Kirloskar Electric Company Ltd - Rs 28.00

Established in 1946, Kirloskar Electric Company Ltd (KECL) is one of India’s leading & oldest manufacturers of electrical and power equipment. When India embarked on an indigenization drive to substitute for imports in the mid seventies, KECL took the lead in the electrical engineering sector to maintain the international quality standard. Interestingly when Indian Railways built the first of the Power cars for Rajadhani, it was KECL who brought out customized generators for tough working in coaches subjected to horizontal and vertical accelerations. With a rich experience of over six decades, KECL has even closely worked with Indian Defense establishment to take up innovative tasks requiring high degree of expertise like containerized power supply units for missile projects, power sources for application in high security communication systems etc. Thus, the main business activity of KECL is the manufacture and sale of a diverse range of electrical and electronic equipments which has been broadly divided into following three segments.

· Rotating Machines: KECL derives round about 45% of total revenue from sales of AC/DC motors, AC generators, DG sets, tractions etc. Infact it was the first company in India to manufacture AC Motors way back in 1948. Remarkably, till late nineties four out of five AC generators manufactured by the organized sector in India were made by KECL. Although company is a pioneer in supplying DG sets to Indian Army, Air Force, & Defense, it ventured into retail marketing in 2006 and offers a wide range under the brand name “BLISS”. On the other hand its traction equipment division being a key supplier to Indian Railways caters to mainline electric and diesel locomotives. Apart from above, the recent merger with Kaytee Switchgear will strengthen KECL’s capability in manufacturing of rotating machines.

· Power Distribution Equipment: With nearly half of the total revenue coming from this division, KECL boast of being the first company in India to acquire ISO 9000 certification in transformer manufacturing. It produces both power as well as distribution transformer in a wide range up to 50 MVA in 200 kV class. Besides it is among the few companies to produce several types of special transformers like furnace, flame proof as well as conventional dry type, earthing, special converter, high voltage testing, short circuit testing, nitrogen gas cushioned, cast resin etc. At the same time, its Switchgear division manufactures high voltage switchgear in the range of 3.3 to 36kV for indoor as well as outdoor applications. It even produces and supplies Circuit Breakers and Panels to a wide range of applications, from large substations to small stand-alone switching requirements of state electricity boards, utilities, power generation, mining, defense applications and industries like cement, steel, paper, textile, chemical and other process industries.

· Others: This segment constitutes the balance 5% of revenue and consists of manufacturing of other electronics and execution of projects. It makes Auxvertor, thyristor controlled Battery Charger, regenerative and non-regenerative thyristor Converters, Digital Readouts, Invertors etc. In collaboration with Toshiba Co. Ltd, Japan it manufactures a wide range of UPS from 0.5 KVA to 50 KVA which find extensive application in supplying continuous and conditioned power to all critical equipment in banking, insurance, IT & medical fields. Its Project division compliments the core business to offer a complete system of electric control and automation. It has developed expertise in design, engineering, supply, erection and commissioning of electrical switchyard upto 220kV. It also undertakes small projects of power generation thru non conventional energy sources including hydel, wind, solar, co-generation and other gas based and diesel based power projects.

KECL operates thru six manufacturing facility with five in Karnataka and one in Kolkatta. Recently, it has setup up a Greenfield plant at Kondhapuri, Maharashtra which can manufacture both vast Resin and oil filled transformer thereby enhancing the transformer manufacturing capacity significantly. Besides, to meet the growing demand from power sector, KECL has also put up a new manufacturing facility in Gurgaon Haryana for rotating machine. Last fiscal it added five new sales offices thereby taking the total count to 30 offices across India. Apart from modernization and expansion, KECL is now focusing to make bigger and larger machines/transformers where margins are pretty high. At the same time it is also thriving to increase its presence in switchgear & other electronic products. Its DG sets division which mainly caters to sectors like hospitals, telecommunication residential, utilities & industrial market has last year introduced DG sets with a capacity rating of 12.5 kVAto 25 kVA which augments its existing range of 30 kVA to 160 kVA. On the back of strong domestic demand, KECL derives less than 5% from exports; but its products are well accepted in USA, Europe, Canada, Hong Kong, Australia, China, Singapore, South Africa, Malaysia, Pakistan, Bangladesh etc.

In order to consolidate and integrate its operation, company has recently merged Kaytee Switchgear Ltd (KSL) & Kirsloskar Power Equipments Ltd (KPEL) with itself. KPEL is engaged in the business of manufacturing and selling of cast resin dry type transformers and oil filled transformers with a turnover of more than Rs 100 cr. On the other hand KSL manufactures rotating machines likes AC/DC motors, alternators, other components etc having a turnover of Rs 400 cr. Notably, KSL was actually a 74% subsidiary of KECL and all the quantity produced by it were sold to or manufactured for KECL only, under contract manufacturing / subcontracting arrangements. As a part of consideration for this merger, company has allotted 1.73 cr equity shares and 11.76 lakh preference shares of Rs. 100/- each to the shareholders of KSL & KPEL. Post merger, company has reported a topline of Rs 653 cr and bottomline of Rs 22 cr for nine month ending Dec’08. Importantly, company has reported an OPM of more than 9% for the latest Dec’08 which is quite encouraging. At the same time higher interest cost has dented the bottomline. Due to industrial slowdown, lower GDP estimates and global turmoil, KECL may not register aggressive growth in medium term but has tremendous growth opportunity in long run. For FY09 it may clock a turnover of Rs 850 cr and net profit of Rs 28~30 cr. This works out to an EPS of Rs 6 on expanded equity of Rs 50.50 cr. Due to drastic fall in metal prices and synergies of merger, KECL has the potential to improve its margin going forward and can report an EPS of more than Rs 8 in FY10. Investors are strongly recommended to buy at current levels as share price can double in 12~15 months.

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