A Stock trading firm have come up with buy stock rating report on Kirloskar Oil Engines with price target based on recent quarterly results.
Q3FY09 Results Analysis
Kirloskar Oil reported its Q3FY09 results which were below our estimates, primarily due to higher than expected forex loss on outstanding ECBs. The company reported revenue of Rs.4.9bn in Q3FY09, decline of 7.9%. Engine segment revenue declined by 8.0% to Rs.4.7bn. Auto Component segment reported revenue of Rs.243mn, de-growth of 28.5%. However, EBITDA during the quarter increased by 24.2% to Rs.605mn, with EBITDA margins expanding by 310bps to 12.2%. EBITDA margins improvement was primarily due to extra ordinarily higher operating costs in the auto components segment in the same quarter last year. Interest cost increased from Rs.52mn to Rs.269mn; however of this Rs.193mn is due to currency depreciation impact on its outstanding foreign currency loans. Reported net profit declined by 54.1% to Rs.100mn. However, adjusting for forex loss net profit increased by 34.7% to Rs.293mn.
Taking into account slowdown in volumes in the power engine segment we are revising our FY09 revenue estimates from Rs.24.3bn to Rs.22.4bn. We expect the company to maintain net profit of Rs.1.3 bn in FY09 due to improved EBITDA margins. For FY10, we expect the company to report revenue of Rs.23.1bn and net profit of Rs.1.3bn. The stock trades at 5.5xFY09E earnings and 0.7xFY09E book value. We upgrade our recommendation from Accumulate to BUY and maintain our target price of Rs.72.
IMPORTANT STATS
Shareholding Pattern
Total promoters shareholding: 60.8%
Total public shareholding (Institutions/FII/General Public):39.2%
Mkt Cap 650.48
P/E 6.32
Div 100.00
EPS (TTM) 5.30
B/V: 47.12
Mkt Lot 1.00
FV 2.00
Drop in revenues; but maintain margins
The engine segment reported sales of Rs.4.7 bn (95% of total revenues) in Q3FY09, decline of 8%. Auto components segment reported sales of Rs.243 mn, a decline of 28.5% over the same quarter last year. The engine segment reported a PBIT of Rs.432 mn, a decline of 3.9% but a PBIT% of 9.2% which is 40 bps expansion of margins. Whereas, the auto components segment has reported a PBIT of Rs.14.6 mn with a PBIT% of 6% as compared to a loss of Rs.5.5 mn in the sale quarter last year.
Margins expansion due to lower operating costs
Despite a 7.9% decline in revenues (led by an 8% decline in engine revenues), the company reported higher EBITDA and EBITDA margins for the quarter. EBIDTA for the quarter increased by 24.2% to Rs.605 mn, with EBITDA margins expanding by 310 bps to 12.2%. This increase in EBITDA margins is primarily due to extra ordinarily higher operating costs in the auto components segment in Q3FY08.
Currency depreciation inflates interest costs
Despite of reporting EBITDA growth in Q3FY09 of 24.2% to Rs.605 mn, the company has reported a drop in profits of 54.1% to Rs.100 mn. The drop in profits is primarily due to interest costs which have increased from Rs.52 mn in Q3FY08 to Rs.269 mn in Q3FY09. However of this Rs.193 mn is due currency depreciation impact on its outstanding foreign currency loans. Adjusting for forex loss, net profit increased by 34.7% to Rs.293 mn.
Attractive Valuations, target price of Rs.72
At CMP of Rs.37 stock trades at 5.5xFY09E earnings (adjusted for forex loss), 0.7xFY09E book value and 3.4xFY09E EV/EBITDA (1.8x adjusted for investments), which we believe is attractive. We upgrade our recommendation from Accumulate to BUY and maintain our target price of Rs.72.
Reorganizing of Investments – Positive for Valuations
The company is considering the reorganization of the investments of the company by way of restructuring and/or de-merger of the company. Investment currently account for about 30% of the companies capital employed. We believe, de-merger of investment to be positive for the stock and could lead to re-rating as the return ratios shall improve substantially.
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