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Research
Techno-Fundamental Report on Kirloskar Oil Engines - HDFC Securities
Posted On : 2012-12-01 10:16:26( TIMEZONE : IST )
Kirloskar Oil Engines Ltd (KOEL) is a leading engine, pumpset and generating set manufacturer and service provider in India. A part of the Kirloskar group, KOEL has excellent management and good market reach across the country. KOEL is largely present across four verticals - power generation, large engines, agri and off highway. The promoters have been increasing their stake in the company for a few quarters and with the ongoing buyback program, promoter shareholding (as a %) could increase further. Additionally, the price of the buyback (Rs. 170) provides a floor price for the stock as KOEL would buyback shares if the market price fell below 170.
A strong research focus gives the company the edge to develop unique products as per the need of the market they supply to. Expectation of good IIP growth in the next few quarters (after several months of slowdown) could be a trigger for the company. We expect India's growth story to gather momentum in the near future led by strong industrial and agricultural growth.
While there are certain concerns such as slower than anticipated economic recovery, fluctuating raw material prices and and foreign exchange exposure, the overall outlook on the company is positive.
KOEL has strong financials with steady growth in the P&L and a clean balance sheet. High cash and current investments provide a margin of safety while good dividend payout (~30-35%) and decent dividend yield (~4.1%) limit the downside. The stock is currently trading fairly cheap on a P/E and Price/Cash Earnings basis. Forward (based on FY14 estimates) P/E and Price/Cash Earnings is 12.8 and 8.9 respectively. Trailing EV/EBITDA is also only 6.4.
KOEL is currently trading at 14.8x FY13 (QE) EPS and 12.8x FY14 (QE) EPS. We recommend buying at the CMP of Rs. 196 and adding on dips to the Rs. 182 to Rs. 186 (~12x FY14 (QE) EPS) band for sequential targets of Rs. 230 (15x FY14 (QE) EPS) and Rs. 245 (16x FY14 (QE) EPS over 1-2 quarters.
