Buy Kirloskar Electric, target Rs 361: India Infoline

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India Infoline is bullish on Kirloskar Electric and has maintianed buy rating on the stock with target price of Rs 361.

 

India Infoline research report on Kirloskar Electric Co.

 

Sharper focus on core operations to lead to revenue CAGR of 37.5% over FY07-09E. Government and private sector capex to provide huge growth opportunities ä Improved realizations and tighter control on costs to expand OPM by 60bps by FY09E. We recommend BUY with a one-year price target of Rs361, an upside of 38%

 

Sharper focus should result in revenues growing at 37.5% CAGR over FY07-09E

 

Restructuring, through transfer of certain assets and liabilities to a subsidiary and relocation of manufacturing facility, helped Kirloskar Electric Company (KECL) turnaround in FY06. The company's new transformer unit in Mysore will help capitalize on robust demand expected over the next five years. We expect KECL to witness a strong CAGR of 37.5% between FY07-09E.

 

Government and private sector capex to provide huge growth opportunities

 

With the government announcing huge investments for the power sector, we believe there will be strong demand for power equipments, i.e. electric motors, transformers and switchgears. Coupled with this, huge capex plans have been announced by players from the metals, cement, oil and gas, and other sectors. KECL's presence in most of these segments makes it one of the key beneficiaries of this oncoming demand.

 

Strong demand and improved realizations to expand operating margin to 13.4%

 

Strong demand arising out of government and private sector capex should improve KECL's realizations. Average realizations for transformers and motors divisions, which contribute majority of the revenues, witnessed an improvement of 45.6% and 32% respectively in FY07. We believe robust demand will further improve average realizations for both these divisions.

 

Bottom line expected to witness 53.3% CAGR over FY07-09E, BUY

 

Demand arising out of investments planned by government and corporates over the next five years, should reap benefits for the company. Improving realizations leading to margin expansion should help bottom line witness 53.3% CAGR over FY07-09E. At the current price the stock trades at 14.6x and 10.9x FY08E and FY09E EPS of Rs18 and Rs24.1 respectively. We recommend BUY with a one-year price target of Rs361, an upside of 38%.  

 

Concerns a Growth dependent on reforms in the sector:

 

Order flows are dependent on the pace of reforms undertaken by the government. Since this is a politicallysensitive issue delays in implementation are likely resulting in subdued performance.

 

Rising raw material prices:

 

Rising prices of key raw materials could lead to contracting margins if the company is unable to pass on rising costs to the consumers.

 

Economic slowdown:

 

A slowdown in the economy will postpone various industries capex plans, which in turn will lead to a deferment in demand for KECL's products.

 

Competition from imports:

 

Huge capex lined up by the government and private sector players will result in high demand for the company's products. With this scenario in place, threat of foreign players and new entrants entering the market is high, which will lead to higher competition and pressure on margins.