Buy Kirloskar Pneumatic Company Ltd for the Target Rs. 1,620 By Prabhudas Liladhar Capital Ltd
Weak Q2; watchful on execution & finalizations
We revise our FY27/28E EPS estimates by -4.8%/-2.2% to reflect the ongoing slowdown in project execution and clearances. Kirloskar Pneumatic (KKPC) reported a 10.3% YoY revenue decline, accompanied by a 658bps YoY EBITDA margin contraction to 15.1%. Refrigeration demand was subdued due to delayed large project execution, while the gas compression segment experienced loss of market share amid heightened competition from new entrants offering lower pricing. Meanwhile, the Tezcatlipoca centrifugal compressor surpassed the 100 units milestone, and the company expects to strengthen its leadership in this category over the coming years. Additionally, KKPC has forayed into the commercial air-conditioning segment with the announcement of the indigenous Zephyros C system, which is expected to unlock new growth opportunities. Despite the weak quarterly performance, management remains confident of delivering ~15% YoY revenue growth and sustaining 18–20% EBITDA margins in FY26, supported by robust revenue visibility and strong order finalization prospects in H2FY26. We maintain our ‘Buy’ rating and roll forward to Sep’27E valuing the business at a PE of 33x Sep’27E (35x Mar’27E earlier) arriving at a TP of Rs1,620 (Rs1,636 earlier).
Long term View: We remain watchful on the execution and finalization in short term. However, we believe KKPC is well placed for healthy long-term growth driven by 1) products launches in air compression (Tezcatlipoca, ARiA) to capture centrifugal and low-end screw compressor markets that are import-dominated, 2) new products – Calana and Jarilo – to address opportunities in CNG daughter stations and CBG plants respectively, 3) launch of Tyche, Khione and acquisition of S&C India to enhance penetration in commercial and industrial refrigeration, 4) focus on building in house IP and backward integration capabilities, and 5) strong cash flows and balance sheet. The stock is trading at a PE of 30.8x/25.8x on FY26/27E earnings.
Lesser revenue booking drags profitability: Revenue declined by 10.3% YoY to Rs3.9bn (Ple: Rs4.7bn), with Compression Systems sales declining by 13.4% YoY to Rs3.5bn. The quarter was impacted by slowdown in the project execution and clearances. Gross margin declined by 131bps YoY to 47.7%. EBITDA came in at Rs585mn vs Rs936mn in Q2FY26 (Ple: Rs906mn). EBITDA margin contracted by 658bps YoY to 15.1% in Q2FY26 (Ple: 19.1%) primarily due to lower revenue booking. Adj. PBT is down by 37.6% YoY to Rs574mn (Ple: Rs881mn). Adj. PAT decreased by 35.1% YoY to Rs438mn (Ple: Rs659mn) due to weak operating performance partially aided by lower effective tax rate (23.7% vs 26.5% YoY)
Conference Call Highlights
* Guidance: Management has guided for ~15% YoY revenue growth along with ~18-20% EBITDA margin in FY26. Management expects H2FY26 to be very strong with Q3FY26 revenue expectations of ~Rs6.0bn. Furthermore, it expects finalization of some large additional orders in Q3FY26 with total order intake expected to surpass ~Rs6.0bn in Q3FY26.
* Refrigeration Compression (~35% of total sales): During the quarter, large projects were facing execution delays which led to lower offtake in refrigeration compression segment. Meanwhile, food and consumption based business drove growth for Khione packages. Company’s new offering Tyche semi-hermetic compressor saw good uptake and has already started gaining market share in an import dominated market.
* KKPC’s entry into Commercial Air Conditioning market: KKPC is applying for a PLI to enter commercial air conditioning space (market estimated at ~Rs50bn per annum) with their unique and patented Zephyros C system. The closest competitors in this space import their compressors and use refrigerant having higher carbon footprint while KKPC’s offering is the only completely indigenous product in India offering lower cost of ownership and zero carbon footprint giving it an edge. KKPC plans to set up a manufacturing facility with the help of PLI in next 18 months which will be able to manufacture thousands of packages per annum.
* Tezcatlipoca Centrifugal Compressor crosses 100 nos mark: Currently KKPC has ~115 Tezcatlipoca compressors on its book. Of which, it has dispatched nearly 88 compressors till date. The market for this compressor is estimated at ~Rs5.0bn, mostly import dominated, where the company believes that they can capture more market share. KKPC aims to increase its offerings in centrifugal compressors covering full range of Tezcatlipoca and expects to become a dominant player in this space in coming years.
* Gas Compression (~30% of total sales): Geopolitical uncertainty, technological changes etc. globally have led to slowdown in O&G packages. The volumes saw ~50% decline YoY in Q2FY26. KKPC has lost some market share in CNG packages given the newer entrants offering much lower priced operations and maintenance contracts. Amid this, KKPC will aim to offer technologically superior products to become competitive in this market.
* Exports: KKPC booked export revenue worth ~Rs310mn in H1FY26 vs ~Rs430mn in H1FY25. Currently company is not focusing on its export business and does not expect exports to surpass double-digit mix in total revenue. Majority of the export business comes from MENA and Asia regions. For FY26, management expects exports to remain flattish.
* Aims to incur capex worth ~Rs900mn in FY26: The company has incurred a total capex of ~Rs210mn till date and expects to incur total capex of ~Rs900mn in FY26. On average, KKPC spends nearly ~Rs700-1,000mn per annum to enhance its capabilities and capacities which have current utilization of ~70%.
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