Buy Kirloskar Oil Engines: Edelweiss

Edelweiss Research report on Kirloskar Oil Engines:

Kirloskar Oil Engines’ (KOEL) Q4FY07 results were below our expectations in terms of revenue and profitability. Net revenues were up by ~27% Y-o-Y for the quarter at ~INR 5.5 bn, while for FY07 revenues grew by ~34% Y-o-Y to ~INR 19.4 bn. EBITDA grew by ~31% Y-o-Y to INR 775 mn for the quarter, while on an annual basis EBITDA grew by ~39% Y-o-Y to ~INR 2.9 bn. Adjusted net profit was up by ~37% Y-o-Y to INR 463 mn in Q4FY07, while for FY07 net profit grew by ~51% Y-o-Y to INR 1.5 bn. Margins improved in Q4FY07 after a disappointing Q3FY07. EBITDA margin was at 14%, up by 40bps Y-o-Y in the quarter. Net margin was up by ~60bps Y-o-Y to 8.4% for the quarter driven by other income gains. While EBITDA margin was at 11.3%, up 30bps Y-o-Y, the net margin was at 8.3%, up 120bps Y-o-Y for FY07.
 
Engines and auto component segments grew by ~40% and ~13% Y-o-Y, respectively in Q4FY07. The business mix changed in favor of the engines segment for Q4FY07 and FY07. Engines formed ~91% of sales in Q4FY07 compared with ~81% in Q4FY06. For FY07, engines formed 85% of sales, while they were 79% in FY06. The stock is currently trading at attractive valuation of 13x and 11x P/E to our FY08 and FY09 earnings estimates, respectively. We remain positive on the stock as an infrastructure and agricultural sector play and maintain our ‘BUY’ recommendation.