Kirloskar Pneumatic up for fourth straight year, gains 858% in a decade; should you buy?

Shares of Kirloskar Pneumatic company (KKPC)⁠⁠⁠⁠⁠⁠⁠ have maintained their upward trajectory for the fourth consecutive year in CY23, delivering a return of 69.65% so far. The shares have generated stellar returns of 181%, 44%, and 48% in CY22, CY21, and CY20, respectively.

Zooming out to a broader perspective, the shares have surged by 559% over the past three years and a staggering 858% over the last decade. According to brokerage firm Ambit Capital, this upward trend is expected to continue, indicating potential for further growth in the stock.

The brokerage, in its latest report, has initiated coverage on the stock with a 'buy' rating, setting a 24-month target price of ₹912 apiece. This indicates an upside of 38% for the stock from its previous closing price of ₹660.

Kirloskar Pneumatic Company is one of the core Kirloskar Group companies. Its product range includes air compressors, air conditioning and refrigeration systems, process gas systems, vapour absorption systems, and industrial gear boxes. The company serves a variety of sectors like oil, gas, steel, cement, food and beverage, railways, defence, and marine.

The brokerage highlighted the following key factors for its bullish outlook:

Play on the shift to a gas-powered economy

Ambit Capital highlights that KKPC's process gas systems, accounting for 45% of its revenues, are poised to gain from increased investments in the country's CNG infrastructure. Aligning with the Government of India's goal to boost natural gas's share in the country's energy mix from 6.3% to 15% by 2030, the PNGRB has set an ambitious target of 17,700 CNG stations by 2030, a substantial increase from the current 5,665 stations.

KKPC currently commands a 20–25% market share in the overall CNG compressors segment. However, it boasts a dominant 50% share in installations at retail outlets where CNG is offered alongside petrol and diesel.

As oil marketing companies (OMCs) are expected to take the lead in constructing CGD infrastructure, KKPC is well-positioned to further enhance its market presence in the expanding CNG compressor market, the brokerage stated.

Expanding TAM by filling product gaps

The company enjoys less than a 20% share in the ₹80 billion domestic market for compressors and packages. Historically, its addressable market was limited by its lack of suitable products in the largest market of screw air compressors, thus restricting its growth.

However, Ambit Capital notes that the company has been actively addressing these product gaps through a series of new product launches in recent years, gaining traction among customers. This strategic move, according to the brokerage, is expected to help the company gain market share on the back of similar cost advantages as it enjoys in the refrigeration and gas segments, led by in-house manufacturing and design.

At the same time, initial success in the export market bodes well as it provides the company with the necessary referral in a large market and the ability to compete on the back of its cost efficiency, it added.

Transition to big league will drive re-rating

While relatively smaller in comparison to industry giants, Ambit Capital believes KKPC has the opportunity to add new revenue stream from exports and untapped product segments. The brokerage draws parallels between KKPC's current stage and that of companies like Triveni Turbines and Elgi Equipments a decade ago, both of which have since increased their exports by 5–10 times.

According to the brokerage, continued tailwinds from CGD infra build-out, cost/market leadership, and thus market share gain in new product markets will drive 18% and 30% revenue and EPS CAGR over FY23–26E.

Trading at around 19x FY25E P/E, the brokerage notes KKPC's stock is among the cheapest in the sector as the street seems concerned about slow CGD infra development currently, but Ambit Capital said this will pick up as the commitments for MWP are to be fulfilled in a time-bound manner by the OMCs.

Ambit Capital's 24-month target price values KKPC's stock at ₹912 per share based on a DCF model. This valuation assumes an FCF/sales ratio of 8.5% over FY24 to FY45E and a 13.4% revenue CAGR.

To achieve this, the company must maintain its leadership in current operations and increase its export contribution to 15-20% of the revenue mix by FY30E, up from approximately 6% in FY24E. Ambit Capital believes this is achievable, citing Elgi's success in reaching an export mix of 40–45%.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.