pick of the month vol-5, no-8 kirloskar pneumatic co....

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.

CMP: Rs. 134 TARGET PRICE: Rs.192 TIME : 12 months



BUY

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

https://www.powerengineeringint.com/content/pei/en/renewables/wind/more-wind.html

https://www.nextmsc.com/report/Air-Compressor-Market




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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.


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




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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.


Exhibit 6: Reciprocating Air Compressors

Source: http://www.kirloskarkpcl.com/html/Productandsolutions/ACD/compressors-balanced.htm




BUY


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.



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





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(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.


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




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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

Please Turn Over




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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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