I N D I A R ES E A RC H

I N I T I AT I N G C O V E R A G E
I N D UST RI A LS

21 August 2018

Kirloskar Pneumatic Co Limited

An arrow in the quiver!

Rahul Gajare Dhirendra Tiwari Abhijeet Singh

+91 22 4031 3381 +91 22 4031 3436 +91 22 4031 3414
rahul.gajare@antiquelimited.com dhirendra.tiwari@antiquelimited.com abhijeet.singh@antiquelimited.com
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 21 August 2018 | 1

Reco : BUY INITIATING COVERAGE

CMP
Target Price
: INR872
: INR1,175
Kirloskar Pneumatic Company Limited
Potential Return : 35% An arrow in the quiver!
Kirloskar Pneumatic Company (KPC) is one of the strongest brands with a
Rahul Gajare well-established products basket and proven capabilities. The company has
+91 22 4031 3381 a lion's share in the refrigeration compressor market and is looking to tap
rahul.gajare@antiquelimited.com the larger oil-flooded rotary screw compressor market through new products.
Incremental investment in the oil & gas sector (with specific focus on
Dhirendra Tiwari increasing gas consumption) is expected to drive demand for KPC products.
+91 22 4031 3436 Further, the government's thrust on cold storage, road construction, and
dhirendra.tiwari@antiquelimited.com exports is expected to aid the company's revenue growth. We expect 23%
earnings CAGR along with improving return ratios over FY18-20E. Thus, we
Abhijeet Singh initiate coverage on KPC with a BUY and target price of INR 1,175, based on
+91 22 4031 3414
abhijeet.singh@antiquelimited.com
20x FY20E earnings.
Strong brand, great product quality, and proven capabilities; largest player in refrigeration
KPC is a multi-product, diversified manufacturer of compressors and transmission equipment
with a proven execution track record. It is the largest player in the refrigeration compressor
Market data market and is the only manufacturer of air-cooled ammonia refrigeration compressors. It has
Sensex : 38,279 developed inhouse expertise in designing complex hydrocarbon refrigeration packages.
Sector : Industrials
Increased thrust on rotary screw compressor market; target opportunity of over INR 18bn
Market Cap (INRbn) : 11.2
Market Cap (USDbn) : 0.160 KPC is a predominant player in the INR 2.5bn reciprocating air compressor segment, which
O/S Shares (m) : 12.8 means it has left a substantial part of the INR 29bn air compressor market untapped. In order
52-wk HI/LO (INR) : 1190/724
to strengthen its foothold in the air compressor segment, it is now venturing into the screw
Avg Daily Vol ('000) : 1
rotary compressors (oil-flooded) market, which constitutes ~75% of the market (at INR 18bn).
Bloomberg : KKPC IN Planned investments in domestic oil & gas industry to boost compressor demand
Source: Bloomberg
The demand for refrigeration and gas compression systems is likely to be accelerated on the
Valuation back of strong capex pegged at INR 500bn by oil & gas companies as they upgrade their
FY18 FY19e FY20e facilities to meet the Bharat Stage VI (BS VI) requirements. Also, the government's expansion
EPS (INR) 38.9 47.0 58.8 of the City Gas Distribution (CGD) network to 240 GAs and focus on increasing gas consumption
P/E (x) 22.4 18.5 14.8 augur well for KPC.
P/BV (x) 0.2 0.2 0.2
Demand from other sectors to aid growth; focus on increasing exports business
EV/EBITDA (x) 12.1 9.8 7.7
Dividend Yield (%) 1.4 1.1 1.1
The government's increased focus on building more cold storage facilities along with road
construction is expected to aid demand for KPC's refrigeration and portable compressors.
Source: Bloomberg
Further, the company has strong plans to increase exports from ~5% at present to 20% over
Returns (%) the next five years with focus on the Gulf region, South Africa and South East Asia.
1m 3m 6m 12m
Absolute (1) (5) (3) (9) Outlook and valuation: Positive; initiate with BUY
Relative (6) (14) (14) (25) The company is set to increase its market opportunity by entering the oil-flooded screw rotary
Source: Bloomberg compressor market. We expect overall performance to improve over the next few years with
improving business fundamentals. Ergo, we initiate coverage on the stock with a BUY
Shareholding pattern
recommendation and target price of INR 1,175, based on 20x FY20E earnings.
Promoters : 54% Key financials
Public : 46% Year ended March (INRm) 2016 2017 2018 2019e 2020e
Others : 0% Revenues (INRm) 5,089 5,145 6,005 7,136 8,561
Source: Bloomberg EBITDA (INRm) 507 617 748 903 1,129
EBITDA Margin (%) 10.0 12.0 12.5 12.6 13.2
Price performance vs Nifty
PAT (INRm) 363 537 499 604 755
130
PAT growth (%) 61.1 46.1 (6.0) 21.0 24.9
110 EPS (INR) 28.3 41.4 38.9 47.0 58.8
90 EPS growth (%) 61.1 46.1 (6.0) 21.0 24.9
70 P/E (x) 30.8 21.1 22.4 18.5 14.8
Aug-17 Dec-17 Apr-18 Aug-18 P/BV (x) 0.3 0.2 0.2 0.2 0.2
Kirlo skar P neumatic NIFTY EV/EBITDA (x) 18.7 14.9 12.1 9.8 7.7
Source: Bloomberg Indexed to 100 Source: Company, Antique
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 21 August 2018 | 2

Investment rationale
Strong brand, great product quality, and proven capabilities; largest
player in refrigeration
KPC is a multi-product and diversified manufacturer of compressors and transmission equipment
with a proven execution track record in various user industries such as refinery & petrochemicals,
chemicals, fertilizers, food & beverages, marine, etc. It is the largest player in the refrigeration
compressor market, with major supplies to the oil & gas sector. The company boasts of an
excellent project management track record with "zero" short supply, 95% on-time delivery, and
no cost overruns. It is also the only manufacturer of Air Cooled Ammonia Refrigeration Compressors
and has developed inhouse expertise in designing Complex Hydrocarbon Refrigeration Packages.

Increased thrust on rotary screw compressor market; target opportunity

of over INR 18bn
KPC is a predominant player in the INR 2.5bn reciprocating air compressor segment, thus
leaving a major part of the INR 29bn air compressor market untapped. The company, after
establishing leadership in the Reciprocating Air Compressors segment, is now looking to
strengthen its foothold in the Air Compressors market by venturing into Rotary Screw Air
Compressors (oil flooded), which constitute ~three-fourths of the total Air Compressor market
(at INR 18bn). KPC has tied up with one of the best institutes in the world for compressors. The
company has already commenced launching new products this year and will complete launch
of the entire range by FY20, thus expanding the addressable market for KPC significantly.
What is a rotary screw compressor?
A Rotary Screw Compressor is a type of compressor that uses a rotary-type positive-displacement
mechanism and is commonly used to replace piston compressors, where large volume of
high-pressure air is needed. In an oil-flooded rotary screw compressor, lubricating oil bridges
the space between the rotors, both providing a hydraulic seal and transferring mechanical
energy between the driving and driven motors. Rotary-screw compressors tend to be smooth
running with limited vibration, thus not requiring a specialized foundation or mounting
system. Normally, rotary-screw compressors are mounted using standard rubber isolation
mounts designed to absorb high-frequency vibrations.
Applications of rotary screw compressor
Rotary Screw Compressors are generally used in larger industrial applications as both
fixed and portable units. They are predominantly used in applications that require a
continuous air demand such as food packaging and automated manufacturing systems.
In addition to these fixed units, rotary screw compressors are commonly mounted on tow-
behind trailers, are powered with small diesel engines and are typically referred to as
construction compressors. Construction compressors are used to provide compressed air to
jack hammers, riveting tools, pneumatic pumps, sand blasting operations, and industrial
paint systems. They are commonly seen at construction sites and on duty with road repair
crews throughout the world.

Planned investments in domestic oil & gas industry to boost compressor demand
The demand for refrigeration and gas compression systems is likely to be accelerated on the
back of strong capital expenditure planned by Indian oil & gas companies as they upgrade
their facility to meet the BS VI requirements. The total relevant capex is expected to top ~INR
500bn, to be spent over the next few years, primarily on brownfield expansion of the refineries,
which is in line with the brisk growth of oil consumption demand in the country. Also, government
thrust on expanding the CGD network to 228 more cities and its plan to lay the nation's
longest LPG pipeline of over 2,000km from Gujarat to Uttar Pradesh present a healthy demand
outlook from the oil & gas industry. Further, the company has also recently ventured successfully
into wet lease business for natural gas compression, adding another revenue stream. In order
to ramp up the wet lease business, it has also tied up with wet lease operators.
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 21 August 2018 | 3

Transition to BS VI to support order inflow

In line with the government mandate, domestic refineries are upgrading their processes to
produce BS VI compliant fuel by April 2020. The investments made by the refineries is expected
to aid compressor players such as KPC, which already have a significant presence in the oil
& gas compressor space; KPC derives one-third of its revenue from the sector. The company
has recently executed BS VI-related order and we expect a healthy order inflow pertaining to
BS VI, going forward.
Increased thrust on gas usage through expansion of CGD and CNG network
The total gas compressor market catering to the distribution segment is at INR 1.7bn, which
includes INR ~0.7bn from operations and management (O&M). The market is dominated by
KPC (60% market share) and Atlas Copco (40% market share). The gas distribution market
has benefitted largely on the back of government thrust on increasing gas consumption in the
overall domestic energy consumption pie in India. Towards this end, the government has
identified 240 Geographical Areas for CGD expansion in India along with over 3,600 CNG
stations, which are expected to come up by FY28 (starting September 2019), to increase gas
usage in the country. With government focused on expanding the CGD and CNG network,
the demand from CGD and CNG players is expected to pick up substantially, going forward.
KPC has already demonstrated strong product capabilities along with high market share of
60%, it is set to benefit from incremental thrust on increasing gas usage. Further, the company
is looking at steady revenue from O&M activity at CNG stations.

Demand from other sectors to aid growth; focus on increasing exports business
Despite being amongst the largest producer of vegetables, fruits and milk, there is significant
wastage, given inadequate cold storage facilities in India. The government's increased focus
on building more cold storage facilities is expected to aid KPC's growth. Another area where
the government has increased its focus is connectivity through large investments in road
construction which, in turn, augurs well for the portable compressors market, primarily those
used in construction activities. Further, KPC has strong plans to increase exports (oil & gas
sector) from ~5% at present to 20% over the next five years with a focus on the Gulf region,
South Africa and South East Asia.
Aggressive government push for cold chain infrastructure development
Despite being the second-largest fruits & vegetable producer and the largest milk producer in
the world, India wastes an estimated 40% of vegetable produce and 15% of milk produce
due to inadequate storage and transportation infrastructure. Hence, the government is
aggressively pushing for development of cold chain infrastructure by announcing incentives
for investment in this space. Therefore, the demand for compressors for cold storages is
expected to grow in the next few years.
Focus on connectivity; road construction capex on the rise
Improving connectivity has been one of the prime vehicle for inclusive growth in the past few
years. The government's push for road construction projects has increased demand for diesel
portable compressors. The capital spending on roads & bridges has seen significant traction
over the past few years and is set to benefit Portable Compressors used in the construction
industry.
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 21 August 2018 | 4

Capital expenditure on roads and bridges sees sharp increase

600

500
400
300
200
100
0
FY15A FY16A FY17A FY18 - revised FY19 - budgeted
budget

Capital Outlay on Roads and Bridges (INR bn)

Source: Union Budget, Antique

Exports expected to gain traction; highest ever enquiry level at INR 7.5bn
KPC's export contribution in revenue is ~5% at present and the company plans to take it to
20% in the next five years with country-specific strategies in place and focus on oil & gas
sector. The company has been able to achieve "Approved Vendor" status in majority of the oil
& gas companies and consultants in the Middle East and is aggressively working towards
achieving the same in other geographies, particularly in Africa and South East Asia. This has
translated into an all-time high export enquiry level of INR 7.5bn, which is expected to drive
significant orders, going forward, and is likely to meaningfully increase the export revenue
contribution.
Transmission segment to tap equipment business; set to become EBIT positive
The transmission equipment segment, which primarily offers gearboxes to the railways and
wind power industry, contributes 10% to the topline but is EBIT negative, dragging the overall
profitability down. We expect the transmission segment's profitability to improve, going forward,
driven by improving topline on improved demand from railways and its foray into the
Customized Industrial Gearboxes segment. Thus, the company has successfully moved from
being a component manufacturer to equipment manufacturer thereby improving the overall
revenue scope. KPC has developed capability of manufacturing the entire range of Gear
Pinion requirement of Indian Railways and is actively working to supply equipment to the
Metro Rail network. KPC is a market leader in sub-megawatt class gearboxes for wind turbines
and has developed the capability of designing and manufacturing megawatt class gearbox,
in line with its increased demand. The company's recent foray into the Customized Industrial
Gearboxes opens up a whole new world of opportunities as its addressable market expands.
KPC has already executed complex gearbox orders for various applications in steel, sugar
and power plants and has installed High Speed Gearboxes for steam turbine-driven Power
Plants catering up to 34MW Steam Turbines.
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 21 August 2018 | 5

Outlook and valuation

KPC is amongst the oldest players in the compressor market in India. The company is set to
increase its market opportunity by entering into the oil-flooded screw rotary compressor market.
Further, KPC has a strong order backlog of INR 5.2, twice its three-year average. Thus, we
expect improved traction to help the company drive strong revenue growth over the next few
years. We expect improvement in overall performance over the next few years on the back of
improving business fundamentals.
We expect the company to report revenue and earnings CAGR of 19% and 23% over FY18-
20E respectively and expect return ratios to improve on margin improvement and asset turnover.
The stock is currently trading at 18.5x and 14.8x its FY19E and FY20E EPS of INR 47.0 and
INR 58.8 respectively. We initiate coverage on the stock with a 'BUY' recommendation and
target price of INR 1,175, based on 20x FY20E earnings, implying an upside of over 35%
from the current level, given uptick in both the businesses. We believe that the improving
overall business and exports coverage is likely to compress the valuation discount to Elgi
Equipments.

Sensitivity analysis for PE

P/E (x) 15 18 20 22 25
Value (INR) 881 1,058 1,175 1,293 1,469

One-year forward P/E chart One-year forward EV/EBITDA chart

40.0 21.0

18.0
32.0
15.0
24.0
12.0

16.0 9.0

6.0
8.0
3.0
-
0.0
Feb-10

Feb-11

Feb-12

Feb-13

Feb-14

Feb-15

Feb-16

Feb-17

Feb-18
Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

Aug-15

Aug-16

Aug-17

Aug-18

Feb-11

Feb-12

Feb-13

Feb-14

Feb-15

Feb-16

Feb-17

Feb-18
Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

Aug-15

Aug-16

Aug-17

Aug-18
PE (x) -1 SD +1 SD avg EV (INR bn)
Source: Company, Antique Source: Company, Antique

Valuation (PE) discount / premium to Elgi Equipment

90

75

60

45

30

15

-
1-Apr-11 1-Apr-12 1-Apr-13 1-Apr-14 1-Apr-15 1-Apr-16 1-Apr-17 1-Apr-18

Discount (%) - Elgi vs KPC

Source: Company, Antique

ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 21 August 2018 | 6

Peer comparative analysis - operating and valuation matrix

Kirloskar Pneumatic Elgi Equipment
(INRmn) FY18 FY19E FY20E FY18 FY19E FY20E
Revenue 6,005 7,136 8,561 16053 18613 21146
Revenue growth (%) 16.7 18.8 20.0 17.2 15.9 13.6
EBITDA 749 903 1,129 1,775 2,184 2,694
EBITDA growth (%) 21.2 20.5 25.1 26.1 23.0 23.4
PAT 499 604 755 953 1,249 1,630
PAT growth (%) (7.1) 21.0 24.9 31.5 31.1 30.5
RoE's (%) 11.2 12.7 14.6 14.7 16.6 19.1
P/E (x) 22.4 18.5 14.8 47.0 36.0 27.5
P/BV (x) 0.2 0.2 0.2 6.5 5.7 4.8
EV/EBITDA (x) 12.1 9.8 7.7 26.1 21.2 17.2
Source: Compnany, Antique
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 21 August 2018 | 7

Key risks
Delay in capex revival
A delay in revival of overall capital expenditure, in particular by Oil & Gas, Industrial and
Food Processing sectors in the domestic market, could affect the company's revenue growth.

Competitive intensity
The domestic market is dominated by Atlas Copco and Elgi Equipments, which together own
more than 55% of the market. Any slowdown in the sector due to slow industrial growth can
lead to heightened competitive intensity and potentially affect KPC's profitability.

Delay in exports pick-up

KPC plans to increase its export footprint and has been aggressively working towards
establishing associations with oil & gas companies in geographies such as the Middle East,
Africa and South East Asia. Any slowdown in these economies/regions could hamper KPC's
endeavor to grow its exports business.

Slow acceptance of new launches

KPC is planning to foray into oil-flooded rotary screw compressors during FY19 and has spent
INR 400-500mn to set up manufacturing. The acceptance of these compressors will give
KPC's growth an extra impetus in a market that is dominated by Elgi Equipments.
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 21 August 2018 | 8

Financial outlook
Healthy order book to drive revenue
KPC is sitting on an all-time high order book of INR 5.2bn, which is ~3x its last three-year
average. Hence, we expect the revenue to post a 19% CAGR over FY18-20E, given the
company's excellent execution history.

Revenue and revenue growth trend PAT and PAT growth trend
10.0 45 900 90

8.0 30 750
60
600
6.0 15 30
450
4.0 0 0
300
2.0 -15 -30
150

- -30 - -60

FY19E

FY20E
FY19E

FY20E

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18
FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Revenue (INR bn) Grow th (RHS,%) PAT (INR mn) Grow th (RHS,%)

Souce: Company, Antique Souce: Company, Antique

Segment-wise revenue contribution Segment-wise EBIT contribution

100 120
9 7 7 6
14 12 11
90 90

80
60
91 93 93 94
70 88 89
86
30
60

-
50
FY19E

FY20E

FY19E

FY20E
FY14

FY15

FY16

FY17

FY18

FY14

FY15

FY16

FY17

FY18

(30)

Compression products Transmission products Compression products (%) Transmission products (%)

Souce: Company, Antique Souce: Company, Antique

Return ratios set to improve, aided by improved asset turnover

After a steep decline in EBITDA margin and profitability in FY15, the company is on an
improving margin path, driven by the compression segment. The transmission segment,
however, has continued to make losses; we expect it to turn around in FY19, driven by
improved revenue. However, the compression segment has limited upside, given KPC's foray
into a new product segment. Hence, we expect only a slight improvement in the overall
margin. Also, we expect asset turnover to improve, driven by an improved utilization of both
compression and transmission segment assets.
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 21 August 2018 | 9

EBITDA and EBITDA margin trend RoE & RoCE likely to pick up
1,200 18.0 30.0

15.0 25.0
900
12.0 20.0
600 9.0
15.0
6.0
300 10.0
3.0
5.0
- -

FY19E

FY20E
FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18
-

FY13

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E
EBITDA (INR mn) Margin (RHS,%) RoE (%) RoCE (%)

Souce: Company, Antique Souce: Company, Antique

Asset turnover on the rise Continuous rationalization of Working Capital

1.6 120

100
1.4
80
1.2
60
1.0
40
0.8
20

0.6 -
FY19E

FY20E
FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E
FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18
Asset turnover (x) Working Capital Cycle (days)

Souce: Company, Antique Souce: Company, Antique

Segmental revenue composition (%) - FY18 Order book at all time high
6.0
5.2
27
5.0

4.0
3.0
48 3.0 2.5 2.3
2.0

1.0

-
25 FY15 FY16 FY17 FY18
Air Gas Refrigeration Closing Orderboard (INR bn)
Souce: Company, Antique Souce: Company, Antique
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 21 August 2018 | 10

Management Background
Rahul C. Kirloskar - Executive Chairman
A mechanical engineer from the US, Rahul C Kirloskar is a top-notch technocrat associated
with Kirloskar Group of Companies for more than 25 years at senior levels in different capacities.
He has been the prime driving force behind the company's great success over that period of
time. After gaining expertise by participating in an intensive course for top management
professionals on Total Quality Management (TQM) in Japan, he played a pivotal role in
reinforcing KPC's focus on reducing overheads in the organization. His efforts resulted in a
healthy bottom line for the company even during trying times.

Aditya Kowshik - Managing Director

A Mechanical Engineer from Bangalore University, Aditya Kowshik has an experience of over
30 years in the engineering industry. He is a member of the ISHRAE Pune Chapter, ASHRAE-
USA and International Institute of Ammonia Refrigeration for over eight years.
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 21 August 2018 | 11

Company description
The Indian compressor industry is estimated at INR 50bn and is dominated by four players -
Atlas Copco, Elgi Equipments, Ingersol Rand, and Kirloskar Pneumatic, which together hold
more than 80% of the total compressor market share. Atlas Copco is the market leader of Air
Compressors worldwide, followed by Ingersol Rand. In the domestic market too, Atlas Copco
leads the pack, followed by Elgi, Ingersol Rand, and KPC.
KPC, established in 1958, is into the business of manufacturing (1) compression products/
systems and (2) transmission equipment. The company derives 90% of its revenue from its
core compressor business, where it has presence across Air Compressors, Gas Compressors
(Process Gas systems) and Refrigeration Compressors (Air Conditioning and Refrigeration
systems & Marine HVACR). The manufacturing facilities of the company are located at Hadapsar
(Pune), Saswad (Pune), and Nashik. KPC has limited export presence with around 5%
contribution in the overall revenue and is planning to ramp up export revenue to 20% in the
next five years with special focus on the Middle East, Africa and South East Asia, where it has
also secured "Approved Vendor" status from a number of Oil & Gas companies and
consultants. The company also has a wide network of dealers and service dealers with
services contribution of ~11% in the overall revenue pie. Within the transmission segment, the
company offers a wide range of products, which include Traction Gears, Customized
Gearboxes, and Specialized Products. These products primarily serve the Indian railways,
wind power projects and other industrial markets.

Kirloskar Pneumatic

Compressors Transmission
Products

Reciprocating
Air Traction Gears
Compressor Screw Components
and Pinions
Centrifugal
Hydraulic
Transmissions
Equipment
Refrigeration
Equipment Axle Drives
Refrigeration
Refrigeration & Systems
Gas
Compressor Process Gas
Systems

Source: Company, Antique

Compression products
KPC is amongst the top four players in the domestic compressor industry (along with Atlas
Copco, Elgi Equipments, and Ingersol Rand) with ~13% market share and has a presence
across Air, Gas and Refrigeration Compressors, Packages and Systems, primarily serving oil
& gas, cold chain, industrial and defense markets. The company has developed end-to-end
capabilities to engineer, design, manufacture, construct, commission, and service systems.

Air Compressor Division (ACD)

The ACD segment offers a wide range of air compressors in 15 product categories with a
presence in the complete range of air compressors covering reciprocating compressors to
high-tech centrifugal type as well as screw-type compressors. KPC sells and services its ACD
range of products through four regional offices and three branch offices in India and is
supported by 30 authorized dealers, who also provide support to customers in their spares
requirement. Also, it provides after-sales service through branch offices.
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 21 August 2018 | 12

Air Conditioning, Refrigeration & Process Gas Division (ACR & PGS)
The ACR-PG division of KPC can be divided into (1) products business (manufacturing of air
conditioning & refrigeration compressors) and (2) projects business (turnkey solutions for
refrigeration projects and process gas applications).
The products business includes compressors and spares that are marketed and serviced
through 30 authorized dealers from across the world and their sales and service is supported
by three regional offices, four branch offices and four overseas offices. After-sales support is
provided through dealer service personnel supported by company engineers. The projects
business undertakes turnkey projects, for which the scope includes planning, designing,
manufacturing, installing, and commissioning of refrigeration systems and process gas systems.

Transmission equipment division

The transmission equipment business caters to the needs of the rail, defense and non-
conventional energy sectors. It has technological leadership in different types of gears and
gear boxes with capacities ranging from sub-megawatt to higher-megawatt range. These
products are sold directly through the sales division in Pune and the after sales support is
provided through service personnel at the head office and regional offices. Most of these
products are sold directly to the customer without the indirect support of dealers.

Product portfolio
(a) Air compressors - centrifugal- reciprocating (lubricated & oil free)- rotary screw (mobile/
stationary)- small (garage) compressors- railway brake compressors/ expressers
(b) Gas compressors packages - specialized reciprocating gas compressor packages for a
wide range of gases, hydrocarbons
(c) Refrigeration & air-conditioning - refrigeration compressors, air-conditioning compressors,
flake & block ice plants, transport air-conditioning, specialized, custom built - screw
compressor packages, turnkey solutions, refrigeration & air-conditioning systems

Innovations and new products at KPC

Air Conditioning Process Gas Air Compressors
& Refrigeration Systems & Systems

" Applied Patent For Split " Successful entry into Wet " Centrifugal Air Compressor
Condenser – For Nuclear Lease Business for Natural " New Rotary Air Compressor
Submarines Gas Compression
" Customised Air Solutions
" Innovative Brine Chiller with " Tie-ups with other Wet Lease
40% reduction in heat Operators.
transfer area.
" Complete range of Air
Cooled Compressors –
Single and Two Stage
" HVAC System for Coast
Guard Ships
" Vapour Absorption Chillers

Source: Company, Antique

ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 21 August 2018 | 13

Annexures
I. Classification tree of compressors
Classification
Criteria

By Product By Technology By Lubrication

Portable Stationary Oil free Oil flooded

Positive
Dynamic
Displacement

Reciprocating Rotary Centrifugal Axial

Single acting Double acting Diaphragm Screw Scroll Others

Source: Company, Antique

II. Types of compressors based on technology

The industrial compressor industry is part of the non-electrical equipment industry and is used
in creating a high pressure for the functioning of heavy machines. The amount of pressure
that is generated depends on the capacity of the compressor and is in accordance with the
application in the end-consumer industry application. There are mainly three types of industrial
compressors:
Rotary screw compressors:
Rotary screw compressor is a type of gas compressor that uses a rotary-type positive displacement
mechanism in which two meshing helical screws, known as rotors, are used to compress the
gas. The screws can be lubricated with oil (oil-flooded) or can be non-lubricated (oil-
free). Oil-free compressors are used in applications where entrained oil carry-over is not
acceptable, such as medical research and semiconductor manufacturing.
They are characteristic of low vibration and low maintenance and can be both lubricated or
oil-free. They find applicability in general industrial applications, construction, wastewater
treatment facilities, etc.
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 21 August 2018 | 14

Reciprocating compressors
A reciprocating compressor is a positive-displacement that uses pistons, driven by a crankshaft,
to deliver gases at high pressure. The intake gas enters the suction manifold, then flows into
the compression cylinder where it gets compressed by a piston driven in a reciprocating
motion via a crankshaft and is then discharged. They find application in oil refineries, gas
pipelines, chemical plants, natural gas processing plants and refrigeration plants. They are
characteristic of low initial cost, high vibration, and high maintenance requirement. Their
typical applications include oil refineries, gas pipelines, chemical plant, natural gas processing
plants, refrigeration plants, etc.

Centrifugal compressors
Centrifugal compressors speed up and compress gas via a rotor with blades. Centrifugal
force is used to force the air or gas to an outer chamber under high pressure. This kinetic
energy is then converted to an increase in potential energy by slowing the flow through a
diffuser. These are characteristic of high initial cost, low vibration and noise levels and are
mostly used in oil refineries, petrochemical, chemical and natural gas processing plants.
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 21 August 2018 | 15

III. Differentiating features of compressor types

Features Reciprocating Rotary Screw Centrifugal
Mechanical functionality Positive displacement Positive displacement Dynamic
Initial Cost Low Low to Medium High
Maintenance High Low (few wearing parts) Sensitive to dust
Vibration High Low Low
Type Lubricated/Oil free Lubricated/Oil free Oil free
Capacity 5HP-1000HP 3HP-500HP 100HP+
Distribution Channel Mostly indirect through dealers/distributors Direct for high capacity Mostly direct
And Indirect for low capacity
User Industry Oil refineries, gas pipelines, chemical General industrial applications, Oil refineries, chemical and
plant, natural gas processing plants, construction, wastewater petrochemical plants, natural
refrigeration plants, etc. treatment facilities, etc. gas processing, plants, etc.
Source: Company, Antique

IV. Products
Oil Injected Electric Screw Compressor

Source: Company, Antique

Portable Air Compressor Centrifugal Air Compressor

Source: Company, Antique Source: Company, Antique

ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 21 August 2018 | 16

Compressors and Expressers for Railway Brake System

Source: Company, Antique

Vertical Reciprocating Air Compressor Reciprocating , Horizontal , Balanced Opposed , Piston

Source: Company, Antique Source: Company, Antique

Water Well Compressor

Source: Company, Antique

ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 21 August 2018 | 17

V. Strong clientele
The company boasts of a strong clientele, including ONGC, IOCL, HPCL, BPCL, GAIL, RIL, Dhanuka, Grasim and so on, providing
a solid foundation to benefit from the uptick in the capex cycle.
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 21 August 2018 | 18

Financials
Profit and loss account (INRm) Cash flow statement (INRm)
Year ended 31 Mar 2016 2017 2018 2019e 2020e Year ended 31 Mar 2016 2017 2018 2019e 2020e
Net Revenue 5,089 5,145 6,005 7,136 8,561 PBT 516 714 727 888 1,110
Op. Expenses 4,581 4,527 5,257 6,233 7,432 Depreciation & amortisation 191 173 173 219 236
EBITDA 507 617 748 903 1,129 Interest expense 12 11 13 10 10
Depreciation 191 173 173 219 236 (Inc)/Dec in working capital 239 56 (255) 59 (314)
EBIT 316 445 576 684 893 Tax paid (153) (177) (227) (284) (355)
Other income 211 280 163 214 227 CF from operating activities 805 778 430 891 687
Interest Exp. 12 11 13 10 10 Capital expenditure 4 (532) (398) (253) (200)
Reported PBT 516 714 726 888 1,110 Inc/(Dec) in investments (391) (10) 196 (140) 27
Tax 152.7 176.6 227 284 355 CF from investing activities (387) (542) (201) (393) (173)
Reported PAT 363 537 499 604 755 Inc/(Dec) in debt - - 7 (2) (4)
Adjusted PAT 363 537 499 604 755 Dividend Paid (108) (154) (185) (154) (154)
Adjusted EPS (INR) 28.3 41.4 38.9 47.0 58.8 CF from financing activities (108) (154) (178) (156) (157)
Net cash flow 310 82 51 343 357
Balance sheet (INRm) Opening balance 193 235 275 613 691
Year ended 31 Mar 2016 2017 2018 2019e 2020e Closing balance 503 317 326 956 1,048
Share Capital 128 128 128 128 128
Reserves & Surplus 3,087 4,129 4,487 4,802 5,252 Growth indicators (%)
Networth 3,215 4,258 4,616 4,930 5,380 Year ended 31 Mar 2016 2017 2018 2019e 2020e
Debt - - 7 5 1 Revenue 15.4 1.1 16.7 18.8 20.0
Net deferred Tax liabilities (13) (35) (55) (45) (50) EBITDA 73.0 21.7 21.2 20.5 25.1
Capital Employed 3,254 4,280 4,620 4,944 5,385 Adj PAT 61.1 47.8 (7.1) 21.0 24.9
Gross Fixed Assets 2,139 2,315 2,428 2,828 3,228 Adj EPS 61.1 46.1 (6.0) 21.0 24.9
Accumulated Depreciation 1,321 1,521 1,680 1,898 2,135
Capital work in progress 7 372 675 519 324 Valuation (x)
Net Fixed Assets 817 794 748 930 1,093 Year ended 31 Mar 2016 2017 2018 2019e 2020e
Investments 1,545 2,184 1,987 2,128 2,101 P/E 30.8 21.1 22.4 18.5 14.8
Current Assets, Loans & Adv. 2,644 2,743 4,107 4,011 4,870 P/BV 0.3 0.2 0.2 0.2 0.2
Inventory 574 738 894 864 1,106 EV/EBITDA 18.7 14.9 12.1 9.8 7.7
Debtors 1,516 1,308 2,087 1,955 2,346 EV/Sales 1.9 1.8 1.5 1.2 1.0
Cash & Bank balance 235 275 613 691 922 Dividend Yield (%) 0.8 1.1 1.4 1.1 1.1
Loans & advances and others 320 309 293 301 297
Other Current Assets - 114 221 200 200
Financial ratios
Current Liabilities & Prov. 1,759 1,830 2,911 1,128 1,170
Year ended 31 Mar 2016 2017 2018 2019e 2020e
RoE (%) 11.8 14.4 11.2 12.7 14.6
Liabilities 1,578 1,592 2,640 828 920
RoCE (%) 16.9 19.2 16.6 18.8 21.7
Provisions 181 239 271 300 250
Asset/T.O (x) 2.9 3.0 3.3 3.4 3.3
Net Current Assets 885 912 1,197 1,358 1,857
Net Debt/Equity (x) (0.1) (0.1) (0.1) (0.1) (0.2)
Application of Funds 3,254 4,280 4,620 4,944 5,385
EBIT/Interest (x) 45.0 65.7 56.1 89.8 112.0
Per share data
Year ended 31 Mar 2016 2017 2018 2019e 2020e
Margins (%)
No. of shares (m) 12.8 13.0 12.8 12.8 12.8
Year ended 31 Mar 2016 2017 2018 2019e 2020e
EBITDA Margin 10.0 12.0 12.5 12.6 13.2
Diluted no. of shares (m) 12.8 13.0 12.8 12.8 12.8
EBIT Margin 6.2 8.6 9.6 9.6 10.4
BVPS (INR) 250.3 327.5 359.3 383.8 418.9
PAT Margin 6.8 9.9 8.1 8.2 8.6
CEPS (INR) 43.1 54.6 52.3 64.0 77.1
DPS (INR) 7.0 9.9 12.0 10.0 10.0 Source: Company Antique

Source: Company, Antique

ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 21 August 2018 | 19

Important Disclaimer:

This report has been prepared by Antique Stock Broking Limited (hereinafter referred to as ASBL) to provide information about the company(ies) and/sector(s), if any, covered in the report and may be distributed
by it and/or its affiliated company(ies).

ASBL is a Stock Broker and Depository Participant registered with and regulated by Securities & Exchange Board of India.

ASBL and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group.

This report is for personal information of the selected recipient/s and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement
to invest in securities or other investments and ASBL is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your general information and should
not be reproduced or redistributed to any other person in any form. This report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs
of individual clients. Before acting on any advice or recommendation in this material, investors should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice.
The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future
performance, future returns are not guaranteed and a loss of original capital may occur.

We and our affiliates have investment banking and other business relationships with a some companies covered by our Research Department. Our research professionals may provide input into our investment banking
and other business selection processes. Investors should assume that ASBL and/or its affiliates are seeking or will seek investment banking or other business from the company or companies that are the subject of
this material and that the research professionals who were involved in preparing this material may educate investors on investments in such business. The research professionals responsible for the preparation of
this document may interact with trading desk personnel, sales personnel and other parties for the purpose of gathering, applying and interpreting information. Our research professionals are paid on the profitability
of ASBL which may include earnings from investment banking and other business.

ASBL generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover.
Additionally, ASBL generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders,
and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary
trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing
among other things, may give rise to real or potential conflicts of interest. ASBL and its affiliated company(ies), their directors and employees and their relatives may; (a) from time to time, have a long or short position
in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation
or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with
respect to any recommendation and other related information and opinions.; however the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations
made by the analyst(s) are completely independent of the views of the affiliates of ASBL even though there might exist an inherent conflict of interest in some of the stocks mentioned in the research report

Reports based on technical and derivative analysis center on studying charts company's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and,
as such, may not match with a report on a company's fundamental analysis. In addition ASBL has different business segments / Divisions with independent research separated by Chinese walls catering to different
set of customers having various objectives, risk profiles, investment horizon, etc, and therefore may at times have different contrary views on stocks sectors and markets.

Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt ASBL or any of its affiliates or
employees from, any and all responsibility/liability arising from such misuse and agrees not to hold ASBL or any of its affiliates or employees responsible for any such misuse and further agrees to hold ASBL or
any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays. The information contained
herein is based on publicly available data or other sources believed to be reliable. Any statements contained in this report attributed to a third party represent ASBL's interpretation of the data, information and/
or opinions provided by that third party either publicly or through a subscription service, and such use and interpretation have not been reviewed by the third party. This Report is not intended to be a complete
statement or summary of the securities, markets or developments referred to in the document. While we would endeavor to update the information herein on reasonable basis, ASBL and/or its affiliates are under
no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent ASBL and/or its affiliates from doing so. ASBL or any of its affiliates or employees shall not
be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. ASBL or any of its affiliates or employees do not
provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose,
and non-infringement. The recipients of this report should rely on their own investigations.

This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision based
on this report or for any necessary explanation of its contents.

ASBL and it's associates may have managed or co-managed public offering of securities, may have received compensation for investment banking or merchant banking or brokerage services, may have received
any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months.

ASBL and it's associates have not received any compensation or other benefits from the subject company or third party in connection with the research report.

Subject Company may have been a client of ASBL or its associates during twelve months preceding the date of distribution of the research report

ASBL and/or its affiliates and/or employees may have interests/positions, financial or otherwise of over 1 % at the end of the month immediately preceding the date of publication of the research in the securities
mentioned in this report. To enhance transparency, ASBL has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.

There are no material disciplinary action that been taken by any regulatory authority impacting equity research analysis activities

Analyst Certification

The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be
directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for preparation
of ASBL research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues

Disclosure of Interest Statement Companies where there is interest

z Analyst ownership of the stock - No

z Served as an officer, director or employee - No

Regional Disclosures (outside India)

This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to
law, regulation or which would subject ASBL & its group companies to registration or licensing requirements within such jurisdictions.

For U.S. persons only: This research report is a product of Antique Stock Broking Limited, which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing
the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-
dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject
company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Antique Stock Broking Limited only to "Major Institutional Investors" as defined
by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient
of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted
onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order
to conduct certain business with Major Institutional Investors, Antique Stock Broking Limited has entered into a chaperoning agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo").
Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer.

SEBI Registration Number: INH000001089 as per SEBI (Research Analysts) Regulations, 2014.

CIN: U67120MH1994PLC079444

Antique Stock Broking Limited

20th Floor, A Wing, Naman Midtown
Senapati Bapat Marg, Elphinstone (West)
Mumbai 400013
Tel. : +91 22 4031 3444 • Fax : +91 22 4031 3445
www.antiquelimited.com