Kirloskar Pneumatic Company Limited (BSE: KIRLPNU)
Founded in 1958 by Shantanurao Kirloskar, Kirloskar Pneumatic Company Limited (KPCL) is one of the flagship companies of the Kirloskar Group. With a range of products that includes air compressors, air conditioning and refrigeration systems, process gas systems, vapour absorption systems and industrial gearboxes, KPCL serves a number of industries such as oil, gas, steel, cement, food and beverages, railways, defence and marine.
KPCL has 3 integrated state-of-the-art manufacturing plants in Pune (Hadapsar and Saswad) and Nashik. Almost 50% of CNG stations in India are powered by KPCL compressors. 94% of its sales are compressors. Its product portfolio has capacity from 30 CFM to 10,000 CFM and pressure from 1 bar to 250 bar.
Q1FY23 revenue was the highest ever Q1 revenue for the company at 272cr, registering over 60% yoy growth driven by export orders to the oil and gas sector in the overseas market and project deliveries in the domestic market.
Project revenue was ~65% and product sales were ~35%. Material costs rose 82% to Rs 160 on the back of a strategic export order to secure entry into the overseas oil and gas space.
Without this project, material costs would have been close to the level of the previous quarter. Staff/other costs grew at a slower pace, leading to an increase in EBITDA margin of 41 basis points to 10.3%. PAT more than doubled to Rs 16 cr while PAT margins grew 179 bps to 6%.
The company continues to remain debt-free and had a net cash position of around Rs 170 crore at the end of Q1 2023. During the quarter, the company issued 53,500 shares under an employee stock option plan.
Order bookings during the first quarter were close to approximately 250 kr. As a result, the company had an order book of 1,225 cr compared to 1,265 cr at the beginning of the year.
KPCL has an established market position in each product segment (Air Compressors, Refrigeration and Gas Compressors and Gear Products) due to technological cooperation and strong after sales support services.
Revenue comes from various industries such as oil and gas, power, cement, steel, automobiles, textiles, refineries, petrochemicals, city gas distribution, cold storage and food, apart from defence and railway departments of the Government of India.
The size of the Indian air compressor market is Rs 4500 crore with three broad product groups – reciprocating, screw and centrifugal compressors. It could rise to Rs 5,200 crore in FY23. KPCL is a leading player in the reciprocating compressor segment.
Although a relatively new entrant in the screw compressor segment, it has a sustainable competitive advantage as it owns the entire value chain, from design to installation to service.
Investment in high speed gearbox gives KPCL the advantage to supply superior and cost effective centrifugal compressors. Stationary type rotary screw air compressors have a major share in the Indian air compressor market. The Indian air compressor market is expected to grow at a CAGR of 6.2% during 2020-2030.
The growing automotive sector in India is expected to drive the demand for compressors. Moreover, India’s manufacturing sector is growing rapidly and is expected to reach $1 trillion by 2025, thanks to continuous support from the government.
Rising demand for home appliances in emerging economies such as India, China, and Brazil will propel the growth of the stationary compressor market through 2027.
KPCL has so far been a small player in the air compressor segment. In FY22, it sold ~150cr reciprocating compressors, ~100cr screw compressors and a small amount of centrifugal compressors. By entering the screw compressor segment, KPCL is taking this trend further. Overall, it had ~8% market share in FY22, which it plans to increase to 10-12% in FY23.
The 4,500cr Indian compressor market is highly fragmented with the unorganised sector accounting for ~40% of the industry. Most players continue to import key inputs such as Impellers or Rotors, while smaller and niche players import complete air terminals.
The recent pandemic has put a significant strain on the finances of smaller and marginal players, many of whom have closed shop. With the government focusing on ‘Make in India’ to strengthen India as a global manufacturing hub, the organised sector is expected to gain market share in the coming years.
KPCL is the market leader in some areas of its business and is now looking to expand geographically. It focuses on markets in the Middle East, Southeast Asia, Indo China, South and West Africa. Entering these markets would reduce the risk to its revenue profile from a slowdown in the domestic market.
At the end of FY22, KPCL had outstanding export orders of over Rs 100 crore (Rs 40 realised in FY23 1) from oil and gas companies that would be realised in FY23. Historically, the company had export revenue of 20- 25 cr.
These contracts have provided KPCL with the necessary approvals to undertake larger scale projects. Management is targeting exports to make up 15-20% of sales in the future (currently less than 10%).
KPCL is set to launch a water compressor in Q2FY23. It has already passed all internal and external testing and has completed the approval process that is required to bring this product to market. This applies to oil and gas stations that are not connected to the gas network.
According to management, about 6,000 compressors are a market opportunity in the next three to five years. Each compressor sells for ~ 45-55 lakh rupees, so the market size will reach 3000 rupees in the next few years. There are about 14-15 local players in this market but no big company.
It is also launching Khione screw compressors to address the refrigeration screw market currently served by imports. The current import of this product in India is around Rs.100.
In addition to these two launches, the company is working on many more products to launch over the next few years. It is developing additional screw compressors for defence applications and a new range of composite compressors.
KPCL is a debt free company with modest capital requirements. KPCL seems to be in the sweet spot due to the revival of capital expenditure first by the government. and later by the private sector. Its financial and operational metrics are healthy.
Capital goods as a sector has been re-rated over the past few months on expectations of better order flows and execution, despite concerns over higher commodity prices. KPCL, which has set ambitious targets, could witness an expansion in earnings and valuation.