Kirloskar Pneumatic, the country's fourth-largest air compressor player, has witnessed a tremendous upswing in its stock price. Over the course of the last three years, the company's shares have skyrocketed by 484%, rising from ₹107 per share to ₹625.
The shares have consistently delivered solid gains over the last four years (including the current year so far). In CY20, they recorded a gain of 19.49%, followed by a remarkable performance in the subsequent year with a return of 152%. In CY22, the shares rallied by 27.51%, and in the ongoing year, they have already achieved a gain of 14.5%.
Domestic brokerage firm Monarch Networth Capital believes there is potential for further upward movement in the company's shares.
The brokerage said the company is well-poised to deliver significant value and rise above competition. It emphasised the below key factors that will contribute to the company's earnings growth.
Clearly visible potential for inflection in the growth trajectory: The brokerage expects a 22%, 34%, and 35% CAGR over FY23–26E in revenue, EBITDA, and PAT, respectively. The brokerage attributes these estimates to the company's strong market share in the CNG gas compression segment and its increasing market share in the rotary screw compressor segment.
Furthermore, the company's leadership in the reciprocating compressor, the substantial growth of its order book to ₹11.5 billion over the past five years, the government's emphasis on infrastructure development, and the company's focus on developing new products also contribute to its growth prospects, it noted.
Remarkable initial success in exports for a newbie: The brokerage stated that the company's export sales have surged significantly since FY23, driven by successful penetration into the MENA region and winning large package orders.
This achievement instils confidence in the company's ability to undertake large projects in a highly competitive export market that is dominated by MNCs, it added.
As of March 2023, the company boasts an impressive order book of ₹11.5 billion, with additional client enquiries worth ₹7-8 billion, primarily from the MENA region, according to the brokerage.
The exports segment will continue to grow fast over the medium term and the brokerage expects it to contribute over 16% to revenues by FY26E and a margin range of 18-20%, comparable to domestic.
Robustness of balance sheet under-appreciated: The brokerage anticipates a 295bps margin expansion by FY25, primarily influenced by a reduction in unallocated expenses by reducing corporate overheads, operating leverage resulting from higher compressor sales, and focusing on cost efficiency.
With strong cash flow generation and ample cash reserves, the company can meet all capital expenditure requirements (approximately ₹1 billion per year) through internal accruals. KKPC's history of prudent capital allocation, coupled with the potential for margin expansion, positions it to achieve return ratios beyond 20%, it highlighted.
The brokerage believes that with its renewed aggression and solid financials, the company has the potential to deliver growth that surpasses industry benchmarks.
Considering all these growth factors, the brokerage has initiated a 'buy' recommendation on the stock, setting a target price of ₹800 per share, valuing the stock at 25x FY25E.
This valuation represents a 33% discount compared to a key competitor, Elgi Equipments. The brokerage's target price implies an upside of 28% from the stock's previous closing price.
There is a strong possibility of further re-rating as KKPC accelerates its growth and strengthens its market position. The stock is currently thinly researched in the market, providing an opportunity for investors, according to the brokerage.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.