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
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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.
CMP: Rs. 134 TARGET PRICE: Rs.192 TIME : 12 months
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November 19, 2019 PICK OF THE MONTH VOL-5, NO-8
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What is a Gearbox? An industrial gearbox in simple words is an enclosed system that transmits mechanical energy to an output
device which can modify its speed, torque and other attributes to convert energy into a useable set-up. The main aim to use a
gearbox is to enable the user with better operational efficiencies which can be achieved only by adopting automated solutions via
which the manufacturers can make high quality products at low costs. As per a research article by MarketersMedia via comtex, the
global industrial gearbox market accounted for approximately USD25.67bn in 2017 and is expected to reach USD43bn by 2026 with
a CAGR growth of 5.90%. Gearboxes are used in a number of devices with various purposes, while the most recent and automated
ones include machine tools, food & beverage processing, tobacco industry, materials handling, packaging applications and many
more. The innovative participants have started shifting towards precision gearbox market. This will clearly enable advancements in
robotic systems which require precise formatting and positioning. Asia Pacific is currently dominating this market, where China and
Japan are among the largest manufacturing countries. Thus, industrial automation will lead to a high demand for energy efficient
gearboxes; but at the same time hindrance is witnessed in the market growth due to high maintenance cost and slowdown in major
economies like Europe. However, growing installations of gearboxes is currently being witnessed in renewable energy generation.
Wind and Gearboxes:
With a lot of emphasis on the clean, sustainable energy and
choosing the right technology as a solution, the focus towards
wind sector has gained a lot of impetus. The central dogma to
this theory will rest on the future of gearboxes and R&D in
this domain which will try to meet the current conditions
which have low wind requirements as a driving force. The
novel use of wind turbine gearbox has introduced boxes with
high storage capacity to drive market growth. The vendors for
wind turbine gearboxes have off-late started introducing
products with a high storage capacity and implementing
automation technologies across various sectors. Some of the
factors which will contribute towards the growth of the wind
turbine gearboxes market will definitely include depletion of
fossil fuels, favourable government initiatives as well as the
belief of high growth potential in emerging economies. As
per globe newswire and MRFR reports, the global market for
wind turbine gearboxes is poised to grow at a CAGR of
6.46% from 2019 to 2025 to surge to USD8.63bn.
Refurbish:
While we speak about Asia-Pacific to lead growth in the
global wind turbine gearbox market, undoubtedly, the
demand for refurbishment will also arise from this geography.
As per certain estimates, the global refurbishment market is
projected to grow at a CAGR of 26.2% (timeline 2017-2022).
Till 2017, APAC was leading the refurbishment market for
gearbox due of capacity addition by China and India in the
recent past. In 2017, China alone had a gearbox refurbishment
market of around USD621.9mn which is anticipated to grow
to USD1.12bn in 2022 (as per power-technology.com). A
very large number of wind turbines were installed in China
during the late 2000s, which makes it absolutely necessary to
be refurbished (as wind turbines require servicing after
operating for 7–10 years in a row). As a result of these
developments, we will see business opportunities creating
demand for new products as well as those which need
refurbishment.
Page No 2 Please Turn Over
Exhibit 2: Wind Gearbox Market Volume (GW)
Source: https://www.power-technology.com/comment/wind-turbine-gearbox-market/
Source: https://www.power-technology.com/comment/wind-turbine-gearbox-market/
Exhibit 3: Wind Gearbox Market Volume (GW)
Exhibit 1: Air Compressor Market
Source: https://www.nextmsc.com/report/Air-Compressor-Market
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
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About the Company: The name ‘Kirloskar’ is a well-known brand in the field of engineering, wherein the group has contributed
incalculably in every possible field for industrial revolution in India and has been known in the business since last 130 years.
Kirloskar Pneumatic Company Limited (KPCL) was founded in 1958 by Shantanurao Laxmanrao Kirloskar and is headquartered in
Pune. KPCL is a well-diversified product company which serves some of the major and critical sectors like oil & gas, steel, cement,
food & beverages, railways, defence, marine etc. The products offered by the company include air compressors, air conditioning and
refrigeration systems, process gas systems, vapour absorption systems and industrial gear boxes. To cater to such critical
requirement; KPCL has successfully developed various sophisticated, hi-tech and high end products. While catering to clients in the
international market, the company is continuously upgrading and tries to maintain highest standard of quality and reliability. The
company has its state-of-the-art manufacturing facilities at Hadapsar, Saswad and Nasik. The company is IMS (Integrated
Management System - ISO 9001, ISO 14001 and OHSAS 18001) certified and the certification is valid upto 27th August, 2021.
KPCL essentially manufactures and sells air, gas, air
conditioning & refrigeration compressors systems in
India and to some extent in some international frontiers.
The company has a plethora of products for refrigeration
and gas compression systems for refineries and
petrochemical plants; CNG systems for city gas
distribution (CGD) companies; industrial refrigeration
compressors and packaging solutions for the cold store,
dairy, pharmaceutical units and process plants; air
compressors and packages for the industrial markets and
engineering; transmission products like traction gears,
customized gearboxes; specialized products for Indian
Railways, wind power projects, and other industrial
markets; power transmission equipments and reverse
reduction gears for marine gear engines, etc. Moreover,
the company also provides HVAC systems for the Indian
defence sector.
The company essentially works in two major business domains i.e. compression product segment and transmission product segment.
The compression business can be further bifurcated into oil & gas, cold chain, industrial biz and ground support business while the
transmission product segment can be subdivided into railway business and those catering to industrial gearbox. KPCL is a leading
market player in some of the areas of its business and is trying to explore exports opportunities in the Middle East, South East Asia,
China, Southern and western parts of Africa etc. The company already has a dedicated team which caters to the sales & services for
exports. Though a very small segment currently; but management’s intension is to achieve growth in exports via a combination of
products as well as projects. The company is powered with highly qualified and trained service personnel who cater to clients across
India. In addition to this, the company is driven by strong sales and service networks in various strategic locations in India. In
addition to this, KPCL has an in-house capability to engineer, design, manufacture, construct, commission and service products and
systems. Some of the customers with whom KPCL deals include Aurobindo, Gadre, Colourtex, Venkys, IOL, Hemani group,
Dhanuka, Bharat Petroleum, Flex Foods Limited, Delmonte, DCM Shriram, John energy, Aditya Birla group, S.A Exports etc.
INVESTMENT RATIONALE: A) Exports: In the current setup, a major portion of the revenues earned by the company is contributed by the domestic segment
while exports business is barely 5% of the total revenues earned. This clearly indicates that the segment for international business
has potential to grow and the company is rightly working towards enhancing further growth in the exports market.
The company has the following product portfolio for exports
Reciprocating Refrigeration Compressors and Packages
Screw Refrigeration Compressors Packages
Electric Screw Air Compressors
Portable Screw Air Compressors
Reciprocating Air Compressors
Centrifugal Air Compressors
Complete Refrigeration Systems specialised for Oil& Gas, Chemicals, and Fertilizers etc.
Gas Compression Systems for Oil & Gas, Power, Fertilizers etc.
As per the annual report for FY19, the company has been reported to be working on export opportunities in specific countries which
intend to strengthen the current business in Oil & Gas segment. In the past, the company had been working aggressively towards
achieving the status of Approved Vendor (for Oil & Gas companies) in the Middle East, Africa and South East Asia and has finally
earned the status in almost all Oil & Gas companies in the Middle East. In addition to this, KPCL now is an approved entity by
major EPC Contractors and Project Management Consultants. KPCL has been regularly receiving enquiries from many international
players which may lead to bagging more orders in the near future. In the past the company had lost few international orders and has
now learnt from their mistakes. KPCL is currently having export enquiry which stands at an all-time high of nearly Rs11.86bn.
Page No 3 Please Turn Over
Source: Progressive Research
Exhibit 5: Overseas Operations
Source: KPCL Financial Analyst Meet August 20, 2018 PPT
Overseas Operation
Location Entity Name
Dubai, UAE KDMCC
Thailand KSEA
South Africa JIT (SA) PL
Exhibit 4: Segments Catered
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
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INVESTMENT RATIONALE:
B) Budding Segment:
As mentioned earlier as well, the company essentially caters two major business domains i.e. (A) compression product segment and
(B) transmission product segment. The compression business can be further broken down into (i) oil & gas, (ii) cold chain,
(iii) industrial biz and (iv) ground support business while the transmission product segment can be subdivided into (i) railway
business and (ii) industrial gearbox.
(a) Compression Products: A compressor maybe defined as device which is required essentially in industrial processes which
necessitate the control or flow of air. Industrial compressors whether small, medium or large have a number of applications. Of these
categories, KPCL confines itself to medium to large size compressors for a simple reason- the margins earned are high and the
competition is less. KPCL is amongst the top 4 large manufacturers of compressors in the country. The products and services
portfolio of the company includes air, gas and refrigeration compressors, packages and systems etc. which serve oil & gas, cold
chain, industrial markets and defence needs of compression systems. The company is powered by its in-house resources which have
the capability to engineer, design, manufacture, construct and commission the service systems. This segment currently contributes
nearly 93% of the total revenues earned by the company. In FY19, the company has successfully developed an air cooled
compressor which is one of its kinds in India wherein no water is required for this compressor. This helps in conserving water and at
the same time also helps improve the efficiency and running cost. These compressors are manufactured using world class processes
and state of the art machines.
The segment of compression products has many sub segments as explained below.
i. Oil & Gas Business: This sub segment offers refrigeration and gas compression systems for refineries and petrochemical plants
as also CNG systems to city gas distribution (CGD) companies. KPCL has immense experience, expertise and many loyal customers
who retain their confidence in the company in the field of Oil & Gas and CGD businesses. In addition to these services, the
company also undertakes O&M contracts all over India. With a market share of nearly 60%, KPCL is a market leader in CNG
systems for City Gas Distribution companies. KPCL has capabilities to deliver 75 CNG compressors in a month with each standard
size being priced at Rs10mn each and O&M also forms a major part of this segment. With the increasing number of Indian cities
migrating towards piped gas distribution, KPCL will be benefitted in a big way.
ii. Cold Chain Business: As per many industry and research reports, the cold chain sector is anticipated to show exponential growth
in the Indian market wherein the much needed push will come from the modernizing of agricultural sector involving production as
well as distribution. Cold chain market is expected to grow by 10% annually. KPCL is one of the largest providers of refrigeration
compressors in India. The company supplies industrial refrigeration compressors & packages for cold store units, dairy units,
pharmaceutical and process plants. While enjoying a dominant market share and a wide network of dealers (as well as service
dealers) the company is closely associated with various state level cold store associations, government nodal agencies and technical
committees. With the help of its in-house team, KPCL is capable to providing customized industrial refrigeration solutions. KPCL is
the world’s largest manufacturer of Open Type Ammonia Refrigeration Compressors and has demonstrated its capability to take this
segment of business to the next orbit with planned growth. Refrigeration compressors and those related to ammonia refrigeration’s
are some of the future concepts which the company is working on. KPCL is bullish of growth in this business and is aspiring to
grow globally with new air cooled compressors.
iii. Industrial Business: For the industrial market, the company offers a number of air compressors and packages to players
involved in cement, steel, power, general engineering etc. Innovations and value added products for the industry is one of the key
areas where KPCL has been contributing since a long time. Recently, the company has developed its own range of Centrifugal
Compressor. In addition to this, the company has also developed new models of water well compressors to cater to high pressure
water well drilling operations. KPCL is working towards developing energy efficient and new electric screw compressors, vib-less
reciprocating compressors and a wide range of centrifugal (turbo) compressors. Such products aim at increasing productivity and
energy efficiencies to customers. All these products provide a vision for sustainable growth in years to come. All these innovative
and technologically driven products can take the company to the next level of growth.
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Exhibit 6: Reciprocating Air Compressors
Source: http://www.kirloskarkpcl.com/html/Productandsolutions/ACD/compressors-balanced.htm
CMP: Rs. 134 TARGET PRICE: Rs.192 TIME : 12 months
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November 19, 2019 PICK OF THE MONTH VOL-5, NO-8
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INVESTMENT RATIONALE:
iii. Industrial Business (contd.) KPCL is an expert in the engineering segments related to Oil and Gas
Refrigeration Systems which is easily reflected by its dominant market
share of around 65% in this domain. The company is looking at export
opportunities and has done some aggressive ground level research in
overseas markets. As a part of the strategy, the targeted zones included
South East Asia, Middle East and North and South Africa region. The
ompany is now recognised as an ‘Approved Vendor’ in almost all Oil &
Gas companies in the Middle East.
By 2019- 2020 it is anticipated there will be a total of approximately 1500
CNG stations in India and another 8000 additional stations will be added in
another 8-10 years. New CNG players will be added. Gas compressors
appear to be a good business and the company has been successful in its
endeavors so far. The GOI has been pushing a number of infra projects
which also aims at road construction projects which indicates that the
demand for diesel portable compressors will increase with time and KPCL,
already has its presence in it. If the GOI push for Make in India is
channelised in the right direction, we can expect Industrial markets to see an
upturn which will provide ample of opportunities for KPCL in the next two
to three years.
iv. Ground Support Business:
The Government of India has been talking high about the idea of Make in India in the defence sector which appears to be an
opportunity for KPCL in the coming years. KPCL is already involved in catering to some of the requirements of the Indian armed
forces wherein they provide products such as heating, ventilation and air conditioning (HVAC) systems for the Indian Navy,
providing ground support units for defence installations and certain annual maintenance contract (AMC) of the equipment in remote
areas in order to assist the armed forces. As mentioned earlier, KPCL can custom design products as per the requirements and
expectations of the customer which is an add-on to the offerings by the company. As per the recent annual report of FY19, the
company has reported a growth in the defence business which is propelled due to orders from ordnance factories and HAL.
Page No 5 Please Turn Over
Source: http://www.kirloskarkpcl.com/html/Productandsolutions/ACD/compressors-balanced.htm
Exhibit7: Vertical Reciprocating Air Compressor
Exhibit 8: Reciprocating, Horizontal, Balanced Opposed, Piston Compressors
Exhibit 9: Compressors and Expressors for Railway Brake System
3HC55 KRM-1200 KCW 623M
Source:http://www.kirloskarkpcl.com/html/Productandsolutions/ACD/
compressors-balanced.htm
Source: http://www.kirloskarkpcl.com/html/Productandsolutions/ACD/compressors-balanced.htm
CMP: Rs. 134 TARGET PRICE: Rs.192 TIME : 12 months
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INVESTMENT RATIONALE:
(b) Transmission Products:
KPCL has been in the business of transmission products for quite some time and has been offering a wide range of products that
includes traction gears, customized gearboxes and other specialized products. These products mainly serve the Indian railways and
other industrial markets. As per the management, the transmissions business is making smaller losses and is more or less at the
breakeven point. This segment contributes approximately 7% of the total revenues earned by the company.
(i) Railway Business: Been a strong player in this market, KPCL has developed the capability of manufacturing entire range of gear
pinion requirement of Indian Railways. Moreover, the company has also been approved as a supplier for the new generation high
speed locomotives. The company has stated about active developments towards supplying equipments to the metro rail projects.
(ii) Industrial Gearbox Business: The company has already developed capability in designing, manufacturing, testing and
servicing of gearboxes. Moreover, KPCL has secured obligatory registrations with some consultants as well. The company is in
association with some vendors via sub-contracting wherein they manufacture larger gear boxes with some premeditated
components. In FY19, the company has reported of successfully executing some of the complex Gearboxes which have applications
in steel, sugar and power plants. Wind turbine gear box business where KPCL has its presence is a slightly tricky domain to work in.
Many a times there is lumpiness in the orders with fluctuating demand and in addition to this, there are long gestation periods for
project completion. Understanding the economics of demand and supply in this domain, KPCL has recently decided to offer
customized gearboxes in the Industrial markets.
Page No 6 Please Turn Over
Exhibit 11: Railway Business Offering
Forward /Reverse Turbo Transmission
for Locomotive
Exhibit 10: Transmission Division (TRM)
Traction Motor Pinions and axle
Mounted Bull Gears Reverse Reduction Hydraulic Marine
Gear
Helical / Bevel Helical Gear Units
Wind Turbine Gear Box
Source: http://www.kirloskarkpcl.com/html/Productandsolutions/TRM/transmission-solutions.htm
Source: KPCL Analyst PPT: 20th August 2018
CMP: Rs. 134 TARGET PRICE: Rs.192 TIME : 12 months
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(ii) Industrial Gearbox Business (contd.):
In addition to the other offerings, KPCL has successfully developed and installed high speed gearboxes for steam turbine driven
power plants as well. The current manufacturing capability of the plant can cater upto 20MW steam turbines. The company has
reported reception of first order for supply of 34MW gear box for steam turbine application in the recent annual report. In FY19, the
company has developed a range of speed increasing gearboxes for hydro turbines upto 5MW.
Earlier, KPCL did not focus on the business horizon of refurbishment, but off late, in order to gain some market competence in the
industrial gearbox business; KPCL has ventured into refurbishment of old gearboxes. Refurbishment is definitely a bigger challenge
when compared to supply of new gearboxes; however, the company has successfully refurbished many old gearboxes for their
existing customers.
For quite some time, the segment of transmission business had been struggling; however, the management has shown interest in
reviving this segment and is trying to make this segment profitable. As per market research, there are indications that the company is
working towards specialized high end or high speed planetary gearbox which are tailor-made for special industrial applications. The
main intension is to create import substitutes manufactured with improved infrastructure. Management is hopeful of bringing about
a turnaround in this segment.
(C) RoadRailer:
In April 2017, the scheme of amalgamation of Pneumatic Holdings Ltd (PHL which is the holding company of KPCL) and
Kirloskar Road Railer Ltd (KRRL which is the wholly owned subsidiary of KPCL) with KPCL was sanctioned by National
Company Law Tribunal (NCLT) while the scheme became effective on April 28, 2017. Since then the company has been taking
baby steps towards the RoadRailer business. The company has recently in FY19 made an investment in the RoadRailer business
which appears to be materializing now.
To understand the concept of RoadRailer in simple words; the goods are loaded on to a RoadRailer unit in a warehouse / godown
which initially travels by roadway. These are then directly coupled with railway wagons at the terminal junction. The unit (with the
wheels attached like a normal truck) is then moved by rail and decoupled from the wagon at the receiving end and finally the truck
is free to be moved on to the final destination.
KPCL in association with the Southern Railways conducted a trial run of a RoadRailer between Melpakkam and Katpadi sections of
Chennai division of southern railways on September 19, 2018. The company is reported to have successfully commenced operations
by undertaking runs of RoadRailer train from both Chennai and Delhi Divisions of Indian Railways. This is covering a distance of
nearly 2150 kilometres each time the RoadRailer travels from Melpakkam in Tamil Nadu to Palwal in Haryana and returns back to
its point of origin. As per the management, there are nearly 10-12 wagons which are currently running between Chennai and Delhi.
These are in the initial trial and error stage for the project; and the process or the protocol will take some time to stabilize.
RoadRailers are anticipated to offer complete logistics solution in diverting cargo traffic from road to rail and also help provide
unified door-to-door transportation of goods. This strategy to move goods will surely open new streams of freight traffic which will
facilitate imports as well as exports.
Page No 7
Exhibit 12: Innovative Technology:
Source: http://www.newindianexpress.com/cities/chennai/2018/sep/26/southern-railway-launches-indias-first-roadrailer-train-1877217.html
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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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