Kirloskar Electric Company Ltd

Buy

ä Sharper focus on core operations to lead to revenue CAGR of 37.5% over FY07-09E

ä Government and private sector capex to provide huge growth opportunities

ä Improved realizations and tighter control on costs to expand OPM by 60bps by

FY09E

ä We recommend BUY with a one-year price target of Rs361, an upside of 38%

Sharper focus should result in revenues growing at 37.5% CAGR over FY07-09E

Restructuring, through transfer of certain assets and liabilities to a subsidiary and

relocation of manufacturing facility, helped Kirloskar Electric Company (KECL)

turnaround in FY06. The company’s new transformer unit in Mysore will help

capitalize on robust demand expected over the next five years. We expect KECL to

witness a strong CAGR of 37.5% between FY07-09E.

Government and private sector capex to provide huge growth opportunities

With the government announcing huge investments for the power sector, we

believe there will be strong demand for power equipments, i.e. electric motors,

transformers and switchgears. Coupled with this, huge capex plans have been

announced by players from the metals, cement, oil and gas, and other sectors.

KECL’s presence in most of these segments makes it one of the key beneficiaries of

this oncoming demand.

Strong demand and improved realizations to expand operating margin to 13.4%

Strong demand arising out of government and private sector capex should improve

KECL’s realizations. Average realizations for transformers and motors divisions,

which contribute majority of the revenues, witnessed an improvement of 45.6%

and 32% respectively in FY07. We believe robust demand will further improve

average realizations for both these divisions.

Bottom line expected to witness 53.3% CAGR over FY07-09E, BUY

Demand arising out of investments planned by government and corporates over

the next five years, should reap benefits for the company. Improving realizations

leading to margin expansion should help bottom line witness 53.3% CAGR over

FY07-09E. At the current price the stock trades at 14.6x and 10.9x FY08E and

FY09E EPS of Rs18 and Rs24.1 respectively. Recommend BUY with a one-year

price target of Rs361, an upside of 38%.