full capacity utilisation, investments towards capacity expansion across industries appear inevitable.

Catering to a wider base of user industries such as steel, power generation, infrastructure, oil and gas, KPCL is likely to benefit directly from this upsurge in capex cycle. Its business is also likely to get a fillip from its foray into the West Asia market; it recently completed an order from German Gulf.

While contributions from this division could scale up further, KPCL’s ability to garner a significant share of the growing market will be crucial. However, the division’s good earnings and the order book of about Rs 200 crore lend confidence. For the year ended FY-07, the compression systems division recorded a 64 per cent growth in earnings on the back of a 17 per cent increase in revenues.

The transmission products division undertakes the manufacture of rail traction gears, wind turbine gearboxes, marine gearboxes for naval and commercial ships and also manufactures gearboxes for other industrial applications.

The increasing need for alternate sources of energy and the growing demand for windmills from corporate India, given the tax concessions, are likely to lead to a buoyant market for windmill gearboxes.

To tap this growing market, KPCL has investments on the anvil. While the capex plans are yet to be finalised, investments in this segment could widen the market for KPCL.

Given the dearth of high-quality windmill gearbox manufacturers, any developments in this regard could trigger a re-rating of the stock. This apart, the division is likely to benefit from the increase in demand for railway rolling stock. For the year ended FY07, the division’s revenue grew by about 19 per cent, while the earnings recorded a growth of about 78 per cent.

Financials

For the year ended March 2007, the company recorded a 17 per cent growth in revenues while the earnings tripled to about Rs 44 crore.

This could be attributed to improving operational efficiencies and better realisations. On the operational front, margins grew by about 6 percentage points, leading to an operating profit of about Rs 35 crore.

On a segmental basis, the compression systems contributed to about 86 per cent of the overall revenues, while the transmission products made up for the rest.

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