Kirloskar Oil Engines Ltd. - Stock Review - May 2014 - Sushil Finance

Leading Engine & Power Generating set manufactures: Kirloskar Oil Engine Ltd (KOEL) is the flagship company of the Kirloskar group. KOEL is one of the leading generating sets & engine manufactures with power output from 5kVA to 6300kVA used for standby & prime power needs. It also manufactures industrial engines in 20 hp to 800 hp range used in construction, material handling & mining applications, and large engines in the range of 2400 hp to 11000 hp used in captive power & marine main propulsion. For agricultural sector, it manufacture a variety of diesel engines & pump sets in the range of 3 hp to 130 hp powering more than 25 applications. The company has four manufacturing facilities at Pune, Kagal, Nasik, and Rajkot.

Growth in industrial activity & agricultural sector to drive demand: While growth in industrial segment has been sluggish during last 3 years due to poor infrastructure & construction activities and ban on several mining projects, we expect the demand should pick up gradually with clearances of many stalled projects across the industrial segment and lifting of mining ban. The growth in power generation (PG) business has also been stagnant due to tight liquidity condition of construction & real estate sectors and improving power situation. We expect PG business to deliver growth with increased construction & real estate activities going forward. The growth from agricultural sector has been volatile due to competition from unorganized players and is expected to revive with new launches & increased mechanization. However, the large engine segment has been growing given its strong order book especially the major order received from NPCIL during FY12.

Foraying into Tiller manufacturing in FY15: To diversify its product portfolio and utilizing its strong positioning & capabilities, KOEL is entering into tiller manufacturing business, which is high growth segment. It is expected to put in a tiller manufacturing plant with an installed capacity of 20,000 tillers per annum. The company expects to launch its tillers by end of FY15 and become a significant player in next 2-3 years. The tillers industry has been growing consistently at 15-20% driven by increase in farm mechanization & government subsidy. Hence, the demand of tillers does not get affected by economic slowdown.

Healthy balance sheet & Return ratios: KOEL has a healthy balance sheet with high net cash ~Rs.6.5 bn (20% of market cap) & low working capital. Its Return Ratios are also decent as RoCE & RoE stand at ~20% & ~15% respectively.

Outlook and Valuation - KOEL has enough capacity to cater potential demand in the market and does not require to add additional capacity in medium term. The current capacity utilization is at 55%, which provides margin lever if utilization improves from current level. KOEL is also fully equipped to deliver engines meeting CPCB-II norms effective 1st July 2014. At CMP, the stock is trading at 15.5x its FY16E EPS of Rs.15. We recommend 'BUY' for the stock with a price target of Rs.300 (20x its FY16E Earnings).

Shares of KIRLOSKAR OIL ENGINES LTD. was last trading in BSE at Rs.241.5 as compared to the previous close of Rs. 239.45. The total number of shares traded during the day was 8293 in over 442 trades.

The stock hit an intraday high of Rs. 245.65 and intraday low of 232.5. The net turnover during the day was Rs. 1992626.

Source : Equity Bulls

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