Accumulate Kirloskar Pneumatic Company Ltd For Target Rs.1,715 by Prabhudas Liladhar Capital Ltd
Near-Term Hiccups, structural story intact
Kirloskar Pneumatic (KKPC) reported decent revenue growth of ~7.6% YoY, while EBITDA margin expanded by 322bps YoY to ~15.0%, driven by a favourable product mix and higher in-house manufacturing. During Q1FY27, the company witnessed slower conversion of large package orders due to slowdown in capex amid Middle East conflict; however, equipment order inflows remained healthy, supported by strong demand across end-user industries. The Precision Engineering business remained soft due to lower-than-expected dispatches, with management expecting a meaningful recovery from Q2FY27. In the Air Compression segment, Tezcatlipoca continues to witness strong traction, while Hydrino and Zephyros are expected to drive incremental growth. Meanwhile, Refrigeration Compressors continue to benefit from healthy demand across food processing, dairy, chemical and industrial applications. Although export order conversion in Gas Compression has moderated, order enquiries across cross domestic gas infrastructure, biogas, hydrogen and coal gasification remain encouraging. Further, the expanding CGD network and growing installed base are expected to support ~25% growth in the services business, while new products such as A-800 and Tonali are likely to strengthen the product portfolio and support longterm growth. The stock is currently trading at P/E of 35.0x/29.8x on FY27E/FY28E. We downgrade our rating from ‘Buy’ rating to ‘Accumulate’ reflecting a cautious stance on near-term order conversion amid the ongoing Middle East conflict, while maintaining our TP of Rs1,715 (same as earlier) valuing the business at a PE of 32x Mar’28E (same as earlier).
Long Tem View:
Despite the macro challenges, we believe KKPC is well placed for healthy long-term growth driven by 1) continued scaling of Air Compression (Tezcatlipoca) to capture import-dominated centrifugal and screw compressor markets; 2) increasing focus on new product platforms across compression and refrigeration segments; 3) launch of Tyche and Khione to enhance penetration in commercial and industrial refrigeration; 4) focus on building in-house IP and fully integrated manufacturing capabilities; 5) leveraging the Precision Engineering division to support near-term growth and 6) strong cash flows and balance sheet.
Healthy operating performance with gross margin expansion aiding profitability: Revenue increased by 7.6% YoY to INR3.0bn (PLe: INR3.3bn), with Compression Systems sales rising by 13.0% YoY to INR2.8bn while the other/precision engineering segment declined by 38.2% YoY to Rs183mn. Gross margin improved by 516bps YoY to 55.9%. EBITDA came in at INR456mn vs. INR333mn in Q1FY26 (PLe: INR443mn). EBITDA margin improved by 322bps YoY to 15.0% (Ple: 13.5%) primarily aided by gross margin expansion. Adj. PBT surged 31.5% YoY to INR447mn (PLe: INR442mn). Adj. PAT also rose by 31.2% YoY to INR332mn (PLe: INR330mn) aided by a flattish effective tax rate of 25.7% (vs. 25.6% in Q1FY26). Order book increased by 7.4% YoY to Rs18.5bn (1.0x TTM revenue) while order intake stood at Rs2.9bn (calc.) in Q1FY27.
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