OVERVIEW: Industry: Oil and Gas Government of India (GOI) has been emphasizing on the usage of clean fuel which is environmental friendly. Such approaches can also help reduce the dependence on crude oil and other related derivatives to benefit the country as a whole. In relation to the same, GOI has started moving towards a gas-based economy which is currently around 6% and is anticipated to grow to reach around 15% in next 3-5 years. In the long run, the focus will be on electric vehicles once the infrastructure in India becomes robust. However, in the current scenario, the top priority is piped natural gas (PNG) for domestic gas distribution in the city gas distribution (CGD) segment and later focus on promoting CNG vehicles aggressively. India targets an approximate investment of US107bn in gas infrastructure by 2029 which includes an addition of another 220 cities to the CGD network (Source: Annual Report FY2019 Kirloskar Pneumatic). As per estimates and reports, Indian Oil & Gas companies are planning an investment of about USD7bn for expanding its existing brownfield refineries with a vision of 5-7 years. In addition to this, there are plans to lay nation’s longest liquefied petroleum gas (LPG) pipeline (of over 2000 km) from Gujarat to Uttar Pradesh to cater to the growing demand for cooking gas in the country. What exactly is an Air Compressor? It may be defined as a mechanical device which is used to harness the natural energy of air while converting the same into a potential energy (or potential source of energy) in the form of pressurized air. Air compressors have many applications in process industries, which include oil & gas, waste management, chemicals, power generation, automotive, mining, pharmaceuticals, food & beverage etc. These devices play a vital role in bringing efficiency, safety and profitability in a number of process industries and hence there is constant R&D activity to create superior designs. Depending upon the applications, air compressors can be divided into consumer grade, professional grade and industrial grades. Research article by www.theinnovativereport.com indicates the global market for air compressor market is anticipated to reach USD26.85bn by 2023 with a CAGR of 4.47% from 2017 to 2023. Some of the top players in this domain include Atlas Copco AB, Kobe Steel Ltd., Elgi Equipments Limited, Ingersoll-Rand PLC, Kirloskar Pneumatic Company Limited, Mitsubishi Heavy Industries Ltd, Suzler Ltd, Ebara Corporations, Porter Cable, VMAC Global Technology etc. The sole reason why a number of companies and players across the industry are interested in this segment is the quantum of creation of efficient energy and cost-effective products. Moreover, at the same time, some of the industries have recently started adopting these processes; industrial infrastructure projects have been increasing along with increase in investment across process industries (especially in the oil & gas and fuel industry), and finally there is demand for high energy solutions as well as the growth in population which augurs well for the demand. With innovation and the future technologies related to IoT (Internet of Things) and Industry 4.0, demand and growth of air compressors market is here to stay. India has always been an agrarian economy. Indian agriculture and allied services continue to be the backbone of the economy. While supporting livelihood of nearly 50% of the population and supporting 17.84% of world’s population, India is one of the leading producers of cereals, milk, sugar, fruits and vegetables, spices, eggs, seafood products etc. However, due to poor infrastructure for storage at optimum temperature, nearly 40% of vegetable produce and 15% of milk is wasted. Thus, the need for integrated cold chains and transportation systems arises where GOI is pushing for the infrastructure development for cold chain distribution. This certainly will push the demand for compressors for cold stores and the same is expected to grow at a rapid rate in the next few years or so. CMP: Rs. 134 TARGET PRICE: Rs. 192 TIME : 12 months SNAPSHOT 52 week H / L Mcap (INR mn) 210 / 132 8,605 Face value: 2 BSE Code NSE CODE 505283 NA Annual Performance (Rs mn) FY17 FY18 FY19 FY20E Total Revenue 5,290 6,005 7,102 7,580 EBITDA 598 738 877 951 EBITDA (%) 11.3 12.3 12.4 12.6 Other Income 273 163 145 145 Interest 0 2 1 2 Depreciation 173 173 219 276 PBT 698 727 802 818 PAT 527 499 553 601 Equity ( Rs mn) 128 128 128 128 EPS (INR)* 41 8 9 9 Ratio Analysis Parameters (Rs mn) FY17 FY18 FY19 FY20E EV/EBITDA (x) 14.1 10.9 9.5 8.7 EV/Net Sales (x) 1.6 1.3 1.2 1.1 M Cap/Sales (x) 1.6 1.4 1.2 1.1 M Cap/EBITDA (x) 14.4 11.7 9.8 9.0 Debt/Equity (x) 0.0 0.1 0.1 0.1 ROCE (%) 19.5 17.0 16.6 16.2 Price/Book Value (x) 0.4 1.9 1.7 1.7 P/E (x) 3.3 17.2 15.6 14.3 Shareholding Pattern as on 30th September, 2019 Parameters No of Shares % Promoters 34595260 53.87 Institutions 16308601 25.39 Public 13317829 20.74 TOTAL 64221690 100.00 Quarterly Performance Parameters (Rs mn) Dec-18 Mar-19 June-19 Sept-19 Sales (Net) 1,338 2,520 1,801 1,968 EBITDA 75 478 97 110 EBITDA (%) 6 19 5 6 Other Income 35 51 17 58 Interest 0 0 1 4 Depreciation 59 64 62 64 PAT 28 326 35 78 Equity ( Rs mn) 128 128 128 128 Page No 1 Kirloskar Pneumatic Co. Limited November 19, 2019 PICK OF THE MONTH VOL-5, NO-8 Please Turn Over BUY Source: Annual Report Note: All the data is calculated as per Market Price on 18th November, 2019 *26/9/2018 Stock Split from Rs10 to Rs2.
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OVERVIEW: Industry: Oil and Gas
Government of India (GOI) has been emphasizing on the usage of clean
fuel which is environmental friendly. Such approaches can also help reduce
the dependence on crude oil and other related derivatives to benefit the
country as a whole. In relation to the same, GOI has started moving
towards a gas-based economy which is currently around 6% and is
anticipated to grow to reach around 15% in next 3-5 years. In the long run,
the focus will be on electric vehicles once the infrastructure in India
becomes robust. However, in the current scenario, the top priority is piped
natural gas (PNG) for domestic gas distribution in the city gas distribution
(CGD) segment and later focus on promoting CNG vehicles aggressively.
India targets an approximate investment of US107bn in gas infrastructure
by 2029 which includes an addition of another 220 cities to the CGD
network (Source: Annual Report FY2019 Kirloskar Pneumatic). As per
estimates and reports, Indian Oil & Gas companies are planning an
investment of about USD7bn for expanding its existing brownfield
refineries with a vision of 5-7 years. In addition to this, there are plans to
lay nation’s longest liquefied petroleum gas (LPG) pipeline (of over
2000 km) from Gujarat to Uttar Pradesh to cater to the growing demand for
cooking gas in the country.
What exactly is an Air Compressor? It may be defined as a mechanical
device which is used to harness the natural energy of air while converting
the same into a potential energy (or potential source of energy) in the form
of pressurized air. Air compressors have many applications in process
industries, which include oil & gas, waste management, chemicals, power
generation, automotive, mining, pharmaceuticals, food & beverage etc.
These devices play a vital role in bringing efficiency, safety and
profitability in a number of process industries and hence there is constant
R&D activity to create superior designs. Depending upon the applications,
air compressors can be divided into consumer grade, professional grade and
industrial grades. Research article by www.theinnovativereport.com
indicates the global market for air compressor market is anticipated to
reach USD26.85bn by 2023 with a CAGR of 4.47% from 2017 to 2023.
Some of the top players in this domain include Atlas Copco AB, Kobe
CMP: Rs. 134 TARGET PRICE: Rs.192 TIME : 12 months
Kirloskar Pneumatic Co. Limited
November 19, 2019 PICK OF THE MONTH VOL-5, NO-8
BUY
Financials: The management believes, the business can be divided into sub segments i.e. products and systems. As far as the segment related to
the products is concerned the same shows steady growth, while that of the systems swings up and down as also adds to the
lumpiness to the businesses and net income generated. The lumpiness is basically due to the long gestation periods
(register —>enquiry —> win or lose orders) first for getting the approvals/ quotations for the projects (nearly 2-3 months) and order
delivery (15-16 months). The company has the best ever order book which is to the tune of Rs6,250mn which has shown a growth of
over 23% over the previous year i.e. FY18. The top line is essentially driven by stability which was around 17% in FY19. In the
current situation, bill to order is around 1.3 times. In FY19, the company has registered highest ever operational revenues with an
increase of nearly 18% over the previous year which indicates that the market share of the company must have increased. An uptick
was seen in the operating profits as well, which is on account of growth of compression segment in terms of revenues as well as
profitability. FY19 had seen growth in both the product lines i.e. the compression products business as well transmission products
business. Moreover, we also saw the introduction of third product line viz the innovative RoadRailer business. It seems KPCL has
burnt its fingers in the past due to some issues related to the payment norms by some of its customers; the company will not hesitate
to walk away from the projects if payments are not received by them according to their norms. The company continues to be an
effective zero debt enterprise with robust liquidity position. Management has shown its interest in exploring and entering new
markets which will boost the exports and finally the profitability. Along with this comes the intent to innovate and launch new
products. KPCL sees enquiries from some targeted countries worth Rs10bn for the first time in the history of the company.
Risks and Concerns: The businesses in which KPCL is involved are largely dependent on the government policies and investments.
A large number of customers of KPCL's are from the engineering and other capital-intensive industries where the demand is cyclical
in nature. This clearly invites dependency on the economic performance and condition of the country which makes KPCL
vulnerable to cyclicality in demand and ultimately dependent on the capex cycle of the end user. Moreover, in the current scenario,
the management too is seeing the economy slowing down, which appears to be a matter of concern as there is a liquidity crunch also
in the market. Many a times, the working capital cycle becomes large or too stretched for KPCL. The operating margins are
impacted by volatile input prices as the gestation period of projects in the segment for compressor systems can be time consuming
ranging from 3-18 months. Moreover, there is stiff competition from many domestic and major international players in the segment
for compressors. Needless to mention, these players have access to strong technological support and managerial background from
their parent companies. The company caters to the Indian defence forces as one of its customers. There are some challenges and
concerns which the company as well as the entire industry faces as a whole due to the defence sector. This is one risk which is
difficult to mitigate.
Outlook and Recommendations: Nonetheless, the sectors which the company caters to i.e. Oil & Gas Business, Cold Chain
Business and Industrial Business are appearing to be promising sectors in near and distant future. Moreover, the company is
constantly striving to develop new technologies with IP rights. KPCL continues with its dominance in gas compression business and
there are cues which indicate growth in the compressions business and better prospects in the upcoming year as well. GOI push for
investments in Oil and Gas business provides some more visibility for the next 2-3 years. The company is approved for higher speed
gear box which will be an add-on to the segment which is currently not in good shape. Cold storage is another segment where the
company is anticipating growth to come from, however the same has long gestation period as well. The company sees visibility in
orders and growth in the segments catering to railway gears & pinions, pricing in CNG, cold chain etc. KPCL is already working
towards enhancing further growth in the exports market. The entire Kirloskar group is known for its ethical business values and its
focus on customers. The company has spoken a lot about Kairos which means moment to change and so is the company
continuously evolving. Management is also seeing the economy slowing down, which appears to be a matter of concern. Moreover,
there is a liquidity crunch in the market. Management is cautiously optimistic keeping aside a slight slowdown which is currently
prevalent in the Indian scenario which may be pushed for another quarter or so till things stabilize in the domestic market. Even
though we are slightly cautious, however the intensions of the company to further upgrade in terms of technology, healthy balance
sheet, strong operational ability in view, approach towards revival of the transmission business and a healthy order book makes us
bullish on this company. Thus, we initiate a BUY on the stock with a target price of Rs192 with a horizon of 12 months.
Page No 8
Exhibit 13: One year forward P/E Exhibit 14: Price vs. Sensex
Source: ACE Equity Source: ACE Equity
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