*Kirloskar Pneumatic Q2FY22 Concall Update*
(Nirmal Bang Securities)
_*Strong growth outlook for H2 & beyond; although margins to remain under pressure in H2*_
*Outlook: Long Term Positive*
*Business Update*
• The trajectory of operating margins is headed in the direction of 17% with aspirations of Rs. 2000 Cr as revenues in FY24.
• The asset turnover ratio is close to 4-5 times and existing infrastructure is cable of Rs. 1500-1600 Cr turnover.
• The order backlog could go up to Rs 1500 Crs and that would be comfortable for the annual sales aspirations.
• Order inflow in H1 was Rs. 540 Cr vs Rs. 350 Cr YoY. Order book as on Q2 remained flat QoQ at over Rs. 1,000 Cr.
• Most of the projects get executed in Q3&Q4 and thus the revenue for all quarters are different and shouldn’t be compared. Co expects strong growth in H2.
• *In the coming quarters margins could be impacted negatively as more projects orders come up for execution which are based on fixed price contracts.* Biggest cost push has come from copper and steel.
• During the quarter 45% of the business was from projects and rest was from products.
• *Also H2FY22 will have 60% revenues from projects and thus the margins will be impacted negatively.*
• *The sheer volume growth to be witnessed in H2 will also positively impact EBITDA and that should to an extent negate the negative impact of increased input costs.*
• The aspirations on return on capital employed (ROCE) on a company level is around 25%.
• The capex in the current fiscal will be around Rs 50 Cr.
• The major part of export orders that are coming up from Middle East & Africa are for oil & gas projects.
• The philosophy of the management has been to have the complete manufacturing value chain within the company while many competitors get a large part manufactured contractually.
*Air compressor segment*
• Air compressor formed 25% mix in H1 vs 18% in FY21.
• Market in India is at Rs. 3,000 Cr (-10 degree to +50 degree).
• Co’s market share here is significantly lower than other competitors.
• *Centrifugal compressor market is around 15% of this i.e. around Rs. 200 Cr. Centrifugal compressors is a focus area for the management and there is advantage for the co against competitors in this segment.*
• Co believes it can gain market share in screw compressors and centrifugal compressors.
*Gas Compression (45% mix for co)*
• In India’s total energy basket, the share of Gas is likely to increase from 6% to 15%.
• All the sectors are showing very good traction especially oil & gas. The newer sectors like bio fuels and hydrogen compressors are also coming up.
• CNG compressor sales got impacted by chip shortages and availability of gas engines despite strong order booking. Availability of gas engine improved by Sep.
• The specifications for city gas pipeline distribution have got very rigorous steps and markets of this scale and size have a strong pressure to have more and more suppliers and new entrants could do multiple things to qualify as a supplier so it is not necessary that it would always remain a two player market with Atlas & Kirloskar.
• The specifications and payments for the compressors is done by the CGD companies.
• Around 85% of the business for the company is directly sold and installed by the company in the business and there is no involvement of a distributor.
• There is an opportunity in biogas and hydrogen gas on which the company is working.
Stock is trading at TTM P/E of 27x