Tezcatlipoca Compressors Will Strengthen Air Compressor Market Position

Key Takeaways

• Strong order book growth and strategic acquisitions enhance Kirloskar Pneumatic's market position in refrigeration and other key sectors.
  
• Investments in manufacturing and export focus boost competitiveness and broaden revenue streams, enhancing future earnings potential.
  
• The company's growth may be hindered by operational and market challenges across multiple segments, affecting revenue, cash flow, and competitive positioning.

Catalysts

Engages in the design, manufacture, and supply industrial air compressors, gas compressors, and pneumatic tools in India and internationally.

• Kirloskar Pneumatic's strong order book growth, particularly in the refrigeration segment, indicates future revenue growth potential, as the company has a robust pipeline of orders in key sectors like dairy, food processing, pharma, and chemicals.
  
• The company is investing in in-house manufacturing capabilities and backward integration, which is expected to reduce raw material costs and enhance net margins by improving competitiveness and execution speed.
  
• The successful launch and strong demand for the Tezcatlipoca Centrifugal Compressors indicate a growing market presence in the air compressor segment, which should support future revenue and margin expansion.
  
• Kirloskar Pneumatic's strategic acquisition of Systems & Components India Private Limited is expected to enhance its position in the refrigeration market, potentially driving revenue through increased market share and better access to customers in the chemical and pharma industries.
  
• The company's increased focus on exports, especially in the CNG package segment to the MENA region, is likely to contribute positively to future earnings, providing new revenue streams and diversifying market risk.

Kirloskar Pneumatic Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kirloskar Pneumatic's revenue will grow by 21.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.4% today to 13.9% in 3 years time.
• Analysts expect earnings to reach ₹3.8 billion (and earnings per share of ₹58.51) by about February 2028, up from ₹1.9 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 41.9x on those 2028 earnings, up from 34.6x today. This future PE is greater than the current PE for the IN Machinery industry at 29.0x.
• Analysts expect the number of shares outstanding to grow by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.04%, as per the Simply Wall St company report.

Kirloskar Pneumatic Future Earnings Per Share Growth

Risks

• The company's process gas segment faces uncertainty due to challenges like gas availability, pricing, and project execution delays, which could impact revenue growth in this segment.
  
• The biogas segment faces generation challenges that need to be resolved before demand can scale up, potentially affecting the company’s future revenue and profitability in this area.
  
• The net working capital has increased due to significant packages waiting to be shipped, which may affect cash flow and financial flexibility if similar delays continue.
  
• The company's reliance on the Tezcatlipoca compressors for growth comes with execution risk, as increased competition from established players in this segment may impact market share and revenue.
  
• Order execution issues led to a backlog and revenue recognition delays in Q3, highlighting operational risks that could impact future earnings if not resolved effectively.

Valuation

• The analysts have a consensus price target of ₹1638.667 for Kirloskar Pneumatic based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1896.0, and the most bearish reporting a price target of just ₹1456.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹27.2 billion, earnings will come to ₹3.8 billion, and it would be trading on a PE ratio of 41.9x, assuming you use a discount rate of 14.0%.
  
• Given the current share price of ₹1019.65, the analyst price target of ₹1638.67 is 37.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.